Banner
Annual Report 2022

Plain-text annual report

2022 Banner Corporation Annual Report Harnessing our momentum Serving our clients, communities and colleagues for 132 years • $15.83 billion in assets • Serving eight of the top 11 largest western Metropolitan Statistical Areas (by population) • A Forbes World’s Best Bank for the third consecutive year CORE EFFICIENCY RATIO 70% 63.59% 61.18% 60.76% 60.22% 57.99% 60% 50% 40% 30% 20% 10% 0% 2018 2019 2020 2021 2022 Core efficiency ratio defined as adjusted non-interest expense divided by adjusted revenue. Adjusted revenue excludes net gain (loss) on sale of securities, fair value adjustments and the gain on sale of branches. Adjusted non-interest expense excludes merger and acquisition related expenses, COVID-19 expenses, Banner Forward expenses, amortization of core deposit intangibles, REO operations, loss on extinguishment of debt and state/municipal business and use taxes. DEPOSIT PORTFOLIO 49% 2022 Total Deposits: $13.62 Billion 46% Interest-bearing transaction and savings accounts CDs Non‐interest bearing deposits 5% TOTAL SHAREHOLDER RETURN PERFORMANCE $200 $175 $150 $125 $100 $100.00 $100.05 $109.07 $137.28 $128.09 $95.40 $127.53 $118.71 $100.00 $75 $82.51 $102.20 $93.33 $50 $25 $0 2017 2018 2019 2020 2021 2022 Banner Corporation KBW Regional Bank Index NOTE: Assumes $100 invested in BANR common stock and other index at the close of business December 31, 2017 and that all dividends were reinvested. Information for the graph was provided by Bloomberg LP, New York City, NY. CORE DEPOSITS BY BRANCH (MILLION) 137 BRANCHES $100 $90 2022 Core Deposits: $12.90 $80 Billion $70 $94 $90 $75 $60 $50 $45 $40 $50 $30 $20 $10 $0 2018 2019 2020 2021 2022 Dear Fellow Stakeholders, Sir Isaac Newton’s Laws of Motion were certainly in effect this past year at Banner. Our nearly 2,000 employees remained in productive motion toward ensuring we are a consistently high-performing company, creating a virtuous cycle of upward mobility that supports all stakeholders. Despite navigating economic uncertainty and a rising-rate environment, we harnessed tremendous momentum to deliver exceptional results. Notably, we generated $195 million in net income and delivered a total shareholder return among the top quartile of our proxy peers. Our experienced employees delivered record revenue, a record efficiency ratio and record core loan production among other significant achievements. We attribute that success to consistently implementing our super community bank strategy, an expanding net interest margin, and crisp execution of Banner Forward. Super Community Bank Strategy As with past years, we generated solid core operating results and profitability by balancing the needs of our clients and community with that of the organization. The foundation of our approach remains fostering new, and deepening current, client relationships across all segments of our company. Our clients affirmed their trust in us by continuing to choose Banner for advice and guidance, competitive products and services, and our client-focused delivery channels. Exceptionally strong core deposits remained a fundamental key to our success, accounting for 95 percent of our total deposits at year-end. This allowed us to maintain high levels of on-balance sheet liquidity, an important element of our moderate risk profile. In fact, we were well above most of our peers in this area. In turn, we utilized those abundant low-cost deposits to fund another year of solid loan growth. Several segments generated historic loan production, including small business and consumer, commercial and business banking, and affordable housing. It’s noteworthy to mention our team accomplished double digit loan growth while further diversifying our loan portfolio (see inside back cover for details). Net Interest Margin With an asset-sensitive balance sheet, last year’s loan growth and higher yields on interest-earning assets led to the expansion of our net interest margin. In fact, our margin grew at a faster pace than many peer banks, thanks to our steady low-cost deposits and strong client relationships. On a tax equivalent basis, we ended 2022 with a 4.23 percent net interest margin in the fourth quarter and 3.68 percent for the full year, compared to 3.39 percent the previous year. Banner Forward Another important element of our 2022 results was the successful implementation of Banner Forward. Initially launched in 2021, Banner Forward is our reimagined strategic planning process with a heightened focus on enhancing revenue growth and investing in innovation to improve back-end processes and reduce operating expenses. By year-end, we implemented more than 90 percent of our originally identified 73 initiatives, generating the anticipated results. While we completed most of our efficiency-related initiatives, we expect the revenue initiatives to continue into 2023 with long-lasting benefits to our operating performance and productivity, including: • Taking greater advantage of our strengths with more efficient product and service delivery through additional technology solutions, while continuing to utilize the exceptional strengths of our knowledgeable bankers. • Introducing several new and expanded products and services to further improve our clients’ experience and continue adapting to their evolving needs and expectations, while creating new opportunities for revenue growth. • Reimagining processes and realigning resources to improve responsiveness— some of the most impactful in the commercial loan application and approval processes—further heightening our competitiveness. President and CEO Mark Grescovich CORE REVENUE (MILLION) $700 $600 $512.0 $623 $580 $588 $551 $500 $400 $300 $200 $100 $0 2018 2019 2020 2021 2022 +$34.9 MM OR +5.9% Net Interest Income Non-Interest over the � Income previous year Core revenue excludes gain on sale of securities, fair value adjustments and the gain on sale of branches. Select Financial Highlights Maintaining a disciplined approach to reinforcing a fortress balance sheet, cultivating our moderate risk profile and focusing on long-term client relationships remain keys to our success. The company’s exceptional 2022 performance further demonstrates our capability to thrive in all economic cycles and change events. Our financial highlights included: • Core revenue increased 6% to $623.1 million, compared to $588.2 million the prior year. • Net income was $195.4 million, just 3% off last year’s record. • Core efficiency ratio improved to 57.99%, compared to 60.22% the prior year. • Loans receivable increased 13% to a record $10.01 billion (excluding PPP loans). • Core deposits rose to 95% of our total $13.6 billion in deposits. • Non-performing assets remained exceptionally low at 0.15% of total assets. We understand you count on us to deliver consistent, sustainable profitability to generate reliable returns on your investment. We are pleased we were able to provide steadily increasing dividends last year with cumulative cash dividends declared to common shareholders of $1.76 per share, compared to $1.64 the prior year. We also continued our stock repurchase program, buying back 200,000 shares of common stock. Additional Accomplishments Our continuing momentum was key to Forbes ranking us one of America’s 100 Best Banks for the sixth consecutive year and one of the World’s Best Banks for the third year. Additionally, for the 10th year, we earned a five-star rating from BauerFinancial, and J.D. Power again ranked us highest in the Northwest region for customer satisfaction in their 2022 U.S. Retail Banking Satisfaction* study. Independent recognition like this affirms our value proposition continues to resonate with clients and reflects the caring, expert service our employees provide every day. We published our inaugural Environmental, Social and Governance (ESG) Highlights Report last year. While we’ve been engaged in ESG related activities and practices for a very long time, the report makes it easier to share more examples and greater detail in a single, dedicated document. We are pleased with our 2022 results. We understand the pace of change in our industry demands bold thinking and ever-evolving agility to remain relevant in the markets we serve. Last year, we again demonstrated we are up to the challenge. As we continue navigating all economic cycles, we remain committed to being responsible stewards of your investment and keeping true to our values and guiding principle to ‘do the right thing’ for all our shareholders, clients, employees and communities. Sincerely, Mark Grescovich President and Chief Executive Officer Banner Corporation and Banner Bank *Banner Bank received the highest score in the Northwest Region of the J.D. Power 2022 U.S. Retail Banking Satisfaction Study of customers’ satisfaction with their primary bank. Visit jdpower.com/awards for more details. 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 (State or other jurisdiction of incorporation or organization) 91-1691604 (I.R.S. Employer Identification Number) 10 South First Avenue, Walla Walla, Washington 99362 (Address of principal executive offices and zip code) Registrant’s telephone number, including area code: (509) 527-3636 Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $.01 per share (Title of Each Class) BANR (Trading Symbol) The NASDAQ Stock Market LLC (Name of Each Exchange on Which Registered) Securities registered pursuant to section 12(g) of the Act: None. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes X No __ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes __No X Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes X No ____ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company" and emerging growth company in Rule 12b-2 of the Exchange Act: Large accelerated filer X Accelerated filer ___ Non-accelerated filer ___ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ____ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U. S. C 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ___ If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ☐ No X The aggregate market value of the voting common equity held by non-affiliates of the registrant based on the closing sales price of the registrant’s common stock quoted on The NASDAQ Stock Market on June 30, 2022, was: Common Stock – $1,902,548,020 (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the Registrant that such person is an affiliate of the Registrant.) The number of shares outstanding of each of the classes of the registrant’s classes of common stock as of January 31, 2023: Common Stock, $.01 par value – 34,194,105 shares Documents Incorporated by Reference Portions of Proxy Statement for Annual Meeting of Shareholders to be held May 24, 2023 are incorporated by reference into Part III. 2 Page Table of Contents BANNER CORPORATION AND SUBSIDIARIES PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recent Developments and significant events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lending Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit Activities and Other Sources of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Item 3. Item 4. Mine Safety Disclosures Properties Legal Proceedings PART II [Reserved] Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . Item 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Overview Comparison of Financial Condition at December 31, 2022 and 2021 . Comparison of Results of Operations Years ended December 31, 2022 and 2021 Years ended December 31, 2021 and 2020 Market Risk and Asset/Liability Management . Liquidity and Capital Resources Capital Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7A. Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9. Item 9A. Controls and Procedures Item 9B. Other Information Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections PART III Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 11. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 14. Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Principal Accounting Fees and Services PART IV Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Signatures 3 5 5 6 6 10 10 11 12 14 15 15 21 24 25 37 37 38 38 39 41 41 46 58 65 66 69 70 71 71 71 71 71 71 72 72 72 73 73 74 76 Forward-Looking Statements Certain matters in this Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance and projections of financial items, including statements about our financial condition, liquidity and results of operations. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia’s invasion of Ukraine, as well as increasing prices and supply chain disruptions, and any governmental or societal responses to the COVID-19 pandemic, including new COVID-19 variants: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses and provisions for credit losses; the ability to manage loan delinquency rates; competitive pressures among financial services companies; changes in consumer spending or borrowing and spending habits; interest rate movements generally and the relative differences between short and long-term interest rates, loan and deposit interest rates, net interest margin and funding sources; the transition away from the London Interbank Offered Rate (LIBOR) toward new interest rate benchmarks; the impact of repricing and competitors’ pricing initiatives on loan and deposit products; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values; the ability to adapt successfully to technological changes to meet clients’ needs and developments in the marketplace; the ability to access cost-effective funding; the ability to control operating costs and expenses, including the costs associated with our “Banner Forward” initiative; the use of estimates in determining fair value of certain assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect employees, and potential associated charges; disruptions, security breaches or other adverse events, failures or interruptions in, or attacks on, information technology systems or on the third-party vendors who perform critical processing functions; changes in financial markets; changes in economic conditions in general and in Washington, Idaho, Oregon and California in particular, including the risk of inflation; secondary market conditions for loans and the ability to sell loans in the secondary market; the costs, effects and outcomes of litigation; legislation or regulatory changes, including but not limited to changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, results of safety and soundness and compliance examinations by the Board of Governors of the Federal Reserve System (the Federal Reserve), the Federal Deposit Insurance Corporation (the FDIC), the Washington State Department of Financial Institutions, Division of Banks (the Washington DFI), or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require restitution or institute an informal or formal enforcement action which could require an increase in reserves for loan losses, write-downs of assets or changes in regulatory capital position, or affect the ability to borrow funds, or maintain or increase deposits, or impose additional requirements and restrictions, any of which could adversely affect liquidity and earnings; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; the quality and composition of our securities portfolio and the impact of adverse changes in the securities markets; the inability of key third-party providers to perform their obligations; changes in accounting principles, policies or guidelines, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business; other economic, competitive, governmental, regulatory and technological factors affecting operations, pricing, products and services; future acquisitions by Banner of other depository institutions or lines of business; and future goodwill impairment due to changes in Banner’s business, changes in market conditions; and other risks detailed from time to time in our filings with the U.S. Securities and Exchange Commission (SEC), including this report on Form 10-K. Any forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. We do not undertake and specifically disclaim any obligation to update any forward-looking statements included in this report or the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements. As used throughout this report, the terms “we,” “our,” “us,” or the “Company” refer to Banner Corporation and its consolidated subsidiaries, unless the context otherwise requires. All references to “Banner” refer to Banner Corporation and those to the “Bank” refer to its wholly- owned subsidiary, Banner Bank. 4 Item 1 – Business PART 1 General Banner is a bank holding company incorporated in the State of Washington which wholly owns one subsidiary bank, Banner Bank. The Bank is a Washington-chartered commercial bank that conducts business from its main office in Walla Walla, Washington and, as of December 31, 2022, its 137 branch offices and 18 loan production offices located in Washington, Oregon, California, Idaho and Utah. Banner is subject to regulation by the Federal Reserve. The Bank is subject to regulation by the Washington DFI and the FDIC. As of December 31, 2022, we had total consolidated assets of $15.83 billion, net loans of $10.01 billion, total deposits of $13.62 billion and total shareholders’ equity of $1.46 billion. Banner’s common stock is traded on the NASDAQ Global Select Market under the ticker symbol “BANR.” The Bank is a regional bank which offers a wide variety of commercial banking services and financial products to individuals, businesses and public sector entities in its primary market areas. The Bank’s primary business is that of traditional banking institutions, accepting deposits and originating loans in locations surrounding our offices in Washington, Oregon, California and Idaho. The Bank is also an active participant in secondary loan markets, engaging in mortgage banking operations largely through the origination and sale of one- to four- family and multifamily residential loans. Lending activities include commercial business and commercial real estate loans, agriculture business loans, construction and land development loans, one- to four-family and multifamily residential loans, U.S. Small Business Administration (SBA) loans and consumer loans. We continue to invest in our delivery platform across the franchise with a primary emphasis on strengthening our presence in the higher growth regions of our markets. In addition, we continue to improve the efficiency of our branch delivery channel with on-going branch consolidations and investments in streamlining the origination of new loan and deposit accounts while simultaneously enhancing our digital service and account origination capabilities. During the past few years, client adoption of mobile and digital banking has accelerated while physical branch transaction volume has declined. Banner anticipates this shift in client service delivery channel preference will continue. We also focus on expanding our product offerings and investing heavily in marketing campaigns designed to significantly increase the brand awareness for the Bank. These marketing investments are a significant element in our strategy to grow client relationships and increase our market presence, while allowing us to better serve existing and future clients. We believe our branch network, broad product line and heightened brand awareness have created a franchise that is well positioned for growth and successful execution of our super community bank model. Our overall strategy is focused on delivering clients, including middle market and small businesses, business owners, their families and employees, a compelling value proposition by providing the financial sophistication and breadth of products of a regional bank while retaining the appeal, responsiveness, and superior service level of a community bank. In late 2021, we began implementing Banner Forward, a bank-wide initiative to enhance revenue growth and reduce operating expense. Banner Forward is focused on accelerating growth in commercial banking, deepening relationships with retail clients, and advancing technology strategies to enhance our digital service channels, while streamlining underwriting and back office processes. The implementation of the revenue initiatives benefited the second half of 2022 and are expected to continue this trend in 2023. The efficiency-related initiatives associated with Banner Forward have largely been completed. Our successful execution of a super community bank model and strategic initiatives have delivered solid core operating results and profitability over the last several years. Banner’s longer term strategic initiatives continue to focus on originating high quality assets and client acquisition, which we believe will continue to generate strong revenue while maintaining the Company’s moderate risk profile. Our total revenues (net interest income plus non-interest income) for 2022 increased $35.1 million, or 6%, to $628.4 million, compared to $593.3 million for 2021. Our operating results depend primarily on our net interest income, which is the difference between interest income on interest-earning assets, consisting primarily of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of client deposits, Federal Home Loan Bank of Des Moines (FHLB) advances, other borrowings, subordinated notes, and junior subordinated debentures. Net interest income is a function of our interest rate spread, which is the difference between the yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities, as well as a function of the average balances of interest-earning assets, interest- bearing liabilities and non-interest-bearing funding sources including non-interest-bearing deposits. Our net income is also affected by the level of our non-interest income, including deposit fees and other service charges, results of mortgage banking operations, which includes gains and losses on the sale of loans and servicing fees, gains and losses on the sale of securities, as well as our non-interest expenses and provisions for credit losses and income taxes. In addition, our net income is affected by the net change in the value of certain financial instruments carried at fair value. 5 Sale of four branches Recent Developments and Significant Events On June 24, 2022, the Bank completed the sale of four branches located in Hayden, Idaho, and in Chewelah, Colville, and Kettle Falls, Washington, generating a gain of $7.8 million. The branch sale included deposit accounts with an approximate balance of $178.2 million. The Bank received a 5.0% premium in relation to the core deposits. The sale also included all related branch premises and equipment. Consistent with the Banner Forward initiative of improving management’s focus on key operations and markets, the sale of these branches improves the Bank’s service footprint, contributes to our capital and improves operating efficiency. The combined impact of these branch sales and Banner Forward initiatives is expected to enhance future annual operating earnings. Lending Activities General: All of our lending activities are conducted through the Bank and its subsidiary, Community Financial Corporation, a residential construction lender located in Portland, Oregon. We offer a wide range of loan products to meet the demands of our clients and our loan portfolio is very diversified by product type, borrower and geographic location within our market area. We originate loans for our portfolio and for sale in the secondary market. Management’s strategy has been to maintain a well-diversified portfolio with a significant percentage of assets in the loan portfolio having more frequent interest rate repricing terms or shorter maturities than traditional long-term fixed-rate mortgage loans. As part of this effort, we offer a variety of floating or adjustable interest rate products that correlate more closely with our cost of interest-bearing funds, particularly loans for commercial business and real estate, agricultural business, and construction and development purposes. In response to client demand, we also originate fixed-rate loans, including fixed interest rate mortgage loans with terms of up to 30 years. The relative amount of fixed-rate loans and adjustable-rate loans that can be originated at any time is largely determined by the demand for each in a competitive environment. At December 31, 2022, our net loan portfolio totaled $10.01 billion compared to $8.95 billion at December 31, 2021. Our lending activities are primarily directed toward the origination of real estate and commercial loans. Commercial real estate loans include owner-occupied, investment properties and multifamily residential real estate. Our level of activity and investment in commercial real estate loans was relatively stable prior to 2020, when COVID-19 caused a temporary slowdown followed by recovery in 2021 and 2022. We also originate construction, land and land development loans, a significant component of which is our residential one- to four-family construction loans. Our origination of construction, land and development loans has been significant during recent years and balances in this portion of the portfolio have increased in recent periods but not at the same pace of originations as brisk sales of new homes have produced rapid turnover through repayments. Our commercial business lending is directed toward meeting the credit and related deposit and treasury management needs of various small- to medium-sized business and agribusiness borrowers operating in our primary market areas. To a lesser extent, our commercial business lending has also included participation in certain national syndicated loans. The demand for commercial business loans strengthened in 2021 and even further in 2022 as our production levels for 2022 exceeded 2021. Our residential mortgage loan originations have been very strong in recent years, as sustained periods of low interest rates have supported demand for loans to refinance existing debt as well as loans to finance home purchases. Demand for residential mortgage loans slowed during 2022 as the rise in interest rates reduced refinance originations. Typically, most of the one- to four-family loans that we originate are sold in the secondary markets with net gains on sales and loan servicing fees reflected in our revenues from mortgage banking. During 2022, due to the rising interest rates, a larger percentage of our one- to four-family production was held for investment. Our consumer loan activity is primarily directed at meeting demand from our existing deposit clients. One- to Four-Family Residential Real Estate Lending: We originate loans secured by first mortgages on one- to four-family residences in the markets we serve. Through our mortgage banking activities, we sell residential loans on either a servicing-retained or servicing-released basis. In recent years, we have generally sold a significant portion of our conventional residential mortgage originations and nearly all of our government insured loans in the secondary market. At December 31, 2022, $1.17 billion, or 12% of our loan portfolio, consisted of permanent loans on one- to four-family residences. We offer fixed- and adjustable-rate mortgages (ARMs) at rates and terms competitive with market conditions, primarily with the intent of selling these loans into the secondary market. Fixed-rate loans generally are offered on a fully amortizing basis for terms ranging from ten to 30 years at interest rates and fees that reflect current secondary market pricing. Most ARM products offered by us adjust annually after an initial period ranging from one to five years, subject to a limitation on the annual adjustment and a lifetime rate cap. For a small portion of the portfolio, where the initial period exceeds one year, the first interest rate change may exceed the annual limitation on subsequent adjustments. Our ARM products most frequently adjust based upon the average yield on Treasury securities adjusted to a constant maturity of one year or other indices plus a margin or spread above the index. ARM loans held in our portfolio may allow for interest-only payments for an initial period up to five years but do not provide for negative amortization of principal and carry no prepayment restrictions. The retention of ARM loans in our loan portfolio can help reduce our exposure to changes in interest rates. 6 Our residential loans are generally underwritten and documented in accordance with the guidelines established by the Federal Home Loan Mortgage Corporation (Freddie Mac or FHLMC) and the Federal National Mortgage Association (Fannie Mae or FNMA). Government insured loans are underwritten and documented in accordance with the guidelines established by the Department of Housing and Urban Development and the Department of Veterans Affairs. In the loan approval process, we assess the borrower’s ability to repay the loan, the adequacy of the proposed security, the employment stability of the borrower and the creditworthiness of the borrower. For ARM loans, our standard practice provides for underwriting based upon fully indexed interest rates and payments. Generally, we will lend up to 95% of the lesser of the appraised value or purchase price of the property on conventional loans, although higher loan-to-value ratios are available on secondary market programs. We require private mortgage insurance on conventional residential loans with a loan-to-value ratio at origination exceeding 80%. Construction and Land Lending: Historically, we have invested a significant portion of our loan portfolio in residential construction and land loans to professional home builders and developers. Our land loans are typically on improved or entitled land, versus raw land. On a more limited basis, we also make land loans to developers, builders and individuals to finance the acquisition and/or development of improved lots or unimproved land. In making land loans, we follow more conservative underwriting policies than those for construction loans but maintain similar disbursement and monitoring procedures. The initial term on land loans is typically one to three years with interest only payments, payable monthly, with provisions for principal reduction as lots are sold and released. We also make construction loans to qualified owner occupants, which upon completion of the construction phase convert to long-term amortizing one- to four-family residential loans that are eligible for sale in the secondary market. We regularly monitor our construction and land loan portfolios and the economic conditions and housing inventory in each of our markets and increase or decrease this type of lending as we observe market conditions change. Our residential construction and land and land development lending has been recently increasing in select markets and has made a meaningful contribution to our net interest income and profitability. To a lesser extent, we also originate construction loans for commercial and multifamily real estate. Although well diversified with respect to sub-markets, price ranges and borrowers, our construction, land and land development loans are significantly concentrated in the greater Puget Sound region of Washington State and the Portland, Oregon market area. At December 31, 2022, our construction, land and land development loans totaled $1.49 billion, or 15% of total loans; 44% of the balance was comprised of one- to four-family construction and residential land and land development loans, with the remaining balance comprised of commercial and multifamily real estate construction loans and commercial land and land development loans. Construction and land lending affords us the opportunity to achieve higher interest rates and fees with shorter terms to maturity than are usually available on other types of lending. Construction and land lending, however, involves a higher degree of risk than other lending opportunities. We attempt to address these risks by adhering to strict underwriting policies, disbursement procedures and monitoring practices. Commercial and Multifamily Real Estate Lending: We originate loans secured by multifamily and commercial real estate, including loans for construction of multifamily and commercial real estate projects. Commercial real estate loans are made for both owner-occupied and investor-owned properties. At December 31, 2022, our loan portfolio included $1.59 billion in non-owner-occupied commercial real estate loans, $845.3 million in owner-occupied commercial real estate loans, $1.20 billion of small balance commercial real estate or CRE loans (CRE loans up to $2 million) and $645.1 million in multifamily loans which in aggregate comprised 42% of our total loans. Multifamily and commercial real estate lending affords us an opportunity to receive interest at rates higher than those generally available from one- to four- family residential lending. In originating multifamily and commercial real estate loans, we consider the location, marketability and overall attractiveness of the properties. Our underwriting guidelines for multifamily and commercial real estate loans require an appraisal from a qualified independent appraiser, as well as an environmental risk assessment and an economic analysis of each property with regard to the annual revenue and expenses, debt service coverage and fair value to determine the maximum loan amount. In the approval process we assess the borrower’s willingness and ability to manage the property and repay the loan and the adequacy of the collateral in relation to the loan amount. While a portion of our multifamily loan originations are held for investment, typically the majority of multifamily loan originations are sold with the gain recognized as mortgage banking income. Multifamily and commercial real estate loans originated by us are both fixed- and adjustable-rate loans with intermediate terms of generally five to ten years. A significant portion of our multifamily and commercial real estate loans are linked to various FHLB advance rates, certain prime rates, US Treasury rates, or other market rate indices. Rates on these adjustable-rate loans generally adjust with a frequency of one to five years after an initial fixed-rate period ranging from one to ten years. Our commercial real estate portfolio consists of loans on a variety of property types with no large concentrations by property type, location or borrower. At December 31, 2022, the average size of our commercial real estate loans was $1.0 million and the largest commercial real estate loan, in terms of an outstanding balance, in our portfolio was $19.7 million. 7 Commercial Business Lending: We are active in small- to medium-sized business lending. Our commercial bankers are focused on local markets and devote a great deal of effort to developing client relationships and providing these types of borrowers with a full array of products and services delivered in a thorough and responsive manner. Our experienced commercial bankers and senior credit staff help us meet our commitment to small business lending while also focusing on corporate lending opportunities for borrowers with credit needs generally in a $3 million to $25 million range. In addition to providing earning assets, commercial business lending has helped us increase our deposit base. In recent years, our commercial business lending has included modest participation in certain national syndicated loans, including shared national credits. We also originate smaller balance business loans principally through our retail branch network, using our Quick Step business loan program, which is closely aligned with our consumer lending operations and relies on centralized underwriting procedures. Quick Step business loans are available up to $1.0 million, business lines of credit are available up to $500,000 and real estate loans are available up to $1.0 million. As a result of the COVID-19 pandemic, the CARES Act was enacted and authorized the SBA to temporarily guarantee loans under a new loan program called the Paycheck Protection Program (PPP). As a qualified SBA lender, beginning in the second quarter of 2020, we began to offer SBA PPP loans to existing and new clients. The SBA guarantees 100% of the SBA PPP loans made to eligible borrowers. The entire principal amount of the borrower’s SBA PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA if the borrower meets the SBA PPP conditions. The great majority of our SBA PPP loans have been forgiven by the SBA in accordance with the terms of the program. We earn 1% interest on SBA PPP loans as well as a fee from the SBA to cover processing costs, which is amortized over the life of the loan and recognized fully at payoff or forgiveness. The maturity date of the SBA PPP loan is either two or five years from the date of loan origination. At December 31, 2022 and 2021, our total SBA PPP loan balance was $7.9 million and $133.90 million, respectively. The balance of unamortized net deferred fees on SBA PPP loans was $261,000 at December 31, 2022, compared to $4.5 million at December 31, 2021. The PPP ended on May 31, 2021. Commercial business loans, other than SBA PPP loans, may entail greater risk than other types of loans. Conventional commercial business loans generally provide higher yields or related revenue opportunities than many other types of loans but also require more administrative and management attention. Loan terms, including the fixed or adjustable interest rate, the loan maturity and the collateral considerations, vary significantly and are negotiated on an individual loan basis. We underwrite our conventional commercial business loans on the basis of the borrower’s cash flow and ability to service the debt from earnings rather than on the basis of the underlying collateral value. We seek to structure these loans so that they have more than one source of repayment. The borrower is required to provide us with sufficient information to allow us to make a prudent lending determination. In most instances, this information consists of at least three years of financial statements and tax returns, a statement of projected cash flows, current financial information on any guarantor and information about the collateral. Loans to closely held businesses typically require personal guarantees by the principals. Our commercial business loan portfolio is geographically dispersed across the market areas serviced by our branch network and there are no significant concentrations by industry or product. Our commercial business loans may be structured as term loans or as lines of credit. Commercial business term loans are generally made to finance the purchase of fixed assets and have maturities of five years or less. Commercial business lines of credit are typically made for the purpose of providing working capital and are usually approved with a term of one year. Adjustable- or floating-rate loans are primarily tied to prime and Secured Overnight Financing Rate (SOFR) indices. At December 31, 2022, commercial business loans totaled $1.28 billion, or 13% of our total loans receivable, including $7.6 million of SBA PPP loans and $234.1 million of shared national credits. Agricultural Lending: Agriculture is a major industry in several of our markets. We make agricultural loans to borrowers with a strong capital base, sufficient management depth, proven ability to operate through agricultural cycles, reliable cash flows and adequate financial reporting. Payments on agricultural loans depend, to a large degree, on the results of operations of the related farm entity. The repayment is also subject to other economic and weather conditions as well as market prices for agricultural products, which can be highly volatile. At December 31, 2022, agricultural business loans, including collateral secured loans to purchase farm land and equipment, totaled $295.1 million, or 3% of our loan portfolio. Agricultural operating loans generally are made as a percentage of the borrower’s anticipated income to support budgeted operating expenses. These loans are secured by a blanket lien on all crops, livestock, equipment, accounts and products and proceeds thereof. In the case of crops, consideration is given to projected yields and prices from each commodity. The interest rate is normally floating based on the prime rate or another index plus a negotiated margin. Because these loans are made to finance a farm’s or ranch’s annual operations, they are usually written on a one-year review and renewable basis. The renewal is dependent upon the prior year’s performance and the forthcoming year’s projections as well as the overall financial strength of the borrower. We carefully monitor these loans and related variance reports on income and expenses compared to budget estimates. To meet the seasonal operating needs of a farm, borrowers may qualify for single payment notes, revolving lines of credit and/or non-revolving lines of credit. In underwriting agricultural operating loans, we consider the cash flow of the borrower based upon the expected operating results as well as the value of collateral used to secure the loans. Collateral generally consists of cash crops produced by the farm, such as milk, grains, fruit, grass seed, peas, sugar beets, mint, onions, potatoes, corn and alfalfa or livestock. In addition to considering cash flow and obtaining a blanket security interest in the farm’s cash crop, we may also collateralize an operating loan with the farm’s operating equipment, breeding stock, real estate and federal agricultural program payments to the borrower. 8 We also originate loans to finance the purchase of farm equipment. Loans to purchase farm equipment are made for terms of up to seven years. On occasion, we also originate agricultural real estate loans secured primarily by first liens on farmland and improvements thereon located in our market areas, although generally only to service the needs of our existing clients. Loans are generally written in amounts ranging from 50% to 75% of the tax assessed or appraised value of the property for terms of five to 20 years. These loans typically have interest rates that adjust at least every five years based upon a Treasury index or FHLB advance rate plus a negotiated margin. Fixed-rate loans are granted on terms usually not to exceed five years. In originating agricultural real estate loans, we consider the debt service coverage of the borrower’s cash flow, the appraised value of the underlying property, the experience and knowledge of the borrower, and the borrower’s past performance with us and/or the market area. These loans normally are not made to start-up businesses and are reserved for existing clients with substantial equity and a proven history. Among the more common risks to agricultural lending can be weather conditions and disease. These risks may be mitigated through multi- peril crop insurance. Commodity prices also present a risk, which may be mitigated through by the use of set price contracts. Normally, required beginning and projected operating margins provide for reasonable reserves to offset unexpected yield and price deficiencies. In addition to these risks, we also consider management succession, life insurance and business continuation plans when evaluating agricultural loans. Consumer and Other Lending: We originate a variety of consumer loans, including home equity lines of credit, automobile, boat and recreational vehicle loans and loans secured by deposit accounts. While consumer lending has traditionally been a small part of our business, with loans made primarily to accommodate our existing client base, it has received consistent emphasis in recent years. Part of this emphasis includes a Banner Bank-owned credit card program. Similar to other consumer loan programs, we focus this credit card program on our existing client base to add to the depth of our client relationships. In addition to earning balances, credit card accounts produce non-interest revenues through interchange fees and other activity-based revenues. Our underwriting of consumer loans is focused on the borrower’s credit history and ability to repay the debt as evidenced by documented sources of income. At December 31, 2022, we had $680.9 million, or 7% of our loan portfolio, in consumer related loans, including $566.3 million, or 6% of our loan portfolio, in consumer loans secured by one- to four-family residences. Loan Solicitation and Processing: We originate real estate loans in our market areas by direct solicitation of builders, developers, depositors, walk-in clients, real estate brokers and visitors to our website. One- to four-family residential loan applications are taken by our mortgage loan officers or through our website and are processed in branch or regional locations. In addition, we have specialized loan origination units, focused on construction and land development, commercial real estate and multifamily loans. Most underwriting and loan administration functions for our real estate loans are performed by loan personnel at central locations. In addition to commercial real estate loans, our commercial bankers solicit commercial and agricultural business loans through call programs focused on local businesses and farmers. While commercial bankers are delegated reasonable lending authority based upon their qualifications, credit decisions on significant commercial and agricultural loans are made by senior credit officers based on their lending authority or if required, by the Credit Risk Committee of the Board of Directors of the Bank. We originate consumer loans and small business (including Quick Step) commercial business loans through various marketing efforts directed primarily toward our existing deposit and loan clients. Consumer and small business commercial business loan applications are primarily underwritten and documented by centralized administrative personnel. Loan Originations, Sales and Purchases While we originate a variety of loans, our ability to originate each type of loan is dependent upon the relative client demand and competition in each market we serve. For the years ended December 31, 2022 and 2021, we originated loans, net of repayments, including our participation in syndicated loans and loans held for sale of $1.30 billion and $306.8 million, respectively. The year ended December 31, 2022 included repayments of SBA PPP loans of $126.0 million, compared to repayments net of originations of SBA PPP loans of $910.5 million for the year ended December 31, 2021. We sell many of our newly originated one- to four-family residential mortgage loans and multifamily loans to secondary market purchasers as part of our interest rate risk management strategy. Originations of loans for sale decreased to $406.9 million for the year ended December 31, 2022 from $1.10 billion during 2021. Originations of loans for sale included $122.2 million and $225.0 million of multifamily held for sale loan production for the years ended December 31, 2022 and December 31, 2021, respectively. Sales of loans generally are beneficial to us because these sales may generate income at the time of sale, provide funds for additional lending and other investments, increase liquidity or reduce interest rate risk. During the year ended December 31, 2022, we received proceeds of $415.6 million from the sale of loans held for sale compared to $1.28 billion for the year ended December 31, 2021. The held for sale loans sold in 2022 and 2021 included $26.3 million and $287.7 million, respectively, of multifamily loans held for sale. We sell one- to four-family mortgage loans on both a servicing-retained and a servicing-released basis. All loans are sold without recourse but subject to the standard representations and warranties contained in the loan sale agreement. The decision to hold or sell loans is based on asset liability management goals, strategies and policies and on market conditions. In addition, we generally sell the guaranteed portion of SBA loans. We periodically purchase whole loans and loan participation interests or participate in syndicates, including shared national credits. These purchases are made during periods of reduced loan demand in our primary market area as well as to support our Community Reinvestment Act lending activities. Any such purchases or loan participations are generally made on terms consistent with our underwriting standards; however, the loans may be located outside of our normal lending area. 9 Loan Servicing We receive fees from a variety of institutional owners in return for performing the traditional services of collecting individual payments and managing portfolios of sold loans. At December 31, 2022, we were servicing $3.01 billion of loans for others. Loan servicing includes processing payments, accounting for loan funds and collecting and paying real estate taxes, hazard insurance and other loan-related items such as private mortgage insurance. In addition to earning fee income, we retain certain amounts in escrow for the benefit of the lender for which we incur no interest expense but are able to invest the funds into earning assets. Mortgage and SBA Servicing Rights: We record mortgage servicing rights (MSRs) with respect to loans we originate and sell in the secondary market on a servicing-retained basis and SBA servicing rights with respect to the guaranteed portion of SBA loans we sell. The value of MSRs is capitalized and amortized in proportion to, and over the period of, the estimated future net servicing income. Management periodically evaluates the estimates and assumptions used to determine the carrying values of MSRs and the amortization of MSRs. MSRs generally are adversely affected by higher levels of current or anticipated prepayments resulting from decreasing interest rates. MSRs are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is recognized through a valuation allowance, to the extent that fair value is less than the capitalized carrying amount. SBA servicing rights are initially recorded and carried at fair value. Any change in the fair value of SBA servicing rights is recorded in non-interest income. At December 31, 2022, our MSRs were carried at a value of $15.3 million, net of amortization, and SBA servicing rights were carried at a value of $835,000. Asset Quality Classified Assets: State and federal regulations require that the Bank reviews and classify its problem assets on a regular basis. In addition, in connection with examinations of insured institutions, state and federal examiners have authority to identify problem assets and, if appropriate, require them to be classified. Historically, we have not had any meaningful differences of opinion with the examiners with respect to asset classification. The Bank’s Credit Policy Division reviews detailed information with respect to the composition and performance of the loan portfolios, including information on risk concentrations, delinquencies and classified assets for the Bank. The Credit Policy Division approves all recommendations for new classified loans or, in the case of smaller-balance homogeneous loans including residential real estate and consumer loans, it has approved policies governing such classifications, or changes in classifications, and develops and monitors action plans to resolve the problems associated with the assets. The Credit Policy Division also approves recommendations for establishing the appropriate level of the allowance for credit losses. Significant problem loans are transferred to the Bank’s Special Assets Department for resolution or collection activities. Both the Bank’s and Banner’s Boards of Directors, or their respective committees, review asset quality at least quarterly. Allowance for Credit Losses: In originating loans, we recognize that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. 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 specific risk characteristics in the current loan portfolio and forecasted economic conditions, as well as historical credit loss experience. We increase our allowance for credit losses by charging a provision for credit losses against income. Real Estate Owned: Real estate owned (REO) is property acquired by foreclosure or receiving a deed in lieu of foreclosure, and is recorded at the estimated fair value of the property, less expected selling costs. Development and improvement costs relating to the property are capitalized to the extent they add value to the property. The carrying value of the property is periodically evaluated by management and, if necessary, allowances are established to reduce the carrying value to net realizable value. Gains or losses at the time the property is sold are credited or charged to operations in the period in which they are realized. The amounts we will ultimately recover from REO may differ substantially from the carrying value of the assets because of market factors beyond our control or because of changes in our strategies for recovering the investment. Investment Activities Investment Securities: Under Washington state law and FDIC regulation, banks are permitted to invest in various types of marketable securities. Authorized securities include but are not limited to Treasury obligations, securities of various federal agencies (including government-sponsored enterprises), mortgage-backed and asset-backed securities, certain certificates of deposit of insured banks and savings institutions, bankers’ acceptances, repurchase agreements, federal funds, commercial paper, corporate debt and equity securities and obligations of states and their political subdivisions. Our investment policies are designed to provide and maintain adequate liquidity and to generate favorable rates of return without incurring undue interest rate or credit risk. Our policies generally limit investments to U.S. Government and agency (including government-sponsored entities) securities, municipal bonds, certificates of deposit, corporate debt obligations and mortgage-backed securities. Investment in mortgage-backed securities may include those issued or guaranteed by Freddie Mac, Fannie Mae, Government National Mortgage Association (Ginnie Mae or GNMA) and investment grade privately-issued mortgage- backed securities, as well as collateralized mortgage obligations (CMOs). All of our investment securities, including those with a credit rating, are subject to market risk in so far as a change in market rates of interest or other conditions may cause a change in an investment’s earnings performance and/or market value. 10 Derivatives: The Company, through its Banner Bank subsidiary, is party to various derivative instruments that are used for asset and liability management and client financing needs. Derivative instruments are contracts between two or more parties that have a notional amount and an underlying variable, require no net investment and allow for the net settlement of positions. The notional amount serves as the basis for the payment provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents a specified interest rate, index, or other component. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the market value of the derivative contract. Our predominant derivative and hedging activities involve interest rate swaps related to certain term loans, interest rate lock commitments to borrowers, and forward sales contracts associated with mortgage banking activities. Generally, these instruments help us manage exposure to market risk and meet client financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors such as market-driven interest rates and prices or other economic factors. Deposit Activities and Other Sources of Funds General: Deposits, FHLB advances (or other borrowings) and loan repayments are our major sources of funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced by general economic, interest rate and money market conditions and may vary significantly. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. Borrowings may also be used on a longer-term basis to fund loans and investments, as well as to manage interest rate risk. We compete with other financial institutions and financial intermediaries in attracting deposits. There is strong competition for transaction balances and savings deposits from commercial banks, credit unions and non-bank corporations, such as securities brokerage companies, mutual funds and other diversified companies, some of which have nationwide networks of offices. Much of the focus of our acquisitions, branch relocations and renovations, and advertising and marketing campaigns has been directed toward attracting additional deposit client relationships and balances. In addition, our electronic and digital banking activities including debit card and automated teller machine (ATM) programs, Internet banking services and client remote deposit and mobile banking capabilities are all directed at providing products and services that enhance client relationships and result in growing deposit balances as well as fee income. Core deposits (non-interest-bearing checking and interest-bearing transaction and savings accounts) are a fundamental element of our business strategy. Core deposits were 95% of total deposits at December 31, 2022, compared to 94% a year earlier. Deposit Accounts: We generally attract deposits from within our primary market areas by offering a broad selection of deposit instruments, including non-interest-bearing checking accounts, interest-bearing checking accounts, money market deposit accounts, regular savings accounts, certificates of deposit, treasury management services and retirement savings plans. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of deposit accounts, we consider current market interest rates, profitability to us, matching deposit and loan products and client preferences and concerns. Borrowings: While deposits are the primary source of funds for our lending and investment activities and for general business purposes, we also use borrowings to supplement our supply of lendable funds, to meet deposit withdrawal requirements and to more efficiently leverage our capital position. The FHLB serves as our primary borrowing source. The FHLB provides credit for member financial institutions such as the Bank. As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the security of that stock and certain of its mortgage loans and securities, provided that certain credit worthiness standards have been met. Limitations on the amount of advances are based on the financial condition of the member institution, the adequacy of collateral pledged to secure the credit, and FHLB stock ownership requirements. The Federal Reserve Bank serves as an additional source of borrowing capacity. The Federal Reserve Bank provides credit based upon acceptable loan collateral, which includes certain loan types not eligible for pledging to the FHLB. In addition, the Bank has federal funds line of credit agreements with other financial institutions. Availability of lines is subject to federal funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs and the agreements may restrict consecutive day usage. We issue retail repurchase agreements, generally due within 90 days, as an additional source of funds, primarily in connection with treasury management services provided to our larger deposit clients. We also may borrow funds through the use of secured wholesale repurchase agreements with securities brokers. We issued junior subordinated debentures in connection with the sale of trust preferred securities (TPS) from 2002 through 2007 by special purpose business trusts formed by Banner and sold in private offerings to pooled investment vehicles. We invested substantially all of the proceeds from the issuance of these TPS as additional paid in capital at the Bank. In addition, Banner has acquired through acquisitions additional junior subordinated debentures. During 2020, we also issued and sold 5.0% fixed-to-floating subordinated notes due in 2030. 11 Human Capital Strategic Priority: Retain, develop and attract talented people. Personnel At Banner, we seek to provide a work environment that retains, develops and attracts top talent by offering our employees an engaging work experience that allows for career growth and opportunities for meaningful community involvement. Our employees contribute to our commitment to social responsibility through personal volunteerism and active engagement in the communities in which they live and work. As our business grows and evolves, the demand for qualified candidates continues to grow. Meanwhile, the pool of experienced candidates continues to tighten across the financial services industry, making it increasingly challenging to compete for top candidates. To address this challenge, we have developed and continue to enhance a robust and comprehensive company-wide talent management program. The program spans from talent acquisition and selection to performance coaching, career development and retention of our top talent and ultimately to succession planning, always with a focus on diversity, equity and inclusion. Diversity, Equity and Inclusion (DEI). Our commitment to diversity starts with our Board of Directors, which oversees our culture and holds management accountable to build and maintain a diverse and inclusive environment. Our Board, through its Compensation and Human Capital Committee and in partnership with the Bank’s executive team, including its Chief Human Resources and Diversity Officer, oversees our human capital management strategies, programs and practices, including our diversity and inclusion initiatives; oversees our establishment, maintenance and administration of appropriately designed compensation programs and plans; and reviews our employee engagement and exit survey trends. Our cross-functional, employee-led DEI council provides leadership and serves as a catalyst for inclusion and diversity initiatives across our organization. The DEI council is intended to help develop effective strategies to encourage diversity, equity and inclusion in our workplace as well as to attract, develop and retain diverse talent. Additionally, our CEO, Mark Grescovich, has signed the CEO Action for Diversity & Inclusion Pledge to demonstrate our commitment to fostering a diverse and inclusive workplace. With this commitment, among other things, we provide unconscious bias training to all of our employees to help them recognize their blind spots. We aim to maintain a work environment where every employee is treated with dignity and respect, is free from discrimination and harassment and is allowed to devote their full attention and best efforts to performing their job to the best of their ability; we maintain a Respectful Workplace Policy in alignment with this commitment. Employing the best talent — including individuals who possess a broad range of experiences, backgrounds and skills — enables us to anticipate and meet the needs of our business and our clients. We have a strong team of colleagues who are collectively capable of professionally operating the business and fulfilling our vision. The following tables illustrate our employees’ gender and racial diversity by level as of December 31, 2022: Employee Position Level Individual Contributor Manager Director* Executive Total workforce * Refers to director-level employees, not Board of Directors Employee Position Level Individual Contributor Manager Director* Executive Total workforce * Refers to director-level employees, not Board of Directors Female Male 70 % 65 % 46 % 38 % 68 % Persons of Color White 29 % 20 % 14 % — % 27 % 30 % 35 % 54 % 62 % 32 % 71 % 80 % 86 % 100 % 73 % Talent Acquisition and Attrition. The competition for qualified talent continues to increase and we have implemented a number of actions to support recruitment and retention. To cultivate and recruit hard-to-fill positions, we partner closely with several colleges and universities with well-known programs relevant to our business. In 2022, we formally launched a Flexible Workplace Program designed to support hiring talent from a more diverse group of candidates, improve the work experience for our employees, enhance retention and strengthen our leadership pipeline. Additionally, we remain highly focused on retention of female and diverse talent where competitive pressures continue to escalate. Our voluntary turnover rate in 2022 decreased to 21% as compared to 23% in 2021. 12 Our employment application and hiring processes do not solicit prior compensation information from candidates. This helps ensure our new hire compensation is based on individual qualifications and roles, rather than how a candidate may have been previously compensated. During 2022, we hired 571 employees. As of December 31, 2022, we had approximately 37% of our workforce working remotely with women representing 67% and people of color representing 19% of our remote employees. Employee Engagement. We utilize anonymous employee surveys to seek valuable feedback on key initiatives and leverage the results to improve current programs as well as develop new programs. To drive employee engagement, we share the results with our employees. Additionally, senior leadership analyzes areas of progress or opportunities for improvement and prioritizes responsive actions and activities. We have in the past conducted a traditional employee engagement survey, but during the COVID-19 pandemic – particularly in the first year of the pandemic – we shifted our approach to use “pulse surveys,” which enable more frequent engagement with employees and allowed us to focus on discrete areas of employee well-being or other topics of particular interest. In 2022, we focused on employee well-being by adding a pulse survey to address employee burnout. Total Rewards (Compensation and Benefits). We provide robust compensation and benefits programs to help meet the needs of our employees. These programs include, subject to eligibility policies, variable pay tied to performance for all employees, a 401(k) plan (including an employer match up to 4% of eligible earnings), healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family care resources, flexible work schedules, employee assistance programs and tuition assistance, among many others. We also grant long-term, stock-based incentive awards to a select group of senior leaders who we believe will play critical roles in the Company’s future. Pay equity is a core tenet of our compensation philosophy and is central to our values. Banner began conducting periodic, rigorous pay equity studies in 2017 with the assistance of outside experts to examine groups of employees in similar roles, accounting for factors that appropriately explain differences in pay, such as job location and experience. We intend to continue our pay equity analysis on a periodic basis to support our ongoing commitment in this area. We offer comprehensive health insurance coverage, including telehealth services, to employees working an average of 20 hours or more each week. Coverage is also available to eligible employees’ family members including domestic partners. In addition to our traditional health insurance coverage, we offer employees a suite of mental health-related programs and benefits, including text-based and telehealth services, a 24-hour nurse line and an employee assistance program. Additionally, we offer virtual physical therapy benefits, virtual support for hypertension and diabetes, and subsidized child, adult or senior care planning services. At the beginning of 2022, we launched our parental leave program which provides eight weeks of leave for both birth and non-birth parents, as well as adoption or surrogacy. In addition to traditional sick leave of up to ten days per year, in 2022 we added (i) 12 weeks of short-term disability coverage, and (ii) a new paid company holiday – Juneteenth – a historically important day that aligns with our diversity and inclusion efforts. We also offer up to 16 paid hours that employees can take during the year to celebrate an individual day of significance, such as a religious holiday or a day of cultural significance, or for other personal reasons. Health, Safety and Well-being. The success of our business is fundamentally connected to the well-being of our employees. We provide employees and their families with access to a variety of programs to support their physical and mental health. In 2022, we were pleased to add a wellness coach benefit (which can also be shared with up to five non-family members) that provides unlimited free one-on-one personal coaching in several different categories such as fitness, nutrition, life coaching, and financial coaching, as well as a range of tools to improve sleep quality. Volunteerism. We strive to be a good corporate citizen by encouraging employees to be engaged in the communities where they live and work. To help remove roadblocks to volunteering, we offer Community Connections, a program that offers employees up to 16 hours of paid time off to volunteer at non-profit organizations of their choice. We also encourage employees to serve in leadership roles in these organizations as part of their professional development. We are proud to support many local community organizations through financial contributions and employee-driven volunteerism, including Junior Achievement, United Way and hundreds of other organizations. Talent Development. We invest significant resources developing the talent needed to be an employer of choice. We deliver a variety of training opportunities, and our talent development programs provide employees with resources to help achieve their career goals, build management skills and lead their teams. To encourage advancement and growth within our organization, we provide information and guides to help individuals design their own career paths. With this strong focus on internal talent development, we filled 20% of all open positions with internal candidates in 2022. Internal mobility is a particular focus for our DEI council as part of our strategy to increase diverse representation at more senior levels of the organization. We require all employees to complete a wide range of online training courses on an annual basis, including job-specific courses as well as general courses covering regulatory compliance, cybersecurity, fraud prevention, workplace standards and ethics, among others. We also encourage employees to enroll in outside education programs to broaden their knowledge and enhance job performance. We provide tuition assistance for external education to help employees hone existing skills and acquire new competencies in areas that align with business goals. 13 Succession Planning. Because our Board of Directors recognizes the importance of succession planning for our CEO and other key executives, the Board is actively involved in monitoring our efforts surrounding this initiative. The Board annually reviews our succession plans for senior leadership roles, with the goal of ensuring we will continue to have the right leadership talent in place to execute the organization’s long-term strategic plans. Through its Compensation and Human Capital Committee, our Board of Directors provides oversight of our talent development and succession planning for senior leadership roles, including reviewing the metrics we track on the gender and ethnic diversity of high-potential employees. Human Capital Metrics. We capture critical metrics regarding human capital management and report them to the Compensation and Human Capital Committee of the Board of Directors on a quarterly basis. The Human Capital Management Dashboard includes a mixture of trending and point-in-time metrics designed to provide information and analysis of workforce demographics; talent acquisition; workforce stability (retention, turnover, etc.); employee engagement; learning and development; and total rewards. As of December 31, 2022, we employed 1,977 full- and part-time employees across our four-state footprint, which equates to 1,931 full-time equivalent employees (based on scheduled hours). Our employees are not represented by a collective bargaining agreement. As of December 31, 2022, 59% of our employees work in Washington State. We also have employees working in Oregon (19%), California (15%) and other states (7%). As of December 31, 2022, five generations of employees were represented in our workplace with Millennials being our largest generation (37%), followed by Gen Xers (35%), Boomers (20%) and Gen Zers (8%). Incentive Compensation Risk Management. We strive to align incentives with the risk and performance frameworks of the Company. The Company’s “pay for performance” philosophy connects individual, operating unit and Company results to compensation, providing employees with opportunities to share in the Company’s overall growth and success. We develop, execute and govern all incentive compensation plans to discourage imprudent or excessive risk-taking and balance financial reward in a manner that supports our clients, employees and Company. Tax-Sharing Agreement Taxation Banner files its federal and state income tax returns on a consolidated basis under a tax-sharing agreement between the Company and the Bank, including the Bank’s subsidiaries. Each company of the consolidated group has calculated a minimum income tax which would be required if the individual subsidiary were to file federal and state income tax returns as a separate entity. Each subsidiary pays to the Company an amount equal to the estimated income tax due if it were to file as a separate entity. The payment is made on or about the time the subsidiary would be required to make such tax payments to the United States Treasury or the applicable State Departments of Revenue. In the event the computation of the subsidiary’s federal or state income tax liability, after taking into account any estimated tax payments made, would result in a refund if the subsidiary were filing income tax returns as a separate entity, then the Company pays to the subsidiary an amount equal to the hypothetical refund. The Company is an agent for each subsidiary with respect to all matters related to the consolidated tax returns and refunds claims. If Banner’s consolidated federal or state income tax liability is adjusted for any period, the liability of each party under the tax-sharing agreement is recomputed to give effect to such adjustments and any additional payments required as a result of the adjustments are made within a reasonable time after the corresponding additional tax payments are made or refunds are received. Federal Taxation For tax reporting purposes, we report our income on a calendar year basis using the accrual method of accounting on a consolidated basis. We are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the reserve for bad debts. State Taxation Washington Taxation: We are subject to a Business and Occupation (B&O) tax which is imposed by the State of Washington on gross receipts. Interest received on loans secured by mortgages or deeds of trust on residential properties, residential mortgage-backed securities, and certain U.S. Government and agency securities is not subject to this tax. California, Oregon, Idaho, Montana and Utah Taxation: Corporations with nexus in the states of California, Oregon, Idaho, Montana and Utah are subject to a corporate level income tax. In 2020, the state of Oregon implemented a tax on Oregon corporate revenue. If a large percentage of our income were to come from these states, our state income tax provision would have an increased effect on our effective tax rate and results of operations. 14 Competition We encounter significant competition both in attracting deposits and in originating loans. Our most direct competition for deposits comes from other commercial and savings banks, savings associations and credit unions with offices in our market areas. We also experience competition from securities firms, insurance companies, money market and mutual funds, and other investment vehicles. We expect continued strong competition from such financial institutions and investment vehicles in the foreseeable future, including competition from on-line banking competitors and “FinTech” companies that rely on technology to provide financial services. Our ability to attract and retain deposits depends on our ability to provide transaction services and investment opportunities that satisfy the requirements of depositors. We compete for deposits by offering a variety of accounts and financial services, including electronic banking capabilities, with competitive rates and terms, at convenient locations and business hours, and delivered with a high level of personal service and expertise. Competition for loans comes principally from other commercial banks, loan brokers, mortgage banking companies, savings banks and credit unions and for agricultural loans from the Farm Credit Administration. The competition for loans is intense as a result of the large number of institutions competing in our market areas. We compete for loans primarily by offering competitive rates and fees and providing timely decisions and excellent service to borrowers. Regulation General: As a state-chartered, federally insured commercial bank, the Bank is subject to extensive regulation and must comply with various statutory and regulatory requirements, including prescribed minimum capital standards. The Bank is regularly examined by the FDIC and the Washington DFI and files periodic reports concerning its activities and financial condition with these banking regulators. The Bank’s relationship with depositors and borrowers also is regulated to a great extent by both federal and state law, especially in such matters as the ownership of deposit accounts and the form and content of mortgage and other loan documents. Federal and state banking laws and regulations govern all areas of the operation of the Bank, including reserves, loans, investments, deposits, capital, issuance of securities, payment of dividends and establishment of branches. Federal and state bank regulatory agencies also have the general authority to limit the dividends paid by insured banks and bank holding companies if such payments should be deemed to constitute an unsafe and unsound practice and in other circumstances. The Federal Reserve and FDIC, as the respective primary federal regulators of Banner and of the Bank, have authority to impose penalties, initiate civil and administrative actions and take other steps intended to prevent banks from engaging in unsafe or unsound practices. The Consumer Financial Protection Bureau (CFPB) is an independent bureau within the Federal Reserve System. The CFPB is responsible for the implementation of the federal financial consumer protection and fair lending laws and regulations and has authority to impose new requirements. Any change in applicable laws, regulations, or regulatory policies may have a material effect on our business, operations, and prospects. We cannot predict the nature or the extent of the effects on our business and earnings that any fiscal or monetary policies or new federal or state legislation may have in the future. The following is a summary discussion of certain laws and regulations applicable to Banner and the Bank which is qualified in its entirety by reference to the actual laws and regulations. Banner Bank State Regulation and Supervision: As a Washington state-chartered commercial bank with branches in the States of Washington, Oregon, Idaho and California, the Bank is subject not only to the applicable provisions of Washington law and regulations, but is also subject to Oregon, Idaho and California law and regulations. These state laws and regulations govern the Bank’s ability to take deposits and pay interest thereon, to make loans on or invest in residential and other real estate, to make consumer loans, to invest in securities, to offer various banking services to its clients and to establish branch offices. Deposit Insurance: The Deposit Insurance Fund of the FDIC insures deposit accounts of the Bank up to $250,000 per separately insured deposit relationship category. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. Under the FDIC’s rules the assessment base for a bank is equal to its total average consolidated assets less average tangible capital. Under the current rules, when the reserve ratio for the prior assessment period reaches, or is greater than 2.0% and less than 2.5%, assessment rates will range from two basis points to 28 basis points and when the reserve ratio for the prior assessment period is greater than 2.5%, assessment rates will range from one basis-point to 25 basis points (in each case subject to adjustments as described above for current rates). No institution may pay a dividend if it is in default on its federal deposit insurance assessment. As of December 31, 2022, assessment rates ranged from three basis points to 30 basis points for all institutions, subject to adjustments for unsecured debt issued by the institution, unsecured debt issued by other FDIC-insured institutions, and brokered deposits held by the institution. Extraordinary growth in insured deposits during the first and second quarters of 2020 caused the Deposit Insurance Fund (DIF) reserve ratio to decline below the statutory minimum of 1.35 percent as of June 30, 2020. In September 2020, the FDIC Board of Directors adopted a Restoration Plan to restore the reserve ratio to at least 1.35 percent within eight years, absent extraordinary circumstances, as required by the Federal Deposit Insurance Act. The Restoration Plan maintained the assessment rate schedules in place at the time and required the FDIC to update its analysis and projections for the DIF balance and reserve ratio at least semiannually. 15 In the semiannual update for the Restoration Plan in June 2022, the FDIC projected that the reserve ratio was at risk of not reaching the statutory minimum of 1.35 percent by September 30, 2028, the statutory deadline to restore the reserve ratio. Based on this update, the FDIC Board approved an Amended Restoration Plan, and concurrently proposed an increase in initial base deposit insurance assessment rate schedules uniformly by 2 basis points, applicable to all insured depository institutions. In October 2022, the FDIC Board finalized the increase with an effective date of January 1, 2023, applicable to the first quarterly assessment period of 2023. The revised assessment rate schedules are intended to increase the likelihood that the reserve ratio of the DIF reaches the statutory minimum level of 1.35 percent by September 30, 2028. The FDIC conducts examinations of and requires reporting by state non-member banks, such as the Bank. The FDIC also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious risk to the deposit insurance fund. The FDIC may terminate the deposit insurance of any insured depository institution if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is not aware of any existing circumstances which would result in termination of the deposit insurance of the Bank. Standards for Safety and Soundness: The federal banking regulatory agencies have prescribed, by regulation, guidelines for all insured depository institutions relating to internal controls, information systems and internal audit systems; loan documentation; credit underwriting; interest rate risk exposure; asset growth; asset quality; earnings; and compensation, fees and benefits. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions. Each insured depository institution must implement a comprehensive written information security program that includes administrative, technical, and physical safeguards appropriate to the institution’s size and complexity and the nature and scope of its activities. The information security program must be designed to ensure the security and confidentiality of client information, protect against any unanticipated threats or hazards to the security or integrity of such information, protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any client, and ensure the proper disposal of client and consumer information. Each insured depository institution must also develop and implement a risk-based response program to address incidents of unauthorized access to client information in client information systems. If the FDIC determines that an institution fails to meet any of these guidelines, it may require an institution to submit to the FDIC an acceptable plan to achieve compliance. Capital Requirements: Bank holding companies, such as Banner, and federally insured financial institutions, such as the Bank, are required to maintain a minimum level of regulatory capital. Banner and the Bank are subject to minimum required ratios for Common Equity Tier 1 (CET1) capital, Tier 1 capital, total capital and the leverage ratio and a required capital conservation buffer over the required capital ratios. Under the capital regulations, the minimum capital ratios are: (1) a CET1 capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (3) a total risk-based capital ratio of 8.0% of risk-weighted assets; and (4) a leverage ratio (the ratio of Tier 1 capital to average total consolidated assets) of 4.0%. CET1 generally consists of common stock; retained earnings; accumulated other comprehensive income (AOCI) unless an institution elects to exclude AOCI from regulatory capital; and certain minority interests; all subject to applicable regulatory adjustments and deductions. Tier 1 capital generally consists of CET1 and noncumulative perpetual preferred stock. Tier 2 capital generally consists of other preferred stock and subordinated debt meeting certain conditions plus an amount of the allowance for credit losses up to 1.25% of assets. Total capital is the sum of Tier 1 and Tier 2 capital. Trust preferred securities issued by a bank holding company, such as the Company, with total consolidated assets of less than $15 billion before May 19, 2010, and treated as regulatory capital are grandfathered, but any such securities issued later are not eligible to be treated as regulatory capital. If an institution grows above $15 billion as a result of an acquisition, the trust preferred securities are excluded from Tier 1 capital and instead included in Tier 2 capital. Mortgage servicing assets and deferred tax assets over designated percentages of CET1 are deducted from capital. In addition, Tier 1 capital includes AOCI, which includes all unrealized gains and losses on available for sale debt and equity securities. However, because of our asset size, we were eligible to elect, and did elect, to permanently opt out of the inclusion of unrealized gains and losses on available for sale debt and equity securities in our capital calculations. For purposes of determining risk-based capital, assets and certain off-balance sheet items are risk-weighted from 0% to 1,250%, depending on the risk characteristics of the asset or item. The regulations include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (up from 0%); and a 250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital. In addition to the minimum CET1, Tier 1, leverage ratio and total capital ratios, Banner and the Bank must maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based capital levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. 16 To be considered “well capitalized,” a bank holding company must have, on a consolidated basis, a total risk-based capital ratio of 10.0% or greater and a Tier 1 risk-based capital ratio of 6.0% or greater and must not be subject to an individual order, directive or agreement under which the FRB requires it to maintain a specific capital level. To be considered “well capitalized,” a depository institution must have a Tier 1 risk-based capital ratio of at least 8.0%, a total risk-based capital ratio of at least 10.0%, a CET1 capital ratio of at least 6.5% and a leverage ratio of at least 5.0% and not be subject to an individualized order, directive or agreement under which its primary federal banking regulator requires it to maintain a specific capital level. Upon adoption of CECL, a banking organization must record a one-time adjustment to its credit loss allowances as of the beginning of the fiscal year of adoption equal to the difference, if any, between the amount of credit loss allowances under the prior methodology and the amount required under CECL. Concurrent with enactment of the CARES Act, federal banking agencies issued an interim final rule that delayed the estimated impact on regulatory capital resulting from the adoption of CECL. The interim final rule provides banking organizations that implement CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay. The changes in the final rule apply only to those banking organizations that elect the CECL transition relief provided under the rule. Banner and the Bank elected this option. Prompt Corrective Action: Federal statutes establish a supervisory framework for FDIC-insured institutions based on five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An institution’s category depends upon where its capital levels are in relation to relevant capital measures. The well-capitalized category is described above. An institution that is not well capitalized is subject to certain restrictions on brokered deposits, including restrictions on the rates it can offer on its deposits generally. To be considered adequately capitalized, an institution must have the minimum capital ratios described above. Any institution which is neither well capitalized nor adequately capitalized is considered undercapitalized. Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions which become more extensive as an institution becomes more severely undercapitalized. Failure by the Bank to comply with applicable capital requirements would, if unremedied, result in progressively more severe restrictions on its activities and lead to enforcement actions, including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels and, ultimately, the appointment of the FDIC as receiver or conservator. Banking regulators will take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. Additionally, approval of any regulatory application filed for their review may be dependent on compliance with capital requirements. As of December 31, 2022, Banner and the Bank met the requirements to be “well capitalized” and the capital conservation buffer requirements. Commercial Real Estate Lending Concentrations: The federal banking agencies have issued guidance on sound risk management practices for concentrations in commercial real estate lending. The particular focus is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be sensitive to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is not to limit a bank’s commercial real estate lending but to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance directs the FDIC and other bank regulatory agencies to focus their supervisory resources on institutions that may have significant commercial real estate loan concentration risk. A bank that has experienced rapid growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding the following supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk: • Total reported loans for construction, land development and other land represent 100% or more of the bank’s total regulatory capital; or • Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank’s total regulatory capital and the outstanding balance of the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be taken into account in supervisory guidance on evaluation of capital adequacy. As of December 31, 2022, the Bank’s aggregate recorded loan balances for construction, land development and land loans were 88% of total regulatory capital. In addition, at December 31, 2022, the Bank’s loans secured by commercial real estate represent 268% of total regulatory capital. Activities and Investments of Insured State-Chartered Financial Institutions: Federal law generally limits the activities and equity investments of FDIC insured, state-chartered banks to those that are permissible for national banks. An insured state bank is not prohibited from, among other things, (1) acquiring or retaining a majority interest in a subsidiary, (2) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets, (3) acquiring up to 10% of the voting stock of a company that solely provides or re-insures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions, and (4) acquiring or retaining the voting shares of a depository institution if certain requirements are met. 17 Washington State has enacted laws regarding financial institution parity. These laws afford Washington-chartered commercial banks the same powers as Washington-chartered savings banks and provide that Washington-chartered commercial banks may exercise any of the powers that the Federal Reserve has determined to be closely related to the business of banking and the powers of national banks, subject to the approval of the Director in certain situations. Finally, the law provides additional flexibility for Washington-chartered banks with respect to interest rates on loans and other extensions of credit. Specifically, they may charge the maximum interest rate allowable for loans and other extensions of credit by federally-chartered financial institutions. Environmental Issues Associated With Real Estate Lending: The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) is a federal statute that generally imposes strict liability on all prior and present “owners and operators” of sites containing hazardous waste. However, Congress acted to protect secured creditors by providing that the term “owner and operator” excludes a person whose ownership is limited to protecting its security interest in the site. Since the enactment of the CERCLA, this “secured creditor exemption” has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as collateral for a loan. To the extent that legal uncertainty exists in this area, all creditors, including the Bank, that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property. Federal Reserve System: The Federal Reserve has the authority to establish reserve requirements on transaction accounts or non-personal time deposits. These reserves may be in the form of cash or non-interest-bearing deposits with the regional Federal Reserve Bank. Interest- bearing checking accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to Regulation D reserve requirements, as are any non-personal time deposits at a bank. In response to COVID-19, the Federal Reserve reduced requirements to zero percent effective on March 26, 2020, to support lending to households and businesses. Currently, the Federal Reserve has stated it has no plans to re-impose reserve requirements. However, the Federal Reserve may adjust reserve requirement ratios in the future if conditions warrant. Affiliate Transactions: Banner and the Bank are separate and distinct legal entities. Banner (and any non-bank subsidiary of Banner) is an affiliate of the Bank. Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates. Transactions deemed to be a “covered transaction” under Section 23A of the Federal Reserve Act between a bank and an affiliate are limited to 10% of the bank’s capital and surplus and, with respect to all affiliates, to an aggregate of 20% of the bank’s capital and surplus. Further, covered transactions that are loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also requires that covered transactions and certain other transactions listed in Section 23B of the Federal Reserve Act between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates. Community Reinvestment Act: The Bank is subject to the provisions of the Community Reinvestment Act of 1977 (CRA), which requires the appropriate federal banking regulatory agency to assess a bank’s performance under the CRA in meeting the credit needs of the community serviced by the bank, including low and moderate income neighborhoods. The regulatory agency’s assessment of the bank’s record is made available to the public. Further, a bank’s CRA performance rating must be considered in connection with a bank’s application to, among other things, establish a new branch office that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. The Bank received an “outstanding” rating during its most recently completed CRA examination. Dividends: The amount of dividends payable by the Bank to the Company depends upon its earnings and capital position, and is limited by federal and state laws, regulations and policies, including the capital conservation buffer requirement. Federal law further provides that no insured depository institution may make any capital distribution (which includes a cash dividend) if, after making the distribution, the institution would be “undercapitalized,” as defined in the prompt corrective action regulations. Moreover, the federal bank regulatory agencies also have the general authority to limit the dividends paid by insured banks if such payments should be deemed to constitute an unsafe and unsound practice. In addition, under Washington law, no bank may declare or pay any dividend in an amount greater than its retained earnings without the prior approval of the Washington DFI. The Washington DFI also has the power to require any bank to suspend the payment of any and all dividends. Privacy Standards and Cybersecurity: The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (GLBA) modernized the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. Federal banking agencies, including the FDIC, have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of the board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services. These regulations require the Bank to disclose its privacy policy, including informing consumers of its information sharing practices and informing consumers of their rights to opt out of certain practices. In addition, other state cybersecurity and data privacy laws and regulations may expose the Bank to risk and result in certain risk management costs. 18 The California Consumer Privacy Act of 2018 (the CCPA), which became effective on January 1, 2020, gives California residents the right to request disclosure of information collected about them, and whether that information has been sold or shared with others, the right to request deletion of personal information (subject to certain exceptions), the right to opt out of the sale of personal information, and the right not to be discriminated against for exercising these rights. The CCPA also created a private right of action with statutory damages for data security breaches, thereby increasing potential liability associated with a data breach, which has triggered a number of class actions against other companies since January 1, 2020. Although the Bank may enjoy several fairly broad exemptions from the CCPA’s privacy requirements, those exemptions do not extend to the private right of action for a data security breach. In November 2020, voters in the State of California approved the California Privacy Rights Act (CPRA), a ballot measure that amends and supplements the substantive requirements of the CCPA, as well as providing certain mechanisms for administration and enforcement of the statute by creating the California Privacy Protection Agency, a watchdog privacy agency. The CCPA, the CPRA as well as other similar state data privacy laws and regulations, may require the establishment by the Bank of certain regulatory compliance and risk management controls. Non-compliance with the CCPA, the CPRA or similar state privacy laws and regulations could lead to substantial regulatory imposed fines and penalties, damages from private causes of action and/or reputational harm. In addition, Congress and federal regulatory agencies are considering similar laws or regulations that could create new individual privacy rights and impose increased obligations on companies handling personal data. On November 18, 2021, the federal banking agencies announced the issuance of a new rule, effective April 1, 2022, providing for new notification requirements for banking organizations and their service providers for significant cybersecurity incidents. Specifically, the new rule requires banking organizations to notify their primary federal regulator as soon as possible, and not later than 36 hours after, the discovery of a computer-security incident that rises to the level of a notification incident within the meaning attributed to those terms by the rule. Notification is required for incidents that have materially affected or are reasonably likely to materially affect the viability of a banking organization’s operations, its ability to deliver banking products and services, or the stability of the financial sector. Service providers are required under the rule to notify any affected bank to which it provides services as soon as possible when it determines it has experienced a computer-security incident that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, covered services provided by that entity to the bank for four or more hours. Anti-Money Laundering and Client Identification: The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) was signed into law on October 26, 2001. The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of clients seeking to open new financial accounts, and the beneficial owners of accounts. Bank regulators are directed to consider an institution’s effectiveness in combating money laundering when ruling on Bank Holding Company Act and Bank Merger Act applications. The Bank’s policies and procedures are designed to comply with the requirements of the USA Patriot Act. Other Consumer Protection Laws and Regulations: The CFPB is empowered to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. The Bank and its affiliates and subsidiaries are subject to CFPB supervisory and enforcement authority. The Bank is subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of its business relationships with consumers. While the list set forth below is not exhaustive, these include the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfers Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and state laws prohibiting unfair and deceptive business practices, and various regulations that implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with clients when taking deposits, making loans, collecting loans, and providing other services. Failure to comply with these laws and regulations can subject the Bank to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages, and the loss of certain contractual rights. Banner Corporation General: Banner, as sole shareholder of the Bank, is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to comprehensive regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended, or the BHCA, and the regulations of the Federal Reserve. We are required to file quarterly reports with the Federal Reserve and provide additional information as the Federal Reserve may require. The Federal Reserve may examine us, and any of our subsidiaries, and charge us for the cost of the examination. The Federal Reserve also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices. Banner is also required to file certain reports with, and otherwise comply with the rules and regulations of the SEC. 19 The Bank Holding Company Act: Under the BHCA, Banner is supervised by the Federal Reserve. The Federal Reserve has a policy that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, the Dodd-Frank Act provides that a bank holding company must serve as a source of financial strength to its subsidiary banks. A bank holding company’s failure to meet its obligation to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve’s regulations or both. No regulations have yet been proposed by the Federal Reserve to implement the source of strength provisions of the Dodd-Frank Act. Banner and any subsidiaries that it may control are considered “affiliates” of the Bank within the meaning of the Federal Reserve Act, and transactions between the Bank and affiliates are subject to numerous restrictions. With some exceptions, Banner and its subsidiaries are prohibited from tying the provision of various services, such as extensions of credit, to other services offered by Banner or by its affiliates. Acquisitions: The BHCA prohibits a bank holding company, with certain exceptions, from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. Under the BHCA, the Federal Reserve may approve the ownership of shares by a bank holding company in any company, the activities of which the Federal Reserve has determined to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto. These activities include: operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers’ checks and U.S. Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for clients. Federal Securities Laws: Banner’s common stock is registered with the SEC under Section 12(b) of the Securities Exchange Act of 1934, as amended. We are subject to information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934 (the Exchange Act). The Dodd-Frank Act: The Dodd-Frank Act imposes various restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions, and implements certain capital regulations applicable to Banner and the Bank that are discussed above under the section entitled “Capital Requirements.” In addition, among other changes, the Dodd-Frank Act requires public companies, like Banner, to (i) provide their shareholders with a non- binding vote (a) at least once every three years on the compensation paid to executive officers and (b) at least once every six years on whether they should have a “say on pay” vote every one, two or three years; (ii) have a separate, non-binding shareholder vote regarding golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that would trigger the parachute payments; (iii) provide disclosure in annual proxy materials concerning the relationship between the executive compensation paid and the financial performance of the issuer; and (iv) disclose the ratio of the Chief Executive Officer’s annual total compensation to the median annual total compensation of all other employees. The regulations to implement the provisions of Section 619 of the Dodd-Frank Act, commonly referred to as the Volcker Rule, contain prohibitions and restrictions on the ability of financial institutions holding companies and their affiliates to engage in proprietary trading and to hold certain interests in, or to have certain relationships with, various types of investment funds, including hedge funds and private equity funds. Banner is continuously reviewing its investment portfolio to determine if changes in its investment strategies are in compliance with the various provisions of the Volcker Rule regulations. Interstate Banking and Branching: The Federal Reserve must approve an application of a bank holding company to acquire control, or acquire all or substantially all of the assets, of a bank located in a state other than the holding company’s home state, without regard to whether the transaction is prohibited by the laws of any state. The Federal Reserve may not approve the acquisition of a bank that has not been in existence for the minimum time period (not exceeding five years) specified by the statutory law of the host state. Nor may the Federal Reserve approve an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank’s home state or in any state in which the target bank maintains a branch. Federal law does not affect the authority of states to limit the percentage of total insured deposits in the state which may be held or controlled by a bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% state-wide concentration limit contained in the federal law. The federal banking agencies are generally authorized to approve interstate merger transactions without regard to whether the transaction is prohibited by the law of any state. Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions are subject to the nationwide and statewide insured deposit concentration amounts described above. Under the Dodd-Frank Act, the federal banking agencies may generally approve interstate de novo branching. 20 Dividends: The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses its view that although there are no specific regulations restricting dividend payments by bank holding companies other than state corporate laws, a bank holding company must maintain an adequate capital position and generally should not pay cash dividends unless the company’s net income for the past year is sufficient to fully fund the cash dividends and that the prospective rate of earnings appears consistent with the company’s capital needs, asset quality, and overall financial condition. The Federal Reserve policy statement also indicates that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. The capital conversion buffer requirement can also restrict Banner’s and the Bank’s ability to pay dividends. Further, under Washington law, Banner is prohibited from paying a dividend if, after making such dividend payment, it would be unable to pay its debts as they become due in the usual course of business, or if its total liabilities, plus the amount that would be needed in the event Banner were to be dissolved at the time of the dividend payment, to satisfy preferential rights on dissolution of holders of preferred stock ranking senior in right of payment to the capital stock on which the applicable distribution is to be made, exceed our total assets. Stock Repurchases: A bank holding company, except for certain “well-capitalized” and highly rated bank holding companies, is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding twelve months, is equal to 10% or more of its consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order or any condition imposed by, or written agreement with, the Federal Reserve. Executive Officers Management Personnel The following table sets forth information with respect to the executive officers of Banner Corporation and Banner Bank as of December 31, 2022: Name Mark J. Grescovich Janet M. Brown Peter J. Conner James M. Costa James P. Garcia Kayleen R. Kohler Kenneth A. Larsen Sherrey Luetjen James P. G. McLean Cynthia D. Purcell M. Kirk Quillin James T. Reed, Jr. Jill M. Rice Age 58 55 57 54 63 50 53 51 58 65 60 60 57 Position with Banner Bank Position with Banner Corporation President, Chief Executive Officer, Director President, Chief Executive Officer, Director Executive Vice President, Chief Information Officer Executive Vice President, Chief Financial Officer Executive Vice President, Chief Risk Officer Executive Vice President, Chief Financial Officer, Treasurer Executive Vice President, General Counsel, Ethics Officer, Secretary Executive Vice President, Chief Audit Executive Executive Vice President, Human Resources, Chief Diversity Officer Executive Vice President, Mortgage Banking Executive Vice President, General Counsel, Secretary Executive Vice President, Commercial Real Estate Lending Division Executive Vice President, Chief Strategy and Administration Officer Executive Vice President, Chief Commercial Executive Executive Vice President, Commercial Banking Executive Vice President, Chief Credit Officer 21 Biographical Information Set forth below is certain information regarding the executive officers of Banner Corporation and Banner Bank. There are no family relationships among or between the directors or executive officers. Mark J. Grescovich is President and Chief Executive Officer, and a director, of Banner Corporation and Banner Bank. Mr. Grescovich joined Banner Bank in April 2010 and became Chief Executive Officer in August 2010 following an extensive banking career specializing in finance, credit administration and risk management. Under his leadership, Banner has grown from $4.7 billion in assets in 2010 to more than $15 billion through organic growth as well as selective acquisitions. During that time, Mr. Grescovich has guided the expansion of the Company’s footprint to over 135 locations in four states. Prior to joining the Bank, Mr. Grescovich was the Executive Vice President and Chief Corporate Banking Officer for Akron, Ohio-based FirstMerit Corporation and FirstMerit Bank N.A., a commercial bank with $14.5 billion in assets and over 200 branch offices in three states. He assumed responsibility for FirstMerit’s commercial and regional line of business in 2007, having served since 1994 in various commercial and corporate banking positions, including that of Chief Credit Officer. Prior to joining FirstMerit, Mr. Grescovich was a Managing Partner in corporate finance with Sequoia Financial Group, Inc. of Akron, Ohio and a commercial and corporate lending officer and credit analyst with Society National Bank of Cleveland, Ohio. He has a Bachelor of Business Administration degree in finance from Miami University and a Master of Business Administration degree, also in finance, from The University of Akron. Janet M. Brown joined Banner Bank in December 2020 as Chief Information Officer. She provides direction and oversight for information technology and security across Banner Bank, including existing and emerging initiatives. Prior to joining the Company, Ms. Brown’s career included more than 25 years of information technology experience. She has specific expertise leading large, complex projects and technology environments. Ms. Brown served as Vice President of Governance & Infrastructure Shared Services at Epiq Global, a worldwide provider of legal services, in the Seattle, WA office from November 2018 through October 2020. In June 2018, Epiq Global purchased Garden City Group, where Ms. Brown had served as Senior Vice President and Chief Information Officer since September 2016 (also in Seattle, WA). From March 2014 to September 2016, Ms. Brown was Vice President, Information Technology Applications for Premera (Mountlake Terrace, WA), where she had previously served as Information Technology Director, Strategic Services. Ms. Brown attended Washington State University and served eight years in the U.S. Marine Corps. She is a Desert Storm Veteran. Ms. Brown is an active volunteer in several children’s welfare and development causes in the Puget Sound area and abroad. Peter J. Conner joined Banner Bank in 2015 upon the acquisition of AmericanWest Bank (AmericanWest). He is Executive Vice President and Chief Financial Officer of Banner Corporation and Banner Bank. Prior to joining the Company, Mr. Conner was the Chief Financial Officer for SKBHC LLC in Seattle, WA the holding company for Starbuck Bancshares, Inc. (Starbuck), the holding company for AmericanWest, and AmericanWest from 2010 until he joined Banner Bank in 2015. Mr. Conner has over 30 years of experience in financial services, including 20 years in executive financial positions at Wells Fargo Bank as well as regional community banks. Additionally, he spent time as a managing director for FSI Group, where he evaluated and placed equity fund investments in community banks. He earned a B.S. in Quantitative Economics from the University of California at San Diego and a Master’s of Business degree from the Haas School of Business at U.C. Berkeley. Mr. Conner’s community involvement includes having served as chairman of the board of directors for Spokane Habitat for Humanity. James M. Costa joined Banner Bank in October 2021 as Executive Vice President and Chief Risk Officer. He brings nearly 30 years of banking experience to his position. Prior to joining Banner, Mr. Costa served at Mann Lake Group in Minneapolis as the Chief Executive Officer and Founder from October 2020 where he provided advice to banks, trade associations and fintech firms on credit strategy, capital allocation, risk program design, regulatory relations, and compliance risk management. From 2013 through October 2020, he served as an executive officer of TCF Financial Corporation (TCF) in Wayzata, MN, including as Executive Vice President and Chief Risk Officer and Chief Credit Officer from August 2019, as Chief Risk Officer and Chief Credit Officer from January 2017, and as Chief Risk Officer since August 2013. TCF was a $49 billion regional bank holding company with operations in USA, Canada and Asia. Prior to that, Mr. Costa was Executive Vice President and Head of Credit Strategy for Wachovia in Charlotte, NC, and PNC Financial Corp. in Pittsburgh, PA. A U.S. Air Force veteran, Mr. Costa earned his bachelor’s degree from The Ohio State University and conducted his doctorate studies in Economics with the University of Minnesota. He is an active community volunteer with a local Habitat for Humanity and Humane Society, as well as with the University of Minnesota Center for Children’s Cancer Research. Mr. Costa is also an advisory board member for the Midsize Bank Coalition of America. James P. Garcia is the Chief Audit Executive responsible for proactively identifying and mitigating risks as well as providing internal audit services in the areas of financial compliance, IT Governance, and operations. He has more than 40 years of experience in the financial services industry. Prior to joining the Company in 2017, Mr. Garcia served for 16 years at the Bank of Hawaii in Honolulu, HI, most recently as Executive Vice President and Chief Audit Executive, with prior positions as Vice President and Senior Audit Manager. Mr. Garcia also has 24 years of experience at Bank of America where he held several positions in consumer and commercial operations management and audit, including that of Audit Director. Mr. Garcia earned his bachelor’s degree in management from St. Mary’s College of California and is a graduate of the School of Mortgage Banking. He is a Certified Bank Auditor (CBA), holds a Certification in Risk Management Assurance (CRMA) and is a Certified Information Systems Auditor (CISA). Mr. Garcia is an active member in the Institute of Internal Audit, the Information Systems Audit and Control Association, and Mid-Sized Bank Coalition of America. 22 Kayleen R. Kohler joined Banner Bank in 2016 as Executive Vice President of Human Resources and, in January 2021, was also appointed as the Bank’s Chief Diversity Officer. Ms. Kohler’s focus is on driving organizational design priorities at Banner Bank including: leadership development, talent acquisition, workforce planning, employee relations, compensation, benefits, diversity initiatives, payroll, and safety. Prior to joining Banner, Ms. Kohler served 20 years in progressive human resource leadership roles for Plum Creek Timber Company, now Weyerhaeuser, in Seattle, WA. She holds bachelors’ degrees in Marketing as well as Business Management from Northwest Missouri State University and a master’s degree in Organizational Management from the University of Phoenix. Through continuing education, she maintains her certifications as a Senior Professional in Human Resources (SPHR) and a Society of Human Resources Management Senior Certified Professional (SHRM-SCP). Kenneth A. Larsen joined Banner Bank in 2005 as the Real Estate Administration Manager and was promoted to Mortgage Banking Director in 2010. Mr. Larsen is responsible for Banner Bank’s mortgage banking activities from origination, administration, secondary marketing, through loan servicing. Mr. Larsen has had a 30-plus year career in mortgage banking, including holding positions in all facets of operations and management. A graduate of Eastern Washington University, he earned a Bachelor of Arts in Education with a degree in Social Science and earned certificates from the Pacific Coast Banking School and the School of Mortgage Banking. He is also a Certified Mortgage Banker, the highest designation recognized by the Mortgage Bankers Association. Mr. Larsen began his career at Action Mortgage/Sterling Savings, later moving to Peoples Bank of Lynden where he managed the mortgage banking operation. Mr. Larsen also served as the 90th President of the Seattle Mortgage Bankers Association. Formerly he was the Chairman of the Washington Mortgage Bankers Association and currently serves as a commissioner on the Washington State Housing Finance Commission. He was promoted to Executive Vice President in 2015. Sherrey Luetjen is Executive Vice President, General Counsel and Secretary for Banner Corporation and Banner Bank, as well as Ethics Officer for Banner Corporation. She joined Banner as Senior Vice President and Assistant General Counsel in May 2019 and was promoted to her current position in August 2021. Ms. Luetjen is responsible for directing and overseeing the company’s legal functions. Ms. Luetjen has more than 20 years of legal experience including more than 15 years as in-house counsel in the financial services industry. From 2010 through 2018, Ms. Luetjen was a Managing Director of Legal and Compliance at BlackRock, Inc. in Seattle, where she had served as a Director of Legal and Compliance from 2007 through 2010. Prior to BlackRock, Ms. Luetjen served as Associate General Counsel at a privately held investment advisory firm. Ms. Luetjen earned concurrent JD and MBA degrees from the University of Washington and earned her bachelor’s degree from Seattle University. Ms. Luetjen’s community involvement includes nine years of service on the board of directors of The Arboretum Foundation, including two years as board chair. James P.G. McLean joined Banner Bank in November 2010 and is Executive Vice President, Commercial Real Estate Lending, leading teams including the Multifamily Lending Group, Commercial Real Estate Specialty Unit, Affordable Housing and LIHTC Investments, Community Financial Corporation, Residential Construction and Income Property Divisions, as well as loan administration functions related to this division. Mr. McLean has more than 30 years of real estate finance experience. His experience includes roles at large national commercial banks and at regional and community banks, as well as 15 years in executive leadership roles and as a principal of a mid-sized regional commercial real estate development firm. Mr. McLean earned his bachelor’s degree from the University of Washington. His community volunteering is focused on organizations that serve local youth, including the Boy Scouts of America, Lake Washington School District and numerous coaching positions. Cynthia D. Purcell is Banner Bank’s Executive Vice President and Chief Strategy and Administration Officer, having previously served as Banner Bank’s Executive Vice President of Retail Banking and Administration. Ms. Purcell is responsible for leading the execution of the Bank’s long-term corporate strategic objectives in addition to leading the community banking, residential lending, digital strategy and delivery channels as well as a number of operational and administrative functions for Banner Bank. She was formerly the Chief Financial Officer of Inland Empire Bank (now Banner Bank), which she joined in 1981. Over her banking career, Ms. Purcell has been deeply involved in advocating for the industry through leadership roles on various boards and committees including State Banking Associations and the American Bankers Association (ABA). She has also taught banking courses throughout her career, including the ABA Graduate School of Bank Investments and Financial Management, the Northwest Intermediate Banking School, and the Oregon Bankers Association Directors College. M. Kirk Quillin joined Banner Bank’s commercial banking group in 2002 and now serves as Chief Commercial Banking Executive. Mr. Quillin began his career in the banking industry in 1984 with Idaho First National Bank, which is now U.S. Bank. His career also included management positions in commercial lending with Washington Mutual. He earned a B.S. in Finance and Economics from Boise State University and was certified by the Pacific Coast Banking School and Northwest Intermediate Commercial Lending School. As a dedicated, civic-minded community member, Mr. Quillin was active in Rotary for over 20 years, and for eight years served as a Fire Commissioner. James T. Reed, Jr. began his banking career in 1985 and joined Banner Bank in 1998. Since then he has held several leadership positions with progressive responsibilities within the Commercial Banking division. Today, as Executive Vice President, Commercial Banking, Mr. Reed leads the teams that focus on commercial banking relationship management, portfolio management, and business development. Mr. Reed earned his bachelor’s degree from the University of Washington and is a graduate of Pacific Coast Banking School. Mr. Reed’s community involvement includes serving on the Association of Washington Businesses Executive Board as well as having served on the University of Washington Bothell Advisory Board. 23 Jill M. Rice joined Banner Bank in 2002 as a Regional Credit Risk Manager, later promoted to Senior Credit Officer overseeing the commercial banking credit function in 2008, and promoted to Chief Credit Officer in 2020. In all, Ms. Rice has more than 30 years of credit- related experience, including time as a Senior Bank Examiner with the FDIC. Ms. Rice earned her bachelor’s degree from Western Washington University, is a graduate of the Pacific Coast Banking School, and has held the RMA Credit Risk Certification since 2009. For more than a decade, Ms. Rice’s community involvement includes having served on the board of directors for the Alzheimer’s Association Washington State Chapter, and volunteering with both the Snoqualmie Valley and Tahoma School Districts. Additionally, for more than a decade, she has engaged with LifeWire, a domestic violence prevention organization, including serving seven years on the board of directors, two of which she was the board president. Corporate Information Our principal executive offices are located at 10 South First Avenue, Walla Walla, Washington 99362. Our telephone number is (509) 527-3636. We maintain a website with the address www.bannerbank.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. Other than an investor’s own Internet access charges, we make available free of charge through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material to, the SEC. 24 Item 1A – Risk Factors An investment in our common stock is subject to risks inherent in our business. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this report. The risks described below are not the only ones we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition, capital levels, cash flows, liquidity, results of operations and prospects. The market price of our common stock could decline significantly due to any of these identified or other risks, and you could lose some or all of your investment. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. This report is qualified in its entirety by these risk factors. Risks Related to Macroeconomic Conditions Our business may be adversely affected by downturns in the national economy and the regional economies on which we depend. Our operations are significantly affected by national and regional economic conditions. Weakness in the national economy or the economies of the markets in which we operate could have a material adverse effect on our financial condition, results of operations and prospects. We provide banking and financial services primarily to businesses and individuals in the states of Washington, Oregon, California and Idaho. All of our branches and most of our deposit clients are also located in these four states. Further, as a result of a high concentration of our client base in the Puget Sound area and eastern Washington state regions, the deterioration of businesses in these areas, or one or more businesses with a large employee base in these areas, could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects. Weakness in the global economy has adversely affected many businesses operating in our markets that are dependent upon international trade and it is not known how changes in tariffs being imposed on international trade may also affect these businesses. In addition, adverse weather conditions as well as decreases in market prices for agricultural products grown in our primary markets can adversely affect agricultural businesses in our markets. As we expand our presence in areas such as San Diego and Sacramento, and throughout California, we will be exposed to concentration risks in those areas as well. A deterioration in economic conditions in the markets we serve as a result of inflation, a recession, the effects of COVID-19 variants or other factors could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations: loan delinquencies, problem assets and foreclosures may increase; • demand for our products and services may decline; • • we may increase our allowance for credit losses; • collateral for loans, especially real estate, may decline in value, in turn reducing clients’ borrowing power, reducing the value of assets and collateral associated with existing loans; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and the amount of our low-cost or non-interest-bearing deposits may decrease. • • A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loans are more geographically diverse. Many of the loans in our portfolio are secured by real estate. Deterioration in the real estate markets where collateral for a loan is real property could negatively affect the borrower’s ability to repay the loan and the value of the collateral securing the loan. Real estate values are affected by various other factors, including changes in general or regional economic conditions, governmental rules or policies and natural disasters such as earthquakes, flooding and tornadoes. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected. Adverse changes in the regional and general economy could reduce our growth rate, impair our ability to collect loans and generally have a negative effect on our financial condition and results of operations. External economic factors, such as changes in monetary policy and inflation and deflation, may have an adverse effect on our business, financial condition and results of operations. Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Board of Governors of the Federal Reserve System, or the Federal Reserve. Actions by monetary and fiscal authorities, including the Federal Reserve, could lead to inflation, deflation, or other economic phenomena that could adversely affect our financial performance. Inflation has risen sharply since the end of 2021 and throughout 2022 at levels not seen for over 40 years. Inflationary pressures are currently expected to remain elevated throughout 2023. Small to medium-sized businesses may be impacted more during periods of high inflation as they are not able to leverage economics of scale to mitigate cost pressures compared to larger businesses. Consequently, the ability of our business clients to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of operations and financial condition. Furthermore, a prolonged period of inflation could cause wages and other costs to the Company to increase, which could adversely affect our results of operations and financial condition. Virtually all of our assets and liabilities are monetary in nature. As a result, interest rates tend to have a more significant impact on our performance than general levels of inflation or deflation. Interest rates do not necessarily move in the same direction or by the same magnitude as the prices of goods and services. 25 The economic impact of the COVID-19 pandemic could continue to affect our financial condition and results of operations. The COVID-19 pandemic has adversely impacted the global and national economy and certain industries and geographies in which our clients operate. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on the business of the Company, its clients, employees and third-party service providers. The extent of such impact will depend on future developments, which are highly uncertain. Additionally, the responses of various governmental and nongovernmental authorities and consumers to the pandemic may have material long-term effects on the Company and its clients which are difficult to quantify in the near-term or long-term. We could be subject to a number of risks as the result of the COVID-19 pandemic, any of which could have a material, adverse effect on our business, financial condition, liquidity, results of operations, ability to execute our growth strategy, and ability to pay dividends. These risks include, but are not limited to, changes in demand for our products and services; increased credit losses or other impairments in our loan portfolios and increases in our allowance for credit losses; a decline in collateral for our loans, especially real estate; unanticipated unavailability of employees; increased cyber security risks as employees work remotely; a prolonged weakness in economic conditions resulting in a reduction of future projected earnings could necessitate a valuation allowance against our current outstanding deferred tax assets; a triggering event leading to impairment testing on our goodwill or core deposit and customer relationships intangibles, which could result in an impairment charge; and increased costs as the Company and our regulators, customers and vendors adapt to evolving pandemic conditions. Risks Related to Credit and Lending Our loan portfolio includes loans with a higher risk of loss. In addition to our first-lien one- to four-family residential real estate lending, we originate construction and land loans, commercial and multifamily mortgage loans, commercial business loans, agricultural mortgage loans and agricultural loans, and consumer loans, primarily within our market areas, which generally involve a higher risk of loss than first-lien one- to four-family residential real estate lending. We had $8.97 billion outstanding in these types of higher risk loans, excluding SBA PPP loans, at December 31, 2022, compared to $8.29 billion at December 31, 2021, which typically present different risks to us than our first-lien one- to four-family residential real estate for a number of reasons, including the following: • Construction and Land Loans. At December 31, 2022, construction and land loans were $1.49 billion, or 15% of our total loan portfolio. This type of lending is subject to the inherent difficulties in estimating both a property’s value at completion of a project and the estimated cost (including interest) of the project. Because of the uncertainties inherent in estimating construction costs, as well as the market value of a completed project and the effects of governmental regulation on real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the completed project’s loan-to-value ratio. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to ensure completion of the project. If our appraisal of the value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss. Disagreements between borrowers and builders and the failure of builders to pay subcontractors may also jeopardize projects. This type of lending also typically involves higher loan principal amounts and may be concentrated with a small number of builders. A downturn in housing, or the real estate market, could increase delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. Many of the builders we deal with have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss. In addition, during the term of some of our construction loans, no payment from the borrower is required since the accumulated interest is added to the principal of the loan through an interest reserve. Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly depleting the interest reserves prior to completion and/or increasing the end- purchaser’s borrowing costs, thereby possibly reducing the homeowner’s ability to finance the home upon completion or the overall demand for the project. Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold which also complicates the process of managing problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete construction and assume the market risk of selling the project at a future market price, which may or may not enable us to fully recover unpaid loan funds and associated construction and liquidation costs. Loans on land under development or held for future construction also pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the collateral. These risks can be significantly impacted by supply and demand. As a result, this type of lending often involves the disbursement of substantial funds with repayment dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to independently repay principal and interest. 26 Construction loans made by us include those with a sales contract or permanent loan in place for the finished homes and those for which purchasers for the finished homes may not be identified either during or following the construction period, known as speculative construction loans. Speculative construction loans to a builder pose a greater potential risk to us than construction loans to individuals on their personal residences. We attempt to mitigate this risk by actively monitoring the number of unsold homes in our construction loan portfolio and local housing markets in an attempt to maintain an appropriate balance between home sales and new loan originations. In addition, the maximum number of speculative construction loans (loans that are not pre-sold) approved for each builder is based on a combination of factors, including the financial capacity of the builder, the market demand for the finished product and the ratio of sold to unsold inventory the builder maintains. We have also attempted to diversify the risk associated with speculative construction lending by doing business with a large number of small and mid-sized builders spread over a relatively large geographic region representing numerous sub-markets within our service area. As a result of the increasing real estate values in certain of our market areas, this category of lending has increased. Our investment in construction and land loans increased by $177.2 million or 14% in 2022. At December 31, 2022, non-performing construction and land loans totaled $181,000, or 1% of total non-performing loans. • Commercial and Multifamily Real Estate Loans. At December 31, 2022, commercial and multifamily real estate loans were $4.28 billion, or 42% of our total loan portfolio. These loans typically involve higher principal amounts than other types of loans and some of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan. Repayment of these loans typically is dependent upon income being generated from the property securing the loan in amounts sufficient to cover operating expenses and debt service, which may be adversely affected by changes in the economy or local market conditions. In addition, many of our commercial and multifamily real estate loans are not fully amortizing and contain large balloon payments upon maturity which may require the borrower to either sell or refinance the underlying property in order to make the balloon payment, thus increasing the risk of default or non-payment. If we foreclose on a commercial or multifamily real estate loan, our holding period for the collateral typically is longer than for one-to-four family residential loans because there are fewer potential purchasers of the collateral. At December 31, 2022, non-performing commercial and multifamily real estate loans totaled $3.7 million, or 16% of total non-performing loans. • Commercial Business Loans. At December 31, 2022, commercial business loans were $2.23 billion, or 22% of our total loan portfolio. Our commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. A borrower’s cash flow may prove to be unpredictable, and collateral securing these loans may fluctuate in value. Most often, this collateral includes accounts receivable, inventory, equipment or real estate. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its clients. Other collateral securing loans may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. At December 31, 2022, non- performing commercial business loans totaled $9.9 million, or 43% of total non-performing loans. • Agricultural Loans. At December 31, 2022, agricultural loans were $295.1 million, or 3% of our total loan portfolio. Repayment of agricultural loans is dependent upon the successful operation of the business and is subject to many factors outside the control of either us or the borrowers. These factors include adverse weather conditions that prevent the planting of a crops or limit crop yields (such as hail, drought and floods), loss of crops or livestock due to disease or other factors, declines in market prices for agricultural products (both domestically and internationally) and the impact of government regulations (including changes in price supports, subsidies, tariffs and environmental regulations). In addition, many farms are dependent on a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm. If the cash flow from a farming operation is diminished, the borrower’s ability to repay the loan may be impaired. Consequently, agricultural loans may involve a greater degree of risk than other types of loans, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as farm equipment (some of which is highly specialized with a limited or no market for resale), or assets such as livestock or crops. In such cases, any repossessed collateral for a defaulted agricultural operating loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation or because the assessed value of the collateral exceeds the eventual realization value. At December 31, 2022, non-performing agricultural loans totaled $594,000, or 3% of total non-performing loans. 27 • Consumer Loans. At December 31, 2022, consumer loans were $680.9 million, or 7% of our total loan portfolio. Home equity lines of credit, which represented 83% of our total consumer loan portfolio at December 31, 2022, generally entail greater risk than one- to four-family residential mortgage loans where we are in the first lien position. For home equity lines secured by a second mortgage, it is less likely that we will be successful in recovering all of our loan proceeds in the event of default as the value of the property must be sufficient to cover the repayment of the first mortgage loan, as well as the costs associated with foreclosure, before the balance on the second mortgage loan is repaid. In the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on these consumer loans. Loans that we purchased, or indirectly originated, may also give rise to claims and defenses by a consumer loan borrower against an assignee of such loans such as us, and a borrower may be able to assert against the assignee claims and defenses that it has against the seller of the underlying collateral. At December 31, 2022, non-performing consumer loans totaled $2.4 million, or 10% of total non-performing loans. Our business may be adversely affected by credit risk associated with residential property and declining property values. At December 31, 2022, first-lien one- to four-family residential loans were $1.17 billion or 12% of our total loan portfolio. Our first-lien one- to four-family residential loans are primarily made based on the repayment ability of the borrower and the collateral securing these loans. Foreclosure on the loans requires the value of the property to be sufficient to cover the repayment of the loan, as well as the costs associated with foreclosure. This type of lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. A downturn in the economy or the housing market in our market areas or a rapid increase in interest rates may reduce the value of the real estate collateral securing these types of loans and increase the risk that we would incur losses if borrowers default on their loans. Residential loans with high combined loan-to-value generally will be more sensitive to declining properly values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, the borrowers may be unable to repay their loans in full from the sale proceeds. As a result, these loans may experience higher rates of delinquencies, defaults and losses, which will in turn adversely affect our financial condition and results of operations. Our allowance for credit losses may not be sufficient to absorb losses in our loan portfolio, which would cause our results of operations, liquidity and financial condition to be adversely affected. Lending money is a substantial part of our business and each loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things: • cash flow of the borrower and/or the project being financed; • • • • changes in economic and industry conditions. in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral; the duration of the loan; the character and creditworthiness of a particular borrower; and We maintain an allowance for credit losses, which is a reserve established through a provision for expected losses, which we believe is appropriate to provide for lifetime expected credit losses in our loan portfolio. The amount of this allowance is determined by our management through periodic reviews and consideration of several factors, including, but not limited to: • our collective loss reserve, for loans evaluated on a pool basis which have similar risk characteristics based on our life of loan historical default and loss experience, certain macroeconomic factors, reasonable and supportable forecasts, regulatory requirements, management’s expectations of future events and certain qualitative factors; and • our individual loss reserve, based on our evaluation of individual loans that do not share similar risk characteristics and the present value of the expected future cash flows or the fair value of the underlying collateral. The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. If our estimates are incorrect, the allowance for credit losses may not be sufficient to cover the expected losses in our loan portfolio, resulting in the need for increases in our allowance for credit losses through the provision for credit losses which is recorded as a charge against income. Management also recognizes that significant new growth in loan portfolios, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner and will increase the risk that our allowance may be insufficient to absorb losses without significant additional provisions. 28 Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for credit losses. If current conditions in the housing and real estate markets weaken, we expect we will experience increased delinquencies and credit losses. In addition, bank regulatory agencies periodically review our allowance for credit losses and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on judgments different than those of management. If charge-offs in future periods exceed the allowance for credit losses, we may need additional provisions to increase the allowance for credit losses. Any increases in the allowance for credit losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations. Loans originated under the SBA Paycheck Protection Program subject us to forgiveness and guarantee risk. As of December 31, 2021, we hold and service a portfolio of 94 loans originated under the SBA PPP with a balance of $7.9 million. The SBA PPP loans are subject to the provisions of the CARES Act and CAA 2021 and to complex and evolving rules and guidance issued by the SBA and other government agencies. Most of our SBA PPP borrowers have already qualified for forgiveness of their loan obligations, however, if an SBA PPP borrower fails to qualify for loan forgiveness, we face a heightened risk of holding these loans at unfavorable interest rates for an extended period of time. We could face additional risks in our administrative capabilities to service our SBA PPP loans, and risk with respect to the determination of loan forgiveness. In the event of a loss resulting from a default on an SBA PPP loan and a determination by the SBA that there was a deficiency in the manner in which we originated, funded or serviced an SBA PPP loan, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if the SBA has already paid under the guaranty, seek recovery of any loss related to the deficiency from us. Risks Related to Merger and Acquisition Strategy We pursue a strategy of supplementing internal growth by acquiring other financial companies or their assets and liabilities that we believe will help us fulfill our strategic objectives and enhance our earnings. We may be adversely affected by risks associated with potential acquisitions. As part of our general growth strategy, we periodically expand our business through acquisitions. Although our business strategy emphasizes organic expansion, we continue, from time to time in the ordinary course of business, to engage in preliminary discussions with potential acquisition targets. There can be no assurance that, in the future, we will successfully identify suitable acquisition candidates, complete acquisitions and successfully integrate acquired operations into our existing operations or expand into new markets. The consummation of any future acquisitions may dilute shareholder value or may have an adverse effect upon our operating results while the operations of the acquired business are being integrated into our operations. In addition, once integrated, acquired operations may not achieve levels of profitability comparable to those achieved by Banner’s existing operations, or otherwise perform as expected. Further, transaction-related expenses may adversely affect our earnings. These adverse effects on our earnings and results of operations may have a negative impact on the value of Banner’s stock. Acquiring banks, bank branches or businesses involves risks commonly associated with acquisitions, including: • We may be exposed to potential asset quality issues or unknown or contingent liabilities of the banks, businesses, assets, and liabilities we acquire. If these issues or liabilities exceed our estimates, our results of operations and financial condition may be materially negatively affected; • Higher than expected deposit attrition; • Potential diversion of our management’s time and attention; • Prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could not be made in specific markets at prices we considered acceptable and expect that we will experience this situation in the future; • The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity into our company to make the transaction economically successful. This integration process is complicated and time consuming and can also be disruptive to the clients of the acquired business. If the integration process is not conducted successfully and with minimal adverse effect on the acquired business and its clients, we may not realize the anticipated economic benefits of particular acquisitions within the expected time frame, and we may lose clients or employees of the acquired business. We may also experience greater than anticipated client losses even if the integration process is successful; • To finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional capital, which could dilute the interests of our existing shareholders; • We have completed various acquisitions in the past few years that enhanced our rate of growth. We may not be able to continue to sustain our past rate of growth or to grow at all in the future; and • To the extent our costs of an acquisition exceed the fair value of the net assets acquired, the acquisition will generate goodwill. We are required to assess our goodwill for impairment at least annually, and any goodwill impairment charge could have a material adverse effect on our results of operations and financial condition. 29 The required accounting treatment of loans we acquire through acquisitions could result in higher net interest margins and interest income in current periods and lower net interest margins and interest income in future periods. Under GAAP, we are required to record loans acquired through acquisitions at fair value. Estimating the fair value of such loans requires management to make estimates based on available information and facts and circumstances as of the acquisition date. Actual performance could differ from management’s initial estimates. If these loans outperform our original fair value estimates, the difference between our original estimate and the actual performance of the loan (the “discount”) is accreted into net interest income. Thus, our net interest margins may initially increase due to the discount accretion. Absent changes in interest rates, we expect the yields on our loans to decline as our acquired loan portfolio pays down or matures and the discount decreases, and we could experience downward pressure on our interest income to the extent that the runoff on our acquired loan portfolio is not replaced with comparable high-yielding loans. This could result in higher net interest margins and interest income in current periods and lower net interest rate margins and lower interest income in future periods. We may incur impairment to goodwill. In accordance with GAAP, we record assets acquired and liabilities assumed in a business combination at their fair value with the excess of the purchase consideration over the net assets acquired resulting in the recognition of goodwill. As a result, acquisitions typically result in recording goodwill. We perform a goodwill evaluation at least annually to test for goodwill impairment. Our test of goodwill for potential impairment is based on a qualitative assessment by management that takes into consideration macroeconomic conditions, industry and market conditions, cost or margin factors, financial performance and share price. Our evaluation of the fair value of goodwill involves a substantial amount of judgment. If our judgment was incorrect, or if events or circumstances change, and an impairment of goodwill was deemed to exist, we would be required to record a non-cash charge to earnings in our financial statements during the period in which such impairment is determined to exist. Any such charge could have a material adverse effect on our results of operations. Risks Related to Market and Interest Rate Changes Our results of operations, liquidity and cash flows are subject to interest rate risk. Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. Since March 2022, in response to inflation, the Federal Open Market Committee (FOMC) of the Federal Reserve has increased the target range for the federal funds rate by 425 basis, including 125 basis points during the fourth calendar quarter of 2022, to a range of 4.25% to 4.50% as of December 31, 2022. As it seeks to control inflation without creating a recession, the FOMC has indicated further increases are to be expected during 2023. If the FOMC further increases the targeted federal funds rate, interest rates will likely continue to rise, which may negatively impact both the housing market, by reducing refinancing activity and new home purchases, and the U.S. economy. We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially affected. Changes in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations or by reducing our margins and profitability. Our net interest margin is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates—up or down—could adversely affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yields on interest-earning assets catch up. Changes in the slope of the “yield curve”—or the spread between short-term and long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets. Also, interest rate decreases can lead to increased prepayments of loans and mortgage-backed securities as borrowers refinance their loans to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such repayment proceeds into lower yielding investments, which would likely decrease our income. A sustained increase in market interest rates could adversely affect our earnings. As is the case with many banks our emphasis on increasing core deposits has resulted in an increasing percentage of our deposit balances being comprised of deposit accounts bearing no or a relatively low rate of interest and having a shorter duration than our assets. At December 31, 2022, we had $531.6 million in certificates of deposit that mature within one year and $12.90 billion in non-interest-bearing, negotiable order of withdrawal (NOW) checking, savings and money market accounts. We may incur a higher cost of funds to retain these deposits in a rising interest rate environment. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. 30 In addition, a substantial amount of our loans have adjustable interest rates. As a result, these loans may experience a higher rate of default in a rising interest rate environment. Further, a significant portion of our adjustable-rate loans have interest rate floors below which the loan’s contractual interest rate may not adjust. Approximately 64% of our loan portfolio was comprised of adjustable or floating-rate loans at December 31, 2022, and approximately $4.40 billion, or 68%, of those loans contained interest rate floors, below which the loans’ contractual interest rate may not adjust. At December 31, 2022, the weighted average floor interest rate of these loans was 4.15%. At that date, approximately $1.09 billion, or 25%, of these loans were at their floor interest rate. The inability of our loans to adjust downward can contribute to increased income in periods of declining interest rates, although this result is subject to the risks that borrowers may refinance these loans during periods of declining interest rates. Also, when loans are at their floors, there is a further risk that our interest income may not increase as rapidly as our cost of funds during periods of increasing interest rates which could have a material adverse effect on our results of operations. Changes in interest rates also affect the value of our interest-earning assets and in particular our securities portfolio. Generally, the fair value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported as a separate component of AOCI, net of tax. Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on stockholders’ equity. Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. Also, our interest rate risk modeling techniques and assumptions may not fully predict or capture the impact of actual interest rate changes on our balance sheet or projected operating results. Our securities portfolio may be negatively impacted by fluctuations in market value and interest rates. Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/ or earnings. Fluctuations in market value may be caused by changes in market interest rates, rating agency actions in respect of the securities, defaults by the issuer or with respect to the underlying securities, lower market prices for securities and limited investor demand. Our available-for-sale debt securities in an unrealized loss position are evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. If a credit loss exists, an allowance for credit losses is recorded for the credit loss, resulting in a charge against earnings. As stated above, changes in interest rates can also have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. We increase or decrease our shareholders’ equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes. There can be no assurance that the declines in market value will not result in expected credit losses, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels. An increase in interest rates, change in the programs offered by secondary market purchasers or our ability to qualify for their programs may reduce our mortgage banking revenues, which would negatively impact our non-interest income. Our mortgage banking operations provide a significant portion of our non-interest income. We generate mortgage banking revenues primarily from gains on the sale of one- to four-family and multifamily mortgage loans. The one- to four-family mortgage loans are sold pursuant to programs currently offered by Fannie Mae, Freddie Mac, Ginnie Mae and non-Government Sponsored Enterprise (GSE) investors. These entities account for a substantial portion of the secondary market in residential one- to four-family mortgage loans. Multifamily mortgage loans are sold primarily to non-GSE investors. Any future changes in the one- to four-family programs, our eligibility to participate in these programs, the criteria for loans to be accepted or laws that significantly affect the activity of such entities, or a reduction in the size of the secondary market for multifamily loans could, in turn, materially adversely affect our results of operations. Mortgage banking is generally considered a volatile source of income because it depends largely on the level of loan volume which, in turn, depends largely on prevailing market interest rates. In a rising or higher interest rate environment, our originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold to investors. This would result in a decrease in mortgage banking revenues and a corresponding decrease in non-interest income. In addition, our results of operations are affected by the amount of non-interest expense associated with mortgage banking activities, such as salaries and employee benefits, occupancy, equipment and data processing expense and other operating costs. During periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in loan originations. In addition, although we sell loans into the secondary market without recourse, we are required to give customary representations and warranties about the loans to the buyers. If we breach those representations and warranties, the buyers may require us to repurchase the loans and we may incur a loss on the repurchase. 31 Certain hedging strategies that we use to manage investment in mortgage servicing rights, mortgage loans held for sale and interest rate lock commitments may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rates and market liquidity. We use derivative instruments to economically hedge mortgage servicing rights, mortgage loans held for sale and interest rate lock commitments to offset changes in fair value resulting from changing interest rate environments. Our hedging strategies are susceptible to prepayment risk, basis risk, market volatility and changes in the shape of the yield curve, among other factors. In addition, hedging strategies rely on assumptions and projections regarding assets and general market factors. If these assumptions and projections prove to be incorrect or our hedging strategies do not adequately mitigate the impact of changes in interest rates, we may incur losses that would adversely impact earnings. Risks Related to Regulatory, Legal and Compliance New or changing tax, accounting, and regulatory rules and interpretations could significantly impact strategic initiatives, results of operations, cash flows, and financial condition. The financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit our shareholders. These regulations may sometimes impose significant limitations on operations. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for credit losses. These bank regulators also have the ability to impose conditions in the approval of merger and acquisition transactions. Additionally, actions by regulatory agencies or significant litigation against us may lead to penalties that materially affect us. These regulations, along with the current tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time. Any new regulations or legislation, change in existing regulations or oversight, whether a change in regulatory policy or a change in a regulator’s interpretation of a law or regulation, could have a material impact on our operations, increase our costs of regulatory compliance and of doing business and/or otherwise adversely affect us and our profitability. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent registered public accounting firm. These changes could materially impact, potentially even retroactively, how we report our financial condition and results of our operations as could our interpretation of those changes. We cannot predict what restrictions may be imposed upon us with future legislation. Climate change and related legislative and regulatory initiatives may materially affect the Company’s business and results of operations. The effects of climate change continue to create an alarming level of concern for the state of the global environment. As a result, the global business community has increased its political and social awareness surrounding the issue, and the United States has entered into international agreements in an attempt to reduce global temperatures. Further, the U.S. Congress, state legislatures and federal and state regulatory agencies continue to propose numerous initiatives to supplement the global effort to combat climate change. Similar and even more expansive initiatives are expected under the current administration, including potentially increasing supervisory expectations with respect to banks’ risk management practices, accounting for the effects of climate change in stress testing scenarios and systemic risk assessments, revising expectations for credit portfolio concentrations based on climate-related factors and encouraging investment by banks in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change. The lack of empirical data surrounding the credit and other financial risks posed by climate change render it difficult, or even impossible, to predict how specifically climate change may impact our financial condition and results of operations; however, the physical effects of climate change may also directly impact us. Specifically, unpredictable and more frequent weather disasters may adversely impact the real property, and/or the value of the real property, securing the loans in our portfolios. Additionally, if insurance obtained by our borrowers is insufficient to cover any losses sustained to the collateral, or if insurance coverage is otherwise unavailable to our borrowers, the collateral securing our loans may be negatively impacted by climate change, natural disasters and related events, which could impact our financial condition and results of operations. Further, the effects of climate change may negatively impact regional and local economic activity, which could lead to an adverse effect on our customers and impact the communities in which we operate. Overall, climate change, its effects and the resulting, unknown impact could have a material adverse effect on our financial condition and results of operations. 32 Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions and limit our ability to obtain regulatory approval of acquisitions. The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of clients seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions and limit our ability to obtain regulatory approval of acquisitions. Recently, several banking institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations and growth prospects. If our enterprise risk management framework is not effective at mitigating risk and loss to us, we could suffer unexpected losses and our results of operations could be materially adversely affected. Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which is critical to optimizing stockholder value. We have established processes and procedures intended to identify, measure, monitor, report, analyze and control the types of risk to which we are subject. These risks include liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and compliance risk, and reputational risk, among others. We also maintain a compliance program designed to identify, measure, assess, and report on our adherence to applicable laws, regulations, policies and procedures. While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk management or compliance programs, along with other related controls, will effectively mitigate all risk and limit losses in our business. However, as with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could suffer unexpected losses and our business financial condition and results of operations could be materially adversely affected. Our business and financial results could be impacted materially by adverse results in legal proceedings. Legal proceedings could result in judgments, significant time and attention from our management, or other adverse effects on our business and financial results. We establish estimated liabilities for legal claims when payments associated with claims become probable and the amount of loss can be reasonably estimated. We may still incur losses for a matter even if we have not established an estimated liability. In addition, the actual cost of resolving a legal claim may be substantially higher than any amounts accrued for that matter. The ultimate resolution of any legal proceeding, depending on the remedy sought and granted, could materially adversely affect our results of operations and financial condition. Risks Related to Cybersecurity, Data and Fraud We are subject to certain risks in connection with our use of technology. Our security measures may not be sufficient to mitigate the risk of a cyber-attack. Communications and information systems are essential to the conduct of our business, as we use such systems to manage our client relationships, our general ledger and virtually all other aspects of our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to breaches, fraudulent or unauthorized access, denial or degradation of service attacks, misuse, computer viruses, malware or other malicious code and cyber-attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our clients’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our clients or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant reputational damage. Security breaches in our internet banking activities could further expose us to possible liability and damage our reputation. Increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions. Any compromise of our security could deter clients from using our internet banking services that involve the transmission of confidential information. We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. Although we have developed and continue to invest in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, these precautions may not protect our systems from compromises or breaches of our security measures, and could result in losses to us or our clients, our loss of business and/or clients, damage to our reputation, the incurrence of additional expenses, disruption to our business, our inability to grow our online services or other businesses, additional regulatory scrutiny or penalties, or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations. 33 Our security measures may not protect us from system failures or interruptions. While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers. While we select third-party vendors carefully, we do not control their actions. If our third-party providers encounter difficulties including those resulting from breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher transaction volumes, cyber-attacks and security breaches or if we otherwise have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our ability to deliver products and services to our clients and otherwise conduct business operations could be adversely impacted. Replacing these third-party vendors could also entail significant delay and expense. Threats to information security also exist in the processing of client information through various other vendors and their personnel. We cannot assure you that such breaches, failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely. We may not be insured against all types of losses as a result of third party failures and insurance coverage may be inadequate to cover all losses resulting from breaches, system failures or other disruptions. If any of our third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to identify alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all. Further, the occurrence of any systems failure or interruption could damage our reputation and result in a loss of clients and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations. We are subject to certain risks in connection with our data management or aggregation. We are reliant on our ability to manage data and our ability to aggregate data in an accurate and timely manner to ensure effective risk reporting and management. Our ability to manage data and aggregate data may be limited by the effectiveness of our policies, programs, processes and practices that govern how data is acquired, validated, stored, protected and processed. While we continuously update our policies, programs, processes and practices, many of our data management and aggregation processes are manual and subject to human error or system failure. Failure to manage data effectively and to aggregate data in an accurate and timely manner may limit our ability to manage current and emerging risks, as well as to manage changing business needs. Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes. The Bank is susceptible to fraudulent activity that may be committed against us or our clients which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client’s information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Nationally, reported incidents of fraud and other financial crimes have increased. We have also experienced losses due to apparent fraud and other financial crimes. While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses will not occur. Risks Related to Our Business and Industry Generally We will be required to transition from the use of the London Interbank Offered Rate (LIBOR) in the future. We have certain FHLB advances, loans, investment securities, subordinated debentures and trust preferred securities indexed to LIBOR to calculate the interest rate. ICE Benchmark Administration, the authorized and regulated administrator of LIBOR, ended publication of the one-week and two-month USD LIBOR tenors on December 31, 2021 and the remaining USD LIBOR tenors will end publication in June 2023. Financial services regulators and industry groups have collaborated to develop alternate reference rate indices or reference rates. The transition to a new reference rate requires changes to contracts, risk and pricing models, valuation tools, systems, product design and hedging strategies. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR (with the exception of overnight repurchase agreements, which are expected to be based on the Secured Overnight Financing Rate, or SOFR). Uncertainty as to the nature of such potential changes, alternative reference rates, the elimination or replacement of LIBOR, or other reforms may adversely affect the value of, and the return on our loans, and our investment securities, and may impact the availability and cost of hedging instruments and borrowings, including the rates we pay on our subordinated debentures and trust preferred securities. The language in our LIBOR-based contracts and financial instruments has developed over time and may have various events that trigger when a successor rate to the designated rate would be selected. If a trigger is satisfied, contracts and financial instruments may give the calculation agent discretion over the substitute index or indices for the calculation of interest rates to be selected. The implementation of a substitute index or indices for the calculation of interest rates under our loan agreements with our borrowers or our existing borrowings may result in our incurring significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the substitute index or indices, and may result in disputes or litigation with clients and creditors over the appropriateness or comparability to LIBOR of the substitute index or indices, which could have an adverse effect on our results of operations. 34 Ineffective liquidity management could adversely affect our financial results and condition. Effective liquidity management is essential to our business. We require sufficient liquidity to meet client loan requests, client deposit maturities and withdrawals, payments on our debt obligations as they come due and other cash commitments under both normal operating conditions and other unpredictable circumstances, including events causing industry or general financial market stress. An inability to raise funds through deposits, borrowings, the sale of loans or investment securities and other sources could have a substantial negative effect on our liquidity. We rely on client deposits and at times, borrowings from the FHLB of Des Moines and certain other wholesale funding sources to fund our operations. Deposit flows and the prepayment of loans and mortgage-related securities are strongly influenced by such external factors as the direction of interest rates, whether actual or perceived, and the competition for deposits and loans in the markets we serve. Further, changes to the FHLB of Des Moines’s underwriting guidelines for wholesale borrowings or lending policies may limit or restrict our ability to borrow, and could therefore have a significant adverse impact on our liquidity. Historically, we have been able to replace maturing deposits and borrowings if desired; however, we may not be able to replace such funds in the future if, among other things, our financial condition, the financial condition of the FHLB of Des Moines, or market conditions change. Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable could be impaired by factors that affect us specifically or the financial services industry or economy in general, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry or deterioration in credit markets. Additional factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our deposits and loans are concentrated, negative operating results, or adverse regulatory action against us. Any decline in available funding in amounts adequate to finance our activities or on terms which are acceptable could adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could, in turn, have a material adverse effect on our business, financial condition and results of operations. Additionally, collateralized public funds are bank deposits of state and local municipalities. These deposits are required to be secured by certain investment grade securities to ensure repayment, which on the one hand tends to reduce our contingent liquidity risk by making these funds somewhat less credit sensitive, but on the other hand reduces standby liquidity by restricting the potential liquidity of the pledged collateral. Although these funds historically have been a relatively stable source of funds for us, availability depends on the individual municipality’s fiscal policies and cash flow needs. Benefits of Banner Forward and other strategic initiatives may not be realized. Banner’s ability to compete depends on a number of factors, including, among others, its ability to develop and successfully execute strategic plans and initiatives. Banner Forward is focused on accelerating growth in commercial banking, deepening relationships with retail clients, and advancing technology strategies to enhance our digital service channels, while streamlining underwriting and back office processes. We may not be successful in achieving some or all of these objectives. The expected cost savings and revenue growth from Banner Forward may not be realized. The costs to implement Banner Forward may be greater than anticipated. Changes in economic conditions beyond our control, including changes in interest rates, may affect our ability to achieve our objectives. Our inability to execute on or achieve the anticipated outcomes of Banner Forward may affect how the market perceives us and could impede our growth and profitability. Development of new products and services may impose additional costs on us and may expose us to increased operational risk. Our financial performance depends, in part, on our ability to develop and market new and innovative services and to adopt or develop new technologies that differentiate our products or provide cost efficiencies, while avoiding increased related expenses. This dependency is exacerbated in the current “FinTech” environment, where financial institutions are investing significantly in evaluating new technologies, such as “Blockchain,” and developing potentially industry-changing new products, services and industry standards. The introduction of new products and services can entail significant time and resources, including regulatory approvals. Substantial risks and uncertainties are associated with the introduction of new products and services, including technical and control requirements that may need to be developed and implemented, rapid technological change in the industry, our ability to access technical and other information from our clients, the significant and ongoing investments required to bring new products and services to market in a timely manner at competitive prices and the preparation of marketing, sales and other materials that fully and accurately describe the product or service and its underlying risks. Our failure to manage these risks and uncertainties also exposes us to enhanced risk of operational lapses which may result in the recognition of financial statement liabilities. Regulatory and internal control requirements, capital requirements, competitive alternatives, vendor relationships and shifting market preferences may also determine if such initiatives can be brought to market in a manner that is timely and attractive to our clients. Failure to successfully manage these risks in the development and implementation of new products or services could have a material adverse effect on our business and reputation, as well as on our consolidated results of operations and financial condition. 35 We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects. Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, the community banking industry where the Bank conducts its business. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel and upon the continued contributions of our management and personnel. In particular, our success has been and continues to be highly dependent upon the abilities of key executives, including our President, and certain other employees. We could undergo a difficult transition period if we were to lose the services of any of these individuals. Our success also depends on the experience of our banking facilities’ managers and bankers and on their relationships with the clients and communities they serve. In addition, our success has been and continues to be highly dependent upon the services of our directors, some of whom are at or nearing retirement age, and we may not be able to identify and attract suitable candidates to replace such directors. The loss of these key persons could negatively impact the affected banking operations. We rely on other companies to provide key components of our business infrastructure. We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor’s organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which in turn could have a material negative impact on our financial condition and results of operations. We also could be adversely affected to the extent such an agreement is not renewed by the third party vendor or is renewed on terms less favorable to us. Additionally, the bank regulatory agencies expect financial institutions to be responsible for all aspects of our vendors’ performance, including aspects which they delegate to third parties. Disruptions or failures in the physical infrastructure or operating systems that support our business and clients, or cyber-attacks or security breaches of the network system or devices that our clients use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition. Any inaccurate assumptions in our analytical and forecasting models could cause us to miscalculate our projected revenue or losses, which could adversely affect us. We use analytical and forecasting models to estimate the effects of economic conditions on our financial assets and liabilities as well as our mortgage servicing rights. Those models include assumptions about interest rates and consumer behavior that may be incorrect. If our model assumptions are incorrect, improperly applied or inadequate, we may record higher than expected losses or lower than expected revenues which could have a material adverse effect on our business, financial condition and results of operations. Managing reputational risk is important to attracting and maintaining clients, investors and employees. Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality or operational failures due to integration or conversion challenges as a result of acquisitions we undertake, compliance deficiencies, and questionable or fraudulent activities of our clients. We have policies and procedures in place to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding our business, employees, or clients, with or without merit, may result in the loss of clients, investors and employees, costly litigation, a decline in revenues and increased governmental regulation. Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks. Companies are facing increasing scrutiny from clients, regulators, investors, and other stakeholders related to their environmental, social and governance (ESG) practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions, human rights, and corporate governance. Increased ESG related compliance costs could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, and our stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure. 36 Risks Related to Holding Our Common Stock Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high. We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. We may at some point, however, need to raise additional capital to support continued growth or be required by our regulators to increase our capital resources. Any capital we obtain may result in the dilution of the interests of existing holders of our common stock. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we cannot make assurances that we will be able to raise additional capital if needed on terms that are acceptable to us, or at all. If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action. We rely on dividends from the Bank for substantially all of our revenue at the holding company level. We are an entity separate and distinct from our principal subsidiary, the Bank, and derive substantially all of our revenue at the holding company level in the form of dividends from that subsidiary. Accordingly, we are, and will be, dependent upon dividends from the Bank to pay the principal of and interest on our indebtedness, to satisfy our other cash needs and to pay dividends on our common stock. The Bank’s ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements. In the event the Bank is unable to pay dividends to us, we may not be able to pay dividends on our common stock at the same rate or at all. Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. Our articles of incorporation contain a provision which could limit the voting rights of a holder of our common stock. Our charter provides that any person or group who acquires beneficial ownership of our common stock in excess of 10% of the outstanding shares may not vote the excess shares. Accordingly, if you acquire beneficial ownership of more than 10% of the outstanding shares of our common stock, your voting rights with respect to our common stock will not be commensurate with your economic interest in our company. Anti-takeover provisions could negatively affect our shareholders. Provisions in our articles of incorporation and bylaws, the corporate laws of the state of Washington and federal laws and regulations could delay or prevent a third party from acquiring us, despite the possible benefit to our shareholders, or otherwise negatively affect the market value of our stock. These provisions, among others, include: restrictions on voting shares of our common stock beneficially owned in excess of 10% of total shares outstanding; and advance notice requirements for nominations for election to our Board of Directors and for proposing matters that shareholders may act on at shareholder meetings. In addition, although we are in the process of transitioning from staggered three-year terms for directors to a declassified board structure in which each director will be elected for a one-year term, this transition is not complete. The partial staggered terms structure will continue to serve as a relevant anti-takeover provision until the transition to a declassified board structure. Our articles of incorporation also authorize our Board of Directors to issue preferred or other stock, and preferred or other stock could be issued as a defensive measure in response to a takeover proposal. In addition, because we are a bank holding company, the ability of a third party to acquire us is limited by applicable banking laws and regulations. The Bank Holding Company Act requires any bank holding company to obtain the approval of the Federal Reserve before acquiring 5% or more of any class of our voting securities. Any entity that is a holder of 25% or more of any class of our voting securities, or in some circumstances a holder of a lesser percentage, is subject to regulation as a bank holding company under the Bank Holding Company Act. Under the Change in Bank Control Act of 1978, as amended, any person (or persons acting in concert), other than a bank holding company, is required to notify the Federal Reserve before acquiring 10% or more of any class of our voting securities. Item 1B – Unresolved Staff Comments None. Item 2 – Properties Banner maintains its administrative offices and main branch office, which is owned by us, in Walla Walla, Washington. In total, as of December 31, 2022, we have 137 branch offices located in Washington, Oregon, California, and Idaho. Geographically we have 66 branches located in Washington, 32 in Oregon, 30 in California and 9 in Idaho. Of these branch locations, approximately two thirds are owned and one third are leased facilities. In addition to the branch locations, we also have 18 loan production offices, ten of which are located in Washington, three in California, two in both Oregon and Idaho, and one in Utah. All but one loan production offices are leased facilities. The lease terms for our branch and loan production offices are not individually material. Lease expirations range from 3 months to 17 years. Administrative support offices are primarily in Washington, where we have eight facilities, of which we own three and lease five. Additionally, we have one leased administrative support offices in Idaho and three administrative support offices located in Oregon, two owned and one leased. In the opinion of management, all properties are adequately covered by insurance, are in a good state of repair and are appropriately designed for their present and future use. 37 Item 3 – Legal Proceedings In the normal course of our business, we have various legal proceedings and other contingent matters pending. These proceedings and the associated legal claims are often contested and the outcome of individual matters is not always predictable. Furthermore, in some matters, it is difficult to assess potential exposure because the legal proceeding is still in the pretrial stage. These claims and counter claims typically arise during the course of collection efforts on problem loans or with respect to actions to enforce liens on properties in which we hold a security interest, although we also are subject to claims related to employment matters. Claims related to employment matters may include, but are not limited to: claims by our employees of discrimination, harassment, violations of wage and hour requirements, or violations of other federal, state, or local laws and claims of misconduct or negligence on the part of our employees. Some or all of these claims may lead to litigation, including class action litigation, and these matters may cause us to incur negative publicity with respect to alleged claims. Our insurance may not cover all claims that may be asserted against us, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. Should the ultimate judgments or settlements in any litigation exceed our insurance coverage, they could have a material adverse effect on our financial condition and results of operation for any period. At December 31, 2022, we had accrued $14.8 million related to these legal proceedings. The ultimate outcome of these legal proceedings could be more or less than what we have accrued. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, operations or cash flows, except as set forth below. A class and collective action lawsuit, Bolding et al. v. Banner Bank, US Dist. Ct., WD WA., was filed against Banner Bank on April 17, 2017. The plaintiffs are former and/or current mortgage loan officers of AmericanWest Bank and/or Banner Bank, who allege that the employer bank failed to pay all required regular and overtime wages that were due pursuant to the Fair Labor Standards Act (FLSA) and related laws of the state respective to each individual plaintiff. The plaintiffs seek regular and overtime wages, plus certain penalty amounts and legal fees. On December 15, 2017, the Court granted the plaintiffs’ motion for conditional certification of a class with regard to the FLSA claims; following notice given to approximately 160 potential class members, 33 persons elected to “opt-in” as plaintiffs in the class. On October 10, 2018, the Court granted plaintiffs’ motion for certification of a different class of approximately 200 members, with regard to state law claims. Significant pre-trial motions were filed by both parties, including various motions by Banner Bank seeking to dismiss and/or limit the class claims. The Court granted in part and denied in part Banner Bank’s motions and has ultimately allowed the case to proceed. The Court ruled on the last of the pre-trial motions on September 13, 2021, increasing the likelihood of trial or settlement. The parties participated in a mediation in December 2022; a stay of proceedings is in place until March 6, 2023, to allow the parties’ continuing settlement efforts. If the parties do not reach a settlement, a trial for this case will be scheduled and will be bifurcated between a liability phase and a damages phase. If the case goes to trial and the Bank is unsuccessful in defending the claims, damages could exceed the amount the Company has accrued as a litigation contingency reserve for this case. The Bank has raised substantial defenses to this lawsuit and will continue to defend this case vigorously. The ultimate outcome is unknown at this time. Item 4 – Mine Safety Disclosures Not applicable. 38 PART II Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information and Holders Our voting common stock is principally traded on the NASDAQ Global Select Market under the symbol “BANR.” Shareholders of record as of December 31, 2022 totaled 1,856 based upon securities position listings furnished to us by our transfer agent. This total does not reflect the number of persons or entities who hold stock in nominee or “street” name through various brokerage firms. Dividends Banner has historically paid cash dividends to its common shareholders. Payments of future cash dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our business, operating results and financial condition, capital requirements, current and anticipated cash needs, plans for expansion, any legal or contractual limitation on our ability to pay dividends and other relevant factors including required payments on our TPS. During 2022, we increased our regular quarterly dividend by 9% to $0.48 per share. No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in future periods. Dividends on common stock from Banner depend substantially upon receipt of dividends from the Bank, which is the Company’s predominant source of income. Management’s projections show an expectation that cash dividends will continue for the foreseeable future. Purchases of Equity Securities by the Issuer and Affiliated Purchasers The following table provides information about repurchases of common stock by the Company during the quarter ended December 31, 2022: Period October 1, 2022 - October 31, 2022 November 1, 2022 - November 30, 2022 December 1, 2022 - December 31, 2022 Total for quarter Total Number of Common Shares Purchased (1) Average Price Paid per Common Share 72 $ 723 58 853 $ 59.36 72.11 62.26 70.36 Total Number of Shares Purchased as Part of Publicly Announced Plan — — — — Maximum Number of Remaining Shares that May be Purchased at Period End under the Board Authorization 1,512,510 1,512,510 1,512,510 1,512,510 (1) Includes 853 shares were surrendered by employees to satisfy tax withholding obligations upon the vesting of restricted stock grants in the fourth quarter of 2022. On December 22, 2021, the Company announced that its Board of Directors had authorized the repurchase up to 1,712,510 shares of the Company’s common stock (which was equivalent to 5% of the Company’s common stock). This authorization expired in December of 2022. There were no shares tendered in connection with option exercises during the years ended December 31, 2022 and 2021, respectively. Restricted shares canceled to pay withholding taxes totaled 55,228 and 59,730 during the years ended December 31, 2022 and 2021, respectively. Equity Compensation Plan Information The equity compensation plan information presented under subparagraph (d) in Part III, Item 12 of this Form 10-K is incorporated herein by reference. 39 Performance Graph The following graph compares the cumulative total shareholder return on Banner common stock with the cumulative total return on the NASDAQ (U.S. Stock) Index, a peer group of the KBW Regional Bank Index and the S&P 500. Total return assumes the reinvestment of all dividends. Total Return Performance e u l a V x e d n I 250 200 150 100 50 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22 Year Ended Banner Corporation KBW Regional Bank Index NASDAQ Composite S&P 500 Index Banner Corporation NASDAQ Composite KBW Regional Bank Index S&P 500 12/31/17 100.00 100.00 100.00 100.00 12/31/18 100.05 97.16 82.51 95.62 Year Ended* 12/31/19 109.07 132.81 102.20 125.72 12/31/20 95.40 192.47 93.33 148.85 12/31/21 128.09 235.15 127.53 191.58 12/31/22 137.28 158.65 118.71 156.88 *Assumes $100 invested in Banner Corporation common stock and each index at the close of business on December 31, 2017 and that all dividends were reinvested. Information for the graph was provided by Bloomberg LP, New York City, NY. Item 6 - Reserved 40 Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Notes to the Consolidated Financial Statements contained in Item IV of this Form 10-K. Executive Overview Banner’s successful execution of its super community bank model and strategic initiatives has delivered solid core operating results and profitability over the last several years. The Company’s longer term strategic initiatives continue to focus on originating high quality assets and client acquisition, which we believe will continue to generate strong revenue while maintaining the Company’s moderate risk profile. 2022 Financial Highlights Revenues increased 6%, to $628.4 million, compared to $593.3 million for the prior year. • • Net income decreased to $195.4 million, or $5.67 per diluted share, compared to net income of $201.0 million, or $5.76 per diluted share for the prior year. • Net interest income increased 11% to $553.2 million, compared to $496.9 million for the prior year. • Net interest margin, on a tax equivalent basis, was 3.68% compared to 3.39% in the prior year. • Non-interest income decreased to $75.3 million, compared to $96.4 million for the prior year. • Non-interest expense decreased to $377.3 million, compared to $380.1 million for the prior year. • • • Net loans receivable increased 12% to $10.01 billion at December 31, 2022, compared to $8.95 billion a year ago. • Non-performing assets decreased to $23.4 million, or 0.15% of total assets, at December 31, 2022, compared to $23.7 million, or Return on average assets was 1.18%, compared to 1.24% in the prior year. Efficiency ratio was 60.04%, compared to 64.06% in the prior year. 0.14% of total assets, a year ago. The allowance for credit losses - loans was $141.5 million, or 1.39% of total loans receivable, at December 31, 2022, compared to $132.1 million, or 1.45% of total loans receivable a year ago. Core deposits (non-interest-bearing and interest-bearing transaction and savings accounts) decreased to $12.90 billion at December 31, 2022, compared to $13.49 billion a year ago. Core deposits represented 95% of total deposits at December 31, 2022. Cash dividends paid to shareholders were $1.76 per share, compared to $1.64 for the prior year. Common shareholders’ equity per share decreased to $42.59 at December 31, 2022, compared to $49.35 a year ago. • • • • 41 Selected Financial Data: The following condensed consolidated statements of financial condition and operations and selected performance ratios as of December 31, 2022, 2021, and 2020 and for the years then ended have been derived from our audited consolidated financial statements. FINANCIAL CONDITION DATA: (1) (In thousands) Total assets Cash and securities Loans receivable, net Deposits Borrowings Total shareholders’ equity Shares outstanding OPERATING DATA: (In thousands) Interest income Interest expense Net interest income Provision (recapture) for credit losses Net interest income after provision (recapture) for credit losses Deposit fees and other service charges Mortgage banking operations revenue Net change in valuation of financial instruments carried at fair value All other non-interest income Total non-interest income Salary and employee benefits All other non-interest expenses Total non-interest expense Income before provision for income tax expense Provision for income tax expense Net income PER COMMON SHARE DATA: Net income: Basic Diluted Diluted adjusted earnings per share Common shareholders’ equity per share Common shareholders’ tangible equity per share Cash dividends Dividend payout ratio (basic) Dividend payout ratio (diluted) (2) (8) (2)(8) OTHER DATA: Full time equivalent employees Number of branches 42 2022 2020 December 31 2021 $ 15,833,431 $ 16,804,872 $ 15,031,623 4,003,469 6,321,196 9,703,703 8,952,664 12,567,296 14,326,933 549,960 532,869 1,666,264 1,690,327 35,159 34,253 4,178,375 10,005,259 13,620,059 456,603 1,456,432 34,194 $ $ $ For the Year Ended December 31 2021 520,500 $ 23,609 496,891 (33,388) 530,279 39,495 33,948 4,616 18,357 96,416 244,351 135,750 380,101 246,594 45,546 201,048 $ 2022 572,569 $ 19,390 553,179 10,364 542,815 44,459 10,834 807 19,155 75,255 242,266 135,029 377,295 240,775 45,397 195,378 $ 2020 519,146 37,845 481,301 67,875 413,426 34,384 51,083 (656) 13,805 98,616 245,400 124,189 369,589 142,453 26,525 115,928 At or For the Years Ended December 31 2020 2021 2022 $ 5.70 5.67 5.69 42.59 31.41 1.76 30.88 % 31.04 % $ 5.81 5.76 5.97 49.35 38.02 1.64 28.23 % 28.47 % 3.29 3.26 3.37 47.39 36.17 1.23 37.39 % 37.73 % As of December 31 2021 2022 1,931 137 1,891 150 2020 2,061 155 KEY FINANCIAL RATIOS: Performance Ratios: (3) (4) (5) Return on average assets Return on average common equity Average common equity to average assets Net interest margin (tax equivalent) Non-interest income to average assets Non-interest expense to average assets Efficiency ratio Adjusted efficiency ratio Average interest-earning assets to funding liabilities Loans to deposits ratio Selected Financial Ratios: (6) (8) Allowance for credit losses - loans as a percent of total loans at end of period Net recoveries (charge-offs) as a percent of average outstanding loans during the period Non-performing assets as a percent of total assets Allowance for credit losses - loans as a percent of non-performing loans(7) Common shareholders’ equity to total assets Common shareholders’ tangible equity to tangible assets (8) Consolidated Capital Ratios: Total capital to risk-weighted assets Tier 1 capital to risk-weighted assets Tier 1 capital to average leverage assets Common equity tier I capital to risk-weighted assets At or For the Years Ended December 31 2020 2021 2022 1.18 % 12.79 9.26 3.68 0.46 2.29 60.04 57.99 104.16 74.92 1.39 0.01 0.15 615.25 9.20 6.95 14.04 12.13 9.45 11.44 1.24 % 12.12 10.26 3.39 0.60 2.35 64.06 60.22 104.18 64.08 1.45 (0.02) 0.14 578.47 10.06 7.93 14.71 12.74 8.76 11.54 0.83 % 7.14 11.63 3.85 0.71 2.65 63.73 60.76 104.61 80.48 1.69 (0.05) 0.24 469.70 11.09 8.69 14.73 12.56 9.50 11.25 Includes securities available-for-sale and held-to-maturity. (1) (2) Calculated using shares outstanding. (3) Net income divided by average assets. (4) Net income divided by average common equity. (5) Net interest income as a percent of average interest-earning assets. (6) Non-interest expenses divided by the total of net interest income and non-interest income. (7) Non-performing loans consist of nonaccrual and 90 days past due loans still accruing interest. (8) Represent non-GAAP financial measures.* *Non-GAAP financial measures: To calculate the adjusted revenue, the diluted adjusted earnings per share and the adjusted efficiency ratio, we make adjustments to our GAAP revenues and expenses as reported on our Consolidated Statements of Operations, which results in non- GAAP financial measures. To calculate tangible equity per share and the ratio of tangible common shareholders’ equity to tangible assets, we make adjustments to our GAAP assets and shareholders’ equity as reported on our Consolidated Statements of Financial Condition, which results in non-GAAP financial measures. Management has presented non-GAAP financial measures in this discussion and analysis because it believes that they provide useful and comparative information to assess trends in our core operations and to facilitate the comparison of our performance with the performance of our peers. However, these non-GAAP financial measures are supplemental and are not a substitute for any analysis based on GAAP. Where applicable, we have also presented comparable earnings information using GAAP financial measures. For a reconciliation of these non-GAAP financial measures, see the tables below. Because not all companies use the same calculations, our presentation may not be comparable to other similarly titled measures as calculated by other companies. 43 The following tables set forth reconciliations of non-GAAP financial measures discussed in this report (dollars in thousands, except share and per share data): $ $ $ $ $ $ $ $ $ $ ADJUSTED REVENUE: Net interest income (GAAP) Non-interest income (GAAP) Total revenue (GAAP) Exclude: Net loss (gain) on sale of securities Net change in valuation of financial instruments carried at fair value Gain on sale of branches, including related deposits Adjusted Revenue (non-GAAP) ADJUSTED EARNINGS: Net income (GAAP) Exclude: Net gain on sale of securities Net change in valuation of financial instruments carried at fair value Merger and acquisition-related costs COVID-19 expenses Gain on sale of branches, including related deposits Banner Forward expenses Loss on extinguishment of debt Related tax benefit Total adjusted earnings (non-GAAP) Diluted earnings per share (GAAP) Diluted adjusted earnings per share (non-GAAP) ADJUSTED EFFICIENCY RATIO: Non-interest expense (GAAP) Exclude: Merger and acquisition-related costs COVID-19 expenses Banner Forward expenses CDI amortization State/municipal tax expense REO operations Loss on extinguishment of debt Adjusted non-interest expense (non-GAAP) Net interest income (GAAP) Non-interest income (GAAP) Total revenue (GAAP) Exclude: Net loss (gain) on sale of securities Net change in valuation of financial instruments carried at fair value Gain on sale of branches, including related deposits Adjusted revenue (non-GAAP) Efficiency ratio (GAAP) Adjusted efficiency ratio (non-GAAP) 44 For the Years Ended December 31 2021 2020 2022 553,179 $ 75,255 628,434 3,248 (807) (7,804) 623,071 $ 195,378 $ 3,248 (807) — — (7,804) 5,293 793 (174) 195,927 $ 5.67 $ 5.69 $ 496,891 $ 96,416 593,307 (482) (4,616) — 588,209 $ 201,048 $ (482) (4,616) 660 436 — 11,604 2,284 (2,373) 208,561 $ 5.76 $ 5.97 $ 481,301 98,616 579,917 (1,012) 656 — 579,561 115,928 (1,012) 656 2,062 3,502 — — — (1,239) 119,897 3.26 3.37 2022 377,295 — — (5,293) (5,279) (4,693) 104 (793) 361,341 553,179 75,255 628,434 3,248 (807) (7,804) 623,071 $ December 31 2021 380,101 (660) (436) (11,604) (6,571) (4,343) 22 (2,284) 354,225 $ $ $ 496,891 96,416 593,307 (482) (4,616) — 588,209 2020 369,589 (2,062) (3,502) — (7,732) (4,355) 190 — 352,128 481,301 98,616 579,917 (1,012) 656 — 579,561 $ $ $ $ 60.04 % 57.99 % 64.06 % 60.22 % 63.73 % 60.76 % We calculate tangible common equity by excluding goodwill and other intangible assets from shareholders’ equity. We calculate tangible assets by excluding the balance of goodwill and other intangible assets from total assets. We believe that this is consistent with the treatment by our bank regulatory agencies, which exclude goodwill and other intangible assets from the calculation of risk-based capital ratios. Management believes that this non-GAAP financial measure provides information to investors that is useful in understanding the basis of our capital position (dollars in thousands). Shareholders’ equity (GAAP) Exclude goodwill and other intangible assets, net Common shareholders’ tangible equity (non-GAAP) Total assets (GAAP) Exclude goodwill and other intangible assets, net Total tangible assets (non-GAAP) Common shareholders’ equity to total assets (GAAP) Common shareholders’ tangible equity to tangible assets (non-GAAP) Common shares outstanding Common shareholders’ equity (book value) per share (GAAP) Common shareholders’ tangible equity (tangible book value) per share (non-GAAP) Critical Accounting Estimates 2022 $ 1,456,432 382,561 $ 1,073,871 $ 15,833,431 382,561 $ 15,450,870 December 31 2021 $ 1,690,327 387,976 $ 1,302,351 $ 16,804,872 387,976 $ 16,416,896 2020 $ 1,666,264 394,547 $ 1,271,717 $ 15,031,623 394,547 $ 14,637,076 9.20 % 6.95 % 10.06 % 7.93 % 11.09 % 8.69 % 34,194,018 42.59 31.41 $ $ 34,252,632 49.35 38.02 $ $ 35,159,200 47.39 36.17 $ $ The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgements that affect amounts reported in the consolidated financial statements. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements. Management believes the following estimates require difficult, subjective or complex judgments and, therefore, management considers the following to be critical accounting estimates. Allowance for Credit Losses: The allowance for credit losses reflects management's evaluation of our loans and their estimated loss potential, as well as the risk inherent in various components of the portfolio. There is significant judgment and assumptions applied in estimating the allowance for credit losses. These judgements, assumptions and estimates are susceptible to significant changes based on the current environment. Among the material estimates required to establish the allowance for credit losses are a reasonable and supportable forecast; a reasonable and supportable forecast period and the reversion period; value of collateral; strength of guarantors; the amount and timing of future cash flows for loans individually evaluated; and determination of the qualitative loss factors. 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 asset based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current portfolio. These factors include, among others, changes in the size and composition of the portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic conditions. Management considers various economic scenarios and forecasts to arrive at the estimate that most reflects management’s expectations of future conditions. The selection of a more optimistic or pessimistic economic forecast would result in a lower or higher allowance for credit losses. The use of a protracted slump economic forecast would have increased the allowance for credit losses - loans by approximately 28% as of December 31, 2022, where the use of a stronger near-term growth economic forecast would result in a negligible decrease in the allowance for credit losses - loans as of December 31, 2022. Management uses a scale to assign qualitative and environmental (QE) factor adjustments based on the level of estimated impact which requires a significant amount of judgment. Some QE factors impact all loan segments equally while others may impact some loan segments more or less than others. If management’s judgment were different for a QE factor that impacts all loan segments equally, a five basis-point change in this QE factor would increase or decrease the allowance for credit losses by 3.7% as of December 31, 2022. 45 Fair Value Accounting and Measurement: We use fair value measurements to record fair value adjustments to certain financial assets and liabilities. A hierarchical disclosure framework associated with the level of pricing observability is utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no pricing observability and a higher degree of judgment utilized in measuring fair value. Determining the fair value of financial instruments with unobservable inputs requires a significant amount of judgment. This includes the discount rate used to fair value our trust preferred securities and junior subordinated debentures. A 25 basis-point increase or decrease in the discount rate used to calculate the fair value of our trust preferred securities would result in a $643,000 decrease or increase in the reported fair value as of December 31, 2022, with an offsetting adjustment to our non-interest income. A 25 basis-point increase or decrease in the discount rate used to calculate the fair value of our junior subordinated debentures would result in a $1.6 million decrease or increase in the reported fair value as of December 31, 2022, with an offsetting adjustment to our accumulated other comprehensive income. Goodwill: An assessment of qualitative factors is completed to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The qualitative assessment involves judgment by management on determining whether there have been any triggering events that have occurred which would indicate potential impairment. If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed. Various valuation methodologies are considered when estimating the reporting unit’s fair value. The specific factors used in these various valuation methodologies that require judgment include the selection of comparable market transactions, discount rates, earnings capitalization rates and the future projected earnings of the reporting unit. Changes in these assumptions could result in changes to the estimated fair value of the reporting unit. The Company completed an assessment of qualitative factors as of December 31, 2022, and concluded that no further analysis was required as it is more likely than not that the fair value of the Bank, the reporting unit, exceeds the carrying value. Income Taxes and Deferred Taxes: The Company determines its deferred tax assets and liabilities based on the enacted tax rates that are expected to be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’s income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A 1% change in tax rates would result in a $7.3 million increase or decrease in our net deferred tax asset as of December 31, 2022. Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations by the tax authorities and newly enacted statutory, judicial and regulatory guidance that could impact the relative merits of tax positions. These changes, when they occur, impact accrued taxes and can materially affect our operating results. The evaluation pertaining to the tax expense and related deferred tax asset and liability balances involves a high degree of judgment and subjectivity around the measurement and resolution of these matters. This includes an evaluation of our ability to use our net operating loss carryforwards. The ultimate realization of the deferred tax assets is dependent upon the existence, or generation, of taxable income in the periods when those temporary differences and net operating loss and credit carryforwards are deductible. Legal Contingencies: In the normal course of our business, we have various legal proceedings and other contingent matters pending. We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We assess our potential liability by analyzing our litigation and regulatory matters using available information. We develop our views on estimated losses in consultation with outside counsel handling our defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. The estimated losses often involve a level of subjectivity and usually are a range of reasonable losses and not an exact number, in those situations we accrue the best estimate within the range or the low end of the range if no estimate within the range is better than another. Comparison of Financial Condition at December 31, 2022 and 2021 General. Total assets decreased to $15.83 billion at December 31, 2022, compared to $16.80 billion at December 31, 2021. The decrease in assets in 2022 was largely the result of a decrease in cash held and interest-bearing deposits, partially offset by loan growth. Total loans receivable (gross loans less deferred fees and discounts and excluding loans held for sale) increased $1.06 billion, or 12%, to $10.15 billion at December 31, 2022, from $9.08 billion at December 31, 2021. The increase in total loans receivable primarily reflects increased one-to-four family residential, multifamily real estate, commercial business, construction, land and land development, and consumer loan balances, partially offset by decreased commercial real estate loan balances. Excluding SBA PPP loans, total loans receivable increased $1.19 billion during the year ended December 31, 2022. Loans held for sale decreased to $56.9 million at December 31, 2022, compared to $96.5 million at December 31, 2021, principally as a result of a decrease in one- to four-family held for sale loan originations and the transfer of $54.0 million of multifamily held for sale loans to held for investment during the fourth quarter of 2022. Loans held for sale at December 31, 2022 included $49.5 million of multifamily loans and $7.4 million of one- to four-family loans, compared to $49.9 million of multifamily loans and $46.6 million of one- to four-family loans at December 31, 2021. 46 The aggregate of securities and interest-bearing deposits decreased $1.98 billion, or 32%, to $4.28 billion at December 31, 2022, compared to $6.26 billion a year earlier, primarily due to a decrease in interest-bearing deposits. Securities decreased to $3.94 billion at December 31, 2022, from $4.19 billion at December 31, 2021, as the fair value of securities available-for-sale declined as a result of an increase in interest rates during 2022. Fair value adjustments for securities designated as available-for-sale reflected a decrease of $418.8 million for the year ended December 31, 2022, which was included net of the associated tax benefit as a component of other comprehensive income, and largely occurred as a result of increases in market interest rates during 2022. Securities which are designated as held-to-maturity increased by $596.7 million from the prior year-end balance. This increase was primarily due to the transfer of $462.2 million of securities from available for sale to held to maturity during the first quarter of 2022 to limit the impact that potential future interest rates changes would have on AOCI. The average effective duration of our securities portfolio was approximately 6.5 years at December 31, 2022, compared to 4.6 years at December 31, 2021. Deposits decreased $706.9 million, or 5%, to $13.62 billion at December 31, 2022, from $14.33 billion at December 31, 2021. The decrease in deposits reflects the sale of four branches, which included the transfer of $178.2 million of related deposits, as well as an overall decline in market liquidity. Core deposits were 95% of total deposits at December 31, 2022, compared to 94% of total deposits one year earlier. Non- interest-bearing deposits decreased by $208.2 million, or 3%, to $6.18 billion from $6.39 billion at December 31, 2021; interest-bearing transaction and savings accounts decreased by $383.6 million or 5%, to $6.72 billion at December 31, 2022 from $7.10 billion at December 31, 2021; and certificates of deposit decreased $115.1 million, or 14%, to $723.5 million at December 31, 2022 from $838.6 million at December 31, 2021. We had $50.0 million of FHLB advances at both December 31, 2022 and December 31, 2021, as core deposits were a sufficient source of funding. Other borrowings, consisting of retail repurchase agreements primarily related to client cash management accounts, decreased $31.7 million to $232.8 million at December 31, 2022, compared to $264.5 million at December 31, 2021. Junior subordinated debentures totaled $74.9 million at December 31, 2022 compared to $119.8 million at December 31, 2021, as we redeemed $50.5 million of junior subordinated debentures during the first quarter of 2022. Subordinated notes, net of issuance costs, were $98.9 million at December 31, 2022 compared to $98.6 million at December 31, 2021. Total shareholders’ equity decreased $233.9 million, to $1.46 billion at December 31, 2022, compared to $1.69 billion at December 31, 2021. The decrease in shareholders’ equity is primarily due to the $363.0 million decrease in AOCI, primarily due to an increase in the unrealized loss and related decrease in the fair value of securities available-for-sale, net of tax, as a result of an increase in interest rates during 2022, the accrual of $60.9 million of cash dividends to common shareholders, and the repurchase of 200,000 shares of common stock at a total cost of $11.0 million, partially offset by the $195.4 million of year-to-date net income. Common shareholder’s equity to total assets was 9.20% and 10.06% at December 31, 2022 and 2021, respectively. Tangible common shareholders’ equity (a non-GAAP financial measure), which excludes goodwill and other intangible assets was $1.07 billion, or 6.95% of tangible assets at December 31, 2022, compared to $1.30 billion, or 7.93% at December 31, 2021. The decrease in tangible common shareholders’ equity as a percentage of tangible assets was primarily due to the previously mentioned decrease in AOCI. The Company’s book value per share was $42.59 at December 31, 2022, compared to $49.35 per share a year ago, and its tangible book value per share (a non-GAAP financial measure) was $31.41 at December 31, 2022, compared to $38.02 per share a year ago. See, “Executive Overview” above for a reconciliation of these non-GAAP financial measures. Investments. At December 31, 2022, our consolidated investment securities portfolio totaled $3.94 billion and consisted principally of mortgage-backed and mortgage-related securities and municipal bonds and to a lesser extent U.S. Government and agency obligations, corporate debt obligations, and asset-backed securities. Our investment levels may be increased or decreased depending upon management’s projections as to the demand for funds to be used in our loan origination, deposit and other activities and upon yields available on investment alternatives. During the year ended December 31, 2022, our aggregate investment in securities decreased $251.6 million primarily due to a decrease in the fair value of securities available-for-sale as a result of an increase in interest rates during 2022. Holdings of mortgage-backed securities decreased $151.7 million and U.S. Government and agency obligations decreased $146.2 million, while municipal bonds increased $35.2 million, corporate debt obligations increased $8.1 million and asset-backed securities increased $5.1 million. U.S. Government and Agency Obligations: Our portfolio of U.S. Government and agency obligations had a carrying value of $55.4 million (with an amortized cost of $56.7 million) at December 31, 2022, a weighted average contractual maturity of 10.3 years and a weighted average coupon rate of 4.84%. Many of the U.S. Government and agency obligations we own include call features which allow the issuing agency the right to call the securities at various dates prior to the final maturity. Mortgage-Backed Obligations: At December 31, 2022, our mortgage-backed and mortgage-related securities had a carrying value of $2.75 billion ($3.12 billion at amortized cost, with a net fair value adjustment of $365.8 million). The weighted average coupon rate of these securities was 2.62% and the weighted average contractual maturity was 24.9 years, although we receive principal payments on these securities each month resulting in a much shorter expected average life. As of December 31, 2022, 98% of the mortgage-backed and mortgage-related securities pay interest at a fixed rate. 47 Municipal Bonds: The carrying value of our tax-exempt bonds at December 31, 2022 was $653.1 million ($678.9 million at amortized cost), comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and, to a lesser extent, revenue bonds (i.e., backed by revenues from the specific project being financed) issued by cities and counties and various housing authorities, and hospital, school, water and sanitation districts. We also had taxable bonds in our municipal bond portfolio, which at December 31, 2022 had a carrying value of $111.2 million ($125.6 million at amortized cost). Many of our qualifying municipal bonds are not rated by a nationally recognized credit rating agency due to the smaller size of the total issuance and a portion of these bonds have been acquired through direct private placement by the issuers. We have not experienced any defaults or payment deferrals on our current portfolio of municipal bonds. Our combined municipal bond portfolio is geographically diverse, with the majority within the states of Washington, Oregon, Texas and California. At December 31, 2022, our municipal bond portfolio, including taxable and tax-exempt, had a weighted average maturity of approximately 20.5 years and a weighted average coupon rate of 3.44%. Corporate Bonds: Our corporate bond portfolio had a carrying value of $153.5 million ($163.5 million at amortized cost, with a net fair value adjustment of $10.0 million) at December 31, 2022. At December 31, 2022, the portfolio had a weighted average maturity of 9.9 years and a weighted average coupon rate of 4.30%. Asset-Backed Securities: At December 31, 2022, our asset-backed securities portfolio had a carrying value of $211.5 million (with an amortized cost of $222.5 million), and was comprised of collateralized loan obligations. The weighted average coupon rate of these securities was 5.93% and the weighted average contractual maturity was 12.9 years. At December 31, 2022, 100% of these securities had adjustable interest rates tied to three-month LIBOR. The following tables set forth certain information regarding carrying values and percentage of total carrying values of our portfolio of securities—trading and securities—available-for-sale, both carried at estimated fair market value, and securities—held-to-maturity, carried at amortized cost as of December 31, 2022, 2021 and 2020 (dollars in thousands): Table 1: Securities Trading Corporate bonds Total securities—trading Available-for-Sale U.S. Government and agency obligations Municipal bonds Corporate bonds Mortgage-backed or related securities Asset-backed securities Total securities—available-for-sale Held-to-Maturity U.S. Government and agency obligations Municipal bonds Corporate bonds Mortgage-backed or related securities Total securities—held-to-maturity Estimated market value 2022 December 31 2021 2020 Carrying Value Percent of Total Carrying Value Percent of Total Carrying Value Percent of Total $ $ 28,694 28,694 100.0 % $ 100.0 % $ 26,981 26,981 100.0 % $ 100.0 % $ 24,980 24,980 100.0 % 100.0 % $ 55,108 261,209 121,853 2,139,336 211,525 $ 2,789,031 $ 312 503,117 2,961 611,577 $ 1,117,967 942,180 $ 2.0 % $ 9.3 4.4 76.7 7.6 201,332 308,612 117,347 2,805,268 206,434 100.0 % $ 3,638,993 5.5 % $ 8.5 3.2 77.1 5.7 141,735 303,518 221,769 1,646,152 9,419 100.0 % $ 2,322,593 — % $ 45.0 0.3 54.7 100.0 % $ $ 316 420,555 3,092 97,392 521,355 541,853 0.1 % $ 80.6 0.6 18.7 100.0 % $ $ 340 370,998 3,222 47,247 421,807 448,681 6.1 % 13.1 9.5 70.9 0.4 100.0 % 0.1 % 87.9 0.8 11.2 100.0 % 48 : ) s d n a s u o h t n i s r a l l o d ( 2 2 0 2 , 1 3 r e b m e c e D f o s a s e i t i r u c e s y t i r u t a m - o t - d l e h d n a e l a s - r o f - e l b a l i a v a f o o i l o f t r o p d e t a d i l o s n o c r u o f o g n i c i r p e r o t d o i r e p r o y t i r u t a m e h t s w o h s e l b a t g n i w o l l o f e h T s e t a R d n a g n i c i r p e R / y t i r u t a M — y t i r u t a M - o t - d l e H d n a e l a S - r o f - e l b a l i a v A s e i t i r u c e S : 2 e l b a T 2 2 0 2 , 1 3 r e b m e c e D d e t h g i e W e g a r e v A d l e i Y g n i y r r a C e u l a V d e t h g i e W e g a r e v A d l e i Y g n i y r r a C e u l a V d e t h g i e W e g a r e v A d l e i Y g n i y r r a C e u l a V d e t h g i e W e g a r e v A d l e i Y g n i y r r a C e u l a V d e t h g i e W e g a r e v A d l e i Y g n i y r r a C e u l a V l a t o T s r a e Y n e T r e t f A s r a e Y n e T o t e v i F r e t f A s r a e Y e v i F o t e n O r e t f A s s e L r o r a e Y e n O % 4 5 . 3 0 2 4 , 5 5 $ % 8 5 . 2 9 6 1 , 3 1 $ % 5 8 . 3 7 0 5 , 1 4 $ % 9 4 . 3 4 4 7 $ % — — $ s n o i t a g i l b o y c n e g a d n a t n e m n r e v o G . . S U 4 8 . 2 8 4 . 3 9 3 . 3 8 9 . 5 6 5 . 2 3 1 . 6 0 9 1 , 1 1 1 6 3 1 , 3 5 6 6 2 3 , 4 6 7 4 1 8 , 4 2 1 5 2 5 , 1 1 2 3 1 9 , 0 5 7 , 2 1 7 . 2 0 5 . 3 1 4 . 3 — 3 6 . 2 8 0 . 6 4 2 2 , 8 7 8 7 4 , 8 9 5 2 0 7 , 6 7 6 1 1 4 , 1 1 7 6 , 2 6 1 4 5 2 , 2 8 2 , 2 5 1 . 4 5 3 . 3 9 3 . 3 3 8 . 3 6 9 . 1 9 2 . 6 1 4 2 , 2 3 3 9 , 3 4 4 7 1 , 6 4 9 5 4 , 7 7 4 5 8 , 8 4 4 6 8 , 9 7 2 1 3 . 3 2 1 . 3 4 2 . 3 8 9 . 3 0 7 . 2 — 4 2 2 , 9 5 5 3 , 6 1 9 7 5 , 5 2 4 9 8 , 4 4 — 9 5 7 , 2 8 1 1 8 . 2 6 5 . 4 7 9 . 2 3 5 . 3 0 9 . 2 — 1 0 5 , 1 0 7 3 , 4 1 1 7 8 , 5 1 — 0 5 0 , 1 6 3 0 , 6 4 0 . 3 8 9 9 , 6 0 9 , 3 $ 7 9 . 2 7 0 2 , 6 3 1 , 3 $ 7 9 . 2 8 5 8 , 3 9 4 $ 8 9 . 2 6 7 9 , 3 5 2 $ 8 9 . 2 7 5 9 , 2 2 1 1 2 , 1 3 7 , 3 $ 8 6 4 , 2 6 9 , 2 $ 3 8 7 , 2 9 4 $ 3 1 2 , 3 5 2 $ 7 4 7 , 2 2 $ $ - o t - d l e h d n a e l a s - r o f - e l b a l i a v a s e i t i r u c e s l a t o T e u l a v g n i y r r a c — y t i r u t a m - o t - d l e h d n a e l a s - r o f - e l b a l i a v a s e i t i r u c e s l a t o T e u l a v t e k r a m d e t a m i t s e — y t i r u t a m s e i t i r u c e s d e t a l e r r o d e k c a b - e g a g t r o M s e i t i r u c e s d e k c a b - t e s s A s d n o b e t a r o p r o C ) 1 ( t p m e x e x a T e l b a x a T : s d n o b l a p i c i n u M . % 0 1 f o e c n a w o l l a s i d x a t a d n a % 1 2 f o e t a r x a t l a r e d e f a g n i s u s i s a b t n e l a v i u q e x a t a n o d e t a l u c l a c s i d l e i y e g a r e v a d e t h g i e w t p m e x e - x a T ) 1 ( 49 Loans and Lending. Loans are our most significant and generally highest yielding earning assets. We attempt to maintain a portfolio of loans to total deposits ratio at a level designed to enhance our revenues, while adhering to sound underwriting practices and appropriate diversification guidelines in order to maintain a moderate risk profile. Our loan to deposit ratio typically ranges from 90% to 95%. Our loan to deposit ratio at December 31, 2022 was 75%. During the most recent quarters our loan to deposit ratio has begun to trend upward as the unprecedented level of market liquidity begins to contract. We offer a wide range of loan products to meet the demands of our clients. Our lending activities are primarily directed toward the origination of real estate and commercial loans. Total loans receivable increased $1.06 billion, or 12%, to $10.15 billion at December 31, 2022, from $9.08 billion at December 31, 2021. The increase in total loans receivable for the year ended December 31, 2022 primarily reflects increased one-to-four family residential, multifamily real estate, commercial business, construction, land and land development, and consumer loan balances, partially offset by decreased commercial real estate loan balances. While we originate a variety of loans, our ability to originate each type of loan is dependent upon the relative client demand and competition in each market we serve. We continue to implement strategies designed to capture more market share and achieve increases in targeted loans. New loan originations and portfolio balances will continue to be significantly affected by economic activity and changes in interest rates. The following table shows loan originations (excluding loans held for sale) activity for the years ended December 31, 2022, 2021, and 2020 (in thousands): Table 3: Loan Originations Commercial real estate Multifamily real estate Construction and land Commercial business: Commercial business SBA PPP Agricultural business One-to four- family residential Consumer Total loan originations (excluding loans held for sale) Years Ended Dec 31, 2021 Dec 31, 2022 $ 418,635 $ 37,612 1,935,476 565,809 $ 110,640 1,975,664 Dec 31, 2020 356,361 27,119 1,588,311 1,034,950 — 89,655 358,976 545,254 4,420,558 $ 731,315 485,077 61,997 206,662 465,213 4,602,377 $ 628,981 1,176,018 76,096 116,713 423,526 4,393,125 $ One- to Four-Family Residential Real Estate Lending: At December 31, 2022, $1.17 billion, or 12% of our loan portfolio, consisted of permanent loans on one- to four-family residences. We are active originators of one- to four-family residential loans in most communities where we have established offices in Washington, Oregon, California and Idaho. Originations of portfolio one- to four-family residential loans have recently been relatively strong, despite increases in interest rates during the current year. Our balance of loans for one- to four- family residences increased by $515.6 million in 2022, compared to the prior year. The increase in one-to-four family real estate loans during 2022 was primarily the result of one- to four-family construction loans converting to one- to four-family residential portfolio loans and a higher percentage of new production originated as held for investment during the year due to the higher interest rate environment. Construction and Land Lending: Our construction loan originations have been relatively strong in recent years as builders have expanded production and experienced strong home sales in many markets where we operate. At December 31, 2022, construction, land and land development loans totaled $1.49 billion, or 15% of total loans, compared to $1.31 billion, or 14%, at December 31, 2021. One-to four-family construction loans increased by $78.6 million in 2022, as builders have expanded production and experienced strong home sales during the year. During the year ended December 31, 2022, land and land development loans (both residential and commercial) increased by $15.0 million, primarily reflecting increased residential land and land development loans also due to the strong housing market. Commercial and Multifamily Real Estate Lending: We also originate loans secured by commercial and multifamily real estate. Commercial and multifamily real estate loans originated by us include both fixed- and adjustable-rate loans with intermediate terms of generally five to ten years. Our commercial real estate portfolio consists of loans on a variety of property types with no significant concentrations by property type, borrowers or locations. At December 31, 2022, our loan portfolio included $3.64 billion of commercial real estate loans, or 36% of the total loan portfolio, and $645.1 million of multifamily real estate loans, or 6% of the total loan portfolio, compared to $3.79 billion, or 42%, and $530.9 million, or 6%, at December 31, 2021, respectively. Commercial Business Lending: Our commercial business lending is directed toward meeting the credit and related deposit needs of various small- to medium-sized business and agribusiness borrowers operating in our primary market areas. In addition to providing earning assets, this type of lending has helped increase our deposit base. At December 31, 2022, commercial business loans totaled $1.28 billion, or 13% of total loans, compared to $1.17 billion, or 13%, at December 31, 2021. SBA PPP loans decreased 94% to $7.9 million at December 31, 2022, compared to $133.9 million at December 31, 2021. Our commercial business lending, to a lesser extent, includes participation in certain syndicated loans, including shared national credits that totaled $234.1 million at December 31, 2022. 50 Agricultural Lending: Agriculture is a major industry in many Washington, Oregon, California and Idaho locations in our service area. While agricultural loans are not a large part of our portfolio, we routinely make agricultural loans to borrowers with a strong capital base, sufficient management depth, proven ability to operate through agricultural cycles, reliable cash flows and adequate financial reporting. Payments on agricultural loans depend, to a large degree, on the results of operation of the related farm entity. The repayment is also subject to other economic and weather conditions as well as market prices for agricultural products, which can be highly volatile at times. At December 31, 2022, agricultural loans totaled $295.1 million, or 3% of the loan portfolio, compared to $280.6 million, or 3%, at December 31, 2021. Consumer and Other Lending: Consumer lending has traditionally been a modest part of our business with loans made primarily to accommodate our existing client base. At December 31, 2022, our consumer loans increased $125.0 million to $680.9 million, or 7% of our loan portfolio, compared to $555.9 million, or 6%, at December 31, 2021. The increase from December 31, 2021 was primarily due to a home equity loan marketing campaign during the second and third quarters of 2022. As of December 31, 2022, 83% of our consumer loans were secured by one- to four-family residences, including home equity lines of credit. Credit card balances totaled $42.9 million at December 31, 2022 compared to $37.8 million a year earlier. Loan Servicing Portfolio: At December 31, 2022, we were servicing $3.01 billion of loans for others and held $11.4 million in escrow for our portfolio of loans serviced for others. The loan servicing portfolio at December 31, 2022 was comprised of $1.35 billion of Freddie Mac residential mortgage loans, $1.09 billion of Fannie Mae residential mortgage loans, $328.5 million of Oregon Housing residential mortgage loans, $69.9 million of SBA loans and $171.4 million of other loans serviced for a variety of investors. The portfolio included loans secured by property located primarily in the states of Washington, Oregon, Idaho and California. For the years ended December 31, 2022 and 2021, we recognized $7.5 million and $7.7 million of loan servicing income in our results of operations, respectively. For the years ended December 31, 2022 and 2021, we recognized $4.2 million and $6.6 million of amortization for MSRs and SBA servicing rights, respectively. 51 l a t o T f o t n e c r e P t n u o m A l a t o T f o t n e c r e P t n u o m A l a t o T f o t n e c r e P t n u o m A 0 2 0 2 , 1 3 r e b m e c e D 1 2 0 2 , 1 3 r e b m e c e D 2 2 0 2 , 1 3 r e b m e c e D r o f e c n a w o l l a e h t e r u s a e m o t d e s u s c i t s i r e t c a r a h c k s i r n o m m o c e h t n o d e s a b y r o g e t a c n a o l E R C e c n a l a B l l a m S s t i f o n o i t a t n e m g e s e h t d e g n a h c y n a p m o C e h t , 2 2 0 2 f o r e t r a u q t s r i f e h t g n i r u D , 1 3 r e b m e c e D t a e l b a v i e c e r s n a o l f o n o i t a t n e s e r p e h T . ) s d n a s u o h t n i s r a l l o d ( s s a l c y b 0 2 0 2 d n a 1 2 0 2 , 2 2 0 2 , 1 3 r e b m e c e D t a e l b a v i e c e r s n a o l e h t s t n e s e r p e l b a t g n i w o l l o f e h T . s e s s o l t i d e r c . n o i t a t n e s e r p d o i r e p t n e r r u c e h t n i d e s u n o i t a t n e m g e s e h t h c t a m o t d e s i v e r n e e b s a h 0 2 0 2 d n a 1 2 0 2 : ) s d n a s u o h t n i s r a l l o d ( d e t a c i d n i s e t a d e h t f o s a n a o l f o e p y t y b , s t s o c d n a s e e f d e r r e f e d d n a s t n u o c s i d f o t e n , o i l o f t r o p n a o l s ’ y n a p m o C e h t f o n o i t i s o p m o c e h t h t r o f s t e s e l b a t g n i w o l l o f e h T s i s y l a n A o i l o f t r o P n a o L : 4 e l b a T % 1 . 8 6 . 6 1 6 . 2 1 3 . 7 3 9 . 3 3 . 2 1 . 3 1 . 5 5 . 2 0 . 3 1 5 . 1 1 6 . 0 1 5 . 7 6 . 9 2 0 . 3 — 0 . 3 0 . 7 0 . 5 2 . 1 2 . 6 % 0 . 0 0 1 0 8 1 , 6 9 7 5 1 1 , 9 3 6 , 1 1 8 2 , 3 4 2 , 1 6 7 5 , 8 7 6 , 3 2 2 8 , 8 8 3 6 6 3 , 7 2 2 7 2 5 , 5 0 3 8 3 6 , 6 0 5 5 1 9 , 8 4 2 6 4 4 , 8 8 2 , 1 1 2 6 , 2 3 1 , 1 2 7 4 , 4 4 0 , 1 1 5 4 , 3 4 7 4 4 5 , 0 2 9 , 2 — 3 5 5 , 3 9 2 3 5 5 , 3 9 2 6 9 5 , 6 9 6 7 8 4 , 0 9 4 8 5 9 , 3 1 1 5 4 4 , 4 0 6 ) 9 7 2 , 7 6 1 ( 2 8 9 , 0 7 8 , 9 $ % 2 . 9 4 . 8 1 1 . 4 1 7 . 1 4 8 . 5 8 . 1 9 . 2 3 . 6 5 . 3 5 . 4 1 4 . 1 1 5 . 1 7 . 8 6 . 1 2 1 . 3 — 1 . 3 2 . 7 0 . 5 1 . 1 1 . 6 % 0 . 0 0 1 3 2 6 , 1 3 8 7 2 0 , 4 7 6 , 1 3 6 8 , 1 8 2 , 1 3 1 5 , 7 8 7 , 3 5 8 8 , 0 3 5 8 9 9 , 7 6 1 6 1 1 , 9 5 2 3 5 7 , 8 6 5 4 5 4 , 3 1 3 1 2 3 , 9 0 3 , 1 4 7 5 , 2 3 1 0 1 3 , 2 9 7 6 0 2 , 8 3 0 , 1 0 9 0 , 3 6 9 , 1 4 5 3 , 1 4 2 2 , 9 7 2 8 7 5 , 0 8 2 4 7 4 , 7 5 6 3 3 5 , 8 5 4 9 6 3 , 7 9 2 0 9 , 5 5 5 ) 9 9 0 , 2 3 1 ( 3 6 7 , 4 8 0 , 9 $ % 3 . 8 7 . 5 1 8 . 1 1 8 . 5 3 4 . 6 8 . 1 2 . 3 4 . 6 2 . 3 6 . 4 1 6 . 2 1 1 . 0 3 . 9 0 . 2 2 9 . 2 — 9 . 2 6 . 1 1 6 . 5 1 . 1 7 . 6 % 0 . 0 0 1 0 2 3 , 5 4 8 5 7 9 , 9 8 5 , 1 1 5 2 , 0 0 2 , 1 6 4 5 , 5 3 6 , 3 1 7 0 , 5 4 6 6 7 8 , 4 8 1 6 1 8 , 5 2 3 9 2 3 , 7 4 6 5 7 4 , 8 2 3 6 9 4 , 6 8 4 , 1 4 9 5 , 7 2 9 0 , 7 4 9 3 1 8 , 5 7 2 , 1 9 9 4 , 0 3 2 , 2 4 3 3 3 4 7 , 4 9 2 7 7 0 , 5 9 2 2 1 1 , 3 7 1 , 1 1 9 2 , 6 6 5 2 3 6 , 4 1 1 3 2 9 , 0 8 6 ) 5 6 4 , 1 4 1 ( 4 2 7 , 6 4 1 , 0 1 $ 3 0 7 , 3 0 7 , 9 $ 4 6 6 , 2 5 9 , 8 $ 9 5 2 , 5 0 0 , 0 1 $ : t n e m p o l e v e d d n a l d n a d n a l , n o i t c u r t s n o C e t a t s e l a e r l a i c r e m m o C l a t o T e t a t s e l a e r y l i m a f i t l u M n o i t c u r t s n o c y l i m a f - r u o f o t - e n O t n e m p o l e v e d d n a l d n a d n a L n o i t c u r t s n o c l a i c r e m m o C n o i t c u r t s n o c y l i m a f i t l u M s e i t r e p o r p t n e m t s e v n I E R C e c n a l a b l l a m S d e i p u c c o - r e n w O : e t a t s e l a e r l a i c r e m m o C d n a l m r a f y b d e r u c e s g n i d u l c n i , s s e n i s u b l a r u t l u c i r g A l a t o T t i d e r c f o s e n i l g n i v l o v e r y t i u q e e m o h — r e m u s n o C l a i t n e d i s e r y l i m a f - r u o f o t - e n O : r e m u s n o C d n a l m r a f y b d e r u c e s g n i d u l c n i , s s e n i s u b l a r u t l u c i r g A : d n a l m r a f y b d e r u c e s g n i d u l c n i , s s e n i s u b l a r u t l u c i r g A s s e n i s u b l a i c r e m m o C l a t o T P P P A B S s n a o l – s e s s o l t i d e r c r o f e c n a w o l l a s s e L s n a o l t e N r e m u s n o C l a t o T r e h t o — r e m u s n o C s n a o l l a t o T t n e m p o l e v e d d n a l d n a d n a l , n o i t c u r t s n o C l a t o T 52 d e r o c s s s e n i s u b l l a m S P P P A B S s s e n i s u b l a i c r e m m o C : s s e n i s u b l a i c r e m m o C The following table sets forth the Company’s loans by geographic concentration at December 31, 2022, 2021 and 2020 (dollars in thousands): Table 5: Loans by Geographic Concentration Washington California Oregon Idaho Utah Other Total Percent $ December 31, 2022 Amount 4,777,546 2,484,980 1,826,743 565,586 75,967 415,902 $ 10,146,724 47.1 % $ 24.5 18.0 5.6 0.7 4.1 100.0 % $ December 31, 2021 December 31, 2020 Amount 4,264,590 2,138,340 1,652,364 525,141 74,913 429,415 9,084,763 Percent 47.0 % $ 23.5 18.2 5.8 0.8 4.7 100.0 % $ Amount 4,647,553 2,279,749 1,792,156 537,996 80,704 532,824 9,870,982 Percent 47.0 % 23.1 18.2 5.5 0.8 5.4 100.0 % The following table sets forth certain information at December 31, 2022 regarding the dollar amount of loans maturing in our portfolio based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances are net of unamortized premiums and discounts and exclude loans held for sale (in thousands): Table 6: Loans by Maturity Commercial real estate: Owner-occupied Investment properties Small balance CRE Total Commercial real estate Multifamily real estate Construction, land and land development: Commercial construction Multifamily construction One- to four-family construction Land and land development Total Construction, land and land development Commercial business: Commercial business SBA PPP Small business scored Total Commercial business Agricultural business, including secured by farmland: Agricultural business, including secured by farmland SBA PPP Total Agricultural business, including secured by farmland One- to four-family residential Consumer: Consumer—home equity revolving lines of credit Consumer—other Total Consumer Total loans Maturing in One Year or Less Maturing After One to Five Years Maturing After Five to Fifteen Years Maturing After Fifteen Years $ 61,124 $ 90,292 55,253 206,669 13,865 103,467 143,078 608,249 134,510 989,304 393,951 — 63,168 457,119 84,445 — 84,445 9,012 113,952 315,592 318,981 748,525 66,797 13,547 149,765 38,858 62,278 264,448 340,383 7,594 218,041 566,018 72,289 334 72,623 10,347 $ $ 637,574 929,061 777,653 2,344,288 321,067 62,069 15,350 — 127,070 204,489 383,118 — 309,395 692,513 136,200 — 136,200 48,159 $ Total 845,320 1,589,975 1,200,251 3,635,546 645,071 184,876 325,816 647,329 328,475 1,486,496 1,275,813 7,594 947,092 2,230,499 294,743 334 32,670 255,030 48,364 336,064 243,342 5,793 17,623 222 4,617 28,255 158,361 — 356,488 514,849 1,809 — 1,809 1,105,594 295,077 1,173,112 3,328 31,594 34,922 566,291 114,632 680,923 $ 1,795,336 $ 1,755,329 $ 3,789,327 $ 2,806,732 $ 10,146,724 546,180 30,639 576,819 6,622 35,989 42,611 10,161 16,410 26,571 Contractual maturities of loans do not necessarily reflect the actual life of such assets. The average life of loans typically is substantially less than their contractual maturities because of principal repayments and prepayments. In addition, due-on-sale clauses on certain mortgage loans generally give us the right to declare loans immediately due and payable in the event that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase however when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and, conversely, decreases when rates on existing mortgage loans are substantially higher than current mortgage loan market rates. 53 The following table sets forth the dollar amount of all loans maturing after December 31, 2023 which have fixed interest rates and floating or adjustable interest rates (in thousands): Table 7: Loans Maturing after One Year Commercial real estate: Owner-occupied Investment properties Small balance CRE Total Commercial real estate Multifamily real estate Construction, land and land development: Commercial construction Multifamily construction One- to four-family construction Land and land development Total Construction, land and land development Commercial business: Commercial business SBA PPP Small business scored Total Commercial business Agricultural business, including secured by farmland: Agricultural business, including secured by farmland SBA PPP Total Agricultural business, including secured by farmland One- to four-family residential Consumer: Consumer—home equity revolving lines of credit Consumer—other Total Consumer Total loans maturing after one year Fixed Rates Floating or Adjustable Rates Total $ 269,471 $ 450,189 250,146 969,806 362,820 514,725 $ 1,049,494 894,852 2,459,071 268,386 10,780 90,834 766 18,267 120,647 569,452 7,594 201,336 778,382 74,415 334 74,749 945,943 70,629 91,904 38,314 175,698 376,545 312,410 — 682,588 994,998 135,883 — 135,883 218,157 2,971 78,521 81,492 3,333,839 $ 559,992 4,517 564,509 5,017,549 $ $ 784,196 1,499,683 1,144,998 3,428,877 631,206 81,409 182,738 39,080 193,965 497,192 881,862 7,594 883,924 1,773,380 210,298 334 210,632 1,164,100 562,963 83,038 646,001 8,351,388 Deposits. We compete with other financial institutions and financial intermediaries in attracting deposits and we generally attract deposits within our primary market areas. Much of the focus of our expansion and current marketing efforts have been directed toward attracting additional deposit client relationships and balances. The long-term success of our deposit gathering activities is reflected not only in the growth of core deposit balances, but also in the level of deposit fees, service charges and other payment processing revenues compared to prior periods. One of our key strategies is to strengthen our franchise by emphasizing core deposit activity in non-interest-bearing and other transaction and savings accounts with less reliance on higher cost certificates of deposit. Increasing core deposits is a fundamental element of our business strategy. This strategy continues to help control our cost of funds and increase the opportunity for deposit fee revenues, while stabilizing our funding base. Total deposits decreased $706.9 million, or 5%, to $13.62 billion at December 31, 2022 from $14.33 billion at December 31, 2021. The decrease in total deposits from the prior year end reflects the sale of four branches during 2022, which included the transfer of $178.2 million of related deposits as well as an overall decrease in market liquidity. Non-interest-bearing deposits decreased by $208.2 million, or 3%, to $6.18 billion at year end from $6.39 billion at December 31, 2021. Interest-bearing transaction and savings accounts decreased by $383.6 million, or 5%, to $6.72 billion at December 31, 2022 compared to $7.10 billion a year earlier. Certificates of deposit decreased $115.1 million, or 14%, to $723.5 million at December 31, 2022 from $838.6 million at December 31, 2021. Core deposits were 95% of total deposits at December 31, 2022, compared to 94% a year earlier. 54 1 3 r e b m e c e D 0 2 0 2 f o t n e c r e P l a t o T t n u o m A e s a e r c n I ) e s a e r c e D ( 1 2 0 2 f o t n e c r e P l a t o T t n u o m A e s a e r c n I ) e s a e r c e D ( 2 2 0 2 f o t n e c r e P l a t o T t n u o m A % 7 . 3 4 4 2 9 , 2 9 4 , 5 $ 3 5 2 , 2 9 8 $ % 6 . 4 4 7 7 1 , 5 8 3 , 6 $ ) 9 7 1 , 8 0 2 ( $ % 4 . 5 4 8 9 9 , 6 7 1 , 6 $ 5 . 2 1 1 . 9 1 4 . 7 1 0 . 9 4 6 . 5 0 . 1 7 . 0 — 3 . 7 5 3 4 , 9 6 5 , 1 2 8 4 , 8 9 3 , 2 5 3 1 , 1 9 1 , 2 9 7 9 , 7 7 3 4 3 2 , 6 8 3 0 6 8 , 9 7 1 2 5 0 , 9 5 1 , 6 3 7 0 , 4 4 9 3 7 4 , 1 0 7 0 9 2 , 3 2 1 8 0 0 , 2 9 4 5 , 8 8 0 2 3 , 5 1 9 ) 9 7 7 , 8 4 ( ) 7 7 2 , 6 ( ) 2 8 0 , 1 2 ( ) 1 5 5 ( ) 9 8 6 , 6 7 ( 6 . 3 1 4 . 9 1 5 . 6 1 5 . 9 4 6 . 4 8 . 0 5 . 0 — 9 . 5 4 1 4 , 7 4 9 , 1 6 1 7 , 4 8 7 , 2 5 9 9 , 0 7 3 , 2 ) 1 6 2 , 6 3 1 ( ) 6 2 6 , 4 7 ( ) 7 0 7 , 2 7 1 ( 5 2 1 , 3 0 1 , 7 ) 4 9 5 , 3 8 3 ( 4 9 6 , 2 5 6 3 1 0 , 7 1 1 7 5 4 , 1 7 6 4 , 7 6 1 3 6 , 8 3 8 ) 8 7 ( 0 8 9 , 5 2 ) 2 5 9 , 9 1 ( ) 1 5 0 , 1 2 1 ( ) 1 0 1 , 5 1 1 ( 3 . 3 1 9 . 9 1 1 . 6 1 3 . 9 4 9 . 3 1 . 1 3 . 0 — 3 . 5 3 5 1 , 1 1 8 , 1 0 9 0 , 0 1 7 , 2 8 8 2 , 8 9 1 , 2 1 3 5 , 9 1 7 , 6 3 4 6 , 1 3 5 3 9 9 , 2 4 1 9 7 3 , 1 5 1 5 , 7 4 0 3 5 , 3 2 7 s g n i v a s d n a n o i t c a s n a r t g n i r a e b - t s e r e t n i l a t o T s r a e y e v i f n i h t i w t u b , s r a e y o w t r e t f A s r a e y o w t n i h t i w t u b , r a e y e n o r e t f A s t n u o c c a e t a c i f i t r e c l a t o T s r a e y e v i f r e t f A s t n u o c c a : g n i r u t a m s e t a c i f i t r e C r a e y e n o n i h t i W g n i k c e h c g n i r a e b - t s e r e t n i - n o N g n i k c e h c g n i r a e b - t s e r e t n I s g n i v a s r a l u g e R t e k r a m y e n o M % 0 . 0 0 1 6 9 2 , 7 6 5 , 2 1 $ 7 3 6 , 9 5 7 , 1 $ % 0 . 0 0 1 3 3 9 , 6 2 3 , 4 1 $ ) 4 7 8 , 6 0 7 ( $ % 0 . 0 0 1 9 5 0 , 0 2 6 , 3 1 $ s t i s o p e D l a t o T % 4 . 2 5 . 0 % 9 . 2 % 1 . 5 3 7 2 1 , 9 5 5 7 8 , 2 0 3 2 0 0 , 2 6 3 5 3 9 , 7 0 4 , 4 $ $ $ 9 9 9 , 0 5 ) 6 6 1 , 9 1 ( 3 3 8 , 1 3 1 5 4 , 6 3 7 $ % 5 . 2 3 . 0 $ $ % 8 . 2 % 9 . 5 3 1 6 9 , 9 3 4 7 8 , 3 5 3 5 3 8 , 3 9 3 6 8 3 , 4 4 1 , 5 $ $ $ 5 8 9 , 8 3 ) 1 5 1 , 3 1 ( 4 3 8 , 5 2 ) 5 8 6 , 6 1 2 ( $ % 9 . 2 2 . 0 $ $ % 1 . 3 % 2 . 6 3 0 1 8 , 6 2 9 5 8 , 2 9 3 9 6 6 , 9 1 4 1 0 7 , 7 2 9 , 4 $ $ $ t i m i l e c n a r u s n i I C D F e h t f o s s e c x e n i s t i s o p e d l a t o T s e t a c i f i t r e c g n i r a e b - t s e r e t n i c i l b u P s t i s o p e d c i l b u p l a t o T s t n u o c c a n o i t c a s n a r t c i l b u P : s t i s o p e D l a t o T n i d e d u l c n I 55 : ) s d n a s u o h t n i s r a l l o d ( d e t a c i d n i s e t a d e h t t a k n a B e h t y b d e r e f f o s t n u o c c a f o s e p y t s u o i r a v e h t n i s t i s o p e d f o s e c n a l a b e h t h t r o f s t e s e l b a t g n i w o l l o f e h T s t i s o p e D : 8 e l b a T The following table indicates the amount of the Bank’s certificates of deposit with balances in excess of the FDIC insurance limit by time remaining until maturity as of December 31, 2022 (in thousands): Table 9: Maturity Period— Certificates of Deposit in excess of the FDIC insurance limit Certificates of Deposit in Excess of FDIC Insurance Limit Maturing in three months or less Maturing after three months through six months Maturing after six months through twelve months Maturing after twelve months Total $ $ 47,716 26,195 48,543 48,870 171,324 The following table provides additional detail on geographic concentrations of our deposits at December 31, 2022, 2021, and 2020 (in thousands): Table 10: Geographic Concentration of Deposits Washington Oregon California Idaho Total deposits December 31, 2021 December 31, 2020 Percent $ December 31, 2022 Amount 7,563,056 2,998,572 2,331,524 726,907 $ 13,620,059 Amount 7,952,376 3,067,054 2,524,296 783,207 100.0 % $ 14,326,933 55.6 % $ 22.0 17.1 5.3 Percent Amount 7,058,404 2,604,908 2,237,949 666,035 100.0 % $ 12,567,296 55.5 % $ 21.4 17.6 5.5 Percent 56.2 % 20.7 17.8 5.3 100.0 % Borrowings. We had $50.0 million FHLB advances at both December 31, 2022 and December 31, 2021, as core deposits were a sufficient source of funding. At that date, based on pledged collateral, the Bank had $2.99 billion of available credit capacity with the FHLB. At December 31, 2022, based upon our available unencumbered collateral, the Bank was eligible to borrow $1.19 billion from the Federal Reserve Bank, however, at that date we had no funds borrowed under this arrangement. At December 31, 2022, retail repurchase agreements totaled $232.8 million, had a weighted average rate of 0.35%, and were secured by pledges of certain mortgage-backed securities and agency securities. Retail repurchase agreement balances, which are primarily associated with client sweep account arrangements, decreased $31.7 million, from the 2021 year-end balance. We had no borrowings under wholesale repurchase agreements at December 31, 2022 or December 31, 2021. At December 31, 2022, we had an aggregate of $86.5 million of TPS. This includes $75.0 million issued by us and $11.5 million acquired in our bank acquisitions. The junior subordinated debentures are carried at their estimated fair value of $74.9 million at December 31, 2022. Banner redeemed $50.5 million of junior subordinated debentures during the first quarter of 2022 and redeemed $8.2 million of junior subordinated debentures during the fourth quarter of 2021. At December 31, 2022, the TPS had a weighted average rate of 5.99%. At December 31, 2022, subordinated notes, net of issuance costs were $98.9 million and had a weighted average interest rate of 5.00%. Asset Quality. Maintaining a moderate risk profile by employing appropriate underwriting standards, avoiding excessive asset concentrations and aggressively managing troubled assets has been and will continue to be a primary focus for us. Non-performing assets decreased to $23.4 million, or 0.15% of total assets, at December 31, 2022, from $23.7 million, or 0.14% of total assets, at December 31, 2021. At December 31, 2022, our allowance for credit losses - loans was $141.5 million, or 615% of non-performing loans, compared to $132.1 million, or 578% of non-performing loans at December 31, 2021. 56 The following table sets forth information with respect to our non-performing assets and restructured loans, at the dates indicated (dollars in thousands): Table 11: Non-Performing Assets (1) Nonaccrual loans: Secured by real estate: Commercial Construction/land One- to four-family Commercial business Agricultural business, including secured by farmland Consumer Loans more than 90 days delinquent, still on accrual: One- to four-family Commercial business Consumer Total non-performing loans REO assets held for sale, net Other repossessed assets held for sale, net Total non-performing assets Total non-performing assets to total assets Total nonaccrual loans to net loans before allowance for credit losses Restructured loans performing under their restructured terms Loans 30-89 days past due and on accrual (2) $ 2022 3,683 181 5,236 9,886 594 2,126 21,706 1,023 — 264 1,287 22,993 340 17 $ 23,350 December 31 2021 2020 $ 14,159 479 2,711 2,156 1,022 1,754 22,281 436 2 117 555 22,836 852 17 $ 23,705 $ 18,199 936 3,556 5,407 1,743 2,719 32,560 1,899 1,025 130 3,054 35,614 816 51 $ 36,481 0.15 % 0.21 % 4,241 $ $ 17,186 0.14 % 0.25 % 5,309 $ $ 11,558 0.24 % 0.33 % 6,673 $ $ 12,291 (1) Includes $44,000 of nonaccrual TDR loans as of December 31, 2022. For the year ended December 31, 2022, interest income was reduced by $725,000 as a result of nonaccrual loan activity, which includes the reversal of $322,000 of accrued interest as of the date the loan was placed on nonaccrual. There was no interest income recognized on nonaccrual loans during the year ended December 31, 2022. (2) These loans were performing under their restructured repayment terms at the dates indicated. The following table presents the Company’s portfolio of risk-rated loans and non-risk-rated loans by grade at the dates indicated (in thousands): Table 12: Loans by Grade Pass Special Mention Substandard Doubtful Total For the years ended December 31, 2021 2020 2022 $ $ 10,000,493 $ 9,081 137,150 — 10,146,724 $ $ 8,874,468 11,932 198,363 — 9,084,763 $ 9,494,147 36,598 340,237 — 9,870,982 The decrease in substandard loans during the year ended December 31, 2022 primarily reflects the payoff of substandard loans as well as risk rating upgrades. 57 Comparison of Results of Operations for the Years Ended December 31, 2022 and 2021 For the year ended December 31, 2022, our net income was $195.4 million, or $5.67 per diluted share, compared to net income of $201.0 million, or $5.76 per diluted share for the year ended December 31, 2021. Current year results were positively impacted by increased interest income, decreased funding costs and a $7.8 million gain recognized on the branch sale completed during the second quarter of 2022, partially offset by a $23.1 million decrease in mortgage banking income and a provision for credit losses of $10.4 million. Our operating results depend largely on our net interest income which increased $56.3 million to $553.2 million, primarily reflecting increased yields on loans and investment securities due to rising interest rates during the year as well as an increase in average interest- earning assets, particularly growth in investment securities balances. Revenues (net interest income and non-interest income) increased $35.1 million, or 6%, to $628.4 million for the year ended December 31, 2022, compared to $593.3 million for the year ended December 31, 2021, which also reflected a $21.2 million decrease in non-interest income primarily as a result of lower income from mortgage banking operations, partially offset by the gain recognized on the branch sale. The decrease in mortgage banking income reflects a reduction in the volume and a decrease in the gain on sale margin for one- to four-family loans sold during the year along with a negative fair market adjustment on multifamily held for sale loans. Non-interest expense decreased to $377.3 million for the year ended December 31, 2022 compared with $380.1 million for the year ended December 31, 2021, largely as a result of a decrease in professional and legal expenses, a decrease in salary and employee benefits expense, and a decrease in advertising and marketing expense, partially offset by a decrease in capitalized loan origination costs. Net Interest Income. Net interest income increased by $56.3 million, or 11%, to $553.2 million for the year ended December 31, 2022, compared to $496.9 million for the year ended December 31, 2021, primarily due to an increase in the average balance of interest-earning assets, increased yields on average interest-earning assets and decreased funding costs, partially offset by a decline in the recognition of deferred loan fee income due to SBA PPP loan repayments from SBA loan forgiveness. The higher average yield on interest-earning assets compared to same prior year period reflects rising market interest rates during the year ended December 31, 2022. The net interest margin on a tax equivalent basis of 3.68% for the year ended December 31, 2022 was 29 basis points higher than the prior year. The increase in net interest margin compared to a year earlier primarily reflects a 25 basis-point increase in yields on average interest- earning assets and a three 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 due to rising interest rates, as well as new loans being originated at higher interest rates, partially offset by a higher percentage of assets being invested in low yielding short term investments and interest-bearing deposits. Since March 2022, in response to inflation, the FOMC of the Federal Reserve System has increased the target range for the federal funds rate by 425 basis points, including 125 basis points during the fourth quarter of 2022, to a range of 4.25% to 4.50%. The decrease in the overall cost of funding liabilities compared to a year earlier was largely due to an increase in the average balance of low-cost core deposits, including non-interest-bearing transaction and savings accounts Interest Income. Interest income for the year ended December 31, 2022 was $572.6 million, compared to $520.5 million for the prior year, an increase of $52.1 million. The increase in interest income occurred as a result of the yields on interest-earnings assets increasing the 25 basis points to 3.80% and the average balance of interest-earning assets increasing $424.6 million to $15.33 billion. The increased yield on interest-earning assets reflects increases in the average yields on loans and securities. Interest income on loans increased by $5.2 million to $450.9 million for the year ended December 31, 2022, from the prior year. The increased interest income on loans is primarily due to the average loan yields increasing 12 basis points to 4.76%, reflecting the impact of rising interest rates. The acquisition accounting loan discount accretion and related balance sheet impact added four basis points to the loan yield for the year ended December 31, 2022, compared to seven basis points for the year ended December 31, 2021. Average loans receivable decreased $116.2 million to $9.60 billion, principally as a result of the forgiveness of SBA PPP loans. The combined average balance of mortgage-backed securities, other investment securities, equity securities, daily interest-bearing deposits and FHLB stock increased $540.9 million to $5.74 billion (excluding the effect of fair value adjustments), contributing to the $47.6 million increase in interest and dividend income compared to the prior year. The average yield on the combined portfolio increased 68 basis points to 2.20%, reflecting a 30 basis-point increase in the average yield on mortgage-backed securities and a 72 basis-point increase in the yield on other securities. Interest Expense. Interest expense for the year ended December 31, 2022 was $19.4 million, compared to $23.6 million for the prior year, a decrease of $4.2 million, or 18%. The decrease in interest expense occurred as a result of a three basis-point decrease in the average cost of all funding liabilities to 0.13%, partially offset by the average balance of funding liabilities increasing $410.2 million to $14.40 billion. The increase in average balance of funding liabilities reflects increases in low-cost core deposits, including non-interest-bearing deposits and interest-bearing transaction and savings accounts, partially offset by lower average balances of certificates of deposit, FHLB advances and subordinated debt. Deposit interest expense decreased $1.6 million, or 14%, to $10.1 million for the year ended December 31, 2022 compared to $11.8 million for the prior year as a result of the average cost of deposits, including non-interest bearing deposits, decreasing two basis points to 0.07%, partially offset by the average balance of interest-bearing deposits increasing $239.9 million to $7.83 billion. The decrease in the average cost of deposits between the periods was primarily due to a $301.8 million increase in the average balance of non-interest-bearing accounts, a higher percentage of our interest-bearing deposits being lower-cost core deposits and a 25 basis-point decrease in the average rate paid on certificates of deposit. 58 The average rate paid on total borrowings increased two basis points to 2.04%, reflecting the 87 basis-point increase in the average cost of our subordinated debt and the 55 basis-point increase in the average cost of FHLB advances, partially offset by the $131.5 million decrease in average balance of total borrowings. The decrease in average total borrowings was largely due to a $82.7 million decrease in average balance of FHLB advances and a $57.7 million decrease in the average balance of subordinated debt. The decrease in average total borrowings was the primary reason for the $2.6 million decrease in the related interest expense to $9.3 million for the year ended December 31, 2022, from $11.8 million in the prior year. 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. 59 0 2 0 2 , 1 3 r e b m e c e D d e d n E r a e Y 1 2 0 2 , 1 3 r e b m e c e D d e d n E r a e Y 2 2 0 2 , 1 3 r e b m e c e D d e d n E r a e Y : ) s d n a s u o h t n i s r a l l o d ( s r a e y e e r h t t s a l e h t r o f d a e r p s t s e r e t n i t e n r u o f o s i s y l a n a n a s e d i v o r p e l b a t g n i w o l l o f e h T d a e r p S t s e r e t n I t e N f o s i s y l a n A : 3 1 e l b a T / d l e i Y ) 3 ( t s o C d n a t s e r e t n I s d n e d i v i D e g a r e v A e c n a l a B / d l e i Y ) 3 ( t s o C d n a t s e r e t n I s d n e d i v i D e g a r e v A e c n a l a B / d l e i Y ) 3 ( t s o C d n a t s e r e t n I s d n e d i v i D e g a r e v A e c n a l a B % 0 8 . 3 3 8 . 4 6 5 . 4 4 0 . 3 3 2 . 6 6 6 . 4 2 4 . 2 1 8 . 2 0 2 . 0 3 3 . 0 0 0 . 5 8 1 . 2 5 1 . 4 1 1 . 0 9 1 . 0 1 3 . 0 6 2 . 1 8 3 . 0 — 2 2 . 0 4 3 . 2 1 3 . 0 3 6 . 3 1 1 . 2 1 3 . 0 2 8 4 , 5 8 7 8 , 2 5 3 7 6 5 , 0 8 3 3 1 , 3 2 8 0 2 , 9 8 8 1 , 2 3 9 3 8 , 1 2 8 6 2 , 1 7 4 3 7 3 7 0 9 7 4 9 4 5 2 , 6 5 2 2 5 , 7 2 5 9 7 4 , 1 7 5 2 , 4 5 7 2 , 6 — 4 0 0 , 3 1 5 1 0 , 5 2 5 1 0 , 5 2 3 2 0 , 5 3 0 6 4 0 2 , 7 0 3 8 , 2 1 5 4 8 , 7 3 $ 0 2 2 , 4 4 1 $ % 5 2 . 3 4 8 5 , 3 0 3 , 7 5 6 2 , 5 6 7 , 1 2 1 9 , 0 6 7 7 2 8 , 7 4 1 5 5 3 , 0 3 3 , 1 8 0 8 , 1 2 1 , 0 1 8 7 3 , 7 7 7 6 4 8 , 2 8 1 2 5 9 , 8 1 5 2 7 , 2 7 2 6 5 2 , 2 8 5 , 2 0 7 1 , 2 6 2 , 1 4 6 0 , 4 0 7 , 2 1 4 3 2 , 6 6 9 , 3 1 $ $ 2 5 2 , 5 8 3 , 1 $ 8 1 4 , 4 9 1 , 2 0 7 8 , 6 9 9 , 1 2 2 7 , 0 3 0 , 1 2 6 2 , 7 0 6 , 6 8 6 7 , 9 2 9 , 4 0 3 0 , 7 3 5 , 1 1 3 9 0 , 5 1 2 2 6 8 , 3 9 1 0 9 4 , 8 9 1 5 4 4 , 7 0 6 5 7 4 , 4 4 1 , 2 1 2 2 4 , 7 9 1 7 3 3 , 4 2 6 , 1 7 9 8 , 1 4 3 , 2 1 4 5 . 4 7 1 . 4 7 4 . 6 6 9 . 5 4 6 . 4 8 8 . 1 5 2 . 2 — 4 1 . 0 4 2 . 4 2 5 . 1 5 5 . 3 7 0 . 0 7 0 . 0 2 1 . 0 9 6 . 0 6 1 . 0 — 9 0 . 0 5 6 . 2 9 1 . 0 5 5 . 3 2 0 . 2 6 1 . 0 6 6 0 , 3 5 1 1 , 8 2 3 9 7 4 , 2 6 4 5 8 , 9 4 8 9 2 , 7 2 1 8 , 0 5 4 9 9 1 , 6 4 4 1 1 , 0 3 — 2 9 5 5 5 9 , 1 0 6 8 , 8 7 2 7 6 , 9 2 5 8 8 1 , 1 3 3 8 , 1 0 7 6 , 2 9 7 0 , 6 — 0 7 7 , 1 1 0 7 7 , 1 1 2 9 5 , 2 7 6 4 0 8 7 , 8 9 3 8 , 1 1 9 0 6 , 3 2 $ 2 5 2 , 4 9 $ % 2 6 . 3 0 6 8 , 5 2 2 , 7 8 0 8 , 8 9 4 , 1 1 4 0 , 0 7 7 0 2 5 , 2 2 1 9 2 4 1 8 4 , 1 1 7 , 9 0 1 1 , 1 5 4 , 2 4 7 9 , 6 3 3 , 1 6 6 9 , 3 1 9 1 6 , 2 9 3 , 1 8 9 0 , 5 9 1 , 5 8 4 3 , 8 6 2 , 1 9 7 5 , 6 0 9 , 4 1 7 2 9 , 4 7 1 , 6 1 $ $ 3 9 2 , 5 5 7 , 1 $ 8 1 0 , 2 5 6 , 2 4 1 8 , 5 0 3 , 2 9 0 5 , 6 7 8 4 3 6 , 9 8 5 , 7 5 7 8 , 2 3 1 , 6 9 0 5 , 2 2 7 , 3 1 5 4 9 , 7 9 7 1 8 , 0 4 2 3 8 5 , 7 4 2 5 4 3 , 6 8 5 4 5 8 , 8 0 3 , 4 1 4 7 7 , 6 0 2 9 9 2 , 9 5 6 , 1 8 2 6 , 5 1 5 , 4 1 1 7 . 4 8 7 . 4 6 3 . 1 1 3 9 . 5 6 7 . 4 8 1 . 2 7 9 . 2 — 9 9 . 0 6 3 . 3 0 2 . 2 0 8 . 3 8 0 . 0 7 0 . 0 3 1 . 0 4 4 . 0 3 1 . 0 — 7 0 . 0 0 2 . 3 5 1 . 0 2 4 . 4 4 0 . 2 3 1 . 0 3 7 9 , 2 9 0 3 , 7 7 9 9 4 , 4 6 3 7 7 6 , 4 2 3 3 , 7 0 9 7 , 6 5 4 8 4 1 , 8 6 8 7 2 , 8 4 — 7 5 3 3 3 6 , 9 6 1 4 , 6 2 1 6 0 2 , 3 8 5 7 5 5 , 1 3 5 0 , 2 3 4 1 , 3 1 7 3 , 3 — 4 2 1 , 0 1 4 2 1 , 0 1 9 8 4 7 7 3 0 0 4 , 8 6 6 2 , 9 0 9 3 , 9 1 $ 0 3 0 , 2 8 $ 5 9 1 , 1 3 7 , 7 1 9 1 , 7 1 6 , 1 7 6 1 , 1 4 7 6 6 , 3 2 1 0 5 2 , 5 9 5 , 9 4 2 1 , 0 3 1 , 3 0 5 2 , 5 2 6 , 1 — 8 2 6 , 0 1 2 5 9 , 9 6 9 4 5 9 , 5 3 7 , 5 1 7 2 , 9 6 1 , 1 4 0 2 , 1 3 3 , 5 1 5 7 4 , 0 0 5 , 6 1 $ s n a o l l a r u t l u c i r g a / l a i c r e m m o C s e i t i r u c e s d e k c a b - e g a g t r o M s n a o l r e h t o d n a r e m u s n o C s n a o l P P P A B S ) 1 ( s n a o l l a t o T s e i t i r u c e s r e h t O s e i t i r u c e s y t i u q E : s t e s s a g n i n r a e - t s e r e t n I s n a o l e l a s r o f d l e H s n a o l e g a g t r o M s k n a b h t i w s t i s o p e d g n i r a e b - t s e r e t n I k c o t s B L H F s e i t i r u c e s t n e m t s e v n i l a t o T s t e s s a g n i n r a e - t s e r e t n i l a t o T s t e s s a g n i n r a e - t s e r e t n i - n o N s t e s s a l a t o T : s t i s o p e D $ 7 1 9 , 0 9 8 , 1 $ s t n u o c c a g n i k c e h c g n i r a e b - t s e r e t n I 4 6 2 , 0 1 8 , 2 2 2 1 , 4 6 3 , 2 5 5 2 , 4 6 7 8 5 5 , 9 2 8 , 7 0 7 6 , 4 3 4 , 6 8 2 2 , 4 6 2 , 4 1 5 8 2 , 5 1 1 8 6 , 9 4 2 0 7 8 , 9 8 1 6 3 8 , 4 5 4 4 6 0 , 9 1 7 , 4 1 3 8 9 , 3 5 2 8 2 4 , 7 2 5 , 1 7 4 0 , 3 7 9 , 4 1 s t i s o p e d g n i r a e b - t s e r e t n i l a t o T s t i s o p e d g n i r a e b - t s e r e t n i - n o N : s e i t i l i b a i l g n i r a e b - t s e r e t n i r e h t O s t i s o p e d l a t o T s g n i w o r r o b l a t o T s e i t i l i b a i l g n i d n u f l a t o T s g n i w o r r o b r e h t O t b e d d e t a n i d r o b u S s e c n a v d a B L H F ) 2 ( s e i t i l i b a i l g n i r a e b - t s e r e t n i - n o n r e h t O y t i u q e ’ s r e d l o h e r a h S s e i t i l i b a i l l a t o T s t n u o c c a t e k r a m y e n o M t i s o p e d f o s e t a c i f i t r e C s t n u o c c a s g n i v a S 60 % 4 8 . 3 % 5 8 . 3 7 7 6 , 9 8 4 $ % 9 3 . 3 % 9 3 . 3 3 6 0 , 6 0 5 $ % 9 0 . 6 7 1 % 1 6 . 4 0 1 % 2 3 . 2 8 1 % 8 1 . 4 0 1 % 9 7 . 3 1 0 3 , 1 8 4 $ % 3 3 . 3 1 9 8 , 6 9 4 $ ) 6 7 3 , 8 ( ) 2 7 1 , 9 ( % 7 6 . 3 % 8 6 . 3 % 1 6 . 3 % 6 0 . 5 8 1 % 6 1 . 4 0 1 6 1 8 , 3 6 5 $ ) 7 3 6 , 0 1 ( 9 7 1 , 3 5 5 $ ) w o l l o f s e t o n t o o f ( s e i t i l i b a i l g n i r a e b - t s e r e t n i e g a r e v a s e i t i l i b a i l g n i d n u f e g a r e v a / / s t e s s a g n i n r a e - t s e r e t n i e g a r e v A s t e s s a g n i n r a e - t s e r e t n i e g a r e v A ) t n e l a v i u q e x a t ( d a e r p s e t a r / e m o c n i t s e r e t n i t e N : e m o c n i t s e r e t n i t e n d e t r o p e r o t n o i t a i l i c n o c e R d e t r o p e r s a , n i g r a m d n a e m o c n i t s e r e t n i t e N s i s a b t n e l a v i u q e e l b a x a t r o f s t n e m t s u j d A ) t n e l a v i u q e x a t ( n i g r a m t s e r e t n i t e N 4 3 2 , 6 6 9 , 3 1 $ 7 2 9 , 4 7 1 , 6 1 $ 5 7 4 , 0 0 5 , 6 1 $ y t i u q e ’ s r e d l o h e r a h s d n a s e i t i l i b a i l l a t o T (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 $5.9 million, $5.1 million, and $4.9 million for the years ended December 31, 2022, December 31, 2021, and December 31, 2020, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $4.8 million, $4.1 million, and $3.5 million for the years ended December 31, 2022, December 31, 2021, and December 31, 2020, 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 Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 Increase (Decrease) in Income/ Expense Due to Volume Rate Net Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 Increase (Decrease) in Income/ Expense Due to Volume Rate Net Interest-earning assets: Held for sale loans Mortgage loans Commercial/agricultural loans SBA PPP loans Consumer and other loans Total loans Mortgage-backed securities Other securities Equity securities Interest-bearing deposits with banks FHLB stock Total investment securities $ 329 $ (422) $ (93) $ (712) $ 12,870 9,642 21,828 (34) 44,635 7,878 10,836 — 8,443 (109) 27,048 23,514 5,188 (67,005) 68 (38,657) 14,071 7,328 — (765) (126) 20,508 36,384 14,830 (45,177) 34 5,978 21,949 18,164 — 7,678 (235) 47,556 (20,989) (6,509) 26,409 (385) (2,186) (5,003) (3,154) (183) (171) (130) (8,641) (1,704) $ (3,774) (11,579) 312 (1,525) (18,270) 19,014 11,429 (190) 1,219 (225) 31,247 (2,416) (24,763) (18,088) 26,721 (1,910) (20,456) 14,011 8,275 (373) 1,048 (355) 22,606 Total net change in interest income on interest-earning assets 71,683 (18,149) 53,534 (10,827) 12,977 2,150 Interest-bearing liabilities: Interest-bearing checking accounts Savings accounts Money market accounts Certificates of deposit Total interest-bearing deposits FHLB advances Other borrowings Subordinated debt Total borrowings Total net change in interest expense on interest-bearing liabilities Net change in net interest income (tax equivalent) 272 107 404 (2,003) (1,220) 451 (107) 1,912 2,256 97 113 69 (705) (426) (2,554) 17 (2,292) (4,829) 369 220 473 (2,708) (1,646) (2,103) (90) (380) (2,573) (1,112) (3,453) (4,579) (5,215) (14,359) 784 (383) (155) 246 821 1,029 974 (1,710) 1,114 (3,215) 247 1,731 (1,237) (291) (2,424) (3,605) (6,925) (13,245) (2,431) (136) 1,576 (991) 1,036 (5,255) $ 70,647 $ (12,894) $ 57,753 $ (4,219) (14,113) (14,236) (123) 3,286 $ 13,100 $ 16,386 61 Provision and Allowance for Credit Losses. We recorded an $8.2 million provision for credit losses - loans in the year ended December 31, 2022, compared to a $33.1 million recapture of provision for credit losses - loans recorded in 2021. The provision and allowance for credit losses is one of the most critical accounting estimates included in our Consolidated Financial Statements. 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 primarily reflects loan growth and, to a lesser extent, a deterioration in forecasted economic conditions and indicators utilized to estimate credit losses, partially offset by an improvement in the level of adversely classified loans. The prior year recapture of provision for credit losses - loans primarily reflected an improvement in forecasted economic indicators and a decrease in adversely classified loans. 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. We recorded net recoveries of $1.2 million for the year ended December 31, 2022, compared to net charge-offs of $2.1 million for the prior year. The reduction in net charge-offs in 2022 reflects the improvement in overall loan portfolio performance during 2022. A comparison of the allowance for credit losses - loans at December 31, 2022 and 2021 reflects an increase of $9.4 million, or 7%, to $141.5 million at December 31, 2022, from $132.1 million at December 31, 2021. The allowance for credit losses - loans as a percentage of total loans (loans receivable excluding allowance for credit losses) decreased to 1.39% at December 31, 2022, compared to 1.45% at December 31, 2021. The decrease in the allowance for credit losses - loans as a percentage of loans reflects an improvement in the level of adversely classified loans during 2022. 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 Balance, beginning of period Beginning balance adjustment for adoption of ASC 326 Provision (recapture) for credit losses – loans Recoveries of loans previously charged off: Commercial real estate Construction and land One- to four-family residential Commercial business Agricultural business, including secured by farmland Consumer Total recoveries Loans charged off: Commercial real estate Multifamily real estate Construction and land One- to four-family residential Commercial business Agricultural business, including secured by farmland Consumer Total charge-offs Net recoveries (charge-offs) Balance, end of period Total loans Average outstanding loans Total nonaccrual loans Allowance for credit losses - loans as a percent of total loans Net loan recoveries (charge-offs) as a percent of average outstanding loans during the period Allowance for credit losses - loans as a percent of nonaccrual loans 62 Years Ended December 31 2022 2021 2020 $ 132,099 — 8,158 $ 167,279 — (33,112) $ 100,559 7,812 64,285 392 384 181 1,923 475 566 3,921 1,729 100 199 1,797 30 760 4,615 275 105 467 3,265 1,823 328 6,263 (2) — (30) — (1,699) (42) (940) (2,713) 1,208 $ 141,465 $10,146,724 $9,595,250 21,706 $ (3,767) (59) — — (1,762) (181) (914) (6,683) (2,068) $ 132,099 $ 9,084,763 $ 9,711,481 22,281 $ (1,854) (66) (100) (136) (7,253) (591) (1,640) (11,640) (5,377) $ 167,279 $ 9,870,982 $10,121,808 32,560 $ 1.39 % 0.01 % 652 % 1.45 % (0.02)% 593 % 1.69 % (0.05)% 514 % f o t n e c r e P e c n a w o l l A n i s n a o L o t h c a E y r o g e t a C 0 2 0 2 f o t n e c r e P n i s n a o L h c a E o t y r o g e t a C s n a o L l a t o T % 7 5 . 1 % 3 . 7 3 0 0 . 1 1 2 . 3 2 4 . 1 0 2 . 1 7 6 . 1 9 3 . 2 9 . 3 0 . 3 1 0 . 7 6 . 9 2 0 . 3 2 . 6 1 9 7 , 7 5 3 9 8 , 3 5 9 2 , 1 4 3 1 9 , 9 7 0 0 , 5 3 4 1 9 , 4 6 6 4 , 4 1 t n u o m A $ % 0 4 . 1 % 7 . 1 4 3 3 . 1 8 0 . 2 5 2 . 1 5 3 . 1 4 1 . 1 5 2 . 1 8 . 5 5 . 4 1 2 . 7 6 . 1 2 1 . 3 1 . 6 f o t n e c r e P e c n a w o l l A n i s n a o L o t h c a E y r o g e t a C 1 3 r e b m e c e D 1 2 0 2 f o t n e c r e P n i s n a o L h c a E o t y r o g e t a C s n a o L l a t o T 3 4 0 , 7 5 9 9 , 2 5 4 9 2 , 7 2 5 0 2 , 8 1 2 4 , 6 2 0 9 1 , 3 1 5 9 , 6 t n u o m A f o t n e c r e P e c n a w o l l A n i s n a o L o t h c a E y r o g e t a C 2 2 0 2 f o t n e c r e P n i s n a o L h c a E o t y r o g e t a C s n a o L l a t o T t n u o m A $ % 1 2 . 1 % 7 . 5 3 0 2 . 1 6 9 . 1 6 2 . 1 9 4 . 1 8 1 . 1 2 3 . 1 4 . 6 7 . 4 1 6 . 1 1 0 . 2 2 9 . 2 7 . 6 4 3 7 , 7 6 8 0 , 4 4 1 7 1 , 9 2 9 2 7 , 4 1 9 9 2 , 3 3 5 7 4 , 3 1 7 9 , 8 $ d n a l m r a f y b d e r u c e s g n i d u l c n i , s s e n i s u b l a r u t l u c i r g A r e m u s n o C : s n a o l - s e s s o l t i d e r c r o f e c n a w o l l A e t a t s e l a e r y l i m a f - r u o f - o t - e n O s s e n i s u b l a i c r e m m o C e t a t s e l a e r l a i c r e m m o C e t a t s e l a e r y l i m a f i t l u M d n a l d n a n o i t c u r t s n o C % 9 6 . 1 % 0 . 0 0 1 9 7 2 , 7 6 1 $ % 5 4 . 1 % 0 . 0 0 1 9 9 0 , 2 3 1 $ % 9 3 . 1 % 0 . 0 0 1 5 6 4 , 1 4 1 $ s n a o l - s e s s o l t i d e r c r o f e c n a w o l l a l a t o T r o f e c n a w o l l a e h t n i e s a e r c n i e h T . 1 2 0 2 , 1 3 r e b m e c e D t a n o i l l i m 4 . 2 1 $ o t d e r a p m o c 2 2 0 2 , 1 3 r e b m e c e D t a n o i l l i m 7 . 4 1 $ s a w s t n e m t i m m o c n a o l d e d n u f n u - s e s s o l t i d e r c r o f e c n a w o l l a e h T n a n a f o t l u s e r e h t y l i r a m i r p , 2 2 0 2 , 1 3 r e b m e c e D d e d n e r a e y g n i r u d d e d r o c e r s t n e m t i m m o c n a o l d e d n u f n u - s e s s o l t i d e r c r o f n o i s i v o r p e h t s t c e l f e r s t n e m t i m m o c n a o l d e d n u f n u - s e s s o l t i d e r c o t d e r a p m o c , n o i l l i m 3 . 2 $ f o s t n e m t i m m o c n a o l d e d n u f n u - s e s s o l t i d e r c r o f n o i s i v o r p a d e d r o c e r e w , 2 2 0 2 , 1 3 r e b m e c e D d e d n e r a e y e h t g n i r u D . s t n e m t i m m o c n a o l d e d n u f n u n i e s a e r c n i 63 . r a e y r o i r p e h t g n i r u d s t n e m t i m m o c n a o l d e d n u f n u - s e s s o l t i d e r c r o f n o i s i v o r p f o e r u t p a c e r 0 0 0 , 5 6 8 $ : ) s d n a s u o h t n i s r a l l o d ( d e t a c i d n i s d o i r e p e h t r o f s t n e m t i m m o c n a o l d e d n u f n u - s e s s o l t i d e r c r o f e c n a w o l l a r u o f o s i s y l a n a n a h t r o f s t e s e l b a t g n i w o l l o f e h T s t n e m t i m m o C n a o L d e d n u f n U - s e s s o L t i d e r C r o f e c n a w o l l A n i s e g n a h C : 7 1 e l b a T 0 2 0 2 1 2 0 2 2 2 0 2 , 1 3 r e b m e c e D , d e d n E s r a e Y 6 1 7 , 2 2 2 0 , 7 9 5 5 , 3 $ 7 9 2 , 3 1 $ 2 3 4 , 2 1 — ) 5 6 8 ( — 9 8 2 , 2 7 9 2 , 3 1 $ 2 3 4 , 2 1 $ 1 2 7 , 4 1 $ $ s t n e m t i m m o c n a o l d e d n u f n u - s e s s o l t i d e r c r o f ) e r u t p a c e r ( / n o i s i v o r P 6 2 3 C S A f o n o i t p o d a r o f t n e m t s u j d a e c n a l a b g n i n n i g e B d o i r e p f o g n i n n i g e b , e c n a l a B d o i r e p f o d n e , e c n a l a B : ) s d n a s u o h t n i s r a l l o d ( d e t a c i d n i s e t a d e h t t a y r o g e t a c n a o l y b s n a o l - s e s s o l t i d e r c r o f e c n a w o l l a e h t f o n w o d k a e r b e h t h t r o f s t e s e l b a t g n i w o l l o f e h T s n a o L - s e s s o L t i d e r C r o f e c n a w o l l A f o n o i t a c o l l A : 6 1 e l b a T Non-interest Income. The following table presents the key components of non-interest income for the years ended December 31, 2022, 2021, and 2020 (dollars in thousands): Table 18: Non-interest Income Deposit fees and other service charges Mortgage banking operations Bank-owned life insurance Miscellaneous Net (loss) gain on sale of securities Net change in valuation of financial instruments carried at fair value Gain on sale of branches, including related deposits Total non-interest income 2022 compared to 2021 2021 compared to 2020 2022 2021 Change Amount Change Percent 2021 2020 Change Amount Change Percent $ 44,459 $ 39,495 $ 4,964 (23,114) 2,794 (6,070) (21,426) 10,834 7,794 6,805 69,892 33,948 5,000 12,875 91,318 12.6 % $ 39,495 $ 34,384 $ (68.1)% 55.9 % (47.1)% (23.5)% 51,083 5,972 6,821 98,260 33,948 5,000 12,875 91,318 5,111 (17,135) (972) 6,054 (6,942) 14.9 % (33.5)% (16.3)% 88.8 % (7.1)% (3,248) 482 (3,730) (773.9)% 482 1,012 (530) (52.4)% 807 4,616 (3,809) (82.5)% 4,616 (656) 5,272 (803.7)% 7,804 7,804 $ 75,255 $ 96,416 $ (21,161) — nm — (21.9)% $ 96,416 $ 98,616 $ — — (2,200) — % (2.2)% Non-interest income decreased for the year ended December 31, 2022, compared to the year ended December 31, 2021. The decrease from the prior year primarily reflects lower income from mortgage banking operations, partially offset by the gain recognized on the branch sale and increased deposit fees and other service charges. Income from deposit fees and other service charges increased for the year ended December 31, 2022, compared to the prior year, primarily as a result of increased transaction deposit account activity and the benefits from implementing Banner Forward initiatives. Mortgage banking income, including gains on one- to four-family and multifamily loan sales and loan servicing fees, decreased for the year ended December 31, 2022, compared to the prior year. Sales of one- to four-family loans held for sale for the year ended December 31, 2022, resulted in gains of $9.9 million, compared to $28.7 million for the year ended December 31, 2021. In addition, for the year ended December 31, 2022, mortgage banking income included $2.1 million of gains on the sale of multifamily loans, compared to $5.8 million for the year ended December 31, 2021. The lower mortgage banking revenue reflected a reduction in the volume and a decrease in the gain on sale margin on one- to four-family loans sold along with a negative fair market adjustment on multifamily held for sale loans. The reduction in one-to four family loans sold primarily reflects a reduction in refinancing activity, as well as decreased purchase activity as interest rates increased during 2022. The increase in bank owned life insurance income for year ended December 31, 2022 compared to the prior year was due to new bank-owned life insurance investments made at the end of 2021 and early in 2022. The $6.1 million decrease in miscellaneous income was primarily driven by a valuation adjustment on the SBA servicing asset recognized during the prior year as well as lower gains on the sale of SBA loans and higher gains related to the disposition of assets from closed branch locations recognized during the prior year. 64 Non-interest Expense. The following table represents key elements of non-interest expense for the years ended December 31, 2022, 2021, and 2020 (dollars in thousands). Table 19: Non-interest Expense Salary and employee benefits Less capitalized loan origination costs Occupancy and equipment Information and computer data services Payment and card processing services Professional and legal expenses Advertising and marketing Deposit insurance State and municipal business and use taxes Real estate operations, net Amortization of core deposit intangibles Loss on extinguishment of debt Miscellaneous COVID-19 expenses Merger and acquisition-related expenses Total non-interest expense 2022 compared to 2021 2021 compared to 2020 Change Amount $ 242,266 $ 244,351 $ (2,085) 2021 2022 Change Percent 2021 (0.9)% $ 244,351 $ 245,400 $ 2020 Change Amount (24,313) 52,018 (34,401) 52,850 10,088 (832) (29.3)% (1.6)% (34,401) 52,850 (34,848) 53,362 25,986 24,356 1,630 6.7 % 24,356 24,386 21,195 14,005 3,959 6,649 20,544 22,274 6,036 5,583 4,693 (104) 4,343 (22) 651 (8,269) (2,077) 1,066 350 (82) 3.2 % (37.1)% (34.4)% 19.1 % 8.1 % 372.7 % 20,544 22,274 6,036 5,583 16,095 12,093 6,412 6,516 4,343 (22) 4,355 (190) 5,279 793 24,869 6,571 (1,292) 2,284 (1,491) 633 24,236 $ 377,295 $ 379,005 $ (1,710) (436) 436 — — (660) $ 377,295 $ 380,101 $ (2,806) 660 6,571 2,284 24,236 (19.7)% (65.3)% 2.6 % (0.5)% $ 379,005 $ 364,025 $ 436 7,732 — 22,712 3,502 (100.0)% (100.0)% 660 (0.7)% $ 380,101 $ 369,589 $ 2,062 Change Percent (0.4)% (1.3)% (1.0)% (0.1)% 27.6 % 84.2 % (5.9)% (14.3)% (0.3)% (88.4)% (15.0)% nm 6.7 % 4.1 % (87.5)% (68.0)% 2.8 % (1,049) 447 (512) (30) 4,449 10,181 (376) (933) (12) 168 (1,161) 2,284 1,524 14,980 (3,066) (1,402) 10,512 Non-interest expense for the year ended December 31, 2022 decreased as compared to the same period in 2021. The decrease was primarily due to a decrease in professional and legal expenses, a decrease in salary and employee benefits expense, and a decrease in advertising and marketing expense, partially offset by a decrease in capitalized loan origination costs. Salary and employee benefits expenses decreased for the year ended December 31, 2022, compared to the prior year, primarily reflecting a reduction in staffing, partially offset by increases in salaries. Capitalized loan origination costs decreased for the year ended December 31, 2022, compared to the prior year, primarily due to decreases in production of one- to four-family residential and construction loans and the origination of SBA PPP loans during 2021. Information and computer data services expenses increased for the year ended December 31, 2022, compared to 2021, primarily due to an increase in computer software expenses. Professional and legal expense decreased for the year ended December 31, 2022 from the year ended December 31, 2021, primarily due to a decrease in consulting expense. Advertising and marketing expenses decreased for the year ended December 31, 2022 from the year ended December 31, 2021, primarily due to a reduction in direct mail marketing expenses. Deposit insurance expense increased for the year ended December 31, 2022, compared to the same period in 2021, due to an increase in our assessment rate during the second quarter of 2022. For the year ended December 31, 2022, the Company recognized a $793,000 loss on extinguishment of debt as a result of the redemption of $50.5 million of junior subordinated debentures during the year, compared to a $2.3 million loss on extinguishment of debt as a result of the redemption of $8.2 million of junior subordinated debentures during the year ended December 31, 2021. Income Taxes. For the year ended December 31, 2022, we recognized $45.4 million in income tax expense for an effective rate of 18.9%, 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 23.5%, 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, 2021, we recognized $45.5 million in income tax expense for an effective tax rate of 18.5%. Comparison of Results of Operations for the Years Ended December 31, 2021 and 2020 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, 2021 previously filed with the SEC. 65 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. The greatest source of interest rate risk to us 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 December 31, 2022, our loans with interest rate floors totaled $4.40 billion and had a weighted average floor rate of 4.15% compared to a current average note rate of 5.91%. As of December 31, 2022, our loans with interest rates at their floors totaled $1.58 billion and had a weighted average note rate of 4.09%. 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 level of risk appropriate 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. The interest rate sensitivity analysis performed by us 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. We update and prepare simulation modeling at least quarterly for review by senior management and oversight by the 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. 66 The following table sets forth as of December 31, 2022, the estimated changes in our net interest income over one-year and two-year time horizons and the estimated changes in economic value of equity based on the indicated interest rate environments (dollars in thousands): Table 20: Interest Rate Risk Indicators (1) Change (in Basis Points) in Interest Rates +300 +200 +100 0 -100 -200 December 31, 2022 Estimated Increase (Decrease) in Net Interest Income Next 24 Months 44,449 51,108 36,020 — (65,771) (156,244) 3.3 % 3.8 2.6 — (4.8) (11.5) Net Interest Income Next 12 Months 17,134 20,389 14,509 — (25,785) (60,927) 2.6 % 3.1 2.2 — (3.9) (9.2) Economic Value of Equity (424,550) (251,748) (94,389) — (10,575) (138,455) (11.6)% (6.9) (2.6) — (0.3) (3.8) (1) Assumes an instantaneous and sustained uniform change in market interest rates at all maturities; however, no rates are allowed to go below zero. The targeted Federal Funds Rate was between 4.25% and 4.50% at December 31, 2022. Another (although less reliable) 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 ARM 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. Table 21, Interest Sensitivity Gap, presents our interest sensitivity gap between interest-earning assets and interest-bearing liabilities at December 31, 2022. The following table sets forth 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 December 31, 2022, total interest-earning assets maturing or repricing within one year exceeded total interest-bearing liabilities maturing or repricing in the same time period by $3.16 billion, representing a one-year cumulative gap to total assets ratio of 19.96%. 67 67 l a t o T 0 1 r e v O s r a e Y 2 2 0 2 , 1 3 r e b m e c e D s r a e Y 5 r e t f A s r a e Y 3 r e t f A r a e Y 1 r e t f A 0 1 n i h t i W s r a e Y 5 n i h t i W s r a e Y 3 n i h t i W s r a e Y s h t n o M r a e Y 1 n i h t i W 6 n i h t i W s h t n o M 6 r e t f A : ) s d n a s u o h t n i s r a l l o d ( 2 2 0 2 , 1 3 r e b m e c e D f o s a s i s y l a n a P A G a s e d i v o r p e l b a t g n i w o l l o f e h T p a G y t i v i t i s n e S t s e r e t n I : 1 2 e l b a T 9 6 1 , 7 4 6 , 2 6 8 7 , 4 8 9 , 3 3 0 0 , 6 6 0 , 3 1 9 1 , 0 2 3 5 3 3 , 3 6 7 3 4 5 , 9 7 9 6 0 0 , 2 9 6 7 5 2 , 9 1 3 , 1 6 2 2 , 8 3 8 4 5 , 0 4 1 3 2 9 , 2 3 0 , 1 8 3 — 0 6 7 , 5 8 1 4 3 , 6 4 4 9 6 , 8 2 4 3 8 5 , 7 1 9 1 3 9 , 3 1 4 2 1 4 , 8 4 9 4 8 1 , 4 2 8 0 , 0 5 1 0 2 6 , 1 1 4 3 6 , 7 2 0 7 5 , 5 1 3 8 4 4 , 1 4 5 8 8 6 , 7 7 4 7 4 2 , 4 9 1 , 1 7 0 2 3 4 5 , 4 3 1 8 3 8 , 5 5 7 8 1 , 7 2 5 6 1 , 4 5 1 5 3 , 5 4 6 3 8 9 , 2 1 0 , 1 8 9 4 , 8 1 4 5 0 5 , 3 7 5 2 , 3 3 2 6 0 5 , 2 6 0 4 3 , 7 8 0 8 5 , 3 0 1 9 6 1 , 4 8 1 7 7 0 , 2 8 2 8 6 3 , 8 9 8 3 4 3 5 3 , 7 7 8 1 4 , 3 2 6 4 7 , 5 5 0 6 1 , 3 2 0 7 0 , 8 1 2 2 2 3 , 3 4 0 , 1 4 1 1 , 0 9 7 5 8 , 1 1 3 0 4 3 , 2 8 3 2 1 , 6 2 8 8 5 7 , 7 4 4 8 8 0 , 4 9 3 2 5 9 , 8 3 1 , 1 $ 4 3 2 , 1 $ 0 1 3 , 7 1 $ 7 3 9 , 9 2 $ 4 5 9 , 4 6 1 $ 9 0 5 , 3 6 $ 8 0 0 , 2 6 8 $ 2 4 2 , 1 1 9 , 4 1 4 6 7 , 3 7 7 , 1 6 2 3 , 6 0 8 , 2 0 6 2 , 5 1 5 , 2 4 7 9 , 1 3 7 , 2 8 3 2 , 8 0 8 0 8 6 , 5 7 2 , 4 9 8 0 , 0 1 7 , 2 4 5 1 , 1 1 8 , 1 7 8 2 , 8 9 1 , 2 0 0 0 , 0 5 9 2 5 , 3 2 7 0 0 0 , 0 0 1 8 7 1 , 9 8 9 9 7 , 2 3 2 — — — — 7 0 1 2 4 8 , 9 7 6 0 7 3 , 0 1 7 6 1 4 , 2 6 5 — — — — 9 6 0 , 4 4 6 2 4 5 , 3 9 3 5 3 8 , 0 2 5 9 7 3 , 1 — — — — 6 3 1 , 2 1 4 4 7 2 , 5 1 2 8 1 6 , 6 2 3 6 3 7 , 3 1 — 1 4 3 , 6 4 5 5 2 1 , 9 5 2 0 9 2 , 8 2 4 1 7 7 , 6 7 1 0 0 0 , 0 0 1 — — — — — — 2 8 5 , 2 6 1 2 0 7 , 2 7 7 8 8 , 6 2 1 8 8 3 , 6 0 2 9 1 1 , 5 6 2 1 4 1 , 0 6 1 1 4 2 , 3 3 2 8 4 1 , 5 2 3 0 0 0 , 0 5 — 8 7 1 , 9 8 9 9 7 , 2 3 2 s e i t i r u c e s d e k c a b - e g a g t r o m e t a r - e l b a t s u j d A s n a o l l a r u t l u c i r g a / l a i c r e m m o c e t a r - d e x i F s e i t i r u c e s d e k c a b - e g a g t r o m e t a r - d e x i F s n a o l l a r u t l u c i r g a / l a i c r e m m o c e t a r - e l b a t s u j d A s n a o l r e h t o d n a r e m u s n o C s t i s o p e d g n i n r a e - t s e r e t n i d n a s e i t i r u c e s t n e m t s e v n I s n a o l e g a g t r o m e t a r - e l b a t s u j d A ) 1 ( : s t e s s a g n i n r a e - t s e r e t n I s n a o l n o i t c u r t s n o C s n a o l e g a g t r o m e t a r - d e x i F s t e s s a e v i t i s n e s e t a r l a t o T s t n u o c c a g n i k c e h c g n i r a e b - t s e r e t n I ) 2 ( : s e i t i l i b a i l g n i r a e b - t s e r e t n I s t n u o c c a t i s o p e d t e k r a m y e n o M s g n i v a s r a l u g e R s e r u t n e b e d d e t a n i d r o b u s r o i n u J s t n e m e e r g a e s a h c r u p e r l i a t e R t i s o p e d f o s e t a c i f i t r e C s e t o n d e t a n i d r o b u S s e c n a v d a B L H F 68 6 3 0 , 5 1 9 , 7 5 3 7 , 2 5 9 , 1 5 2 8 , 9 5 5 , 1 4 6 7 , 7 6 9 7 2 5 , 0 1 5 , 1 9 5 5 , 8 6 5 6 2 6 , 5 5 3 , 1 s e i t i l i b a i l e v i t i s n e s e t a r l a t o T 6 0 2 , 6 9 9 , 6 6 0 2 , 6 9 9 , 6 $ $ ) 1 7 9 , 8 7 1 ( 6 0 2 , 6 9 9 , 6 $ $ 1 0 5 , 6 4 2 , 1 7 7 1 , 5 7 1 , 7 $ $ 6 9 4 , 7 4 5 , 1 6 7 6 , 8 2 9 , 5 $ $ 7 4 4 , 1 2 2 , 1 0 8 1 , 1 8 3 , 4 $ $ 9 7 6 , 9 3 2 3 3 7 , 9 5 1 , 3 $ $ 4 5 0 , 0 2 9 , 2 4 5 0 , 0 2 9 , 2 $ $ e v i t i s n e s - t s e r e t n i r e v o s t e s s a e v i t i s n e s - t s e r e t n i f o ) y c n e i c i f e d ( s s e c x E s t e s s a e v i t i s n e s - t s e r e t n i f o s s e c x e e v i t a l u m u C s e i t i l i b a i l % 9 3 . 8 8 1 % 9 3 . 8 8 1 % 4 3 . 0 2 2 % 7 6 . 4 3 2 % 6 5 . 7 2 2 % 1 2 . 4 6 2 % 0 4 . 5 1 3 s e i t i l i b a i l g n i r a e b - t s e r e t n i o t s t e s s a g n i n r a e - t s e r e t n i f o o i t a r e v i t a l u m u C % 9 1 . 4 4 % 9 1 . 4 4 % ) 3 1 . 1 ( % 9 1 . 4 4 % 7 8 . 7 % 2 3 . 5 4 % 7 7 . 9 % 4 4 . 7 3 % 1 7 . 7 % 7 6 . 7 2 % 1 5 . 1 % 6 9 . 9 1 % 4 4 . 8 1 % 4 4 . 8 1 s t e s s a l a t o t o t p a g e v i t a l u m u c f o o i t a R s t e s s a l a t o t o t p a g y t i v i t i s n e s t s e r e t n I ) w o l l o f s e t o n t o o f ( (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 and 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-bearing 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 $(2.54) billion, or (16.04)% of total assets at December 31, 2022. Interest-bearing liabilities for this table exclude certain non-interest-bearing deposits that are included in the average balance calculations reflected in Table 13, Analysis of Net Interest Spread. Management is aware of the sources of interest rate risk and in its opinion actively monitors and manages it to the extent possible. The Bank’s objectives in using interest rate derivatives are to reduce volatility in net interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Bank uses interest rate swaps as part of its interest rate risk management strategy. The Bank enters into interest rate swaps with certain qualifying commercial loan clients. The Bank simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the client pays a fixed rate of interest and the Bank receives a floating rate. During the fourth quarter of 2021, the Bank entered into interest rate swaps designated as cash flow hedges to hedge the variable cash flows associated with existing floating rate loans. These hedge contracts involve the receipt of fixed-rate amounts from a counterparty in exchange for the Bank making floating-rate payments over the life of the agreements without exchange of the underlying notional amount. The Bank is a party to $400.0 million in notional amounts of these types of interest rate swaps at December 31, 2022 Based on our analysis of the interest rate risk scenarios and our strategies for managing our risk, management believes that our current level of interest rate risk is reasonable. Liquidity and Capital Resources Our primary sources of funds are deposits, borrowings, proceeds from loan principal and interest payments and sales of loans, and the maturity of and interest income on mortgage-backed and investment securities. While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, competition and our pricing strategies. Our primary investing activity is the origination of loans and, in certain periods, the purchase of securities or loans. During the years ended December 31, 2022 and 2021, our loan originations, including originations of loans held for sale, exceeded our loan repayments by $1.30 billion and $306.8 million, respectively. During those same periods we purchased loans of $126.6 million and $5.1 million, respectively. This activity was funded primarily by the reduction in the balance of cash held as interest-bearing deposits. During the years ended December 31, 2022 and 2021, we received proceeds of $429.7 million and $1.32 billion, respectively, from the sale of loans. Securities purchased during the years ended December 31, 2022 and 2021 totaled $850.6 million and $2.94 billion, respectively, and securities repayments, maturities and sales in those same periods were $639.4 million and $1.43 billion, respectively. Our primary financing activity is gathering deposits. Total deposits decreased by $706.9 million during the year ended December 31, 2022, as core deposits decreased by $591.8 million and certificates of deposit decreased by $115.1 million. The decrease in total deposits during 2022 reflects the sale of four branches, which included the transfer of $178.2 million of related deposits, as well as an overall decline in market liquidity. At December 31, 2022, core deposits totaled $12.90 billion, or 95% of total deposits, compared with $13.49 billion, or 94% of total deposits at December 31, 2021. Certificates of deposit are generally more vulnerable to competition and more price sensitive than other retail deposits and our pricing of those deposits varies significantly based upon our liquidity management strategies at any point in time. At December 31, 2022, certificates of deposit totaled $723.5 million, or 5% of our total deposits, including $531.6 million which were scheduled to mature within one year. Certificates of deposit decreased from 6% of our total deposits at December 31, 2021. While no assurance can be given as to future periods, historically, we have been able to retain a significant amount of our certificates of deposit as they mature. We had $50.0 million of FHLB advances at both December 31, 2022 and December 31, 2021. Other borrowings at December 31, 2022 decreased $31.7 million to $232.8 million following an increase of $79.7 million in 2021. Both the FHLB advances and other borrowings outstanding at December 31, 2022 mature during 2023. 69 We must maintain an adequate level of liquidity to ensure the availability of sufficient funds to accommodate deposit withdrawals, to support loan growth, to satisfy financial commitments and to take advantage of investment opportunities. During the years ended December 31, 2022 and 2021, we used our sources of funds primarily to fund loan commitments and purchase securities. At December 31, 2022, we had outstanding loan commitments totaling $4.17 billion, primarily relating to undisbursed loans in process and unused credit lines. While representing potential growth in the loan portfolio and lending activities, this level of commitments is proportionally consistent with our historical experience and does not represent a departure from normal operations. For the year ended December 31, 2023, we have $20.6 million of purchase obligations under contracts with our key vendors to provide services, mainly information technology related contracts. In addition, for the year ended December 31, 2023, we have $14.4 million of commitments under operating lease agreements. We generally maintain sufficient cash and readily marketable securities to meet short-term liquidity needs; however, our primary liquidity management practice to supplement deposits is to increase or decrease short-term borrowings, including FHLB advances and Federal Reserve Bank of San Francisco (FRBSF) borrowings. We maintain credit facilities with the FHLB, which provided for advances that in the aggregate would equal the lesser of 45% of the Bank’s assets or adjusted qualifying collateral (subject to a sufficient level of ownership of FHLB stock). At December 31, 2022, under these credit facilities based on pledged collateral, the Bank had $2.99 billion of available credit capacity. Advances under these credit facilities totaled $50.0 million at December 31, 2022. In addition, the Bank has been approved for participation in the FRBSF’s Borrower-In-Custody program. Under this program, based on pledged collateral, the Bank had available lines of credit of approximately $1.19 billion as of December 31, 2022, subject to certain collateral requirements, namely the collateral type and risk rating of eligible pledged loans. We had no funds borrowed from the FRBSF at December 31, 2022 or 2021. At December 31, 2022, the Bank also had uncommitted federal funds line of credit agreements with other financial institutions totaling $125.0 million. No balances were outstanding under these agreements as of December 31, 2022 or 2021. Availability of lines is subject to federal funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs and the agreements may restrict consecutive day usage. Management believes it has adequate resources and funding potential to meet our foreseeable liquidity requirements. Banner is a separate legal entity from the Bank and, on a stand-alone level, must provide for its own liquidity and pay its own operating expenses and cash dividends. Banner’s primary sources of funds consist of capital raised through dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. We currently expect to continue our current practice of paying quarterly cash dividends on our common stock subject to our Board of Directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is $0.48 per share, as approved by our Board of Directors, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank, and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2023 at this rate of $0.48 per share, our average total dividend paid each quarter would be approximately $16.4 million based on the number of outstanding shares at December 31, 2022. At December 31, 2022, Banner (on an unconsolidated basis) had liquid assets of $77.5 million. During the year ended December 31, 2022, total shareholders’ equity decreased $233.9 million to $1.46 billion. At December 31, 2022, tangible common shareholders’ equity, which excludes goodwill and other intangible assets, was $1.07 billion, or 6.95% of tangible assets. See “Executive Overview” above for a reconciliation of total shareholders’ equity to tangible common shareholders’ equity, which is a non- GAAP financial measure. Capital Requirements Banner is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. The Bank, as state-chartered, federally insured commercial bank, is subject to the capital requirements established by the FDIC. The capital adequacy requirements are quantitative measures established by regulation that require Banner and the Bank to maintain minimum amounts and ratios of capital. The Federal Reserve requires Banner to maintain capital adequacy that generally parallels the FDIC requirements. The FDIC requires the Bank to maintain minimum ratios of Total Capital, Tier 1 Capital, and Common Equity Tier 1 Capital to risk-weighted assets as well as Tier 1 leverage capital to average assets. In addition to the minimum capital ratios, the Bank has to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. At December 31, 2022, Banner and the Bank each exceeded all current regulatory capital requirements to be “well-capitalized” and the fully phased-in capital conservation buffer requirement. The following table shows the regulatory capital ratios for Banner and the Bank, as of December 31, 2022. Table 22: Regulatory Capital Ratios Capital Ratios Total capital to risk-weighted assets Tier 1 capital to risk-weighted assets Tier 1 capital to average leverage assets Tier 1 common equity to risk-weighted assets Banner Corporation 14.04 % 12.13 9.45 11.44 Banner Bank 13.38 % 12.27 9.55 12.27 70 ITEM 7A – Quantitative and Qualitative Disclosures about Market Risk See pages 66–69 of Management’s Discussion and Analysis of Financial Condition and Results of Operations. ITEM 8 – Financial Statements and Supplementary Data For financial statements, see index on page 77. ITEM 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. ITEM 9A – Controls and Procedures The management of Banner is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934 (Exchange Act). A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that its objectives are met. Also, because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. As a result of these inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Further, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. (a) Evaluation of Disclosure Controls and Procedures: An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management as of the end of the period covered by this report. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2022, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. (b) Changes in Internal Controls Over Financial Reporting: There was no change in our internal control over financial reporting during the fourth quarter of the period covered by this Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Management’s Annual Report on Internal Control over Financial Reporting: Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we included a report of management’s assessment of the effectiveness of its internal controls beginning on page 79 of this Annual Report on Form 10-K for the year ended December 31, 2022. ITEM 9B – Other Information None. ITEM 9C-Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable 71 ITEM 10 – Directors, Executive Officers and Corporate Governance PART III The information required by this item contained under the section captioned “Proposal 1– Election of Directors,” “Meetings and Committees of the Board of Directors” and “Shareholder Proposals” in the Proxy Statement for the Annual Meeting of Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year, is incorporated herein by reference. Information regarding the executive officers of the Registrant is provided herein in Part I, Item 1 hereof. The information regarding our Audit Committee and Financial Expert included under the sections captioned “Meetings and Committees of the Board of Directors” and “Audit Committee Matters” in the Proxy Statement for the Annual Meeting of Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year, is incorporated herein by reference. There have been no material changes to the procedures by which stockholders may recommend nominees to our board of directors since last disclosed to stockholders. Code of Ethics The Board of Directors has adopted a Code of Ethics and Business Conduct for our directors, officers (including its senior financial officers), and employees. The Code of Ethics and Business Conduct was most recently approved by the Board of Directors on July 28, 2021; and the Code of Ethics and Business Conduct is reviewed by the Board on an annual basis. The Code of Ethics and Business Conduct requires our officers, directors, and employees to maintain the highest standards of professional conduct. A copy of the Code of Ethics and Business Conduct in substantially its current form was filed as an exhibit with Form 8-K on August 11, 2021 and is available without charge, upon request to Investor Relations, Banner Corporation, P.O. Box 907, Walla Walla, WA 99362. The Code is also available on the Company’s website at www.bannerbank.com. We subscribe to the Ethicspoint reporting system and encourage employees, clients, and vendors to call the Ethicspoint hotline at 1-866- ETHICSP (384-4277) or visit its website at www.Ethicspoint.com to report any concerns regarding financial statement disclosures, accounting, internal controls, or auditing matters. We will not retaliate against any of our officers or employees who raise legitimate concerns or questions about an ethics matter or a suspected accounting, internal control, financial reporting, or auditing discrepancy or otherwise assists in investigations regarding conduct that the employee reasonably believes to be a violation of Federal Securities Laws or any rule or regulation of the SEC, federal securities laws relating to fraud against shareholders or violations of applicable banking laws. Non-retaliation against employees is fundamental to our Code of Ethics and there are strong legal protections for those who, in good faith, raise an ethical concern or a complaint about their employer. ITEM 11 – Executive Compensation Information required by this item regarding management compensation and employment contracts, director compensation, and compensation committee interlocks and insider participation is incorporated by reference to the sections captioned “Executive Compensation,” “Directors’ Compensation,” and “Compensation Discussion and Analysis - Compensation and Human Capital Committee Interlocks and Insider Participation,” respectively, in the Proxy Statement for the Annual Meeting of Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year. ITEM 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters (a) Security Ownership of Certain Beneficial Owners and Management Information required by this item is incorporated herein by reference to the section captioned “Security Ownership of Certain Beneficial Owners and Management” in the proxy statement for the Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year. (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the section captioned “Security Ownership of Certain Beneficial Owners and Management” in the proxy statement for the Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year. (c) Change in Control Banner is not aware of any arrangements, including any pledge by any person of securities of Banner, the operation of which may at a subsequent date result in a change in control of Banner. 72 (d) Equity Compensation Plan Information The following table sets forth information about equity compensation plans that were in effect at December 31, 2022: Plan category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total (A) Number of securities to be issued upon exercise of outstanding options, (1) warrants and rights (B) Weighted average exercise price of outstanding options, (1) warrants and rights (C) Number of securities remaining available for future issuance under equity (2) compensation plans 382,727 — 382,727 N/A — 541,524 — 541,524 (1) Represents shares that are issuable pursuant to awards of restricted stock units for which there is no applicable exercise price. (2) All of the securities remaining available for future issuance under the equity compensation plans approved by security holders are available for issuance as stock awards. ITEM 13 – Certain Relationships and Related Transactions, and Director Independence The information required by this item contained under the sections captioned “Related Party Transactions” and “Director Independence” in the Proxy Statement for the Annual Meeting of Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year, is incorporated herein by reference. ITEM 14 – Principal Accounting Fees and Services The information required by this item contained under the section captioned “Proposal 4– Ratification of Selection of Independent Registered Public Accounting Firm” in the Proxy Statement for the Annual Meeting of Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year, is incorporated herein by reference. 73 PART IV ITEM 15 – Exhibits and Financial Statement Schedules (a) (1) Financial Statements See Index to Consolidated Financial Statements on page 77. Financial Statement Schedules All financial statement schedules are omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements or the Notes thereto or in Part 1, Item 1. Exhibits See Index of Exhibits on page 144. (2) (3) (b) Exhibits See Index of Exhibits on page 144. 74 Item 16 - Form 10-K Summary. None. 75 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Signatures Date: February 21, 2023 Banner Corporation /s/ Mark J. Grescovich Mark J. Grescovich President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Mark J. Grescovich Mark J. Grescovich President and Chief Executive Officer; Director (Principal Executive Officer) /s/ Peter J. Conner Peter J. Conner Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) Date: February 21, 2023 /s/ John R. Layman John R. Layman Director Date: February 21, 2023 /s/ Connie R. Collingsworth Connie R. Collingsworth Director Date: February 21, 2023 /s/ Margot J. Copeland Margot J. Copeland Director Date: February 21, 2023 /s/ Terry Schwakopf Terry Schwakopf Director Date: February 21, 2023 /s/ Roberto R. Herencia Roberto R. Herencia Chairman of the Board Date: February 21, 2023 Date: February 21, 2023 /s/ Paul J. Walsh Paul J. Walsh Director Date: February 21, 2023 /s/ Ellen R.M. Boyer Ellen R.M. Boyer Director Date: February 21, 2023 /s/ David A. Klaue David A. Klaue Director Date: February 21, 2023 /s/ Kevin F. Riordan Kevin F. Riordan Director Date: February 21, 2023 /s/ John Pedersen John Pedersen Director Date: February 21, 2023 76 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS BANNER CORPORATION AND SUBSIDIARIES (Item 8 and Item 15(a)(1)) Report of Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management Report on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Report of Independent Registered Public Accounting Firm (Moss Adams LLP, Spokane, Washington, PCAOB ID: 659) . . . . . . . Consolidated Statements of Financial Condition as of December 31, 2022 and 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Operations for the Years Ended December 31, 2022, 2021 and 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021 and 2020 . . . . . . . . . . . . . . . . Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2022, 2021 and 2020 . . . . . . . . Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020 . . . . . . . . . . . . . . . . . . . . . . . . . Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 78 79 80 83 84 85 86 87 89 77 February 21, 2023 Report of Management To the Shareholders: The management of Banner Corporation (the Company) is responsible for the preparation, integrity, and fair presentation of its published financial statements and all other information presented in this annual report. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, as such, include amounts based on informed judgments and estimates made by management. In the opinion of management, the financial statements and other information herein present fairly the financial condition and operations of the Company at the dates indicated in conformity with accounting principles generally accepted in the United States of America. Management is responsible for establishing and maintaining an effective system of internal control over financial reporting. The internal control system is augmented by written policies and procedures and by audits performed by an internal audit staff (assisted in certain instances by contracted external audit resources other than the independent registered public accounting firm), which reports to the Audit Committee of the Board of Directors. Internal auditors monitor the operation of the internal and external control system and report findings to management and the Audit Committee. When appropriate, corrective actions are taken to address identified control deficiencies and other opportunities for improving the system. The Audit Committee provides oversight to the financial reporting process. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time. The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of the Company’s management. The Audit Committee is responsible for the selection of the independent auditors. It meets periodically with management, the independent auditors and the internal auditors to ensure that they are carrying out their responsibilities. The Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting, and auditing procedures of the Company in addition to reviewing the Company’s financial reports. The independent auditors and the internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the adequacy of the internal control structure for financial reporting and any other matters which they believe should be brought to the attention of the Committee. Mark J. Grescovich, Chief Executive Officer Peter J. Conner, Chief Financial Officer 78 Management Report on Internal Control over Financial Reporting February 21, 2023 The management of Banner Corporation is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that: Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with the authorizations of management and directors of the Company; and Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, including the possibility of human error and circumvention or overriding of controls, internal control over financial reporting may not prevent or detect misstatements. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. This assessment was based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Based on this assessment and those criteria, management believes that, as of December 31, 2022, the Company maintained effective internal control over financial reporting. The Company’s independent registered public accounting firm has audited the Company’s Consolidated Financial Statements that are included in this annual report and the effectiveness of our internal control over financial reporting as of December 31, 2022 and issued their Report of Independent Registered Public Accounting Firm, appearing under Item 8. The audit report expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. 79 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Banner Corporation and Subsidiaries Opinions on the Consolidated Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated statements of financial condition of Banner Corporation and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2022 and 2021, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 80 Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. As described in Notes 1 and 4 to the consolidated financial statements, the balance of the Company’s consolidated allowance for credit losses – loans was $141.5 million at December 31, 2022. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans held for investments to present the net carrying value at the amount expected to be collected on such financial assets. The measurement of expected credit losses is based on relevant information about past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses – loans 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. Management uses economic indicators to adjust the historical loss rates so that they better reflect management’s expectations of future conditions over the remaining lives of the loans in the portfolio based on reasonable and supportable forecasts. These economic indicators are selected based on correlation to the Company’s historical credit loss experience and are evaluated for each loan category. Management also considers qualitative and environmental factors for each loan category to adjust for differences between the historical periods used to calculate historical loss rates and expected conditions over the remaining lives of the loans in the portfolio. We identified the estimation and application of forecasted economic conditions used in the allowance for credit losses – loans as a critical audit matter. The economic forecast component of the allowance for credit losses – loans is used to compare the conditions that existed during the historical period to current conditions and future expectations, and to make adjustments to the historical data accordingly. Auditing the estimation of forecasted economic conditions and the method by which management applied these forecasts to the allowance for credit losses – loans involved especially challenging and subjective auditor judgment when performing audit procedures and evaluating the results of those procedures. The primary procedures we performed to address this critical audit matter included: • Testing the design, implementation, and operating effectiveness of controls relating to management’s calculation of the allowance for credit losses – loans, including controls over the selection and implementation of the forecasted economic conditions used. • Obtaining management’s analysis and supporting documentation related to the forecasted economic conditions, and testing whether the forecasts used in the calculation of the allowance for credit losses are reasonable and supportable based on the analysis provided by management. Testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for credit losses, testing completeness and accuracy of the data used in the calculation, testing application of the forecasted economic conditions determined by management and used in the calculation, and recalculating the impact of the forecast on the allowance for credit losses – loans balance. • We identified the estimation of qualitative and environmental factors used in the allowance for credit losses – loans as a critical audit matter. The qualitative and environmental factors are used to estimate credit losses related to matters that are not captured in the historical loss rates, and are based on management’s evaluation of available internal and external data. Auditing management’s judgments regarding the qualitative and environmental factors applied to the allowance for credit losses - loans involved especially challenging and subjective auditor judgment when performing audit procedures and evaluating the results of those procedures. The primary procedures we performed to address this critical audit matter included: • Testing the design, implementation, and operating effectiveness of controls relating to management’s calculation of the allowance for credit losses, including controls over the determination of the qualitative and environmental factors used. • Obtaining management’s analysis and supporting documentation related to the qualitative and environmental factors, and testing whether the environmental and qualitative factors used in the calculation of the allowance for credit losses – loans are supported by the analysis provided by management. Testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for credit losses, testing completeness and accuracy of the data used in the calculation, testing application of the environmental and qualitative factors determined by management and used in the calculation, and recalculating the allowance for credit losses balance. • We identified management’s risk ratings of loans which are used in the allowance for credit losses – loans as a critical audit matter. The Company uses internally determined risk ratings as credit indicators to classify loans into pools and to estimate expected loss rates for each of the loan pools. Those loan pools are then included in the calculation of the allowance for credit losses – loans. Auditing management’s judgments regarding risk ratings of loans involved especially challenging and subjective auditor judgment when performing audit procedures and evaluating the results of those procedures. 81 The primary procedures we performed to address this critical audit matter included: • • • Testing the design, implementation, and operating effectiveness of controls over the accuracy of risk ratings of loans. Testing a risk-based, targeted selection of loans to gain substantive evidence that the Company is appropriately rating these loans in accordance with its policies, and that the risk ratings for the loans are reasonable. Testing the completeness and accuracy of the loan data used in the allowance for credit losses calculation, including application of the loan risk ratings determined by management and used in the calculation, and recalculating the allowance for credit losses – loans balance. /s/ Moss Adams LLP Spokane, Washington February 21, 2023 We have served as the Company’s auditor since 2004. 82 BANNER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands, except shares) December 31, 2022 and 2021 ASSETS Cash and due from banks Interest-bearing deposits Total cash and cash equivalents Securities—trading Securities—available-for-sale, amortized cost $3,218,777 and $3,653,160, respectively Securities—held-to-maturity, net of allowance for credit losses of $379 and $433, respectively Total securities Federal Home Loan Bank (FHLB) stock Securities purchased under agreements to resell Loans held for sale (includes $51,779 and $39,775, at fair value, respectively) Loans receivable Allowance for credit losses – loans Net loans receivable Accrued interest receivable Real estate owned (REO), held for sale, net Property and equipment, net Goodwill Other intangibles, net Bank-owned life insurance (BOLI) Deferred tax assets, net Operating lease right-of-use assets Other assets Total assets LIABILITIES Deposits: Non-interest-bearing Interest-bearing transaction and savings accounts Interest-bearing certificates Total deposits Advances from FHLB Other borrowings Subordinated notes, net Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities) Operating lease liabilities Accrued expenses and other liabilities Deferred compensation Total liabilities $ $ December 31, 2022 December 31, 2021 $ 198,154 $ 44,908 243,062 28,694 2,789,031 1,117,588 3,935,313 12,000 300,000 56,857 10,146,724 (141,465) 10,005,259 57,284 340 138,754 373,121 9,440 297,565 178,131 49,283 177,022 15,833,431 $ 358,461 1,775,839 2,134,300 26,981 3,638,993 520,922 4,186,896 12,000 300,000 96,487 9,084,763 (132,099) 8,952,664 42,916 852 148,759 373,121 14,855 244,156 71,138 55,257 171,471 16,804,872 6,176,998 $ 6,719,531 723,530 13,620,059 50,000 232,799 98,947 74,857 55,205 200,839 44,293 14,376,999 6,385,177 7,103,125 838,631 14,326,933 50,000 264,490 98,564 119,815 59,756 148,303 46,684 15,114,545 COMMITMENTS AND CONTINGENCIES (Note 20) SHAREHOLDERS’ EQUITY Preferred stock - $0.01 par value per share, 500,000 shares authorized; no shares outstanding at December 31, 2022 and December 31, 2021 Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized; 34,194,018 shares issued and outstanding at December 31, 2022; 34,252,632 shares issued and outstanding at December 31, 2021 Common stock (non-voting) and paid in capital - $0.01 par value per share, 5,000,000 shares authorized; no shares issued and outstanding at December 31, 2022; no shares issued and outstanding at December 31, 2021 Retained earnings Carrying value of shares held in trust for stock-based compensation plans Liability for common stock issued to stock related compensation plans Accumulated other comprehensive (loss) income Total shareholders’ equity Total liabilities and shareholders’ equity See notes to consolidated financial statements — — 1,293,959 1,299,381 — 525,242 (6,905) 6,905 (362,769) 1,456,432 15,833,431 $ — 390,762 (7,435) 7,435 184 1,690,327 16,804,872 $ 83 BANNER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except for per share amounts) For the Years Ended December 31, 2022, 2021 and 2020 2022 2021 2020 INTEREST INCOME: Loans receivable Mortgage-backed securities Securities and cash equivalents Total interest income INTEREST EXPENSE: Deposits FHLB advances Other borrowings Subordinated debt Total interest expense Net interest income PROVISION (RECAPTURE) FOR CREDIT LOSSES Net interest income after provision (recapture) for credit losses NON-INTEREST INCOME Deposit fees and other service charges Mortgage banking operations BOLI Miscellaneous Net (loss) gain on sale of securities Net change in valuation of financial instruments carried at fair value Gain on sale of branches, including related deposits Total non-interest income NON-INTEREST EXPENSE: Salary and employee benefits Less capitalized loan origination costs Occupancy and equipment Information and computer data services Payment and card processing services Professional and legal expenses Advertising and marketing Deposit insurance State and municipal business and use taxes Real estate operations, net Amortization of core deposit intangibles Loss on extinguishment of debt Miscellaneous COVID-19 expenses Merger and acquisition - related expenses Total non-interest expense Income before provision for income taxes PROVISION FOR INCOME TAXES NET INCOME Earnings per common share: Basic Diluted Cumulative dividends declared per common share Weighted average number of common shares outstanding: Basic Diluted $ 450,916 $ 67,585 54,068 572,569 445,731 $ 45,723 29,046 520,500 10,124 489 377 8,400 19,390 553,179 10,364 542,815 44,459 10,834 7,794 6,805 69,892 (3,248) 807 7,804 75,255 242,266 (24,313) 52,018 25,986 21,195 14,005 3,959 6,649 4,693 (104) 5,279 793 24,869 377,295 — — 377,295 240,775 45,397 195,378 $ 5.70 $ 5.67 $ 1.76 $ 11,770 2,592 467 8,780 23,609 496,891 (33,388) 530,279 39,495 33,948 5,000 12,875 91,318 482 4,616 — 96,416 244,351 (34,401) 52,850 24,356 20,544 22,274 6,036 5,583 4,343 (22) 6,571 2,284 24,236 379,005 436 660 380,101 246,594 45,546 201,048 $ 5.81 $ 5.76 $ 1.64 $ $ $ $ $ 466,360 31,792 20,994 519,146 25,015 5,023 603 7,204 37,845 481,301 67,875 413,426 34,384 51,083 5,972 6,821 98,260 1,012 (656) — 98,616 245,400 (34,848) 53,362 24,386 16,095 12,093 6,412 6,516 4,355 (190) 7,732 — 22,712 364,025 3,502 2,062 369,589 142,453 26,525 115,928 3.29 3.26 1.23 34,264,322 34,459,922 34,610,056 34,919,188 35,264,252 35,528,848 See notes to the consolidated financial statements 84 BANNER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) For the Years Ended December 31, 2022, 2021 and 2020 NET INCOME OTHER COMPREHENSIVE (LOSS) INCOME, NET OF INCOME TAXES: Unrealized holding (loss) gain on securities—available-for-sale arising during the period Income tax benefit (expense) related to securities—available-for-sale unrealized holding losses Reclassification for net loss (gain) on securities—available-for-sale realized in earnings Income tax (benefit) expense related to securities—available-for-sale realized gains Unrealized loss on securities transferred from available-for-sale to held-to-maturity Income tax benefit related to securities transferred from available-for-sale to held- to-maturity Amortization of unrealized loss on securities transferred from available-for-sale to held-to-maturity Income tax benefit related to amortization of unrealized loss on securities transferred from available-for-sale to held-to-maturity Net unrealized loss on interest rate swaps used in cash flow hedges Income tax benefit related to interest rate swaps used in cash flow hedges Changes in fair value of junior subordinated debentures related to instrument specific credit risk Income tax benefit (expense) related to junior subordinated debentures Reclassification of fair value of junior subordinated debentures redeemed Income tax expense related to junior subordinated debentures redeemed Other comprehensive (loss) income COMPREHENSIVE (LOSS) INCOME 2022 2021 2020 $ 195,378 $ 201,048 $ 115,928 (418,827) (80,073) 100,518 19,217 3,248 (780) (34,596) 8,303 2,625 (630) (25,223) 6,054 (5,560) 1,334 765 (498) 120 — — — — (1,261) 302 (10,419) 2,501 1,613 (184) (362,953) (167,575) $ (387) (68,885) 132,163 $ $ 45,247 (10,860) (454) 109 — — — — — — 2,330 (559) — — 35,813 151,741 See notes to the consolidated financial statements 85 S E I R A I D I S B U S D N A N O I T A R O P R O C R E N N A 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2 0 6 , 7 5 ( ) 8 2 5 , 6 5 ( 8 4 0 , 1 0 2 0 3 0 , 6 7 2 3 , 0 9 6 , 1 8 7 3 , 5 9 1 ) 3 5 9 , 2 6 3 ( ) 8 9 8 , 0 6 ( ) 0 6 9 , 0 1 ( 7 2 3 , 0 9 6 , 1 8 3 5 , 5 ) 5 8 8 , 8 6 ( $ $ 4 8 1 4 8 1 ) 3 5 9 , 2 6 3 ( 8 4 0 , 1 0 2 ) 2 0 6 , 7 5 ( $ $ 2 6 7 , 0 9 3 2 6 7 , 0 9 3 8 7 3 , 5 9 1 ) 8 9 8 , 0 6 ( $ $ 0 3 0 , 6 1 8 3 , 9 9 2 , 1 1 8 3 , 9 9 2 , 1 $ $ 2 3 4 , 3 4 1 2 3 6 , 2 5 2 , 4 3 2 3 6 , 2 5 2 , 4 3 ) 8 2 5 , 6 5 ( ) 0 0 0 , 0 5 0 , 1 ( ) 0 6 9 , 0 1 ( ) 0 0 0 , 0 0 2 ( 8 3 5 , 5 6 8 3 , 1 4 1 2 3 4 , 6 5 4 , 1 $ ) 9 6 7 , 2 6 3 ( $ 2 4 2 , 5 2 5 $ 9 5 9 , 3 9 2 , 1 $ 8 1 0 , 4 9 1 , 4 3 s e r a h s f o t e n , s t n a r g k c o t s d e t c i r t s e r o t d e t a l e r n o i t a s n e p m o c d e s a b - k c o t s f o n o i t a z i t r o m A x a t f o t e n , n o i t p o d a f o r a e y n i t c a p m i - ) 6 2 3 C S A ( d r a d n a t s t i d e r c w e N ) e v i t a l u m u c - e r a h s / 3 2 . 1 $ ( k c o t s n o m m o c n o s d n e d i v i d f o l a u r c c A x a t e m o c n i f o t e n , e m o c n i e v i s n e h e r p m o c r e h t O k c o t s n o m m o c f o e s a h c r u p e R e m o c n i t e N 0 2 0 2 , 1 3 r e b m e c e D , e c n a l a B d e r e d n e r r u s 1 2 0 2 , 1 y r a u n a J , e c n a l a B e m o c n i t e N s e r a h s f o t e n , s t n a r g k c o t s d e t c i r t s e r o t d e t a l e r n o i t a s n e p m o c d e s a b - k c o t s f o n o i t a z i t r o m A ) e v i t a l u m u c - e r a h s / 4 6 . 1 $ ( k c o t s n o m m o c n o s d n e d i v i d f o l a u r c c A x a t e m o c n i f o t e n , s s o l e v i s n e h e r p m o c r e h t O k c o t s n o m m o c f o e s a h c r u p e R 86 s e r a h s f o t e n , s t n a r g k c o t s d e t c i r t s e r o t d e t a l e r n o i t a s n e p m o c d e s a b - k c o t s f o n o i t a z i t r o m A ) e v i t a l u m u c - e r a h s / 6 7 . 1 $ ( k c o t s n o m m o c n o s d n e d i v i d f o l a u r c c A x a t e m o c n i f o t e n , s s o l e v i s n e h e r p m o c r e h t O k c o t s n o m m o c f o e s a h c r u p e R 2 2 0 2 , 1 3 r e b m e c e D , e c n a l a B d e r e d n e r r u s 1 2 0 2 , 1 3 r e b m e c e D , e c n a l a B d e r e d n e r r u s 2 2 0 2 , 1 y r a u n a J , e c n a l a B e m o c n i t e N s t n e m e t a t s l a i c n a n i f d e t a d i l o s n o c e h t o t s e t o n e e S BANNER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Years Ended December 31, 2022, 2021 and 2020 OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided from operating activities: Depreciation Deferred income and expense, net of amortization Capitalized loan servicing rights, net of amortization Amortization of core deposit intangibles Loss (gain) on sale of securities, net Net change in valuation of financial instruments carried at fair value Reinvested dividends – equity securities Gain on sale of branches, including related deposits Decrease (increase) in deferred taxes Increase (decrease) in current taxes payable Stock-based compensation Net change in cash surrender value of BOLI Gain on sale of loans, excluding capitalized servicing rights Loss (gain) on disposal of real estate held for sale and property and equipment, net Provision (recapture) for credit losses Provision for losses on real estate held for sale Loss on extinguishment of debt Origination of loans held for sale Proceeds from sales of loans held for sale Net change in: Other assets Other liabilities Net cash provided from operating activities INVESTING ACTIVITIES: Purchases of securities—available-for-sale Principal repayments and maturities of securities—available-for-sale Proceeds from sales of securities—available-for-sale Purchases of securities—held-to-maturity Principal repayments and maturities of securities—held-to-maturity Purchases of equity securities Proceeds from sales of equity securities Loan (originations) repayments, net Purchases of loans and participating interest in loans Proceeds from sales of other loans Net cash paid related to branch divestiture Purchases of property and equipment Proceeds from sale of real estate held for sale and sale of other property Proceeds from FHLB stock repurchase program Purchase of FHLB stock Purchase of securities purchased under agreements to resell Investment in bank-owned life insurance Other Net cash used by investing activities 2022 2021 2020 $ 195,378 $ 201,048 $ 115,928 16,933 (3,757) 1,326 5,279 3,248 (807) — (7,804) 7,624 8,250 8,870 (7,100) (4,556) 102 10,364 — 765 (406,915) 415,635 (39,028) 34,244 238,051 (659,905) 368,996 214,335 (190,645) 56,056 — — (897,505) (126,556) 14,034 (168,137) (14,724) 6,088 15,080 (15,080) — (50,053) 3,459 (1,444,557) 17,345 (38,786) (1,805) 6,571 (482) (4,616) — — 16,357 (3,643) 9,258 (4,685) (26,140) (2,305) (33,388) — 2,284 (1,102,663) 1,276,111 2,200 (11,083) 301,578 (2,805,251) 1,314,484 83,663 (135,615) 32,487 (4,750) 4,796 795,892 (5,086) 46,028 — (10,493) 11,759 4,358 — (300,000) (50,053) 2,355 (1,015,426) 18,130 (15,040) (894) 7,732 (1,012) 656 (353) — (13,963) (2,193) 9,168 (5,030) (43,304) 859 67,875 45 — (1,461,872) 1,471,828 (27,559) 4,385 125,386 (1,361,132) 474,876 150,374 (222,094) 33,848 (1,060,000) 1,060,695 (561,338) (2,510) 19,469 — (12,803) 8,893 52,169 (40,185) — (83) 5,197 (1,454,624) (Continued on next page) 87 BANNER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (in thousands) For the Years Ended December 31, 2022, 2021 and 2020 2022 FINANCING ACTIVITIES: (Decrease) increase in deposits, net Repayment of long term FHLB borrowing Advances (repayments) of overnight and short-term FHLB borrowings, net (Decrease) increase in other borrowings, net Net proceeds from issuance of subordinated notes Repayment of junior subordinated debentures Proceeds from redemption of trust securities related to junior subordinated debentures Cash dividends paid Cash paid for repurchase of common stock Taxes paid related to net share settlement for equity awards Net cash (used by) provided from financing activities NET CHANGE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR (528,672) (50,000) 50,000 (31,690) — (50,518) 1,518 (61,078) (10,960) (3,332) (684,732) (1,891,238) 2,134,300 $ 243,062 $ 2021 2020 1,759,638 (100,000) — 79,704 — (8,248) 248 (57,621) (56,528) (3,228) 1,613,965 900,117 1,234,183 2,134,300 $ 2,518,654 — (300,000) 66,311 98,027 — — (94,078) (31,775) (1,453) 2,255,686 926,448 307,735 1,234,183 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid in cash Taxes paid NON-CASH INVESTING AND FINANCING TRANSACTIONS: Transfer of loans to real estate owned and other repossessed assets Dividends accrued but not paid until after period end Loans, held-for-sale, transferred to portfolio Securities, available-for-sale, transferred to held-to-maturity DISPOSITIONS: Assets divested Liabilities divested 2022 2021 2020 $ 18,583 $ 24,885 24,278 $ 29,017 40,942 39,672 — 1,158 35,466 462,159 (1,539) (178,209) 512 1,338 — — — — 1,602 1,357 — — — — See notes to consolidated financial statements 88 BANNER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business: Banner Corporation (Banner or the Company) is a bank holding company incorporated in the State of Washington. The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary, Banner Bank (the Bank). The Bank is a Washington-chartered commercial bank that conducts business from its headquarters in Walla Walla, Washington and, as of December 31, 2022, its 137 branch offices located in Washington, Oregon, California and Idaho. The Bank also has 18 loan production offices located in Washington, Oregon, California, Idaho and Utah. Banner is subject to regulation by the Board of Governors of the Federal Reserve System (the Federal Reserve Board). The Bank is subject to regulation by the Washington State Department of Financial Institutions, Division of Banks (the DFI) and the Federal Deposit Insurance Corporation (the FDIC). Basis of Presentation and Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All material intercompany transactions, profits and balances have been eliminated. The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) and under the rules and regulations of the U.S. Securities and Exchange Commission (the SEC). At December 31, 2022, the Company had five wholly-owned subsidiary grantor trusts (the Trusts), each of which issued trust preferred securities (TPS) and common securities. The Trusts are not consolidated in the Company’s consolidated financial statements. Subsequent Events: The Company has evaluated events and transactions subsequent to December 31, 2022 through the date that the consolidated financial statements were issued for potential recognition or disclosure. Cash and Cash Equivalents: Cash and cash equivalents include cash and due from banks and temporary investments which are federal funds sold and interest bearing balances due from other banks. Cash and cash equivalents generally have maturities of three months or less at the date of purchase. Business Combinations: Business combinations are accounted for using the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed, both tangible and intangible, and consideration exchanged are recorded at acquisition date fair values. The excess purchase consideration over fair value of net assets acquired is recorded as goodwill. In the event that the fair value of net assets acquired exceeds the purchase price, including fair value of liabilities assumed, a bargain purchase gain is recorded on that acquisition. Expenses incurred in connection with a business combination are expensed as incurred, except for those items permitted to be capitalized. Changes in deferred tax asset valuation allowances related to acquired tax uncertainties are recognized in net income after the measurement period. In the opinion of management, the accompanying Consolidated Statements of Financial Condition and related Use of Estimates: Consolidated Statements of Operations, Comprehensive Income, Changes in Shareholders’ Equity and Cash Flows reflect all adjustments (which include reclassification and normal recurring adjustments) that are necessary for a fair presentation in conformity with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of Banner’s consolidated financial statements. These policies relate to (i) determination of the provision and allowance for credit losses, (ii) the valuation of financial assets and liabilities recorded at fair value, (iii) the valuation of intangible assets, such as goodwill, (iv) the valuation or recognition of deferred tax assets and liabilities and (v) the determination of estimated losses from legal proceedings and other contingent matters pending. Management believes that the judgments, estimates and assumptions used in the preparation of the consolidated financial statements are appropriate based on the factual circumstances at the time. However, given the sensitivity of the Consolidated Financial Statements to these critical accounting estimates, the use of other judgments, estimates and assumptions could result in material differences in the Company’s results of operations or financial condition. Further, subsequent changes in economic or market conditions could have a material impact on these estimates and the Company’s financial condition and operating results in future periods. Securities: Debt securities are classified as held-to-maturity when the Company has the ability and positive intent to hold them to maturity. Debt securities classified as available-for-sale are available for future liquidity requirements and may be sold prior to maturity. Debt securities classified as trading are also available for future liquidity requirements and may be sold prior to maturity. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Debt securities classified as held-to-maturity are carried at cost, net of the allowance for credit losses - securities, adjusted for amortization of premiums to the earliest callable date and accretion of discounts to maturity. Debt securities classified as available-for-sale are measured at fair value. Unrealized holding gains and losses on debt securities classified as available-for-sale are excluded from earnings and are reported net of tax as accumulated other comprehensive income (AOCI), a component of shareholders’ equity, until realized. Debt securities classified as trading are also measured at fair value. Unrealized holding gains and losses on securities classified as trading are included in earnings. Realized gains and losses on sale are computed on the specific identification method and are included in earnings on the trade date sold. Equity securities are measured at fair value with changes in the fair value recognized through net income. 89 Allowance for Credit Losses - Securities: Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. The Company’s held-to maturity portfolio contains mortgage-backed securities issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The Company’s held-to-maturity portfolio also contains municipal bonds that are typically rated by major rating agencies as Aa or better. The Company has never incurred a loss on a municipal bond, therefore the expectation of credit losses on these securities is insignificant. The Company uses industry historical credit loss information adjusted for current conditions to establish the allowance for credit losses on the municipal bond portfolio. Less than 2% of the Company’s held-to- maturity portfolio are community development bonds; approximately half represent pools of one- to four-family loans while the other half are not collateralized. The expected credit losses on these bonds is similar to Banner’s commercial business loan portfolio. Therefore, the Company uses the commercial business loan portfolio loss rates to establish the allowance for credit losses on the collateralized bonds and its own loss history to establish a loss rate on bonds that are not collateralized. For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized costs, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. Projected cash flows are discounted by the current effective interest rate. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to AOCI. Changes in the allowance for credit losses are recorded as provision for (or recapture of) credit losses. Losses are charged against the allowance when management believes the non-collectability of an available-for-sale or held-to-maturity security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Investment in FHLB Stock: FHLB stock does not have a readily determinable fair value. The Bank’s investment in FHLB stock is carried at cost or par value ($100 per share) and evaluated for impairment based on the Bank’s expectations of the ultimate recoverability of the stock’s par value. Ownership of FHLB stock is restricted to the FHLB and member institutions and can only be purchased and redeemed at par, therefore there has been no observable changes in market prices. As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding FHLB advances. Management periodically evaluates FHLB stock for impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the client base of the FHLB, and (4) the liquidity position of the FHLB. The Company has determined there is no impairment on the FHLB stock investment as of December 31, 2022 and 2021. Loans Receivable: The Bank originates residential one- to four-family and multifamily mortgage loans for both portfolio investment and sale in the secondary market. The Bank also originates construction and land development, commercial real estate, commercial business, agricultural and consumer loans for portfolio investment. Loans receivable not designated as held for sale are recorded at amortized cost, net of the allowance for credit losses. Amortized cost is the principal amount outstanding, net of deferred fees, discounts and premiums. Accrued interest on loans is reported in accrued interest receivable on the Consolidated Statements of Financial Condition. Premiums, discounts and deferred loan fees are amortized to maturity using the level-yield methodology. Loans Held for Sale: Residential one- to four-family and multifamily mortgage loans originated with the intent to be sold in the secondary market are considered held for sale. Residential one- to four-family loans under best effort delivery commitments are carried at the lower of aggregate cost or estimated market value. Residential one- to four-family loans expected to be delivered under mandatory commitments are carried at fair value in order to match changes in the value of the loans with the value of the related economic hedges on the loans. Fair values for residential mortgage loans held for sale are determined by comparing actual loan rates to current secondary market prices for similar loans. The multifamily held for sale loans originated prior to April 1, 2020 were carried at fair value in order to match changes in the value of the loans with the value of the related economic hedges on the loans. Fair values for multifamily loans held for sale are calculated based on discounted cash flows using a discount rate that is a combination of market spreads for similar loan types added to selected index rates. The multifamily held for sale loans originated subsequent to March 31, 2020 are carried at the lower of cost or market. Net unrealized losses on loans held for sale that are carried at lower of cost or market are recognized through the valuation allowance as charges to income. Non-refundable fees and direct loan origination costs related to loans held for sale carried at the lower of cost or market are recognized as part of the cost basis of the loan. Gains and losses on sales of loans held for sale are determined using the aggregate method and are recorded in the mortgage banking operations component of non-interest income. For the years ended December 31, 2022 and 2021, we recorded net gains on loans sold of $7.8 million and $34.5 million, respectively. 90 Loans Acquired in Business Combinations: Loans acquired in business combinations are recorded at their fair value at the acquisition date. Establishing the fair value of acquired loans involves a significant amount of judgment, including determining the credit discount based upon historical data adjusted for current economic conditions and other factors. If any of these assumptions are inaccurate actual credit losses could vary significantly from the credit discount used to calculate the fair value of the acquired loans. Acquired loans are evaluated upon acquisition and classified as either purchased credit-deteriorated or purchased non-credit-deteriorated. Purchased credit-deteriorated (PCD) loans have experienced more than insignificant credit deterioration since origination. For PCD loans, an allowance for credit losses is determined at the acquisition date using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The loan’s fair value is grossed up for the allowance for credit losses and becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through a provision for credit losses. For purchased non-credit-deteriorated loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income over the life of the loan. While credit discounts are included in the determination of the fair value for non-credit-deteriorated loans, since these discounts are expected to be accreted over the life of the loans, they cannot be used to offset the allowance for credit losses that must be recorded at the acquisition date. As a result, an allowance for credit losses is determined at the acquisition date using the same methodology as other loans held for investment and is recognized as a provision for credit losses. Any subsequent deterioration (improvement) in credit quality is recognized by recording (recapturing) a provision for credit losses. Income Recognition on Nonaccrual Loans and Securities: Interest on loans and securities is accrued as earned unless management doubts the collectability of the asset or the unpaid interest. Interest accruals on loans are generally discontinued when loans become 90 days past due for payment of interest or principal and the loans are then placed on nonaccrual status. All previously accrued but uncollected interest is deducted from interest income upon transfer to nonaccrual status. For any future payments collected, interest income is recognized only upon management’s assessment that there is a strong likelihood that the full amount of a loan will be repaid or recovered. Management’s assessment of the likelihood of full repayment involves judgment including determining the fair value of the underlying collateral which can be impacted by the economic environment. A loan may be put on nonaccrual status sooner than this policy would dictate if, in management’s judgment, the amounts owed, principal or interest may be uncollectable. While less common, similar interest reversal and nonaccrual treatment is applied to investment securities if their ultimate collectability becomes questionable. Loans modified due to the COVID-19 pandemic are considered current if they are less than 30 days past due on the contractual payments at the time the loan modification program was put in place and therefore continue to accrue interest unless the interest is being waived. Provision and Allowance for Credit Losses - Loans: The methodology for determining the allowance for credit losses - loans is considered a critical accounting estimate by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for credit losses - loans. Among the material estimates required to establish the allowance for credit losses - loans are: a reasonable and supportable forecast; a reasonable and supportable forecast period and reversion period; value of collateral; strength of guarantors; the amount and timing of future cash flows for loans individually evaluated; and determination of the qualitative loss factors. All of these estimates are susceptible to significant change. The allowance for credit losses - loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. The Bank has elected to exclude accrued interest receivable from the amortized cost basis in their estimate of the allowance for credit losses - loans. The provision for credit losses 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 Company has established systematic methodologies for the determination of the adequacy of the Company’s allowance for credit losses - loans. The methodologies are set forth in a formal policy and take into consideration the need for a valuation allowance for loans evaluated on a collective (pool) basis which have similar risk characteristics as well as allowances that are tied to individual loans that do not share risk characteristics. The Company increases its allowance for credit losses - loans by charging the provision for credit losses. Losses related to specific assets are applied as a reduction of the carrying value of the assets and charged against the allowance for credit loss reserve when management believes the uncollectibility of a loan balance is confirmed. Recoveries on previously charged off loans are credited to the allowance for credit losses - loans. Management estimates the allowance for credit losses - loans using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses - loans 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 allowance for credit losses - loans is measured on a collective (pool) basis when similar risk characteristics exist. In estimating the component of the allowance for credit losses for loans that share common risk characteristics, loans are pooled based on loan type and areas of risk concentration. For loans evaluated collectively, the allowance for credit losses is calculated using life of loan historical losses adjusted for economic forecasts and current conditions. 91 For commercial real estate, multifamily real estate, construction and land, commercial business and agricultural loans with risk rating segmentation, historical credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and risk rating. For one- to four- family residential loans, consumer loans, home equity lines of credit, small business loans, and small balance commercial real estate loans, historical credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and delinquency status. These models calculate an expected life-of-loan loss percentage for each loan category by calculating the probability of default, based on the migration of loans from performing to loss by risk rating or delinquency categories using historical life-of-loan analysis and the severity of loss, based on the aggregate net lifetime losses incurred for each loan pool. For credit cards, historical credit loss assumptions are estimated using a model that calculates an expected life-of-loan loss percentage for each loan category by considering the historical cumulative losses based on the aggregate net lifetime losses incurred for each loan pool. For loans evaluated collectively, management uses economic indicators to adjust the historical loss rates so that they better reflect management’s expectations of future conditions over the remaining lives of the loans in the portfolio based on reasonable and supportable forecasts. These economic indicators are selected based on correlation to the Company’s historical credit loss experience and are evaluated for each loan category. The economic indicators evaluated include the unemployment rate, gross domestic product, real estate price indices and growth, industrial employment, corporate profits, the household consumer debt service ratio, the household mortgage debt service ratio, and single family median home price growth. Management considers various economic scenarios and forecasts when evaluating the economic indicators and weighs the probability of various scenarios to arrive at the forecast that most reflects management’s expectations of future conditions. The allowance for credit losses is then adjusted for the period in which those forecasts are considered to be reasonable and supportable. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, the adjustments discontinue to be applied so that the model reverts back to the historical loss rates using a straight line reversion method. Management selected a reasonable and supportable forecast period of 12 months with a reversion period of 12 months. Both the reasonable and supportable forecast period and the reversion period are periodically reviewed by management. Further, for loans evaluated collectively, management also considers qualitative and environmental factors for each loan category to adjust for differences between the historical periods used to calculate historical loss rates and expected conditions over the remaining lives of the loans in the portfolio. In determining the aggregate adjustment needed, management considers the financial condition of the borrowers, the nature and volume of the loans, the remaining terms and the extent of prepayments on the loans, the volume and severity of past due and classified loans as well as the value of the underlying collateral on loans in which the collateral dependent practical expedient has not been used. Management also considers the Company’s lending policies, the quality of the Company’s credit review system, the quality of the Company’s management and lending staff, and the regulatory and economic environments in the areas in which the Company’s lending activities are concentrated. Loans that do not share risk characteristics with other loans in the portfolio are individually evaluated for impairment and are not included in the collective evaluation. Factors involved in determining whether a loan should be individually evaluated include, but are not limited to, the financial condition of the borrower and the value of the underlying collateral. Expected credit losses for loans evaluated individually are measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or when the Bank determines that foreclosure is probable, the expected credit loss is measured based on the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. As a practical expedient, the Bank measures the expected credit loss for a loan using the fair value of the collateral, if repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the Bank’s assessment as of the reporting date. In both cases, if the fair value of the collateral is less than the amortized cost basis of the loan, the Bank will recognize an allowance as the difference between the fair value of the collateral, less costs to sell (if applicable) at the reporting date and the amortized cost basis of the loan. If the fair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis will be limited to the amount previously charged-off. Subsequent changes in the expected credit losses for loans evaluated individually are included within the provision for credit losses in the same manner in which the expected credit loss initially was recognized or as a reduction in the provision that would otherwise be reported. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Bank. Some of the Bank’s loans are reported as troubled debt restructures (TDRs). Loans are reported as TDRs when the Bank grants a concession to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for a transaction of similar risk. The allowance for credit losses on a TDR is determined using the same method as all other loans held for investment, except when the value of the concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method the allowance for credit losses is determined by discounting the expected future cash flows at the original interest rate of the loan. 92 Loan Origination and Commitment Fees: Loan origination fees, net of certain specifically defined direct loan origination costs, are deferred and recognized as an adjustment of the loans’ interest yield using the level-yield method over the contractual term of each loan adjusted for actual loan prepayment experience. Loan commitment fees are deferred until the expiration of the commitment period unless management believes there is a remote likelihood that the underlying commitment will be exercised, in which case the fees are amortized to fee income using the straight-line method over the commitment period. If a loan commitment is exercised, the deferred commitment fee is accounted for in the same manner as a loan origination fee. Deferred commitment fees associated with expired commitments are recognized as fee income. Allowance for Credit Losses - unfunded loan commitments: An allowance for credit losses - unfunded loan commitments is maintained at a level that, in the opinion of management, is adequate to absorb expected credit losses associated with the contractual life of the Bank’s commitments to lend funds under existing agreements such as letters or lines of credit. The Bank uses a methodology for determining the allowance for credit losses - unfunded loan commitments that applies the same segmentation and loss rate to each pool as the funded exposure adjusted for probability of funding. Draws on unfunded loan commitments that are considered uncollectible at the time funds are advanced are charged to the allowance for credit losses on off-balance sheet exposures. Changes in the allowance for credit losses - unfunded loan commitments are recognized as provision for (or recapture of) credit loss expense and added to the allowance for credit losses - unfunded loan commitments, which is included in other liabilities in the Consolidated Statements of Financial Condition. Real Estate Owned: Property acquired by foreclosure or deed in lieu of foreclosure is recorded at the estimated fair value of the property, less expected selling costs. Development and improvement costs relating to the property may be capitalized, while other holding costs are expensed. The carrying value of the property is periodically evaluated by management and, if necessary, allowances are established to reduce the carrying value to net realizable value. Gains or losses at the time the property is sold are charged or credited to operations in the period in which they are realized. The amounts the Bank will ultimately recover from real estate held for sale may differ substantially from the carrying value of the assets because of market factors beyond the Bank’s control or because of changes in the Bank’s strategies for recovering the investment. Property and Equipment: Property and equipment is carried at cost less accumulated depreciation. Depreciation is based upon the straight- line method applied to individual assets and groups of assets acquired in the same year over the lesser of their estimated useful lives or the related lease terms of the assets: Buildings and leased improvements Furniture and equipment 10–39 years 3–10 years Routine maintenance, repairs and replacement costs are expensed as incurred. Expenditures which significantly increase values or extend useful lives are capitalized. The Company reviews buildings, leasehold improvements and equipment for impairment whenever events or changes in circumstances indicate that the undiscounted cash flows for the property are less than its carrying value. If identified, an impairment loss is recognized through a charge to earnings based on the fair value of the property. Property is classified as held for sale when the Company commits to a plan to sell the property and is actively marketing the property for sale. Held for sale property is recorded at the lower of the estimated fair value of the property, less expected selling costs, or the book value at the date the property is transferred to held for sale. Depreciation is not recorded on held for sale property. Leases: The Company leases retail space, office space, storage space, and equipment under operating leases. Most leases require the Company to pay real estate taxes, maintenance, insurance and other similar costs in addition to the base rent. Certain leases also contain lease incentives, such as tenant improvement allowances and rent abatement. Variable lease payments are recognized as lease expense as they are incurred. We record an operating lease right of use (ROU) asset and an operating lease liability (lease liability) for operating leases with a lease term greater than 12 months. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Accordingly, ROU assets are reduced by tenant improvement allowances from landlords plus any prepaid rent. We do not separate lease and non-lease components of contracts. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. Many of our leases contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule, which are factored into our determination of lease payments when appropriate. Substantially all of the leases provide the Company with the option to extend the lease term one or more times following expiration of the initial term. The ROU asset and lease liability terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. 93 Goodwill: Goodwill represents the excess of the purchase consideration paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination and is not amortized but is reviewed annually, or more frequently as current circumstances and conditions warrant, for impairment. The Company completes its annual review of goodwill as of December 31. An assessment of qualitative factors is completed to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The qualitative assessment involves judgment by management on determining whether there have been any triggering events that have occurred which would indicate potential impairment. If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed. The quantitative goodwill impairment test is used to identify the existence of impairment and the amount of impairment loss and compares the reporting unit’s estimated fair values, including goodwill, to its carrying amount. If the fair value exceeds the carrying amount then goodwill is not considered impaired. If the carrying amount exceeds its fair value, an impairment loss would be recognized equal to the amount of excess, limited to the amount of total goodwill allocated to the reporting unit. The impairment loss would be recognized as a charge to earnings. The disposal of a portion of a reporting unit that meets the definition of a business requires goodwill to be allocated for purposes of determining the gain or loss on disposal. Other Intangible Assets: Other intangible assets consist primarily of core deposit intangibles (CDI), which are amounts recorded in business combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the client relationships associated with the deposits. CDI is being amortized on an accelerated basis over a weighted average estimated useful life of eight years to ten years. These assets are reviewed at least annually for events or circumstances that could impact their recoverability. These events could include loss of the underlying core deposits, increased competition or adverse changes in the economy. To the extent other identifiable intangible assets are deemed unrecoverable, impairment losses are recorded in other non-interest expense to reduce the carrying amount of the assets. Mortgage and Small Business Administration (SBA) Servicing Rights: Servicing assets are recognized as separate assets when rights are acquired through purchase or sale of loans. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage and SBA loans, the fair value of the servicing right is estimated and capitalized. Fair values are estimated based on an independent dealer analysis of discounted cash flows. Capitalized mortgage servicing rights are reported in other assets and are amortized into mortgage banking operations in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Capitalized SBA servicing rights are reported in other assets and are carried at fair value. Changes in the fair value of SBA servicing rights are recognized into miscellaneous non-interest income. Mortgage servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics for the underlying loans, such as interest rate, balance outstanding, loan type, age and remaining term, and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If the Company later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income. Servicing fee income is recorded for fees earned for servicing loans. Servicing fee income is reflected in mortgage banking operations for mortgage servicing rights and in miscellaneous non-interest income for SBA servicing rights on the Consolidated Statements of Operations. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Bank-Owned Life Insurance: The Bank has purchased, or acquired through mergers, life insurance policies in connection with the implementation of certain executive supplemental income, salary continuation and deferred compensation retirement plans. These policies provide protection against the adverse financial effects that could result from the death of a key employee and provide tax-exempt income to offset expenses associated with the plans. It is the Bank’s intent to hold these policies as a long-term investment; however, there may be an income tax impact if the Bank chooses to surrender certain policies. Although the lives of individual current or former management-level employees are insured, the Bank is the respective owner and sole or partial beneficiary. BOLI is carried at the cash surrender value (CSV) of the underlying insurance contract. Changes in the CSV and any death benefits received in excess of the CSV are recognized as non-interest income. Derivative Instruments: Derivatives include “off-balance-sheet” financial products, the value of which is dependent on the value of underlying financial assets, such as stock, bonds, foreign currency, or a reference rate or index. Such derivatives include “forwards,” “futures,” “options” or “swaps.” The Bank uses an interest rate swap program which involves the receipt of fixed-rate amounts from a counterparty in exchange for variable-rate payments over the life of the agreements without exchange of the underlying notional amount. Such derivatives are used to hedge the variable cash flows associated with existing variable-rate assets. These interest rate swaps qualify as cash flow hedging instruments so gains and losses are recorded in AOCI to the extent the hedge is effective. Gains and losses on the interest rate swaps are reclassified from AOCI to earnings in the period the hedged transaction affects earnings and are included in interest income. Amounts reported in AOCI related to derivatives will be reclassified to interest income as interest payments are received on the Company’s variable-rate assets. The Bank is a party to $400.0 million in notional amounts of these types of interest rate swaps at December 31, 2022. In addition, the Bank uses an interest rate swap program for commercial loan clients that provides the client with a variable rate loan and enters into an interest rate swap allowing them to effectively fix their loan interest rates. These client swaps are matched with third party swaps with qualified broker/dealer or banks to offset the risk. At December 31, 2022, the Bank had $440.7 million in notional amounts of these client interest rate swaps outstanding, with an equal amount of offsetting third party swaps also in place. The fair value adjustments for these swaps are reflected in other assets or other liabilities as appropriate. 94 Further, as a part of its mortgage banking activities, the Company issues “rate lock” commitments to one- to four-family loan borrowers and obtains offsetting “best efforts” delivery commitments from purchasers of loans. The Company uses forward contracts for the sale of mortgage-backed securities and mandatory delivery commitments for the sale of loans to hedge one- to four-family loan “rate lock” commitments and one- to four-family loans held for sale. The commitments to originate mortgage loans held for sale and the related delivery contracts are considered derivatives. The Company recognizes all derivatives as either assets or liabilities in the balance sheet and requires measurement of those instruments at fair value through adjustments to current earnings. None of these residential mortgage loan related derivatives are designated as hedging instruments for accounting purposes. Rather, they are accounted for as free-standing derivatives, or economic hedges, and the Company reports changes in fair values of its derivatives in current period net income. The fair values for these instruments, which generally change as a result of changes in the level of market interest rates, are estimated based on dealer quotes and secondary market sources. Assumptions used include rate assumptions based on historical information, current mortgage interest rates, the stage of completion of the underlying application and underwriting process, the time remaining until the expiration of the derivative loan commitment, and the expected net future cash flows related to the associated servicing of the loan. Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee has the right to pledge or exchange the transferred assets beyond a trivial benefit, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Advertising Expenses: Advertising costs are expensed as incurred. Costs related to production of advertising are considered incurred when the advertising is first used. Income Taxes: The Company files a consolidated income tax return including all of its wholly-owned subsidiaries on a calendar year basis. Income taxes are accounted for using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates which are expected to be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’s income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period of change. A valuation allowance is recognized as a reduction to deferred tax assets when management determines it is more likely than not that deferred tax assets will not be available to offset future income tax liabilities. Accounting standards for income taxes prescribe a recognition threshold and measurement process for financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a tax return, and also provides guidance on the de-recognition of previously recorded benefits and their classification, as well as the proper recording of interest and penalties, accounting in interim periods, disclosures and transition. The Company periodically reviews its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This review takes into consideration the status of current taxing authorities’ examinations of the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment. Stock-Based Compensation: The Company maintains a number of stock-based incentive plans, which are discussed in more detail in Note 13, Stock-Based Compensation Plans. Under these plans, the Company compensates employees and directors with time-based restricted stock and restricted stock unit grants. Some restricted stock awards include performance-based and market-based goals that impact the number of shares that ultimately vest based on the level of goal achievement. The Company measures the cost of employee or director services received in exchange for an award of equity instruments based on the fair value of the award, which is the intrinsic value on the grant date. This cost is recognized as expense in the Consolidated Statements of Operations ratably over the vesting period of the award. Any tax benefit or deficiency is recorded as income tax benefit or expense in the period the shares vest. Excess tax benefits are classified along with other income tax cash flows as an operating activity. The Company issues restricted stock and restricted stock unit awards which vest over a one or three year period during which time the employee or director accrues or receives dividends and may have full voting rights depending on the terms of the grant. Earnings Per Share: Earnings per common share is computed under the two-class method. Pursuant to the two-class method, non-vested stock-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and are included in the computation of EPS. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Application of the two-class method resulted in the equivalent earnings per share to the treasury method. Basic earnings per common share is computed by dividing net earnings allocated to common shareholders by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method. Comprehensive Income: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. In addition, certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, unrealized gains and losses on interest rate swaps used in cash flow hedges and changes in fair value of junior subordinated debentures related to instrument specific credit risk, are reported as a separate component of the equity section of the Consolidated Statements of Financial Condition, and such items, along with net income, are components of comprehensive income which is reported in the Consolidated Statements of Comprehensive Income. 95 Business Segments: The Company is managed by legal entity and not by lines of business. The Bank is a community oriented commercial bank chartered in the State of Washington. The Bank’s primary business is that of a traditional banking institution, gathering deposits and originating loans for portfolio in its respective primary market areas. The Bank offers a wide variety of deposit products to its consumer and commercial clients. Lending activities include the origination of real estate, commercial/agriculture business and consumer loans. The Bank is also an active participant in the secondary market, originating residential loans for sale on both a servicing released and servicing retained basis. In addition to interest income on loans and investment securities, the Bank receives other income from deposit service charges, loan servicing fees and from the sale of loans and investments. The performance of the Bank is reviewed by the Company’s executive management and Board of Directors on a monthly basis. All of the executive officers of the Company are members of the Bank’s management team. The Company has determined that its current business and operations consist of a single business segment and a single reporting unit. Reclassification: Certain reclassifications have been made to the prior years’ consolidated financial statements and/or schedules to conform to the current year’s presentation. These reclassifications may have an impact on certain reported amounts and ratios for the prior periods. These reclassifications had no effect on retained earnings or net income as previously presented and the effect of these reclassifications is considered immaterial. Note 2: ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED Reference Rate Reform (Topic 848) In March 2020, the Financial Accounting Standards Board (FASB) issued guidance within Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, in response to the scheduled discontinuation of LIBOR on December 31, 2021. The amendments in this ASU provide optional guidance designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements (e.g., loans, debt securities, derivatives, borrowings) necessitated by reference rate reform. Since the issuance of this guidance, the publication cessation of U.S. dollar LIBOR has been extended to June 30, 2023. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of Sunset Date of Topic 848. This ASU defers the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. This deferral of the sunset date is in response to the extension of the publication cessation date to June 30, 2023 noted above which was beyond the current sunset date of December 31, 2022. The amendments in this ASU are effective upon the issuance date of December 2022. The following optional expedients for applying the requirements of certain Topics or Industry Subtopics in the Codification are permitted for contracts that are modified because of reference rate reform and that meet certain scope guidance: 1) modifications of contracts within the scope of Topics 310, Receivables, and 470, Debt, should be accounted for by prospectively adjusting the effective interest rate; 2) modifications of contracts within the scope of Topic 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required under this Topic for modifications not accounted for as separate contracts; 3) modifications of contracts do not require an entity to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract under Subtopic 815-15, Derivatives and Hedging- Embedded Derivatives; and 4) for other Topics or Industry Subtopics in the Codification, the amendments in this ASU also include a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. The amendments in this ASUs are effective upon the issuance date of March 12, 2020, and applies to contract modifications made and new hedging relationships entered into through December 31, 2022. The Company has elected certain expedients related to individual hedge relationships. The Company will be able to use other expedients in the Reference Rate Reform guidance to manage through the transition from LIBOR, specifically as they relate to loans, leases and hedging relationships. The adoption of this accounting guidance did not have a material impact on the Company’s Consolidated Financial Statements. Financial Instruments – Credit Losses (Topic 326) In March 2022, the FASB issued guidance within ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments in this ASU eliminate the current troubled debt restructuring (TDR) recognition and measurement guidance and, instead, require that a creditor evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. 96 These amendments require vintage disclosures including current-period gross write-offs by year of origination for financing receivables. Gross write-off information must be included in the vintage disclosures in accordance with ASC 326-20-50-6, which requires disclosure of the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, as the Company previously adopted the amendments in ASU 2016-13, which is commonly referred to as the current expected credit loss methodology, on January 1, 2020. These amendments should be applied prospectively, though for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative- effect adjustment to retained earnings in the period of adoption. The adoption of this ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements. Fair Value Measurement (Topic 820) In June 2022, the FASB issued guidance within ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The amendments in this ASU affect all entities that have investments in equity securities measured at fair value that are subject to a contractual sale restriction. These amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments in this ASU are effective for fiscal years, beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The adoption of this ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements. 97 Note 3: SECURITIES The amortized cost, gross unrealized gains and losses, and estimated fair value of securities at December 31, 2022 and December 31, 2021 are summarized as follows (in thousands): Trading: Corporate bonds Available-for-Sale: U.S. Government and agency obligations Municipal bonds Corporate bonds Mortgage-backed or related securities Asset-backed securities Held-to-Maturity: U.S. Government and agency obligations Municipal bonds Corporate bonds Mortgage-backed or related securities Trading: Corporate bonds Available-for-Sale: U.S. Government and agency obligations Municipal bonds Corporate bonds Mortgage-backed or related securities Asset-backed securities December 31, 2022 Amortized Cost Fair Value $ $ 27,203 $ 27,203 $ 28,694 28,694 December 31, 2022 Gross Unrealized Losses Gross Unrealized Gains Allowance for Credit Losses Amortized Cost Fair Value $ 56,344 $ 301,449 133,334 2,505,172 222,478 $ 3,218,777 $ 8 $ 530 — 885 40 1,463 $ (1,244) $ (40,770) (11,481) (366,721) (10,993) (431,209) $ 55,108 — $ 261,209 — 121,853 — 2,139,336 — — 211,525 — $ 2,789,031 December 31, 2022 Gross Unrealized Losses Gross Unrealized Gains Fair Value Allowance for Credit Losses Amortized Cost $ 312 $ 503,117 2,961 611,577 $ 1,117,967 $ — $ 109 — — 109 $ (7) $ (70,907) (16) (104,966) (175,896) $ 305 $ 432,319 2,945 506,611 942,180 $ — (183) (196) — (379) December 31, 2021 Amortized Cost Fair Value $ $ 27,203 $ 27,203 $ 26,981 26,981 Gross Unrealized Gains December 31, 2021 Gross Unrealized Losses Allowance for Credit Losses Amortized Cost Fair Value $ 201,101 $ 293,761 114,427 2,837,480 206,391 $ 3,653,160 $ 852 $ 15,171 3,103 17,749 52 36,927 $ (621) $ (320) (183) (49,961) (9) (51,094) $ — $ 201,332 — 308,612 — 117,347 — 2,805,268 — 206,434 — $ 3,638,993 98 Held-to-Maturity: U.S. Government and agency obligations Municipal bonds Corporate bonds Mortgage-backed or related securities Gross Unrealized Gains December 31, 2021 Gross Unrealized Losses Fair Value Allowance for Credit Losses Amortized Cost $ $ 316 $ 420,555 3,092 97,392 521,355 $ 3 $ 20,743 — 1,171 21,917 $ — $ (1,393) (3) (23) (1,419) $ 319 $ 439,905 3,089 98,540 541,853 $ — (203) (230) — (433) Accrued interest receivable on held-to-maturity debt securities was $4.8 million and $3.3 million as of December 31, 2022 and December 31, 2021, and was $12.4 million and $10.1 million on available-for-sale debt securities at December 31, 2022 and December 31, 2021, respectively. Accrued interest receivable on securities is reported in accrued interest receivable on the Consolidated Statements of Financial Condition and is excluded from the calculation of the allowance for credit losses. At December 31, 2022 and December 31, 2021, the gross unrealized losses and the fair value for securities available-for-sale aggregated by the length of time that individual securities have been in a continuous unrealized loss position were as follows (in thousands): Less Than 12 Months Fair Value Unrealized Losses December 31, 2022 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Available-for-Sale: U.S. Government and agency obligations Municipal bonds Corporate bonds Mortgage-backed or related securities Asset-backed securities Available-for-Sale: U.S. Government and agency obligations Municipal bonds Corporate bonds Mortgage-backed or related securities Asset-backed securities $ (882) $ 33,407 $ 188,920 108,187 930,566 201,437 (1,244) (40,770) (11,481) (366,721) (10,993) $ 1,462,517 $ (137,551) $ 1,222,815 $ (293,658) $ 2,685,332 $ (431,209) 50,139 $ 222,827 121,253 2,089,676 201,437 16,732 $ 33,907 13,066 1,159,110 — (15,178) (1,934) (276,184) — (25,592) (9,547) (90,537) (10,993) (362) $ Less Than 12 Months Fair Value Unrealized Losses December 31, 2021 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses $ — $ 40,397 8,009 1,307,411 3,382 $ 1,359,199 $ — $ (221) (121) (38,028) (9) 71,306 $ 8,541 9,938 721,454 — (38,379) $ 811,239 $ (621) $ (99) (62) (11,933) — 71,306 $ 48,938 17,947 2,028,865 3,382 (12,715) $ 2,170,438 $ (621) (320) (183) (49,961) (9) (51,094) At December 31, 2022, there were 298 securities—available-for-sale with unrealized losses, compared to 97 at December 31, 2021. Management does not believe that any individual unrealized loss as of December 31, 2022 or December 31, 2021 resulted from credit loss. The decline in fair market value of these securities was generally due to changes in interest rates and changes in market-desired spreads subsequent to their purchase. There were no sales of securities—trading for the years ended December 31, 2022, 2021 or 2020. There were no securities—trading in a nonaccrual status at December 31, 2022 or December 31, 2021. Net unrealized holding gains of $1.7 million were recognized in 2022 and net unrealized holding gains of $2.0 million were recognized 2021. 99 The following table presents gross gains and losses on sales and partial calls of securities available-for-sale (in thousands): For the Year Ended December 31, 2021 2020 2022 Available-for-Sale: Gross Gains Gross Losses Balance, end of the period $ $ 522 $ (3,770) (3,248) $ 993 $ (495) 498 $ 899 (445) 454 There were no securities—available-for-sale in a nonaccrual status at December 31, 2022 and 2021. The Company sold no held-to-maturity securities and had no partial calls of securities during the year ended December 31, 2022 and sold one held-to-maturity security with a resulting net gain of $3,000 and had partial calls of securities that resulted in a net loss of $65,000 during the year ended December 31, 2021. There were no sales of securities—held-to-maturity during the year ended December 31, 2020, although there were partial calls of securities that resulted in a net loss of $216,000 for the year ended December 31, 2020. There were no securities— held-to-maturity in a nonaccrual status at December 31, 2022 and 2021. During the year ended December 31, 2022, the Company sold no equity securities, compared to a $4.8 million equity security with a resulting net gain of $46,000 during the year ended December 31, 2021, and two equity securities totaling $1.06 billion for the year ended December 31, 2020 with a resulting net loss of $177,000. During the year ended December 31, 2020, the Company also sold Visa Class B stock with a net gain of $519,000. The stock was previously carried at a zero-cost basis due to transfer restrictions and uncertainty of litigation. The following table presents the amortized cost and estimated fair value of securities at December 31, 2022, by contractual maturity and does not reflect any required periodic payments (in thousands). Expected maturities will differ from contractual maturities because some securities may be called or prepaid with or without call or prepayment penalties. Trading December 31, 2022 Available-for-Sale Held-to-Maturity Maturing within one year Maturing after one year through five years Maturing after five years through ten years Maturing after ten years $ $ — $ — — 27,203 27,203 $ Amortized Cost Fair Value 3,624 $ Fair Value Amortized Cost Fair Value 19,161 — $ 26,090 227,123 — 20,756 472,026 — 28,694 876,173 2,086,295 28,694 $ 3,218,777 $ 2,789,031 $ 1,117,967 $ 942,180 Amortized Cost 19,371 $ 26,852 21,832 1,049,912 243,507 526,454 2,445,192 3,587 $ The following table presents, as of December 31, 2022, investment securities which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law (in thousands): Purpose or beneficiary: State and local governments public deposits Interest rate swap counterparties Repurchase transaction accounts Other Total pledged securities Carrying Value December 31, 2022 Amortized Cost Fair Value $ $ 261,878 $ 6,384 330,728 2,450 601,440 $ 264,582 $ 6,826 339,227 2,450 613,085 $ 231,405 6,202 277,369 2,416 517,392 100 The Company monitors the credit quality of held-to-maturity debt securities through the use of credit ratings which are reviewed and updated quarterly. The Company’s non-rated held-to-maturity debt securities are primarily United States government sponsored enterprise debentures carrying minimal to no credit risk. The non-rated corporate bonds primarily consist of Community Reinvestment Act related bonds secured by loan instruments from low to moderate income borrowers. The remaining non-rated held-to-maturity debt securities balance is comprised of local municipal debt from within the Company’s geographic footprint and is monitored through quarterly or annual financial review. This municipal debt is predominately essential service or unlimited general obligation backed debt. The following tables summarize the amortized cost of held-to-maturity debt securities by credit rating at December 31, 2022 and December 31, 2021 (in thousands): AAA/AA/A Not Rated AAA/AA/A Not Rated December 31, 2022 U.S. Government and agency obligations Municipal bonds Corporate bonds Mortgage-backed or related securities $ $ — $ 312 312 $ 492,105 $ 11,012 503,117 $ 500 $ 2,461 2,961 $ 16,681 $ 594,896 611,577 $ December 31, 2021 U.S. Government and agency obligations Municipal bonds Corporate bonds Mortgage-backed or related securities $ $ — $ 316 316 $ 406,363 $ 14,192 420,555 $ 500 $ 2,592 3,092 $ — $ 97,392 97,392 $ Total 509,286 608,681 1,117,967 Total 406,863 114,492 521,355 The following tables present the activity in the allowance for credit losses for held-to-maturity debt securities by major type for the year ended December 31, 2022 and December 31, 2021 (in thousands): U.S. Government and agency obligations For the Year Ended December 31, 2022 Mortgage- backed or related securities Municipal bonds Corporate bonds Total Allowance for credit losses – securities Beginning Balance Recapture of provision for credit losses Securities charged-off Recoveries Ending Balance $ $ — $ — — — — $ 203 $ (20) — — 183 $ 230 $ (63) — 29 196 $ — $ — — — — $ 433 (83) — 29 379 U.S. Government and agency obligations For the Year Ended December 31, 2021 Mortgage- backed or related securities Corporate bonds Municipal bonds Total Allowance for credit losses – securities Beginning Balance Provision for credit losses Securities charged-off Ending Balance $ $ — $ — — — $ 59 $ 144 — 203 $ 35 $ 445 (250) 230 $ — $ — — — $ 94 589 (250) 433 U.S. Government and agency obligations For the Year Ended December 31, 2020 Mortgage- backed or related securities Corporate bonds Municipal bonds Total Allowance for credit losses – securities Beginning Balance Impact of adopting ASC 326 Provision for credit losses Ending Balance — $ — — — $ — $ 28 31 59 $ — $ 35 — 35 $ — $ — — — $ — 63 31 94 $ $ 101 Note 4: LOANS RECEIVABLE AND THE ALLOWANCE FOR CREDIT LOSSES During the first quarter of 2022, the Company changed the segmentation of its Small Balance CRE loan category based on the common risk characteristics used to measure the allowance for credit losses - loans. The presentation of loans receivable at December 31, 2021 has been updated to match the segmentation used in the current period presentation. The following table presents the loans receivable at December 31, 2022 and 2021 by class (dollars in thousands). December 31, 2022 December 31, 2021 Amount Percent of Total Amount Percent of Total Commercial real estate: Owner-occupied Investment properties Small balance CRE Multifamily real estate Construction, land and land development: Commercial construction Multifamily construction One- to four-family construction Land and land development Commercial business: Commercial business Small business scored (1) Agricultural business, including secured by farmland(2) One- to four-family residential Consumer: Consumer—home equity revolving lines of credit Consumer—other Total loans Less allowance for credit losses - loans Net loans $ 845,320 1,589,975 1,200,251 645,071 8.3 % $ 15.7 11.8 6.4 831,623 1,674,027 1,281,863 530,885 184,876 325,816 647,329 328,475 1,283,407 947,092 295,077 1,173,112 566,291 114,632 10,146,724 (141,465) 1.8 3.2 6.4 3.2 12.7 9.3 2.9 11.6 5.6 1.1 100.0 % $ 10,005,259 $ 167,998 259,116 568,753 313,454 1,170,780 792,310 280,578 657,474 458,533 97,369 9,084,763 (132,099) 8,952,664 9.2 % 18.4 14.1 5.8 1.8 2.9 6.3 3.5 12.9 8.7 3.1 7.2 5.0 1.1 100.0 % (1) Includes $7.6 million and $132.6 million of SBA Paycheck Protection Program (PPP) loans as of December 31, 2022 and December 31, 2021, respectively. (2) Includes $334,000 of SBA PPP loans as of December 31, 2022 and $1.4 million as of December 31, 2021. Loan amounts are net of unearned loan fees in excess of unamortized costs of $8.1 million as of December 31, 2022 and $8.6 million as of December 31, 2021. Net loans include net discounts on acquired loans of $6.6 million and $9.7 million as of December 31, 2022 and 2021, respectively. Net loans does not include accrued interest receivable. Accrued interest receivable on loans was $39.8 million as of December 31, 2022 and $29.2 million as of December 31, 2021 and was reported in accrued interest receivable on the Consolidated Statements of Financial Condition. At December 31, 2022 and 2021, the Company had pledged $6.5 billion and $5.4 billion of loans as collateral for FHLB and other borrowings, respectively. The Company’s loans to directors, executive officers and related entities are on substantially the same terms and underwriting as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectability. Such loans had balances of $683,000 and $700,000 at December 31, 2022 and 2021, respectively. Purchased credit-deteriorated and purchased non-credit-deteriorated loans. Loans acquired in business combinations are recorded at their fair value at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased credit-deteriorated (PCD) or purchased non-credit-deteriorated. There were no PCD loans at December 31, 2022 or 2021. Troubled Debt Restructurings. Loans are reported as TDRs when the Bank grants one or more concessions to a borrower experiencing financial difficulties that it would not otherwise consider. The Company’s TDRs have generally not involved forgiveness of amounts due, but almost always include a modification of multiple factors; the most common combination includes interest rate, payment amount and maturity date. 102 As of December 31, 2022 and 2021, the Company had TDRs of $4.3 million and $5.5 million, respectively. The Company had no commitments to advance additional funds related to TDRs as of both December 31, 2022 and 2021. There were no new TDRs that occurred during the years ended December 31, 2022 or December 31, 2021. There were no TDRs which incurred a payment default within the years ended December 31, 2022 and 2021, for which the payment default occurred within twelve months of the restructure date. A default on a TDR results in either a transfer to nonaccrual status or a partial charge- off, or both Credit Quality Indicators: To appropriately and effectively manage the ongoing credit quality of the Company’s loan portfolio, management has implemented a risk-rating or loan grading system for its loans. The system is a tool to evaluate portfolio asset quality throughout each applicable loan’s life as an asset of the Company. Generally, loans are risk rated on an aggregate borrower/relationship basis with individual loans sharing similar ratings. There are some instances when specific situations relating to individual loans will provide the basis for different risk ratings within the aggregate relationship. Loans are graded on a scale of 1 to 9. A description of the general characteristics of these categories is shown below: Overall Risk Rating Definitions: Risk-ratings contain both qualitative and quantitative measurements and take into account the financial strength of a borrower and the structure of the loan or lease. Consequently, the definitions are to be applied in the context of each lending transaction and judgment must also be used to determine the appropriate risk rating, as it is not unusual for a loan or lease to exhibit characteristics of more than one risk-rating category. Consideration for the final rating is centered on the borrower’s ability to repay, in a timely fashion, both principal and interest. The Company’s risk-rating and loan grading policies are reviewed and approved annually. There were no material changes in the risk-rating or loan grading system for the periods presented. Risk Ratings 1-5: Pass Credits with risk ratings of 1 to 5 meet the definition of a pass risk rating. The strength of credits vary within the pass risk ratings, ranging from a risk rated 1 being an exceptional credit to a risk rated 5 being an acceptable credit that requires a more than normal level of supervision. Risk Rating 6: Special Mention A credit with potential weaknesses that deserves management’s close attention is risk rated a 6. If left uncorrected, these potential weaknesses will result in deterioration in the capacity to repay debt. A key distinction between Special Mention and Substandard is that in a Special Mention credit, there are identified weaknesses that pose potential risk(s) to the repayment sources, versus well defined weaknesses that pose risk(s) to the repayment sources. Assets in this category are expected to be in this category no more than 9-12 months as the potential weaknesses in the credit are resolved. Risk Rating 7: Substandard A credit with well-defined weaknesses that jeopardize the ability to repay in full is risk rated a 7. These credits are inadequately protected by either the sound net worth and payment capacity of the borrower or the value of pledged collateral. These are credits with a distinct possibility of loss. Loans headed for foreclosure and/or legal action due to deterioration are rated 7 or worse. Risk Rating 8: Doubtful A credit with an extremely high probability of loss is risk rated 8. These credits have all the same critical weaknesses that are found in a substandard loan; however, the weaknesses are elevated to the point that based upon current information, collection or liquidation in full is improbable. While some loss on doubtful credits is expected, pending events may make the amount and timing of any loss indeterminable. In these situations taking the loss is inappropriate until the outcome of the pending event is clear. Risk Rating 9: Loss A credit that is considered to be currently uncollectible or of such little value that it is no longer a viable bank asset is risk rated 9. Losses should be taken in the accounting period in which the credit is determined to be uncollectible. Taking a loss does not mean that a credit has absolutely no recovery or salvage value but, rather, it is not practical or desirable to defer writing off the credit, even though partial recovery may occur in the future. 103 e r a t a h t s n a o l g n i v l o v e R . ) s d n a s u o h t n i ( 1 2 0 2 , 1 3 r e b m e c e D d n a 2 2 0 2 , 1 3 r e b m e c e D f o s a e d a r g y b d n a s s a l c y b s n a o l d e t a r - k s i r f o o i l o f t r o p s ’ y n a p m o C e h t t n e s e r p s e l b a t g n i w o l l o f e h T e r a s y a d 0 9 n a h t r e g n o l s d o i r e p r o f d e d n e t x e r o d e w e n e r e r a t a h t s n a o l m r e T . n o i t a n i g i r o f o r a e y y b d e t n e s e r p e r a d n a w o l e b e l b a t e h t n i s n o i t a n i g i r o w e n s a d e t a e r t e r a s n a o l m r e t o t d e t r e v n o c . n o i s n e t x e r o l a w e n e r t n e c e r t s o m e h t f o r a e y e h t n i n o i t a n i g i r o w e n a s a d e t n e s e r p l a t o T s n a o L g n i v l o v e R s n a o L 2 2 0 2 , 1 3 r e b m e c e D n o i t a n i g i r O f o r a e Y y b s n a o L m r e T r o i r P 8 1 0 2 9 1 0 2 0 2 0 2 1 2 0 2 2 2 0 2 : s s a l c y B — — 2 7 0 , 3 8 3 0 , 5 3 1 0 2 0 0 2 — — 2 4 7 0 3 — — — — — — — — 9 2 8 , 2 4 6 5 , 3 1 — — — 1 1 2 , 7 — — — — — — — 6 5 7 , 3 1 0 1 2 , 7 0 8 $ 3 3 8 , 0 1 $ 2 0 9 , 8 4 1 $ 5 9 0 , 7 5 $ 1 7 1 , 4 7 $ 2 7 2 , 0 5 1 $ 7 8 7 , 8 9 1 $ 0 5 1 , 7 6 1 $ d e i p u c c o r e n w o - e t a t s e l a e r l a i c r e m m o C n o i t n e M l a i c e p S d r a d n a t s b u S g n i t a R k s i R s s a P l u f t b u o D s s o L 0 2 3 , 5 4 8 $ 4 3 2 , 1 1 $ 1 5 2 , 9 4 1 $ 5 9 0 , 7 5 $ 4 6 5 , 0 9 $ 3 8 4 , 7 5 1 $ 7 8 7 , 8 9 1 $ 6 0 9 , 0 8 1 $ d e i p u c c o r e n w o - e t a t s e l a e r l a i c r e m m o C l a t o T 5 7 9 , 9 8 5 , 1 $ 3 0 0 , 7 2 $ 6 0 9 , 0 5 5 $ 7 6 6 , 9 6 1 $ 6 3 1 , 6 8 1 $ 6 7 4 , 2 4 1 $ 0 6 1 , 3 2 3 $ 7 2 6 , 0 9 1 $ s e i t r e p o r p t n e m t s e v n i - e t a t s e l a e r l a i c r e m m o C l a t o T — — — 2 0 6 , 7 — — — 2 1 3 , 1 — — — 7 0 0 , 3 — — — — — — — 3 8 2 , 3 — — — — — — — — — — — — 3 7 3 , 2 8 5 , 1 $ 1 9 6 , 5 2 $ 9 9 8 , 7 4 5 $ 7 6 6 , 9 6 1 $ 3 5 8 , 2 8 1 $ 6 7 4 , 2 4 1 $ 0 6 1 , 3 2 3 $ 7 2 6 , 0 9 1 $ s e i t r e p o r p t n e m t s e v n i - e t a t s e l a e r l a i c r e m m o C n o i t n e M l a i c e p S d r a d n a t s b u S g n i t a R k s i R s s a P l u f t b u o D s s o L 104 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1 7 0 , 5 4 6 $ 8 7 6 , 1 $ 0 4 1 , 6 5 1 $ 5 6 6 , 9 2 $ 0 6 4 , 6 4 $ 1 6 9 , 3 9 $ 4 8 7 , 7 7 1 $ 3 8 3 , 9 3 1 $ e t a t s e l a e r y l i m a f i t l u M n o i t n e M l a i c e p S d r a d n a t s b u S g n i t a R k s i R s s a P l u f t b u o D s s o L 1 7 0 , 5 4 6 $ 8 7 6 , 1 $ 0 4 1 , 6 5 1 $ 5 6 6 , 9 2 $ 0 6 4 , 6 4 $ 1 6 9 , 3 9 $ 4 8 7 , 7 7 1 $ 3 8 3 , 9 3 1 $ e t a t s e l a e r y l i m a f i t l u M l a t o T l a t o T s n a o L g n i v l o v e R s n a o L 2 2 0 2 , 1 3 r e b m e c e D n o i t a n i g i r O f o r a e Y y b s n a o L m r e T r o i r P 8 1 0 2 9 1 0 2 0 2 0 2 1 2 0 2 2 2 0 2 — — — 9 4 6 , 7 7 2 2 , 7 7 1 $ 6 7 8 , 4 8 1 $ — — — — 6 1 8 , 5 2 3 $ 6 1 8 , 5 2 3 $ — — — — — — — — — — — — $ $ $ $ — — — 9 7 3 , 6 1 — — — — 0 5 9 , 0 3 6 $ 1 1 7 $ 9 2 3 , 7 4 6 $ 1 1 7 $ — — — — — — — — — — — — — — — — — — — — — 7 1 7 , 4 — — — — — — — — — 1 — — — — — 1 3 9 , 2 $ 7 0 1 , 1 $ 0 6 2 , 4 $ 2 5 9 , 2 1 $ 9 7 6 , 6 4 $ 9 2 2 , 2 1 1 $ $ 4 2 8 , 5 $ 0 6 2 , 4 $ 2 5 9 , 2 1 $ 0 8 6 , 6 4 $ 0 6 1 , 5 1 1 $ n o i t c u r t s n o c l a i c r e m m o C l a t o T $ $ $ $ — — — — — — — — — — — — $ 8 4 4 , 1 $ 2 2 6 , 0 2 $ 6 6 0 , 1 6 1 $ 0 8 6 , 2 4 1 $ n o i t c u r t s n o c y l i m a f i t l u M l a t o T $ 1 3 3 $ 7 7 6 $ 0 3 5 , 6 5 $ 1 0 7 , 2 7 5 $ — — — — — — — — — — — 6 0 9 , 2 — — — 3 7 4 , 3 1 n o i t c u r t s n o c y l i m a f - r u o f o t - e n O n o i t n e M l a i c e p S d r a d n a t s b u S g n i t a R k s i R s s a P l u f t b u o D s s o L $ 1 3 3 $ 7 7 6 $ 6 3 4 , 9 5 $ 4 7 1 , 6 8 5 $ n o i t c u r t s n o c y l i m a f - r u o f o t - e n O l a t o T — — — — — — — — — — — — — — — — $ 8 4 4 , 1 $ 2 2 6 , 0 2 $ 6 6 0 , 1 6 1 $ 0 8 6 , 2 4 1 $ n o i t c u r t s n o c y l i m a f i t l u M n o i t n e M l a i c e p S d r a d n a t s b u S g n i t a R k s i R s s a P l u f t b u o D s s o L 105 n o i t c u r t s n o c l a i c r e m m o C : s s a l c y B n o i t n e M l a i c e p S d r a d n a t s b u S g n i t a R k s i R s s a P l u f t b u o D s s o L l a t o T s n a o L g n i v l o v e R s n a o L 2 2 0 2 , 1 3 r e b m e c e D n o i t a n i g i r O f o r a e Y y b s n a o L m r e T r o i r P 8 1 0 2 9 1 0 2 0 2 0 2 1 2 0 2 2 2 0 2 : s s a l c y B — 1 8 1 — — — — — — — 4 8 — — — 7 9 — — — — — — — — — — — — — — — — — — 4 9 2 , 8 2 3 $ 9 3 3 $ 4 6 1 , 6 $ 2 4 2 , 6 $ 6 6 8 , 1 1 $ 8 7 2 , 6 1 $ 6 6 0 , 8 8 $ 9 3 3 , 9 9 1 $ t n e m p o l e v e d d n a l d n a d n a L n o i t n e M l a i c e p S d r a d n a t s b u S g n i t a R k s i R s s a P l u f t b u o D s s o L 5 7 4 , 8 2 3 $ 9 3 3 $ 8 4 2 , 6 $ 9 3 3 , 6 $ 6 6 8 , 1 1 $ 8 7 2 , 6 1 $ 6 6 0 , 8 8 $ 9 3 3 , 9 9 1 $ t n e m p o l e v e d d n a l d n a d n a L l a t o T 7 0 4 , 3 8 2 , 1 $ 3 5 1 , 8 9 3 $ 2 8 1 , 6 8 $ 6 6 6 , 2 9 $ 7 7 5 , 7 2 1 $ 7 1 9 , 6 6 1 $ 5 6 7 , 1 6 1 $ 7 4 1 , 0 5 2 $ s s e n i s u b l a i c r e m m o C l a t o T — — 4 6 9 6 4 1 , 3 1 7 5 3 7 9 9 — — — — — 9 9 5 , 2 — — — — — — — 5 6 5 , 6 1 7 2 — — — 6 3 3 0 7 9 — — — — — 5 1 0 , 2 7 6 9 , 0 8 2 $ 6 0 6 , 9 0 1 $ 3 6 0 , 7 2 $ 0 1 7 , 4 2 $ 4 5 3 , 8 2 $ 6 4 9 , 8 1 $ 0 4 4 , 5 3 $ 8 4 8 , 6 3 $ d n a l m r a f y b d e r u c e s g n i d u l c n i , s s e n i s u b l a r u t l u c i r g A n o i t n e M l a i c e p S d r a d n a t s b u S g n i t a R k s i R s s a P l u f t b u o D s s o L 7 7 0 , 5 9 2 $ 0 6 9 , 0 1 1 $ 2 6 6 , 9 2 $ 0 1 7 , 4 2 $ 9 1 9 , 4 3 $ 7 1 2 , 9 1 $ 6 4 7 , 6 3 $ 3 6 8 , 8 3 $ d n a l m r a f y b d e r u c e s g n i d u l c n i , s s e n i s u b l a r u t l u c i r g A l a t o T — — 7 6 7 , 3 1 3 0 , 9 2 — — 0 0 2 1 0 1 , 6 — 6 9 7 — — — — — 4 5 9 , 5 — — — 1 6 1 , 1 — — 7 6 4 , 3 6 5 9 , 1 — — 6 2 9 9 5 , 2 1 4 7 4 6 4 — — 9 0 6 , 0 5 2 , 1 $ 2 5 8 , 1 9 3 $ 6 8 3 , 5 8 $ 2 1 7 , 6 8 $ 6 1 4 , 6 2 1 $ 4 9 4 , 1 6 1 $ 0 4 1 , 9 4 1 $ 9 0 6 , 9 4 2 $ s s e n i s u b l a i c r e m m o C n o i t n e M l a i c e p S d r a d n a t s b u S g n i t a R k s i R s s a P l u f t b u o D s s o L 106 l a t o T s n a o L g n i v l o v e R s n a o L 1 2 0 2 , 1 3 r e b m e c e D n o i t a n i g i r O f o r a e Y y b s n a o L m r e T r o i r P 7 1 0 2 8 1 0 2 9 1 0 2 0 2 0 2 1 2 0 2 : s s a l c y B — — 9 5 2 , 2 3 6 1 , 2 5 — — — — — — 4 7 0 4 7 , 3 2 — — — 6 5 0 , 1 — — — — — — 5 8 1 , 2 0 7 7 , 3 1 — — — — — — — 7 9 5 , 3 1 1 0 2 , 7 7 7 $ 2 8 7 , 1 1 $ 2 7 4 , 3 5 1 $ 1 7 3 , 3 4 $ 4 2 1 , 3 8 $ 7 7 0 , 0 0 1 $ 8 6 9 , 2 7 1 $ 7 0 4 , 2 1 2 $ d e i p u c c o r e n w o - e t a t s e l a e r l a i c r e m m o C n o i t n e M l a i c e p S d r a d n a t s b u S g n i t a R k s i R s s a P l u f t b u o D s s o L 3 2 6 , 1 3 8 $ 2 8 7 , 1 1 $ 6 8 2 , 7 7 1 $ 7 2 4 , 4 4 $ 4 2 1 , 3 8 $ 2 3 0 , 6 1 1 $ 8 6 9 , 2 7 1 $ 4 0 0 , 6 2 2 $ d e i p u c c o r e n w o - e t a t s e l a e r l a i c r e m m o C l a t o T 7 2 0 , 4 7 6 , 1 $ 1 7 4 , 8 1 $ 1 2 7 , 5 9 4 $ 3 4 0 , 6 0 2 $ 8 1 9 , 7 8 1 $ 4 0 6 , 4 3 2 $ 4 7 1 , 5 6 1 $ 6 9 0 , 6 6 3 $ s e i t r e p o r p t n e m t s e v n i - e t a t s e l a e r l a i c r e m m o C l a t o T — — 1 7 3 , 4 4 7 4 , 4 6 — — — — — — — 0 0 9 , 7 2 — — — 5 0 3 , 4 — — — 1 3 1 , 4 — — 0 4 2 3 4 3 , 3 — — — — — — — 6 2 9 , 8 2 2 8 1 , 5 0 6 , 1 $ 1 7 4 , 8 1 $ 1 2 8 , 7 6 4 $ 8 3 7 , 1 0 2 $ 7 8 7 , 3 8 1 $ 1 2 0 , 1 3 2 $ 4 7 1 , 5 6 1 $ 0 7 1 , 7 3 3 $ s e i t r e p o r p t n e m t s e v n i - e t a t s e l a e r l a i c r e m m o C n o i t n e M l a i c e p S d r a d n a t s b u S g n i t a R k s i R s s a P l u f t b u o D s s o L 107 — — — 0 5 4 , 6 — — — — — — — 2 4 5 , 1 — — — — — — — — — — — — — — — — — — — 8 0 9 , 4 5 3 4 , 4 2 5 $ 0 3 0 , 3 $ 5 5 0 , 8 8 $ 2 1 6 , 4 8 $ 8 0 7 , 3 3 $ 4 9 4 , 5 5 $ 6 2 2 , 5 7 $ 0 1 3 , 4 8 1 $ e t a t s e l a e r y l i m a f i t l u M n o i t n e M l a i c e p S d r a d n a t s b u S g n i t a R k s i R s s a P l u f t b u o D s s o L 5 8 8 , 0 3 5 $ 0 3 0 , 3 $ 7 9 5 , 9 8 $ 2 1 6 , 4 8 $ 8 0 7 , 3 3 $ 4 9 4 , 5 5 $ 6 2 2 , 5 7 $ 8 1 2 , 9 8 1 $ e t a t s e l a e r y l i m a f i t l u M l a t o T l a t o T s n a o L g n i v l o v e R s n a o L 1 2 0 2 , 1 3 r e b m e c e D n o i t a n i g i r O f o r a e Y y b s n a o L m r e T r o i r P 7 1 0 2 8 1 0 2 9 1 0 2 0 2 0 2 1 2 0 2 9 3 5 , 0 5 1 $ — — — 9 5 4 , 7 1 8 9 9 , 7 6 1 $ 6 1 1 , 9 5 2 $ — — — — 6 1 1 , 9 5 2 $ — — — — — — — — — — — — $ $ $ $ — — 8 9 — — 8 9 — — — — — — $ $ $ $ 3 5 7 , 8 6 5 $ 0 2 9 , 1 $ 6 1 2 $ — — — — — — — — — — — — 3 5 7 , 8 6 5 $ 0 2 9 , 1 $ 6 1 2 $ — — — — — — — — — — — — — — — — — — $ 7 8 0 , 8 $ 9 5 2 , 7 $ 1 4 8 , 1 3 $ 2 5 3 , 3 0 1 $ — — — 6 0 8 , 4 — 8 8 6 — — — 5 8 — — — — — 2 8 7 , 1 1 $ 3 9 8 , 2 1 $ 7 4 9 , 7 $ 6 2 9 , 1 3 $ 4 3 1 , 5 1 1 $ n o i t c u r t s n o c l a i c r e m m o C l a t o T $ $ $ $ — — — — — — — — — — — — $ 9 5 3 , 4 5 $ 4 1 1 , 8 1 1 $ 3 4 6 , 6 8 $ n o i t c u r t s n o c y l i m a f i t l u M l a t o T — — — — — — — — — — — — $ 1 3 3 $ 3 3 1 , 0 4 $ 3 5 1 , 6 2 5 $ n o i t c u r t s n o c y l i m a f - r u o f o t - e n O n o i t n e M l a i c e p S d r a d n a t s b u S g n i t a R k s i R s s a P l u f t b u o D s s o L $ 1 3 3 $ 3 3 1 , 0 4 $ 3 5 1 , 6 2 5 $ n o i t c u r t s n o c y l i m a f - r u o f o t - e n O l a t o T — — — — — — — — — — — — $ 9 5 3 , 4 5 $ 4 1 1 , 8 1 1 $ 3 4 6 , 6 8 $ n o i t c u r t s n o c y l i m a f i t l u M n o i t n e M l a i c e p S d r a d n a t s b u S g n i t a R k s i R s s a P l u f t b u o D s s o L 108 n o i t c u r t s n o c l a i c r e m m o C : s s a l c y B n o i t n e M l a i c e p S d r a d n a t s b u S g n i t a R k s i R s s a P l u f t b u o D s s o L l a t o T s n a o L g n i v l o v e R s n a o L 1 2 0 2 , 1 3 r e b m e c e D n o i t a n i g i r O f o r a e Y y b s n a o L m r e T r o i r P 7 1 0 2 8 1 0 2 9 1 0 2 0 2 0 2 1 2 0 2 : s s a l c y B — — — 1 8 2 , 3 — — — — — 8 2 1 — — — — — — — — — — — 3 6 2 — — — 4 1 — — — — — 6 7 8 , 2 3 7 1 , 0 1 3 $ 2 8 6 , 1 $ 0 7 8 , 7 $ 0 5 0 , 4 $ 1 4 1 , 8 $ 4 5 1 , 7 1 $ 5 9 8 , 9 8 $ 1 8 3 , 1 8 1 $ t n e m p o l e v e d d n a l d n a d n a L n o i t n e M l a i c e p S d r a d n a t s b u S g n i t a R k s i R s s a P l u f t b u o D s s o L 4 5 4 , 3 1 3 $ 2 8 6 , 1 $ 8 9 9 , 7 $ 0 5 0 , 4 $ 1 4 1 , 8 $ 7 1 4 , 7 1 $ 9 0 9 , 9 8 $ 7 5 2 , 4 8 1 $ t n e m p o l e v e d d n a l d n a d n a L l a t o T 0 8 7 , 0 7 1 , 1 $ 8 7 0 , 1 5 2 $ 6 3 7 , 8 7 $ 8 2 3 , 6 4 $ 5 0 3 , 5 2 1 $ 8 2 4 , 8 7 1 $ 3 0 8 , 5 1 2 $ 2 0 1 , 5 7 2 $ s s e n i s u b l a i c r e m m o C l a t o T — — — 9 9 3 , 3 — — — — — 2 7 — — — 9 2 1 — — — 3 9 4 — — — — — 1 3 2 , 2 — 4 7 4 — — — — — — 9 7 1 , 7 7 2 $ 0 1 4 , 9 9 $ 2 4 0 , 0 3 $ 8 1 9 , 1 1 $ 1 0 4 , 7 2 $ 1 5 9 , 9 4 $ 8 3 3 , 5 2 $ 9 1 1 , 3 3 $ d n a l m r a f y b d e r u c e s g n i d u l c n i , s s e n i s u b l a r u t l u c i r g A n o i t n e M l a i c e p S d r a d n a t s b u S g n i t a R k s i R s s a P l u f t b u o D s s o L 8 7 5 , 0 8 2 $ 0 1 4 , 9 9 $ 4 1 1 , 0 3 $ 7 4 0 , 2 1 $ 4 9 8 , 7 2 $ 2 8 1 , 2 5 $ 2 1 8 , 5 2 $ 9 1 1 , 3 3 $ d n a l m r a f y b d e r u c e s g n i d u l c n i , s s e n i s u b l a r u t l u c i r g A l a t o T — — 0 4 8 , 2 7 9 4 , 3 1 — — 0 3 4 , 2 7 9 2 , 2 8 9 7 6 — — 9 1 5 7 8 — — — — 1 4 2 3 5 8 , 3 — — — 2 9 2 , 2 — — 7 7 0 6 5 , 1 — — 5 6 1 4 9 , 1 3 4 4 , 4 5 1 , 1 $ 1 5 3 , 6 4 2 $ 9 4 0 , 8 7 $ 4 3 4 , 5 4 $ 1 1 2 , 1 2 1 $ 6 3 1 , 6 7 1 $ 6 6 1 , 4 1 2 $ 6 9 0 , 3 7 2 $ s s e n i s u b l a i c r e m m o C n o i t n e M l a i c e p S d r a d n a t s b u S g n i t a R k s i R s s a P l u f t b u o D s s o L 109 s n a o l g n i v l o v e R . ) s d n a s u o h t n i ( 1 2 0 2 , 1 3 r e b m e c e D d n a 2 2 0 2 , 1 3 r e b m e c e D f o s a s u t a t s y c n e u q n i l e d d n a s s a l c y b s n a o l d e t a r - k s i r - n o n f o o i l o f t r o p s ’ y n a p m o C e h t t n e s e r p s e l b a t g n i w o l l o f e h T 0 9 n a h t r e g n o l s d o i r e p r o f d e d n e t x e r o d e w e n e r e r a t a h t s n a o l m r e T . n o i t a n i g i r o f o r a e y y b d e t n e s e r p e r a d n a w o l e b e l b a t e h t n i s n o i t a n i g i r o w e n s a d e t a e r t e r a s n a o l m r e t o t d e t r e v n o c e r a t a h t . n o i s n e t x e r o l a w e n e r t n e c e r t s o m e h t f o r a e y e h t n i n o i t a n i g i r o w e n a s a d e t n e s e r p e r a s y a d l a t o T s n a o L g n i v l o v e R s n a o L 2 2 0 2 , 1 3 r e b m e c e D n o i t a n i g i r O f o r a e Y y b s n a o L m r e T r o i r P 8 1 0 2 9 1 0 2 0 2 0 2 1 2 0 2 2 2 0 2 — 2 9 5 8 , 1 — — — — 2 9 9 3 , 1 — — — — — — 0 6 4 — — — — — — — — 0 9 3 , 8 9 1 , 1 $ 0 3 6 $ 4 2 9 , 4 5 3 $ 2 9 5 , 2 4 1 $ 2 5 5 , 4 3 1 $ 6 8 2 , 2 7 1 $ 1 0 8 , 5 1 2 $ 5 0 6 , 7 7 1 $ 1 5 2 , 0 0 2 , 1 $ 0 3 6 $ 5 2 3 , 6 5 3 $ 2 9 5 , 2 4 1 $ 2 5 5 , 4 3 1 $ 6 4 7 , 2 7 1 $ 1 0 8 , 5 1 2 $ 5 0 6 , 7 7 1 $ 9 7 4 , 1 1 6 6 9 1 0 , 1 3 7 1 6 7 1 1 6 4 0 8 2 7 5 0 3 6 4 9 4 1 0 7 2 6 2 5 7 2 7 5 1 4 5 — 6 2 8 1 5 4 5 — 6 4 1 — — 3 3 9 , 3 4 9 $ 1 8 2 , 9 1 1 $ 5 2 0 , 8 7 $ 0 2 4 , 6 5 $ 3 0 6 , 1 8 $ 7 6 8 , 9 9 $ 8 2 6 , 1 0 2 $ 9 0 1 , 7 0 3 $ 2 9 0 , 7 4 9 $ 1 9 0 , 0 2 1 $ 7 1 6 , 8 7 $ 5 8 6 , 6 5 $ 7 9 2 , 2 8 $ 7 4 9 , 9 9 $ 0 0 2 , 2 0 2 $ 5 5 2 , 7 0 3 $ 7 8 2 , 5 2 4 2 , 2 5 7 1 , 5 8 7 — — 2 6 4 , 1 7 6 0 , 1 7 7 5 , 1 6 1 1 5 1 1 4 9 — — 2 1 7 5 5 7 — 3 7 9 6 4 8 — 9 1 8 , 1 — 0 3 0 , 2 0 6 0 , 1 8 0 4 , 0 6 1 , 1 $ 5 3 3 , 1 $ 0 9 8 , 1 9 1 $ 0 4 7 , 7 3 $ 7 0 6 , 4 3 $ 2 7 6 , 9 5 $ 1 3 3 , 9 7 2 $ 3 3 8 , 5 5 5 $ e u D t s a P s y a D 9 5 - 0 3 e u D t s a P s y a D 9 8 - 0 6 e u D t s a P + s y a D 0 9 E R C e c n a l a b l l a m S l a t o T y r o g e t a C e u D t s a P E R C e c n a l a b l l a m S t n e r r u C : s s a l c y B e u D t s a P s y a D 9 5 - 0 3 e u D t s a P s y a D 9 8 - 0 6 e u D t s a P + s y a D 0 9 t n e r r u C d e r o c s s s e n i s u b l l a m S y r o g e t a C e u D t s a P d e r o c s s s e n i s u b l l a m S l a t o T l a i t n e d i s e r y l i m a f - r u o f o t - e n O e u D t s a P s y a D 9 5 - 0 3 e u D t s a P s y a D 9 8 - 0 6 e u D t s a P + s y a D 0 9 y r o g e t a C e u D t s a P t n e r r u C 110 2 1 1 , 3 7 1 , 1 $ 3 1 4 , 1 $ 6 9 9 , 5 9 1 $ 5 6 0 , 8 3 $ 9 1 3 , 5 3 $ 0 0 4 , 1 6 $ 6 9 9 , 1 8 2 $ 3 2 9 , 8 5 5 $ l a i t n e d i s e r y l i m a f - r u o f o t - e n O l a t o T l a t o T s n a o L g n i v l o v e R s n a o L 2 2 0 2 , 1 3 r e b m e c e D n o i t a n i g i r O f o r a e Y y b s n a o L m r e T r o i r P 8 1 0 2 9 1 0 2 0 2 0 2 1 2 0 2 2 2 0 2 : s s a l c y B 4 2 8 , 1 3 0 2 2 8 5 , 1 9 5 0 8 2 2 7 3 , 1 4 1 2 5 4 5 7 6 4 7 9 4 4 6 — — 6 7 4 5 7 — 3 7 0 4 0 5 4 1 9 4 — — 2 8 6 , 2 6 5 $ 8 6 0 , 7 4 5 $ 8 8 7 , 3 $ 1 1 6 , 1 $ 5 5 3 , 1 $ 9 2 3 $ 9 8 0 , 1 $ 2 4 4 , 7 $ t i d e r c f o s e n i l g n i v l o v e r y t i u q e e m o h — r e m u s n o C e u D t s a P s y a D 9 5 - 0 3 e u D t s a P s y a D 9 8 - 0 6 e u D t s a P + s y a D 0 9 y r o g e t a C e u D t s a P t n e r r u C 1 9 2 , 6 6 5 $ 9 7 7 , 8 4 5 $ 2 2 7 , 4 $ 8 9 7 , 1 $ 1 3 8 , 1 $ 7 7 4 $ 3 9 1 , 1 $ 1 9 4 , 7 $ t i d e r c f o s e n i l g n i v l o v e r y t i u q e e m o h — r e m u s n o C l a t o T 9 5 2 8 7 1 0 1 0 2 1 2 6 — 7 6 3 1 — 2 — — 5 4 2 — 6 1 9 2 — — 9 0 1 9 4 1 4 — 5 8 1 , 4 1 1 $ 9 1 2 , 5 2 $ 5 7 6 , 6 1 $ 4 8 3 , 5 $ 5 9 6 , 5 $ 4 3 3 , 9 $ 8 3 1 , 2 1 $ 0 4 7 , 9 3 $ 2 3 6 , 4 1 1 $ 1 0 4 , 5 2 $ 5 5 7 , 6 1 $ 6 8 3 , 5 $ 4 2 7 , 5 $ 9 7 3 , 9 $ 7 5 1 , 2 1 $ 0 3 8 , 9 3 $ y r o g e t a C e u D t s a P r e h t o - r e m u s n o C t n e r r u C e u D t s a P s y a D 9 5 - 0 3 e u D t s a P s y a D 9 8 - 0 6 e u D t s a P + s y a D 0 9 r e h t o - r e m u s n o C l a t o T 111 l a t o T s n a o L g n i v l o v e R s n a o L 1 2 0 2 , 1 3 r e b m e c e D n o i t a n i g i r O f o r a e Y y b s n a o L m r e T r o i r P 7 1 0 2 8 1 0 2 9 1 0 2 0 2 0 2 1 2 0 2 9 8 — 8 9 2 , 1 — — — — — 2 1 1 9 4 — 6 8 1 , 1 — — — — — — — — — 0 4 — — 6 7 4 , 0 8 2 , 1 $ 3 3 5 $ 7 0 0 , 7 7 3 $ 9 3 2 , 8 3 1 $ 0 4 9 , 2 8 1 $ 2 4 3 , 7 5 1 $ 2 8 4 , 8 0 2 $ 3 3 9 , 5 1 2 $ 3 6 8 , 1 8 2 , 1 $ 3 3 5 $ 9 1 1 , 7 7 3 $ 4 7 4 , 9 3 1 $ 0 4 9 , 2 8 1 $ 2 4 3 , 7 5 1 $ 2 8 4 , 8 0 2 $ 3 7 9 , 5 1 2 $ 4 2 9 5 6 4 8 0 5 5 8 1 4 6 4 6 4 8 4 2 7 4 7 9 6 0 3 3 3 1 1 1 2 6 — 3 3 1 — 8 6 2 — 9 6 0 6 2 — — 3 1 4 , 0 9 7 $ 2 3 6 , 8 0 1 $ 4 0 5 , 9 6 $ 0 4 9 , 5 5 $ 0 6 4 , 4 8 $ 3 8 4 , 9 0 1 $ 9 5 9 , 6 2 1 $ 5 3 4 , 5 3 2 $ 0 1 3 , 2 9 7 $ 5 4 9 , 8 0 1 $ 3 6 7 , 9 6 $ 9 2 3 , 6 5 $ 6 6 6 , 4 8 $ 6 1 6 , 9 0 1 $ 6 9 2 , 7 2 1 $ 5 9 6 , 5 3 2 $ 8 1 3 , 2 7 2 3 5 2 2 , 1 — — — 3 8 6 0 3 8 5 0 , 1 5 3 6 — — 4 0 4 5 9 2 7 6 1 — 2 — 6 9 5 — — — — — 4 0 6 , 3 5 6 $ 5 2 4 , 1 $ 9 7 4 , 5 9 1 $ 4 5 6 , 1 5 $ 9 9 2 , 8 4 $ 4 5 8 , 3 5 $ 3 7 8 , 7 7 $ 0 2 0 , 5 2 2 $ e u D t s a P s y a D 9 5 - 0 3 e u D t s a P s y a D 9 8 - 0 6 e u D t s a P + s y a D 0 9 E R C e c n a l a b l l a m S l a t o T y r o g e t a C e u D t s a P E R C e c n a l a b l l a m S t n e r r u C e u D t s a P s y a D 9 5 - 0 3 e u D t s a P s y a D 9 8 - 0 6 e u D t s a P + s y a D 0 9 t n e r r u C d e r o c s s s e n i s u b l l a m S y r o g e t a C e u D t s a P : s s a l c y B e u D t s a P s y a D 9 5 - 0 3 e u D t s a P s y a D 9 8 - 0 6 e u D t s a P + s y a D 0 9 y r o g e t a C e u D t s a P t n e r r u C l a i t n e d i s e r y l i m a f - r u o f o t - e n O d e r o c s s s e n i s u b l l a m S l a t o T 112 4 7 4 , 7 5 6 $ 5 2 4 , 1 $ 0 5 2 , 7 9 1 $ 9 8 2 , 2 5 $ 5 6 1 , 9 4 $ 6 5 8 , 3 5 $ 9 6 4 , 8 7 $ 0 2 0 , 5 2 2 $ l a i t n e d i s e r y l i m a f - r u o f o t - e n O l a t o T l a t o T s n a o L g n i v l o v e R s n a o L 1 2 0 2 , 1 3 r e b m e c e D n o i t a n i g i r O f o r a e Y y b s n a o L m r e T r o i r P 7 1 0 2 8 1 0 2 9 1 0 2 0 2 0 2 1 2 0 2 : s s a l c y B 5 8 9 8 6 2 3 0 8 0 1 2 1 9 9 5 1 8 6 5 3 8 8 8 1 7 3 5 4 6 5 1 3 2 — 1 9 1 — — 9 0 1 — — — 7 4 1 9 4 — 7 7 4 , 6 5 4 $ 2 5 3 , 0 4 4 $ 0 2 9 , 2 $ 4 6 7 , 1 $ 2 7 7 , 1 $ 4 2 3 , 1 $ 0 1 2 , 1 $ 5 3 1 , 7 $ t i d e r c f o s e n i l g n i v l o v e r y t i u q e e m o h — r e m u s n o C e u D t s a P s y a D 9 5 - 0 3 e u D t s a P s y a D 9 8 - 0 6 e u D t s a P + s y a D 0 9 y r o g e t a C e u D t s a P t n e r r u C 3 3 5 , 8 5 4 $ 2 1 8 , 0 4 4 $ 9 5 7 , 3 $ 2 0 0 , 2 $ 6 8 9 , 1 $ 3 3 4 , 1 $ 0 1 2 , 1 $ 1 3 3 , 7 $ t i d e r c f o s e n i l g n i v l o v e r y t i u q e e m o h — r e m u s n o C l a t o T 8 8 3 5 7 6 1 0 6 9 5 — 9 2 8 — 2 2 — — 0 5 1 — 6 3 1 2 0 1 4 1 1 — — — 6 — 0 9 8 , 6 9 $ 6 3 3 , 5 2 $ 5 5 0 , 7 1 $ 8 3 1 , 6 $ 2 4 2 , 8 $ 6 7 6 , 8 $ 3 0 8 , 2 1 $ 0 4 6 , 8 1 $ 9 6 3 , 7 9 $ 5 5 4 , 5 2 $ 2 9 0 , 7 1 $ 0 6 1 , 6 $ 8 9 3 , 8 $ 1 0 7 , 8 $ 7 1 9 , 2 1 $ 6 4 6 , 8 1 $ y r o g e t a C e u D t s a P r e h t o - r e m u s n o C t n e r r u C e u D t s a P s y a D 9 5 - 0 3 e u D t s a P s y a D 9 8 - 0 6 e u D t s a P + s y a D 0 9 r e h t o - r e m u s n o C l a t o T 113 d e t n e s e r p s n a o l t n e d n e p e d l a r e t a l l o c r u O . ) s d n a s u o h t n i ( 1 2 0 2 , 1 3 r e b m e c e D d n a 2 2 0 2 , 1 3 r e b m e c e D f o s a s n a o l t n e d n e p e d - l a r e t a l l o c f o s i s a b t s o c d e z i t r o m a e h t e d i v o r p s e l b a t g n i w o l l o f e h T . n o i t a c o l r o e p y t y t r e p o r p y b s n o i t a r t n e c n o c t n a c i f i n g i s o n e v a h w o l e b s e l b a t e h t n i 2 2 0 2 , 1 3 r e b m e c e D l a t o T t n e m p i u q E e t a t s E l a e R 3 5 9 , 2 $ — $ 3 5 9 , 2 $ 7 0 3 7 3 5 , 4 2 2 6 , 1 9 1 4 , 9 7 0 3 — 7 3 5 , 4 $ 4 4 8 , 4 $ — — 2 2 6 , 1 5 7 5 , 4 $ 1 2 0 2 , 1 3 r e b m e c e D l a t o T t n e m p i u q E e t a t s E l a e R 1 2 9 6 3 1 , 6 2 0 9 , 5 4 6 1 2 0 , 1 4 4 0 , 4 1 $ — — — 7 4 $ 4 9 5 1 4 6 $ 1 2 9 $ 6 3 1 , 6 2 0 9 , 5 7 1 7 2 4 $ 3 0 4 , 3 1 $ s s e n i s u b l a i c r e m m o C d e r o c s s s e n i s u b l l a m S : e t a t s e l a e r l a i c r e m m o C E R C e c n a l a b l l a m S : s s e n i s u b l a i c r e m m o C l a i t n e d i s e r y l i m a f - r u o f o t - e n O l a t o T d n a l m r a f y b d e r u c e s g n i d u l c n i , s s e n i s u b l a r u t l u c i r g A l a t o T s e i t r e p o r p t n e m t s e v n I E R C e c n a l a b l l a m S d e i p u c c o - r e n w O : e t a t s e l a e r l a i c r e m m o C s s e n i s u b l a i c r e m m o C 114 — — — — — — — — — — — 3 2 0 , 1 4 5 2 0 1 0 9 s n a o L r o s y a D t s a P e r o M d n a e u D g n i u r c c A — 0 4 5 , 3 — — — — 1 8 1 6 5 3 , 7 0 3 5 , 2 4 9 5 6 3 2 , 5 2 4 2 1 , 2 $ 3 4 1 $ - n o N l a t o T ) 1 ( l a u r c c a l a u r c c a - n o N o n h t i w e c n a w o l l A s n a o L l a t o T t n e r r u C t s a P l a t o T e u D r o s y a D 0 9 t s a P e r o M e u D s y a D 9 8 - 0 6 e u D t s a P s y a D 9 5 - 0 3 e u D t s a P — — 7 2 9 , 2 — — — — — 3 0 3 8 9 9 , 6 4 9 5 9 6 5 , 1 — — $ 0 2 3 , 5 4 8 $ 0 2 3 , 5 4 8 $ 5 7 9 , 9 8 5 , 1 5 7 9 , 9 8 5 , 1 — — $ 1 5 2 , 0 0 2 , 1 0 9 3 , 8 9 1 , 1 1 6 8 , 1 1 7 0 , 5 4 6 1 7 0 , 5 4 6 6 7 8 , 4 8 1 6 1 8 , 5 2 3 9 2 3 , 7 4 6 5 7 4 , 8 2 3 6 7 8 , 4 8 1 6 1 8 , 5 2 3 9 2 4 , 6 4 6 7 5 4 , 7 2 3 2 9 0 , 7 4 9 3 3 9 , 3 4 9 7 0 4 , 3 8 2 , 1 3 1 5 , 6 7 2 , 1 — — — 0 0 9 8 1 0 , 1 4 9 8 , 6 9 5 1 , 3 7 7 0 , 5 9 2 8 9 2 , 3 9 2 2 1 1 , 3 7 1 , 1 8 0 4 , 0 6 1 , 1 9 7 7 , 1 4 0 7 , 2 1 1 9 2 , 6 6 5 2 3 6 , 4 1 1 2 8 6 , 2 6 5 5 8 1 , 4 1 1 7 4 4 9 0 6 , 3 — — 2 — — — — 7 9 9 4 6 9 1 0 , 1 4 9 5 5 7 1 , 5 0 1 2 8 5 , 1 $ — — — — — — — — 1 6 6 5 4 1 , 4 — 2 4 2 , 2 3 0 2 8 7 1 $ — — 9 5 8 , 1 $ — — — 0 0 9 1 2 9 0 0 1 , 2 9 7 4 , 1 5 8 1 , 1 7 8 2 , 5 9 5 2 4 2 8 , 1 7 8 2 , 1 $ 6 0 7 , 1 2 $ 1 9 3 , 2 1 $ 4 2 7 , 6 4 1 , 0 1 $ 3 5 3 , 4 1 1 , 0 1 $ 1 7 3 , 2 3 $ 8 2 1 , 9 $ 9 2 4 , 7 $ 4 1 8 , 5 1 $ : t n e m p o l e v e d d n a l d n a d n a l , n o i t c u r t s n o C n o i t c u r t s n o c y l i m a f - r u o f o t - e n O t n e m p o l e v e d d n a l d n a d n a L n o i t c u r t s n o c l a i c r e m m o C n o i t c u r t s n o c y l i m a f i t l u M s s e n i s u b l a i c r e m m o C d e r o c s s s e n i s u b l l a m S : s s e n i s u b l a i c r e m m o C f o s e n i l g n i v l o v e r y t i u q e e m o h — r e m u s n o C y b d e r u c e s g n i d u l c n i , s s e n i s u b l a r u t l u c i r g A d n a l m r a f l a i t n e d i s e r y l i m a f - r u o f o t - e n O : r e m u s n o C r e h t o — r e m u s n o C t i d e r c l a t o T s e i t r e p o r p t n e m t s e v n I E R C e c n a l a b l l a m S d e i p u c c o - r e n w O : e t a t s e l a e r l a i c r e m m o C e t a t s e l a e r y l i m a f i t l u M 115 2 2 0 2 , 1 3 r e b m e c e D : ) s d n a s u o h t n i ( 1 2 0 2 d n a 2 2 0 2 , 1 3 r e b m e c e D f o s a s n a o l e u d t s a p s ’ y n a p m o C e h t f o s i s y l a n a e g a e h t n o l i a t e d l a n o i t i d d a e d i v o r p s e l b a t g n i w o l l o f e h T — — — — — — — — 2 — — 6 3 4 4 1 1 3 5 5 5 0 9 s n a o L r o s y a D t s a P e r o M d n a e u D g n i u r c c A - n o N l a t o T ) 1 ( l a u r c c a 1 2 0 2 , 1 3 r e b m e c e D l a u r c c a - n o N o n h t i w e c n a w o l l A s n a o L l a t o T t n e r r u C t s a P l a t o T e u D r o s y a D 0 9 t s a P e r o M e u D s y a D 9 8 - 0 6 e u D t s a P s y a D 9 5 - 0 3 e u D t s a P 2 8 2 , 6 1 2 4 , 6 — 8 9 — — 1 8 3 4 4 1 , 1 2 1 0 , 1 2 2 0 , 1 1 1 7 , 2 8 1 6 3 7 , 1 6 0 7 , 3 6 8 8 , 5 7 2 0 , 4 7 6 , 1 6 4 9 , 3 7 6 , 1 1 8 3 6 8 , 1 8 2 , 1 6 7 4 , 0 8 2 , 1 7 8 3 , 1 — 8 9 2 , 1 — — — — — — 8 2 2 — 1 2 0 , 1 — — 5 8 8 , 0 3 5 5 8 8 , 0 3 5 8 9 9 , 7 6 1 6 1 1 , 9 5 2 3 5 7 , 8 6 5 4 5 4 , 3 1 3 0 0 9 , 7 6 1 6 1 1 , 9 5 2 1 9 5 , 8 6 5 9 8 3 , 3 1 3 0 1 3 , 2 9 7 3 1 4 , 0 9 7 0 8 7 , 0 7 1 , 1 8 2 0 , 4 6 1 , 1 8 7 5 , 0 8 2 4 7 4 , 7 5 6 8 1 4 , 9 7 2 4 0 6 , 3 5 6 3 3 5 , 8 5 4 9 6 3 , 7 9 7 7 4 , 6 5 4 0 9 8 , 6 9 — 8 9 — 2 6 1 5 6 2 5 7 , 6 7 9 8 , 1 0 6 1 , 1 0 7 8 , 3 9 7 4 6 5 0 , 2 — 8 9 — — 4 1 8 8 5 8 0 5 1 2 0 , 1 5 2 2 , 1 3 0 8 6 1 $ 6 5 4 , 1 $ 4 2 9 $ 3 2 6 , 1 3 8 $ 2 4 9 , 0 3 8 $ 1 8 6 $ 8 4 4 $ — — — — — — — — 5 6 4 7 0 0 , 1 — 7 2 3 8 6 2 5 7 1 8 9 8 — — — 2 6 1 1 5 4 2 9 7 5 1 , 5 9 3 1 8 1 3 , 2 5 8 9 8 8 3 $ 3 3 2 $ : t n e m p o l e v e d d n a l d n a d n a l , n o i t c u r t s n o C n o i t c u r t s n o c y l i m a f - r u o f o t - e n O t n e m p o l e v e d d n a l d n a d n a L n o i t c u r t s n o c l a i c r e m m o C n o i t c u r t s n o c y l i m a f i t l u M s s e n i s u b l a i c r e m m o C d e r o c s s s e n i s u b l l a m S : s s e n i s u b l a i c r e m m o C s e i t r e p o r p t n e m t s e v n I E R C e c n a l a b l l a m S d e i p u c c o - r e n w O : e t a t s e l a e r l a i c r e m m o C e t a t s e l a e r y l i m a f i t l u M f o s e n i l g n i v l o v e r y t i u q e e m o h — r e m u s n o C y b d e r u c e s g n i d u l c n i , s s e n i s u b l a r u t l u c i r g A d n a l m r a f l a i t n e d i s e r y l i m a f - r u o f o t - e n O : r e m u s n o C 116 r e h t o — r e m u s n o C t i d e r c $ 1 8 2 , 2 2 $ 5 6 7 , 1 1 $ 3 6 7 , 4 8 0 , 9 $ 5 7 0 , 6 6 0 , 9 $ 8 8 6 , 8 1 $ 9 1 0 , 6 $ 2 4 1 , 2 $ 7 2 5 , 0 1 $ . 1 2 0 2 d n a 2 2 0 2 , 1 3 r e b m e c e D d e d n e s r a e y e h t h t o b g n i r u d s n a o l l a u r c c a - n o n n o e m o c n i t s e r e t n i y n a e z i n g o c e r t o n d i d y n a p m o C e h T ) 1 ( l a t o T l a t o T d e t a c o l l a n U r e m u s n o C 2 2 0 2 , 1 3 r e b m e c e D d e d n E r a e Y e h t r o F o t - e n O y l i m a F - r u o F l a i t n e d i s e R l a r u t l u c i r g A s s e n i s u B l a i c r e m m o C n o i t c u r t s n o C s s e n i s u B d n a L d n a y l i m a f i t l u M e t a t s E l a e R l a i c r e m m o C e t a t s E l a e R 8 5 1 , 8 1 2 9 , 3 ) 3 1 7 , 2 ( 9 9 0 , 2 3 1 $ 5 6 4 , 1 4 1 $ — — — — — $ 1 5 9 , 6 4 9 3 , 2 6 6 5 ) 0 4 9 ( $ 5 0 2 , 8 3 4 3 , 6 — 1 8 1 $ 0 9 1 , 3 $ 1 2 4 , 6 2 $ 4 9 2 , 7 2 $ ) 8 4 1 ( ) 2 4 ( 5 7 4 4 5 6 , 6 3 2 9 , 1 ) 9 9 6 , 1 ( ) 0 3 ( 4 8 3 3 2 5 , 1 — — 1 9 6 3 4 0 , 7 $ 5 9 9 , 2 5 $ ) 2 ( 2 9 3 ) 9 9 2 , 9 ( $ 1 7 9 , 8 $ 9 2 7 , 4 1 $ 5 7 4 , 3 $ 9 9 2 , 3 3 $ 1 7 1 , 9 2 $ 4 3 7 , 7 $ 6 8 0 , 4 4 $ % 1 0 . 0 a / n % — % — % — % — % — % — % — l a t o T d e t a c o l l a n U r e m u s n o C 1 2 0 2 , 1 3 r e b m e c e D d e d n E r a e Y e h t r o F - r u o F o t - e n O y l i m a F l a i t n e d i s e R l a r u t l u c i r g A s s e n i s u B l a i c r e m m o C s s e n i s u B n o i t c u r t s n o C d n a L d n a y l i m a f i t l u M e t a t s E l a e R l a i c r e m m o C e t a t s E l a e R 5 1 6 , 4 ) 3 8 6 , 6 ( ) 2 1 1 , 3 3 ( 9 7 2 , 7 6 1 $ 9 9 0 , 2 3 1 $ — — — — — $ 6 6 4 , 4 1 $ 0 6 7 ) 4 1 9 ( ) 1 6 3 , 7 ( 3 1 9 , 9 ) 7 0 9 , 1 ( — 9 9 1 $ 4 1 9 , 4 ) 3 7 5 , 1 ( 0 3 ) 1 8 1 ( $ 7 0 0 , 5 3 $ 5 9 2 , 1 4 $ ) 1 2 6 , 8 ( 7 9 7 , 1 ) 2 6 7 , 1 ( — 0 0 1 ) 1 0 1 , 4 1 ( — ) 9 5 ( 3 9 8 , 3 9 0 2 , 3 $ 1 9 7 , 7 5 $ ) 8 5 7 , 2 ( 9 2 7 , 1 ) 7 6 7 , 3 ( $ 1 5 9 , 6 $ 5 0 2 , 8 $ 0 9 1 , 3 $ 1 2 4 , 6 2 $ 4 9 2 , 7 2 $ 3 4 0 , 7 $ 5 9 9 , 2 5 $ % ) 2 0 . 0 ( a / n % — % — % — % — % — % — % ) 2 0 . 0 ( s e s s o l t i d e r c r o f n o i s i v o r p / ) e r u t p a c e R ( : s e s s o l t i d e r c r o f e c n a w o l l A e c n a l a b g n i n n i g e B s e i r e v o c e R s f f o - e g r a h C e c n a l a b g n i d n E e g a r e v a f o t n e c r e p a s a s e i r e v o c e r n a o l t e N d o i r e p e h t g n i r u d s n a o l g n i d n a t s t u o e g a r e v a f o t n e c r e p a s a s f f o - e g r a h c n a o l t e N d o i r e p e h t g n i r u d s n a o l g n i d n a t s t u o s e s s o l t i d e r c r o f n o i s i v o r p / ) e r u t p a c e R ( : s e s s o l t i d e r c r o f e c n a w o l l A e c n a l a b g n i n n i g e B s e i r e v o c e R s f f o - e g r a h C e c n a l a b g n i d n E 117 : ) s d n a s u o h t n i ( 0 2 0 2 d n a 1 2 0 2 , 2 2 0 2 , 1 3 r e b m e c e D d e d n e s r a e y e h t r o f t n e m g e s o i l o f t r o p y b s n a o l - s e s s o l t i d e r c r o f e c n a w o l l a e h t n i y t i v i t c a e h t e d i v o r p s e l b a t g n i w o l l o f e h T 0 2 0 2 , 1 3 r e b m e c e D d e d n E r a e Y e h t r o F l a t o T d e t a c o l l a n U r e m u s n o C - r u o F o t - e n O y l i m a F l a i t n e d i s e R l a r u t l u c i r g A s s e n i s u B l a i c r e m m o C s s e n i s u B n o i t c u r t s n o C d n a L d n a y l i m a f i t l u M e t a t s E l a e R l a i c r e m m o C e t a t s E l a e R 2 1 8 , 7 ) 2 9 3 , 2 ( 9 5 5 , 0 0 1 $ 2 9 3 , 2 $ 2 0 2 , 8 3 7 9 , 2 $ 6 3 1 , 4 5 2 1 , 7 $ 3 6 2 , 6 5 8 2 , 4 6 ) 0 4 6 , 1 1 ( 9 7 2 , 7 6 1 $ — — — — 8 2 3 3 0 6 , 4 ) 0 4 6 , 1 ( 7 6 4 ) 6 3 1 ( ) 9 7 6 , 1 ( $ 6 6 4 , 4 1 $ 3 1 9 , 9 $ ) 1 5 3 ( 0 2 1 , 4 ) 7 8 ( ) 1 9 5 ( 3 2 8 , 1 4 1 9 , 4 $ 0 7 3 , 3 2 $ 4 9 9 , 2 2 $ 0 1 0 , 3 5 1 5 , 2 5 6 2 , 3 5 1 6 , 2 1 ) 3 5 2 , 7 ( 5 0 1 ) 0 0 1 ( 1 8 7 , 5 1 4 5 7 , 4 ) 4 0 2 , 2 ( — ) 6 6 ( 9 0 4 , 1 $ 1 9 5 , 0 3 $ ) 4 6 8 , 2 ( 5 7 2 3 4 6 , 1 3 ) 4 5 8 , 1 ( $ 7 0 0 , 5 3 $ 5 9 2 , 1 4 $ 3 9 8 , 3 $ 1 9 7 , 7 5 $ % ) 5 0 . 0 ( a / n % ) 1 0 . 0 ( % — % 1 0 . 0 % ) 4 0 . 0 ( % — % — % ) 2 0 . 0 ( 6 2 3 C S A g n i t p o d A f o t c a p m I n a o l r o f ) e r u t p a c e r ( / n o i s i v o r P s e s s o l : s e s s o l t i d e r c r o f e c n a w o l l A e c n a l a b g n i n n i g e B s e i r e v o c e R s f f o - e g r a h C e c n a l a b g n i d n E a s a s e i r e v o c e r ) s f f o - e g r a h c ( n a o l t e N s n a o l g n i d n a t s t u o e g a r e v a d o i r e p f o t n e c r e p e h t g n i r u d 118 Note 5: REAL ESTATE OWNED, HELD FOR SALE, NET The following table presents the changes in REO, net of valuation allowance, for the years ended December 31, 2022, 2021 and 2020 (in thousands): Balance, beginning of period Additions from loan foreclosures Proceeds from dispositions of REO Gain on sale of REO Valuation adjustments in the period Balance, end of period Years Ended December 31 2021 2020 2022 $ $ 852 $ — (864) 352 — 340 $ 816 $ 512 (783) 307 — 852 $ 814 1,588 (2,360) 819 (45) 816 The Company had no foreclosed residential real estate properties held as REO at both December 31, 2022 and December 31, 2021. The recorded investment in one- to four-family residential loans in the process of foreclosure was $1.1 million and $609,000 at December 31, 2022 and December 31, 2021, respectively. Note 6: PROPERTY AND EQUIPMENT, NET Land, buildings and equipment owned by the Company and its subsidiaries at December 31, 2022 and 2021 are summarized as follows (in thousands): Land(1) Buildings and leasehold improvements(1) Furniture and equipment Less accumulated depreciation Property and equipment, net December 31 2022 2021 27,064 $ 145,128 129,451 301,643 (162,889) 138,754 $ 29,387 150,238 121,637 301,262 (152,503) 148,759 $ $ (1) The Company had $4.5 million and $3.3 million of properties held for sale that were included in land and buildings at December 31, 2022 and 2021, respectively. The Company’s depreciation expense related to property and equipment was $16.9 million, $17.3 million, and $18.1 million for the years ended December 31, 2022, 2021 and 2020, respectively. 119 Note 7: DEPOSITS Deposits consist of the following at December 31, 2022 and 2021 (in thousands): Non-interest-bearing checking Interest-bearing checking Regular savings accounts Money market accounts Total interest-bearing transaction and savings accounts Certificates of deposit: Certificates of deposit greater than or equal to $250,000 Certificates of deposit less than $250,000 Total certificates of deposit Total deposits Included in total deposits: Public fund transaction accounts Public fund interest-bearing certificates Total public deposits December 31 2022 6,176,998 $ 1,811,153 2,710,090 2,198,288 6,719,531 178,324 545,206 723,530 13,620,059 $ 2021 6,385,177 1,947,414 2,784,716 2,370,995 7,103,125 184,515 654,116 838,631 14,326,933 392,859 $ 26,810 419,669 $ 353,874 39,961 393,835 $ $ $ $ Deposits at December 31, 2022 and 2021 included deposits from the Company’s directors, executive officers and related entities totaling $9.7 million and $13.1 million, respectively. Scheduled maturities and weighted average interest rates of certificates of deposits at December 31, 2022 are as follows (dollars in thousands): Maturing in one year or less Maturing after one year through two years Maturing after two years through three years Maturing after three years through four years Maturing after four years through five years Maturing after five years Total certificates of deposit December 31, 2022 Amount Weighted Average Rate $ $ 531,643 142,993 33,779 8,638 5,098 1,379 723,530 0.48 % 1.91 0.54 0.39 0.35 0.78 0.76 % Note 8: ADVANCES FROM FEDERAL HOME LOAN BANK OF DES MOINES Utilizing a blanket pledge, qualifying loans receivable at December 31, 2022 and 2021, were pledged as security for FHLB borrowings and there were no securities pledged as collateral as of December 31, 2022 or 2021. At December 31, 2022 and 2021, FHLB advances were scheduled to mature as follows (dollars in thousands): At or for the Years Ended December 31 Amount 2022 Weighted Average Rate Amount Maturing in one year or less Maturing after one year through three years Maturing after three years through five years Maturing after five years Total FHLB advances $ $ 50,000 — — — 50,000 4.60 % $ — — — 4.60 % $ 50,000 — — — 50,000 2021 Weighted Average Rate 2.72 % — — — 2.72 % 120 The maximum amount outstanding from the FHLB advances at any month end for the years ended December 31, 2022 and 2021 was $75.0 million and $150.0 million, respectively. The average FHLB advances balance outstanding for the years ended December 31, 2022 and 2021 was $15.3 million and $97.9 million, respectively. The average contractual interest rate on the FHLB advances for the years ended December 31, 2022 and 2021 was 3.20% and 2.65%, respectively. As of December 31, 2022, the Bank has established a borrowing line with the FHLB to borrow up to 45% of its total assets, contingent on having sufficient qualifying collateral and ownership of FHLB stock. At December 31, 2022, under these credit facilities based on pledged collateral, the Bank had $2.99 billion of available credit capacity. Note 9: OTHER BORROWINGS Other borrowings consist of retail and wholesale repurchase agreements, other term borrowings and Federal Reserve Bank borrowings. Repurchase Agreements: At December 31, 2022, retail repurchase agreements carry interest rates ranging from 0.05% to 2.50%. These repurchase agreements are secured by the pledge of certain mortgage-backed and agency securities with a carrying value of $330.7 million. The Bank has the right to pledge or sell these securities, but it must replace them with substantially the same securities. The Bank had no borrowings under wholesale repurchase agreements at December 31, 2022 or December 31, 2021. Federal Reserve Bank of San Francisco and fed fund lines: The Bank periodically borrows funds on an overnight basis from the Federal Reserve Bank through the Borrower-In-Custody program. Such borrowings are secured by a pledge of eligible loans. At December 31, 2022, based upon available unencumbered collateral, the Bank was eligible to borrow $1.19 billion from the Federal Reserve Bank, although, at that date, as well as at December 31, 2021, the Bank had no funds borrowed under this arrangement. At December 31, 2022, the Bank had uncommitted federal funds lines of credit agreements with other financial institutions totaling $125.0 million. No balances were outstanding under these agreements as of December 31, 2022 and 2021. Availability of lines is subject to federal funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs and the agreements may restrict consecutive day usage. A summary of all other borrowings at December 31, 2022 and 2021 by the period remaining to maturity is as follows (dollars in thousands): Repurchase agreements: Maturing in one year or less Maturing after one year through two years Maturing after two years Total year-end outstanding Average outstanding Maximum outstanding at any month-end At or for the Years Ended December 31 2022 2021 Amount Weighted Average Rate Amount Weighted Average Rate $ $ $ $ 232,799 — — 232,799 249,681 266,776 0.35 % $ — — 0.35 % $ 0.15 % $ n/a $ 264,490 — — 264,490 240,817 258,779 0.13 % — — 0.13 % 0.19 % n/a 121 s a l l e w s a , s e i t r a p d r i h t o t ) S P T ( s e i t i r u c e S d e r r e f e r P t s u r T f o n o i l l i m 5 . 6 8 $ d e u s s i d a h h c i h w , ) s t s u r T e h t ( s t s u r t r o t n a r g y r a i d i s b u s d e n w o - y l l o h w e v i f d a h y n a p m o C e h t , 2 2 0 2 , 1 3 r e b m e c e D t A d e i f i c e p s t a y l l a c i d o i r e p s n o i t u b i r t s i d y a p d n a e u r c c a s e i t i r u c e s l a t i p a c n o m m o c d n a S P T . y n a p m o C e h t o t d e u s s i e r e w h c i h w , s t e s s a r e h t o s a d e i r r a c , s e i t i r u c e s l a t i p a c n o m m o c f o n o i l l i m 7 . 2 $ e h T . y n a p m o C e h t f o ) s e r u t n e b e D e h t ( s e r u t n e b e d d e t a n i d r o b u s r o i n u j f o t n u o m a e k i l a e s a h c r u p o t s g n i r e f f o e h t m o r f s d e e c o r p e h t d e s u s t s u r T e h T . s e r u t n e d n i e h t n i d e d i v o r p s a s e t a r l a u n n a e h t y b e e t n a r a u g l a n o i t i d n o c n u d n a l l u f a e t u t i t s n o c , r e h t e g o t n e k a t , s t n e m u c o d d e t a l e r d n a s e r u t n e b e d e h t r e d n u s n o i t a g i l b o s ’ y n a p m o C e h T . s t s u r T e h t f o s t e s s a e l o s e h t e r a s e r u t n e b e D y n a p m o C e h T . s e r u t n e d n i e h t n i d e d i v o r p s a n o i t p m e d e r r e i l r a e n o p u r o , s e r u t n e b e D e h t f o y t i r u t a m e h t n o p u e l b a m e e d e r y l i r o t a d n a m e r a S P T e h T . s t s u r T e h t f o s n o i t a g i l b o e h t f o y n a p m o C g n i r u D . e t a d n o i t p m e d e r e h t o t t s e r e t n i d i a p n u t u b d e u r c c a y n a s u l p s e r u t n e d n i e h t n i d e i f i c e p s e c i r p n o i t p m e d e r a t a , s e t a d c i f i c e p s r e t f a r o n o e l o h w n i s e r u t n e b e D e h t m e e d e r o t t h g i r e h t s a h d e m e e d e r y n a p m o C e h T . 0 0 0 , 3 9 7 $ f o s s o l a n i g n i t l u s e r , n o i l l i m 5 . 0 5 $ g n i l a t o t , s t s u r T e h t f o r u o f y b d e u s s i s e r u t n e b e d e h t d e m e e d e r y l l u f y n a p m o C e h t , 2 2 0 2 , 1 3 r e b m e c e D d e d n e r a e y e h t g n i n i a m e r e h t , 2 2 0 2 , 1 3 r e b m e c e D t A . 1 2 0 2 , 1 3 r e b m e c e D d e d n e r a e y e h t g n i r u d n o i l l i m 3 . 2 $ f o s s o l a n i g n i t l u s e r s e i t i r u c e s l a t i p a c n o m m o c d e t a l e r n i 0 0 0 , 8 4 2 $ d n a S P T n i n o i l l i m 0 . 8 $ S E I T I R U C E S D E R R E F E R P T S U R T E L B A M E E D E R Y L I R O T A D N A M D N A T B E D D E T A N I D R O B U S : 0 1 e t o N : ) s d n a s u o h t n i s r a l l o d ( 2 2 0 2 , 1 3 r e b m e c e D t a S P T f o y r a m m u s a s i e l b a t g n i w o l l o f e h T . l a t i p a c d e s a b - k s i r l a t o t s ’ y n a p m o C e h t f o % 9 . 4 r o , n o i l l i m 5 . 6 8 $ d e s i r p m o c s t s u r T d a e r p S e t a R t s e r e t n I t e s e R d o i r e P t n e r r u C t s e r e t n I e t a R ) 1 ( d e t a t S y t i r u t a M e t a g e r g g A t n u o m A l a p i c n i r P r o i n u J f o d e t a n i d r o b u S s e r u t n e b e D e t a g e r g g A n o i t a d i u q i L f o t n u o m A l a t i p a C n o m m o C s e i t i r u c e S e t a g e r g g A n o i t a d i u q i L t s u r T f o t n u o m A d e r r e f e r P s e i t i r u c e S % 7 5 . 1 + R O B I L h t n o m - e e r h T y l r e t r a u Q % 2 6 . 1 + R O B I L h t n o m - e e r h T y l r e t r a u Q % 8 3 . 1 + R O B I L h t n o m - e e r h T y l r e t r a u Q % 8 6 . 1 + R O B I L h t n o m - e e r h T y l r e t r a u Q % 5 6 . 1 + R O B I L h t n o m - e e r h T y l r e t r a u Q 6 2 . 6 8 3 . 6 2 1 . 5 5 4 . 6 2 4 . 6 % 9 9 . 5 5 3 0 2 7 3 0 2 7 3 0 2 5 3 0 2 6 3 0 2 4 7 7 , 5 2 4 7 7 , 5 2 4 7 7 , 5 2 4 2 1 , 4 2 3 7 , 7 8 7 1 , 9 8 ) 1 2 3 , 4 1 ( 7 5 8 , 4 7 $ $ 4 7 7 4 7 7 4 7 7 4 2 1 2 3 2 $ 0 0 0 , 5 2 0 0 0 , 5 2 0 0 0 , 5 2 0 0 0 , 4 0 0 5 , 7 8 7 6 , 2 $ 0 0 5 , 6 8 $ $ I I t s u r T y r o t u t a t S p r o c n a B o t n e m a r c a S r e t a e r G t s u r T f o e m a N V t s u r T l a t i p a C r e n n a B I V t s u r T l a t i p a C r e n n a B I I V t s u r T l a t i p a C r e n n a B I t s u r T y r o t u t a t S s k a O n o i s s i M r a p t a y t i l i b a i l S P T l a t o T ) 2 ( t n e m t s u j d a e u l a v r i a F ) 2 ( e u l a v r i a f t a y t i l i b a i l S P T l a t o T 122 a t a ) s e t o N ( 0 3 0 2 e u d s e t o N d e t a n i d r o b u S e t a R g n i t a o l F - o t - d e x i F % 0 0 0 . 5 f o t n u o m a l a p i c n i r p e t a g e r g g a n o i l l i m 0 . 0 0 1 $ g n i r e f f o n e t t i r w r e d n u n a n i d l o s d n a d e u s s i r e n n a B , 0 2 0 2 , 0 3 e n u J n O y l e t a m i x o r p p a f o , s e s n e p x e g n i r e f f o d e t a m i t s e d n a s t n u o c s i d g n i t i r w r e d n u r e t f a , s d e e c o r p t e n n i g n i t l u s e r , s e t o N e h t f o t n u o m a l a p i c n i r p e t a g e r g g a e h t f o % 0 0 1 o t l a u q e e c i r p g n i r e f f o c i l b u p h c i h w , e t a r k r a m h c n e b a o t d e i t e t a r t s e r e t n i g n i t a o l f a o t s e g n a h c e t a r t s e r e t n i e h t s r a e y 5 r e t f a , s r a e y 5 t s r i f e h t r o f % 0 0 0 . 5 o t l a u q e d e x i f s n i a m e r s e t o N e h t n o e t a r t s e r e t n i e h T . n o i l l i m 1 . 8 9 $ n i , s e t o N e h t m e e d e r y a m y n a p m o C e h t , 5 2 0 2 , 0 3 e n u J r e t f a r o n O . 0 3 0 2 , 0 3 e n u J n o e r u t a m l l i w s e t o N e h T . s t n i o p s i s a b 9 8 4 f o d a e r p s a s u l p , R F O S m r e T h t n o M - e e r h T e b o t d e t c e p x e s i . t r a p n i r o e l o h w e r u t u f d n a t n e r r u c s ’ y n a p m o C e h t f o s e i t i l i b a i l r e h t o d n a s t i s o p e d , s s e n d e t b e d n i e r u t u f d n a g n i t s i x e l l a o t t n e m y a p f o t h g i r n i d e t a n i d r o b u s e r a d n a s n o i t a g i l b o d e r u c e s n u e r a s e t o N e h T e r a s e t o N e h T . s s e n i s u b f o e s r u o c y r a n i d r o e h t g n i r u d g n i s i r a s e i t i l i b a i l d n a s r o t i d e r c l a r e n e g o t s e i t i l i b a i l ’ s e i r a i d i s b u s s ’ y n a p m o C e h t s a l l e w s a s t i s o p e d s ’ k n a B e h t g n i d u l c n i , s e i r a i d i s b u s . s n o i t a t e r p r e t n i d n a s e n i l e d i u g y r o t a l u g e r t n e r r u c r e d n u y n a p m o C e h t r o f l a t i p a c 2 r e i T n i d e d u l c n i . S P T s t i n o g n i t n u o c c a e u l a v r i a f e s u o t d e t c e l e s a h y n a p m o C e h T . n o i t p m e d e r r o f e l b i g i l e e r a S P T s ’ y n a p m o C e h t f o l l A ) 1 ( ) 2 ( Note 11: INCOME TAXES The following table presents the components of the provision for income taxes included in the Consolidated Statements of Operations for the years ended December 31, 2022, 2021 and 2020 (in thousands): Current Federal State Total Current Deferred Federal State Total Deferred Provision for income taxes Years Ended December 31 2022 2021 2020 $ 26,653 $ 5,882 32,535 20,461 $ 4,359 24,820 30,325 6,964 37,289 11,595 1,267 12,862 18,278 2,448 20,726 (8,134) (2,630) (10,764) $ 45,397 $ 45,546 $ 26,525 The following table presents the reconciliation of the federal statutory rate to the actual effective rate for the years ended December 31, 2022, 2021 and 2020: Federal income tax statutory rate Increase (decrease) in tax rate due to: Tax-exempt interest Investment in life insurance State income taxes, net of federal tax offset Tax credits Low income housing partnerships, net of amortization Other Effective income tax rate Years Ended December 31 2022 21.0 % 2021 21.0 % (3.6) (0.7) 2.3 (1.9) 1.3 0.5 18.9 % (3.0) (0.4) 2.2 (1.5) 1.1 (0.9) 18.5 % 2020 21.0 % (4.4) (0.9) 2.5 (2.6) 1.6 1.4 18.6 % 123 The following table reflects the effect of temporary differences that gave rise to the components of the net deferred tax asset as of December 31, 2022 and 2021 (in thousands): Deferred tax assets: Loan loss and REO Deferred compensation Net operating loss carryforward Federal and state tax credits State net operating losses Loan discount Lease liability Unrealized loss on securities - available-for-sale, net Other Total deferred tax assets Deferred tax liabilities: Depreciation Deferred loan fees, servicing rights and loan origination costs Intangibles Right of use asset Financial instruments accounted for under fair value accounting Total deferred tax liabilities Deferred income tax asset Valuation allowance Deferred tax asset, net December 31 2022 37,615 $ 22,033 15,470 1,545 4,558 1,104 12,997 114,708 4,782 214,812 (6,458) (13,331) (3,929) (11,603) (1,176) (36,497) 178,315 (184) 178,131 $ 2021 34,753 21,193 20,159 7,631 5,179 1,830 14,136 91 5,091 110,063 (7,119) (12,696) (4,977) (13,071) (878) (38,741) 71,322 (184) 71,138 $ $ Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recognized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period of enactment. At December 31, 2022, the Company had federal net operating loss carryforwards of $73.7 million. The Company also has $64.6 million of state net operating loss carryforwards, against which the Company has established a $184,000 valuation reserve. The federal and state net operating losses will expire, if unused, by the end of 2034. The Company has federal general business credit carryforwards at December 31, 2022 of $219,000, which will expire, if unused, by the end of 2031. The Company also has federal alternative minimum tax credit carryforwards of $1.2 million, which are available to reduce future federal regular income taxes, if any, over an indefinite period. At December 31, 2021, the Company had federal and state net operating loss carryforwards of approximately $96.0 million and $72.5 million, respectively, and federal general business credits carryforwards of $3.3 million. At that same date, the Company also had federal alternative minimum tax credit carryforwards of approximately $4.2 million. The Company had $100,000 of state credits at both December 31, 2022 and 2021, which are waiting for state funding before they can be utilized. As a consequence of the Company’s 2015 acquisition of Starbuck Bancshares, Inc., the Company experienced a change in control within the meaning of Section 382 of the Code. In addition, the underlying Section 382 limitations at Starbuck Bancshares, Inc.’s level continue to apply to the Company. Section 382 limits the ability of a corporate taxpayer to use net operating loss carryforwards, general business credits, and recognized built-in-losses, on an annual basis, incurred prior to the change in control against income earned after the change in control. As a result of the Section 382 limitations, the Company is limited to utilizing $21.5 million on an annual basis (after the application of the Section 382 limitations carried over from Starbuck Bancshares, Inc.) of federal net operating loss carryforwards, general business credits, and recognized built-in losses. The applicable state Section 382 limitations range from $525,000 to $21.5 million. In 2017, the Company established a $184,000 valuation reserve against the portion of its various state net operating loss carryforwards and tax credits that it believed it is more likely than not that it would not realize the benefit because the application of the Section 382 limitations at the state level is based on future apportionment rates. For non-Section 382 limited alternative minimum tax credits, the credits expired in 2019 due to the passage of the CARES Act in 2020. As a consequence of Banner’s capital raise in June 2010, the Company experienced a change in control within the meaning of Section 382 of the Code. As a result of the Section 382 limitations, the Company is limited to utilizing $6.9 million of net operating loss carryforwards which existed prior to the acquisition of Starbuck Bancshares, Inc., on an annual basis. Based on its analysis, the Company believes it is more likely than not that the June 2010 change in control will not impact its ability to utilize all of the related available net operating loss carryforwards, general business credits, and recognized built-in-losses. As of December 31, 2022, the Company had utilized all federal net operating losses and credits limited due to the June 2010 change in control. Certain state net operating losses subject to the change of control limitations are still outstanding. 124 As a consequence of the Company’s 2019 acquisition of AltaPacific and AltaPacific Bank, the Company did not experience a change in control within the meaning of Section 382 of the Code. However, the underlying Section 382 limitations at AltaPacific and AltaPacific Bank’s continue to apply to the Company. As a result of the Section 382 limitations, the Company is limited to utilizing $110,000 of the federal net operating loss carryovers and general business credits acquired from AltaPacific and AltaPacific Bank based on underlying limits carried over. Based on its analysis, the Company believes it is more likely than not that the Section 382 limitations will not impact its ability to utilize all of the related available net operating loss carryforwards and general business credits. Retained earnings at December 31, 2022 and 2021 included approximately $5.4 million in tax basis bad debt reserves for which no income tax liability has been recorded. In the future, if this tax bad debt reserve is used for purposes other than to absorb bad debts or the Company no longer qualifies as a bank or is completely liquidated, the Company will incur a federal tax liability at the then-prevailing corporate tax rate, established as $1.1 million at December 31, 2022. A reconciliation of the beginning and ending amount of total unrecognized state tax benefits for the years ended December 31, 2022 and 2021 is as follows (in thousands): Balance, beginning of year Changes related to prior year tax positions Changes related to current year tax positions Balance, end of year Years Ended December 31 2021 450 365 185 1,000 2022 1,000 $ 415 185 1,600 $ $ $ None of the unrecognized tax benefits, if recognized, would materially affect the effective tax rate. The Company does not anticipate that the amount of unrecognized tax benefits will significantly increase or decrease in the next twelve months. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense. The amount of interest and penalties accrued for the years ended December 31, 2022, 2021 and 2020 is immaterial. The Company files consolidated income tax returns in Oregon, California, Utah, Montana and Idaho and for federal purposes. The Company is no longer subject to tax examination for tax years before 2019. Tax credit investments: The Company invests in low income housing tax credit funds that are designed to generate a return primarily through the realization of federal tax credits. The Company accounts for these investments by amortizing the cost of tax credit investments over the life of the investment using a proportional amortization method and tax credit investment amortization expense is a component of the provision for income taxes. The following table presents the balances of the Company’s tax credit investments and related unfunded commitments at December 31, 2022 and 2021 (in thousands): Tax credit investments Unfunded commitments—tax credit investments December 31, 2022 December 31, 2021 $ 71,430 $ 44,563 56,589 31,174 The following table presents other information related to the Company’s tax credit investments for the years ended December 31, 2022, 2021 and 2020 (in thousands): Tax credits and other tax benefits recognized Tax credit amortization expense included in provision for income taxes Note 12: EMPLOYEE BENEFIT PLANS For the years ended December 31, 2020 3,842 2,992 2022 $ 5,621 $ 4,638 2021 4,390 $ 3,816 Employee Retirement Plans: Substantially all of the Company’s and the Bank’s employees are eligible to participate in its 401(k)/Profit Sharing Plan, a defined contribution and profit sharing plan sponsored by the Company. Employees may elect to have a portion of their salary contributed to the plan in conformity with Section 401(k) of the Internal Revenue Code. At the discretion of the Company’s Board of Directors, the Company may elect to make matching and/or profit sharing contributions for the employees’ benefit. For the years ended December 31, 2022, 2021 and 2020, $6.9 million, $6.5 million and $6.7 million, respectively, was expensed for 401(k) contributions. During 2022, the Board of Directors elected to make a 4% of eligible compensation matching contribution. 125 Supplemental Retirement and Salary Continuation Plans: Through the Bank, the Company is obligated under various non-qualified deferred compensation plans to help supplement the retirement income of certain executives, including certain retired executives, selected by resolution of the Bank’s Boards of Directors or in certain cases by the former directors of acquired banks. These plans are unfunded, include both defined benefit and defined contribution plans, and provide for payments after the executive’s retirement. In the event of a participant employee’s death prior to or during retirement, the Company is obligated to pay to the designated beneficiary the benefits set forth under the plan. For the years ended December 31, 2022, 2021 and 2020, expense recorded for supplemental retirement and salary continuation plan benefits totaled $2.0 million, $3.3 million, and $2.1 million, respectively. At December 31, 2022 and 2021, liabilities recorded for the various supplemental retirement and salary continuation plan benefits totaled $37.1 million and $39.4 million, respectively, and are recorded in a deferred compensation liability account. Deferred Compensation Plans and Rabbi Trusts: The Company and the Bank also offer non-qualified deferred compensation plans to members of their Boards of Directors and certain employees. The plans permit each participant to defer a portion of director fees, non- qualified retirement contributions, salary or bonuses for future receipt. Compensation is charged to expense in the period earned. In connection with its acquisitions, the Company also assumed liability for certain deferred compensation plans for key employees, retired employees and directors. In order to fund the plans’ future obligations, the Company has purchased life insurance policies or other investments, including Banner common stock, which in certain instances are held in irrevocable trusts commonly referred to as “Rabbi Trusts.” As the Company is the owner of the investments and the beneficiary of the insurance policies, and in order to reflect the Company’s policy to pay benefits equal to the accumulations, the assets and liabilities are reflected in the Consolidated Statements of Financial Condition. Banner common stock held for such plans is reported as a contra-equity account and was recorded at an original cost of $6.9 million at December 31, 2022 and $7.4 million at December 31, 2021. At December 31, 2022 and 2021, liabilities recorded in connection with deferred compensation plan benefits totaled $14.5 million ($6.9 million in contra-equity) and $15.0 million ($7.4 million in contra-equity), respectively, and are recorded in deferred compensation or equity as appropriate. The Bank has purchased, or acquired through mergers, life insurance policies in connection with the implementation of certain executive supplemental retirement, salary continuation and deferred compensation retirement plans, as well as additional policies not related to any specific plan. These policies provide protection against the adverse financial effects that could result from the death of a key employee and provide tax-exempt income to offset expenses associated with the plans. It is the Bank’s intent to hold these policies as a long-term investment. However, there will be an income tax impact if the Bank chooses to surrender certain policies. Although the lives of individual current or former management-level employees are insured, the Bank is the owner and sole or partial beneficiary. At December 31, 2022 and 2021, the cash surrender value of these policies was $297.6 million and $244.2 million, respectively. The Bank is exposed to credit risk to the extent an insurance company is unable to fulfill its financial obligations under a policy. In order to mitigate this risk, the Bank uses a variety of insurance companies and regularly monitors their financial condition. Note 13: STOCK-BASED COMPENSATION PLANS The Company operates the following stock-based compensation plans as approved by its shareholders: • • 2014 Omnibus Incentive Plan (the 2014 Plan). 2018 Omnibus Incentive Plan (the 2018 Plan). The purpose of these plans is to promote the success and enhance the value of the Company by providing a means for attracting and retaining highly skilled employees, officers and directors of Banner and its affiliates and linking their personal interests with those of the Company’s shareholders. Under these plans the Company currently has outstanding restricted stock share grants and restricted stock unit grants. 2014 Omnibus Incentive Plan The 2014 Plan was approved by shareholders on April 22, 2014. The 2014 Plan provides for the grant of incentive stock options, non- qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, other stock- based awards and other cash awards, and provides for vesting requirements which may include time-based or performance-based conditions. The Company reserved 900,000 shares of its common stock for issuance under the 2014 Plan in connection with the exercise of awards. As of December 31, 2022, 272,495 restricted stock shares and 429,982 restricted stock units have been granted under the 2014 Plan of which 1,552 restricted stock shares and 23,170 restricted stock units are unvested. 2018 Omnibus Incentive Plan The 2018 Plan was approved by shareholders on April 24, 2018. The 2018 Plan provides for the grant of incentive stock options, non- qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, other stock- based awards and other cash awards, and provides for vesting requirements which may include time-based or performance-based conditions. The Company reserved 900,000 shares of common stock for issuance under the 2018 Plan in connection with the exercise of awards. As of December 31, 2022, 556,269 restricted stock units have been granted under the 2018 Plan of which 358,005 restricted stock units are unvested. 126 The expense associated with all restricted stock and unit grants was $8.9 million, $9.3 million and $9.2 million respectively, for the years ended December 31, 2022, 2021 and 2020. Unrecognized compensation expense for these awards as of December 31, 2022 was $10.9 million and will be recognized over a weighted average period of 24 months. A summary of the Company’s Restricted Stock/Unit award activity during the years ended December 31, 2022, 2021 and 2020 follows: Shares/Units Weighted Average Grant-Date Fair Value Unvested at January 1, 2020 Granted (380,004 non-voting) Vested Forfeited Unvested at December 31, 2020 Granted (181,309 non-voting) Vested Forfeited Unvested at December 31, 2021 Granted (138,022 non-voting) Vested Forfeited Unvested at December 31, 2022 382,872 $ 384,807 (146,919) (42,624) 578,136 183,548 (232,267) (53,195) 476,222 139,574 (193,082) (39,987) 382,727 54.39 33.49 55.18 47.90 40.76 55.52 45.37 45.95 43.62 58.87 45.30 47.63 49.98 127 Note 14: REGULATORY CAPITAL REQUIREMENTS Banner is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. Banner Bank, as a state-chartered federally insured commercial bank, is subject to the capital requirements established by the FDIC. The Federal Reserve requires Banner to maintain capital adequacy that generally parallels the FDIC requirements. The following table shows the regulatory capital ratios of the Company and the Bank and the minimum regulatory requirements (dollars in thousands): Actual Amount Ratio Minimum for Capital Adequacy Purposes Ratio Amount Minimum to be Categorized as “Well- Capitalized” Under Prompt Corrective Action Provisions Amount Ratio December 31, 2022: Banner Corporation—consolidated: Total capital to risk-weighted assets Tier 1 capital to risk-weighted assets Tier 1 capital to average leverage assets Tier 1 common equity to risk-weighted assets $ 1,769,064 1,528,694 1,528,694 1,442,194 14.04 % $ 1,008,232 756,174 12.13 647,345 9.45 567,130 11.44 8.00 % $ 1,260,290 756,174 6.00 n/a 4.00 n/a 4.50 10.00 % 6.00 n/a n/a Banner Bank: Total capital to risk- weighted assets Tier 1 capital to risk- weighted assets Tier 1 capital to average leverage assets Tier 1 common equity to risk-weighted assets 1,684,766 1,544,396 1,544,396 1,544,396 13.38 12.27 9.55 12.27 1,007,325 755,494 646,935 566,620 8.00 6.00 4.00 4.50 1,259,156 1,007,325 808,668 818,452 10.00 8.00 5.00 6.50 December 31, 2021: Banner Corporation—consolidated: Total capital to risk-weighted assets Tier 1 capital to risk-weighted assets Tier 1 capital to average leverage assets Tier 1 common equity to risk-weighted assets $ 1,663,943 1,440,694 1,440,694 1,305,194 14.71 % $ 12.74 8.76 11.54 Banner Bank: Total capital to risk- weighted assets Tier 1 capital to risk- weighted assets Tier 1 capital to average leverage assets Tier 1 common equity to risk-weighted assets 1,552,204 1,428,955 1,428,955 1,428,955 13.73 12.64 8.69 12.64 904,633 678,474 658,091 508,856 904,159 678,119 657,882 508,589 8.00 % $ 1,130,791 678,474 6.00 n/a 4.00 n/a 4.50 10.00 % 6.00 n/a n/a 8.00 6.00 4.00 4.50 1,130,199 904,159 822,353 734,629 10.00 8.00 5.00 6.50 At December 31, 2022, Banner and the Bank each exceeded the requirements to be “well capitalized” and the fully phased-in capital conservation buffer requirement. There have been no conditions or events since December 31, 2022 that have materially adversely changed the Tier 1 or Tier 2 capital of the Company or the Bank. However, events beyond the control of the Bank, such as weak or depressed economic conditions in areas where the Bank has most of its loans, could adversely affect future earnings and, consequently, the ability of the Bank to meet its respective capital requirements. The Company may not declare or pay cash dividends on, or repurchase, any of its shares of common stock if the effect thereof would cause equity to be reduced below applicable regulatory capital maintenance requirements or if such declaration and payment would otherwise violate regulatory requirements. Note 15: GOODWILL, OTHER INTANGIBLE ASSETS AND MORTGAGE SERVICING RIGHTS Goodwill and Other Intangible Assets: At December 31, 2022, intangible assets are comprised of goodwill and CDI acquired in business combinations. Goodwill represents the excess of the purchase consideration paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination, and is not amortized but is reviewed at least annually for impairment. Banner has identified one reporting unit for purposes of evaluating goodwill for impairment. At December 31, 2022, the Company completed an assessment of qualitative factors and concluded that no further analysis was required as it is more likely than not that the fair value of the Bank, the reporting unit, exceeds the carrying value. 128 CDI represents the value of transaction-related deposits and the value of the client relationships associated with the deposits. The Company amortizes CDI assets over their estimated useful lives and reviews them at least annually for events or circumstances that could impair their value. The CDI assets shown in the table below represent the value ascribed to the long-term deposit relationships acquired in various bank acquisitions. These intangible assets are being amortized using an accelerated method over estimated useful lives of eight years to ten years. The CDI assets are not estimated to have a significant residual value. The following table summarizes the changes in the Company’s goodwill and other intangibles for the years ended December 31, 2022, 2021 and 2020 (in thousands): Balance, January 1, 2020 Amortization Balance, December 31, 2020 Amortization Balance, December 31, 2021 Amortization Other Changes(1) Balance, December 31, 2022 Goodwill CDI Total $ $ 373,121 $ — 373,121 — 373,121 — — 373,121 $ 29,158 $ (7,732) 21,426 (6,571) 14,855 (5,279) (136) 9,440 $ 402,279 (7,732) 394,547 (6,571) 387,976 (5,279) (136) 382,561 (1) Acquired CDI was adjusted for the sale of branches in 2022. Estimated amortization expense with respect to CDI as of December 31, 2022 for the periods indicated (in thousands): Year ended: 2023 2024 2025 2026 2026 Thereafter Net carrying amount Estimated Amortization 3,756 $ 2,626 1,567 904 426 161 9,440 $ Mortgage Servicing Rights: Mortgage and SBA servicing rights are reported in other assets. SBA servicing rights are initially recorded and carried at fair value. Mortgage servicing rights are initially recognized at fair value and are amortized in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Mortgage servicing rights are subsequently evaluated for impairment based upon the fair value of the rights compared to the amortized cost (remaining unamortized initial fair value). If the fair value is less than the amortized cost, a valuation allowance is created through an impairment charge to servicing fee income. However, if the fair value is greater than the amortized cost, the amount above the amortized cost is not recognized in the carrying value. In 2022, 2021 and 2020, the Company did not record any impairment charges or recoveries against mortgage servicing rights. Unpaid principal balance of loans for which mortgage and SBA servicing rights have been recognized totaled $2.77 billion at both December 31, 2022 and 2021. Custodial accounts maintained in connection with this servicing totaled $11.2 million and $3.2 million at December 31, 2022 and 2021, respectively. An analysis of the mortgage and SBA servicing rights for the years ended December 31, 2022, 2021 and 2020 is presented below (in thousands): Balance, beginning of the year Additions—amounts capitalized Additions—through purchase (1) Amortization Fair value adjustments (2) (3) Balance, end of the year Years Ended December 31 2021 2020 2022 $ $ 17,206 $ 3,200 285 (4,216) (309) 16,166 $ 15,223 $ 7,260 159 (6,580) 1,144 17,206 $ 14,148 8,572 175 (7,672) — 15,223 (1) Amortization of mortgage servicing rights is recorded as a reduction of loan servicing income within mortgage banking operations and any unamortized balance is fully amortized if the loan repays in full. (2) There was no valuation allowance on mortgage servicing rights as of both December 31, 2022 and 2021. (3) Fair value adjustments relate to SBA servicing rights. These adjustments are estimated based on an independent dealer analysis by discounting estimated net future cash flows from servicing SBA loans. 129 Note 16: FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents estimated fair values of the Company’s financial instruments as of December 31, 2022 and 2021, whether or not recognized or recorded in the Consolidated Statements of Financial Condition (in thousands): Assets: Cash and cash equivalents Securities—trading Securities—available-for-sale Securities—held-to-maturity Securities—held-to-maturity Securities purchased under agreements to resell Loans held for sale Loans receivable, net Equity securities FHLB stock Bank-owned life insurance Mortgage servicing rights SBA servicing rights Investments in limited partnerships Derivatives: Interest rate swaps Interest rate lock and forward sales commitments Liabilities: Demand, interest checking and money market accounts Regular savings Certificates of deposit FHLB advances Other borrowings Subordinated notes, net Junior subordinated debentures Derivatives: Interest rate swaps Interest rate lock and forward sales commitments Risk participation agreement December 31, 2022 December 31, 2021 Level Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value 1 3 2 2 3 2 2 3 1 3 1 3 3 3 2 2,3 2 2 2 2 2 2 3 2 2,3 2 $ 243,062 $ 28,694 2,789,031 1,109,319 8,648 300,000 56,857 10,005,259 553 12,000 297,565 15,331 835 12,427 243,062 $ 28,694 2,789,031 933,513 8,667 300,000 56,948 9,810,965 553 12,000 297,565 35,148 835 12,427 2,134,300 $ 26,981 3,638,993 464,008 57,347 300,000 96,487 8,952,664 1,000 12,000 244,156 16,045 1,161 10,257 19,339 142 19,339 142 20,826 1,555 10,186,439 2,710,090 723,530 50,000 232,799 98,947 74,857 10,186,439 2,710,090 702,581 50,000 232,799 96,718 74,857 10,703,586 2,784,716 838,631 50,000 264,490 98,564 119,815 2,134,300 26,981 3,638,993 484,483 57,370 300,000 96,914 9,100,516 1,298 12,000 244,156 24,393 1,161 10,257 20,826 1,555 10,703,586 2,784,716 836,877 50,287 264,490 105,241 119,815 37,150 37,150 11,615 11,615 118 67 118 67 140 — 140 — The Company measures and discloses certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (that is, not a forced liquidation or distressed sale). When measuring fair value, management will maximize the use of observable inputs and minimize the use of unobservable inputs whenever possible. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s estimates for market assumptions. The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize at a future date. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. 130 Items Measured at Fair Value on a Recurring Basis: The following tables present financial assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy of the fair value measurements for those assets and liabilities as of December 31, 2022 and 2021 (in thousands): Assets: Securities—trading Corporate bonds (TPS securities) $ — $ — $ 28,694 $ 28,694 December 31, 2022 Level 1 Level 2 Level 3 Total Securities—available-for-sale U.S. Government and agency obligations Municipal bonds Corporate bonds Mortgage-backed or related securities Asset-backed securities Loans held for sale(1) Equity securities SBA servicing rights Investment in limited partnerships Derivatives Interest rate swaps Interest rate lock and forward sales commitments Liabilities: Junior subordinated debentures Derivatives Interest rate swaps Interest rate lock and forward sales commitments Risk participation agreement — — — — — — — 553 — — 55,108 261,209 121,853 2,139,336 211,525 2,789,031 2,305 — — — — — — — — — — — 835 12,427 55,108 261,209 121,853 2,139,336 211,525 2,789,031 2,305 553 835 12,427 — — 553 $ 19,339 61 2,810,736 $ — 81 42,037 $ 19,339 142 2,853,326 — $ — — — — $ — $ 74,857 $ 74,857 37,150 76 67 37,293 $ — 42 — 74,899 $ 37,150 118 67 112,192 $ $ $ 131 Assets: Securities—trading Corporate bonds (TPS securities) $ — $ — $ 26,981 $ 26,981 December 31, 2021 Level 1 Level 2 Level 3 Total Securities—available-for-sale U.S. Government and agency obligations Municipal bonds Corporate bonds Mortgage-backed or related securities Asset-backed securities (1) Loans held for sale SBA servicing rights Investment in limited partnerships Derivatives Interest rate swaps Interest rate lock and forward sales commitments Liabilities Junior subordinated debentures Derivatives Interest rate swaps Interest rate lock and forward sales commitments $ $ $ — — — — — — — — — — — — $ — $ — — — $ 201,332 308,612 117,347 2,805,268 206,434 3,638,993 39,775 — — 20,826 88 3,699,682 $ — — — — — — — 1,161 10,257 201,332 308,612 117,347 2,805,268 206,434 3,638,993 39,775 1,161 10,257 — 1,467 39,866 $ 20,826 1,555 3,739,548 — $ 119,815 $ 119,815 11,615 140 11,755 $ — — 119,815 $ 11,615 140 131,570 (1) The unpaid principal balance of residential mortgage loans held for sale carried at fair value on a recurring basis was $2.2 million and $38.6 million at December 31, 2022 and 2021, respectively. The following methods were used to estimate the fair value of each class of financial instruments above: Securities: The estimated fair values of investment securities and mortgaged-backed securities are priced using current active market quotes, if available, which are considered Level 1 measurements. For most of the portfolio, matrix pricing based on the securities’ relationship to other benchmark quoted prices is used to establish the fair value. These measurements are considered Level 2. Due to the continued limited activity in the trust preferred markets that have limited the observability of market spreads for some of the Company’s TPS securities, management has classified these securities as a Level 3 fair value measure. Management periodically reviews the pricing information received from third-party pricing services and tests those prices against other sources to validate the reported fair values. Loans Held for Sale: Fair values for residential mortgage loans held for sale are determined by comparing actual loan rates to current secondary market prices for similar loans. Equity Securities: Equity securities are invested in a publicly traded stock. The fair value of these securities are based on daily quoted market prices. SBA Servicing Rights: Fair values are estimated based on an independent dealer analysis by discounting estimated net future cash flows from servicing. The evaluation utilizes assumptions market participants would use in determining fair value including prepayment speeds, delinquency and foreclosure rates, the discount rate, servicing costs, and the timing of cash flows. The SBA servicing portfolio is stratified by loan type and fair value estimates are adjusted up or down based on the serviced loan interest rates versus current rates on new loan originations since the most recent independent analysis. 132 Junior Subordinated Debentures: The fair value of junior subordinated debentures is estimated using an income approach technique. The significant inputs included in the estimation of fair value are the credit risk adjusted spread and three month LIBOR. The credit risk adjusted spread represents the nonperformance risk of the liability. The Company utilizes an external valuation firm to validate the reasonableness of the credit risk adjusted spread used to determine the fair value. The junior subordinated debentures are carried at fair value which represents the estimated amount that would be paid to transfer these liabilities in an orderly transaction amongst market participants. Due to inactivity in the trust preferred markets that have limited the observability of market spreads, management has classified this as a Level 3 fair value measurement. Derivatives: Derivatives include interest rate swap agreements, interest rate lock commitments to originate loans held for sale, forward sales contracts to sell loans and securities related to mortgage banking activities and risk participation agreements. Fair values for these instruments, which generally change as a result of changes in the level of market interest rates, are estimated based on dealer quotes and secondary market sources. As the interest rate lock commitments use a pull-through rate that is considered an unobservable input, these derivatives are classified as a level 3 fair value measurement. Off-Balance Sheet Items: Off-balance sheet financial instruments include unfunded commitments to extend credit, including standby letters of credit, and commitments to purchase investment securities. The fair value of these instruments is not considered to be material. Limitations: The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2022 and 2021. The factors used in the fair value estimates are subject to change subsequent to the dates the fair value estimates are completed, therefore, current estimates of fair value may differ significantly from the amounts presented herein. Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3): The following table provides a description of the valuation technique, unobservable inputs and quantitative and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring and non- recurring basis at December 31, 2022 and 2021: December 31 Financial Instruments Corporate bonds (TPS securities) Junior subordinated debentures Loans individually evaluated REO Interest rate lock commitments Investments in limited partnerships SBA servicing rights Valuation Technique Discounted cash flows Discounted cash flows Collateral valuations Appraisals Pricing model Net Asset Value Discounted cash flows Unobservable Inputs Discount rate Discount rate Discount to appraised value Discount to appraised value Pull-through rate Infrequent transactions Constant prepayment rate 2022 Weighted Average Rate 8.27 % 8.27 % 2021 Weighted Average Rate 3.71 % 3.71 % n/a 8.5% to 20.0% 60.91 % 86.64 % n/a 12.25% 68.35 % 78.65 % n/a 14.10% TPS Securities: Management believes that the credit risk-adjusted spread used to develop the discount rate utilized in the fair value measurement of TPS securities is indicative of the risk premium a willing market participant would require under current market conditions for instruments with similar contractual rates and terms and conditions and issuers with similar credit risk profiles and with similar expected probability of default. Management attributes the change in fair value of these instruments, compared to their par value, primarily to perceived general market adjustments to the risk premiums for these types of assets subsequent to their issuance. Junior subordinated debentures: Similar to the TPS securities discussed above, management believes that the credit risk-adjusted spread utilized in the fair value measurement of the junior subordinated debentures is indicative of the risk premium a willing market participant would require under current market conditions for an issuer with Banner’s credit risk profile. Management attributes the change in fair value of the junior subordinated debentures, compared to their par value, primarily to perceived general market adjustments to the risk premiums for these types of liabilities subsequent to their issuance. Future contractions in the risk adjusted spread relative to the spread currently utilized to measure the Company’s junior subordinated debentures at fair value as of December 31, 2022, or the passage of time, will result in negative fair value adjustments. At December 31, 2022, the discount rate utilized was based on a credit spread of 350 basis points and three month LIBOR of 477 basis points. Interest rate lock commitments: The fair value of the interest rate lock commitments is based on secondary market sources adjusted for an estimated pull-through rate. The pull-through rate is based on historical loan closing rates for similar interest rate lock commitments. An increase or decrease in the pull-through rate would have a corresponding, positive or negative fair value adjustment. SBA servicing asset: The constant prepayment rate (CPR) is set based on industry data. An increase in the CPR would result in a negative fair value adjustment, where a decrease in CPR would result in a positive fair value adjustment. 133 The following table provides a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years ended December 31, 2022 and 2021 (in thousands): Borrowings— Junior Subordinated Debentures Level 3 Fair Value Inputs Interest Rate Lock and Forward Sales Commitments Investments in Limited Partnerships SBA Servicing Asset TPS Securities Balance, January 1, 2021 Net change recognized in earnings Net change recognized in AOCI Purchases, issuances and settlements Redemptions Balance, December 31, 2021 Net change recognized in earnings Net change recognized in AOCI Purchases, issuances and settlements Redemptions Balance, December 31, 2022 $ $ 24,980 $ 2,001 — — — 26,981 1,713 — — — 28,694 $ 116,974 $ — 11,089 — (8,248) 119,815 — 5,560 — (50,518) 74,857 $ 5,221 $ (3,754) — — — 1,467 (1,428) — — — 39 $ 2,819 $ 2,615 — 4,823 — 10,257 (460) — 2,630 — 12,427 $ — 1,161 — — — 1,161 (326) — — — 835 Interest income and dividends from the TPS securities are recorded as a component of interest income. Interest expense related to the junior subordinated debentures is measured based on contractual interest rates and reported in interest expense. The change in fair value of the junior subordinated debentures, which represents changes in instrument specific credit risk, is recorded in other comprehensive income. The change in fair value of the investment in limited partnerships and the SBA servicing asset are recorded as a component of non-interest income. Items Measured at Fair Value on a Non-recurring Basis The following tables present financial assets and liabilities measured at fair value on a non-recurring basis and the level within the fair value hierarchy of the fair value measurements for those assets at December 31, 2022 and 2021 (in thousands): Loans individually evaluated REO Loans held for sale Loans individually evaluated REO Level 1 December 31, 2022 Level 2 Level 3 — $ — — — $ — 49,474 1,883 $ 340 — Total 1,883 340 49,474 December 31, 2021 Level 1 Level 2 Level 3 Total — $ — — $ — 2,989 $ 852 2,989 852 $ $ The following table presents the losses resulting from non-recurring fair value adjustments for the years ended December 31, 2022, 2021 and 2020 (in thousands): Loans individually evaluated REO Loans held for sale Total loss from non-recurring measurements For the years ended December 31, 2021 2022 2020 (626) $ — (2,538) (3,164) $ (303) $ — — (303) $ (3,482) (45) — (3,527) $ $ 134 Loans individually evaluated: Expected credit losses for loans evaluated individually are measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or when the Bank determines that foreclosure is probable, the expected credit loss is measured based on the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. As a practical expedient, the Bank measures the expected credit loss for a loan using the fair value of the collateral, if repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the Bank’s assessment as of the reporting date. In both cases, if the fair value of the collateral is less than the amortized cost basis of the loan, the Bank will recognize an allowance as the difference between the fair value of the collateral, less costs to sell (if applicable) at the reporting date and the amortized cost basis of the loan. If the fair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis will be limited to the amount previously charged-off by the subsequent changes in the expected credit losses for loans evaluated individually are included within the provision for credit losses in the same manner in which the expected credit loss initially was recognized or as a reduction in the provision that would otherwise be reported. REO: The Company records REO (acquired through a lending relationship) at fair value on a non-recurring basis. Fair value adjustments on REO are based on updated real estate appraisals which are based on current market conditions. All REO properties are recorded at the lower of the estimated fair value of the real estate, less expected selling costs, or the carrying amount of the defaulted loans. From time to time, non-recurring fair value adjustments to REO are recorded to reflect partial write-downs based on an observable market price or current appraised value of property. Banner considers any valuation inputs related to REO to be Level 3 inputs. The individual carrying values of these assets are reviewed for impairment at least annually and any additional impairment charges are expensed to operations. Loans held for sale: The multifamily held for sale loans are carried at the lower of cost or market value. Lower of cost or market adjustments for multifamily loans held for sale are calculated based on discounted cash flows using a discount rate that is a combination of market spreads for similar loan types added to selected index rates. If the fair value of the multifamily held for sale loans is lower than the amortized cost basis of the loans, a net unrealized loss is recognized through the valuation allowance by charges to income. Note 17: BANNER CORPORATION (PARENT COMPANY ONLY) Summary financial information is as follows (in thousands): Statements of Financial Condition ASSETS Cash Investment in trust equities Investment in subsidiaries Other assets Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY Miscellaneous liabilities Deferred tax liability, net Subordinated notes, net Junior subordinated debentures at fair value Shareholders’ equity Total liabilities and shareholders’ equity Statements of Operations INTEREST INCOME: Interest-bearing deposits OTHER INCOME (EXPENSE): Dividend income from subsidiaries Equity in undistributed income of subsidiaries Other income Interest on other borrowings Other expenses Net income before taxes BENEFIT FROM INCOME TAXES NET INCOME 135 December 31 2022 2021 77,457 $ 2,678 1,549,918 11,651 1,641,704 $ 8,925 $ 2,543 98,947 74,857 1,456,432 1,641,704 $ 106,329 4,196 1,801,764 5,877 1,918,166 5,723 3,737 98,564 119,815 1,690,327 1,918,166 $ $ $ $ Years Ended December 31 2021 2022 2020 $ $ 80 $ 97 $ 112 101,931 104,391 96 (8,400) (6,092) 192,006 99,788 112,814 146 (8,780) (7,391) 196,674 (3,372) 195,378 $ (4,374) 201,048 $ 87,748 36,401 62 (7,204) (3,530) 113,589 (2,339) 115,928 Statements of Cash Flows OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries (Decrease) increase in deferred taxes Net change in valuation of financial instruments carried at fair value Share-based compensation Loss on extinguishment of debt Net change in other assets Net change in other liabilities Net cash provided from operating activities INVESTING ACTIVITIES: Other investing activities Reduction in investment in subsidiaries Net cash used by investing activities FINANCING ACTIVITIES: Net proceeds from issuance of subordinated notes Repayment of junior subordinated debentures Proceeds from redemption of trust securities related to junior subordinated debentures Taxes paid related to net share settlement for equity awards Repurchase of common stock Cash dividends paid Net cash used by financing activities NET CHANGE IN CASH CASH, BEGINNING OF PERIOD CASH, END OF PERIOD Note 18: STOCK REPURCHASES Years Ended December 31 2021 2022 2020 $ 195,378 $ 201,048 $ 115,928 (104,391) (43) (56) 8,870 765 (4,169) 3,765 100,119 (1,549) (3,072) (4,621) — (50,518) 1,518 (3,332) (10,960) (61,078) (112,814) (571) 55 9,258 2,284 (2,970) 4,050 100,340 (228) — (228) — (8,248) 248 (3,228) (56,528) (57,621) (124,370) (28,872) 106,329 77,457 $ (125,377) (25,265) 131,594 106,329 $ $ (36,401) 1,438 — 9,168 — 16,756 (235) 106,654 (38) — (38) 98,027 — — (1,453) (31,775) (94,078) (29,279) 77,337 54,257 131,594 On March 27, 2019 the Company announced that its Board of Directors had authorized the repurchase up to 5% of the Company’s common stock, or 1,757,637 of the Company’s outstanding shares. Under the authorization, shares could be repurchased by the Company in open market purchases. There were 624,780 shares repurchased in the first quarter of 2020 under the 2019 authorization at an average price of $50.84 per share. This authorization expired in March 2020. On December 21, 2020, the Company announced that its Board of Directors had authorized the repurchase up to 1,757,781 shares, or approximately 5% of the Company’s outstanding common stock. Under the authorization, shares could be repurchased by the Company in open market purchases. During 2020, no shares were repurchased under the 2020 authorization. In addition to the shares repurchased under the 2019 authorization, there were 41,507 shares surrendered during 2020 by employees to satisfy tax withholding obligations upon vesting of restricted stock. There were 1,050,000 shares repurchased during 2021, under the 2020 authorization at an average price of $53.84 per share. This authorization expired in December 2021. On December 22, 2021, the Company announced that its Board of Directors had authorized the repurchase of up to 1,712,510 shares, or approximately 5%, of the Company’s outstanding common stock. Under the authorization, shares could be repurchased by the Company in open market purchases. The extent to which the Company repurchases its shares and the timing of such repurchases will depend upon market conditions and other corporate considerations. During the year ended December 31, 2021, no shares were repurchased under the 2021 authorization. There were 59,730 shares surrendered during 2021 by employees to satisfy tax withholding obligations upon vesting of restricted stock and settlement of restricted stock units. There were 200,000 shares repurchased during 2022, under the 2021 authorization at an average price of $54.77 per share, leaving 1,512,510 available for future repurchase. In addition to the shares repurchased under the 2021 authorization, there were 55,228 shares surrendered during 2022 by employees to satisfy tax withholding obligations upon vesting of restricted stock. This authorization expired in December 2022. 136 Note 19: CALCULATION OF EARNINGS PER COMMON SHARE The following table reconciles basic to diluted weighted average shares outstanding used to calculate earnings per share data (dollars in thousands, except per share data): Net income Basic weighted average shares outstanding Dilutive effect of unvested restricted stock Diluted weighted shares outstanding Earnings per common share Basic Diluted Years Ended December 31 2021 2022 2020 $ 195,378 $ 201,048 $ 115,928 34,264,322 195,600 34,459,922 34,610,056 309,132 34,919,188 35,264,252 264,596 35,528,848 $ $ 5.70 $ 5.67 $ 5.81 $ 5.76 $ 3.29 3.26 Note 20: COMMITMENTS AND CONTINGENCIES Financial Instruments with Off-Balance Sheet Risk - The Company has financial instruments with off-balance-sheet risk generated in the normal course of business to meet the financing needs of its clients. These financial instruments include commitments to extend credit, commitments related to standby letters of credit, commitments to originate loans, commitments to sell loans, and commitments to buy or sell securities. These instruments involve, to varying degrees, elements of credit and interest rate risk similar to the risk involved in on-balance sheet items recognized in our Consolidated Statements of Financial Condition. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument from commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as for on-balance sheet instruments. Outstanding commitments for which no asset or liability for the notional amount has been recorded consisted of the following at the dates indicated (in thousands): Commitments to extend credit Standby letters of credit and financial guarantees Commitments to originate loans Risk participation agreements Contract or Notional Amount December 31, 2022 $ 4,031,954 $ 26,119 53,266 48,566 December 31, 2021 3,527,143 21,830 106,609 40,064 Derivatives also included in Note 21: Commitments to originate loans held for sale Commitments to sell loans secured by one- to four-family residential properties Commitments to sell securities related to mortgage banking activities 10,525 12,568 7,000 106,590 27,006 127,580 In addition to the commitments disclosed in the table above, the Company is committed to funding its unfunded tax credit investments, as discussed previously in Note 11, Income Taxes. The Company has also entered into agreements to invest in several limited partnerships. As of December 31, 2022 and December 31, 2021, the funded balances and remaining outstanding commitments of these investments were as follows (in thousands): December 31, 2022 December 31, 2021 Limited partnerships investments $ 10,272 $ 12,228 $ Funded Balance Unfunded Balance Funded Balance Unfunded Balance 9,858 7,642 $ Commitments to extend credit are agreements to lend to a client, as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Many of the commitments may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements. Each client’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the client. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties. The Company’s allowance for credit losses - unfunded loan commitments was $14.7 million and $12.4 million, at December 31, 2022 and 2021, respectively. 137 Standby letters of credit are conditional commitments issued to guarantee a client’s performance or payment to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. Under a risk participation agreement, the Bank guarantees the financial performance of a borrower on the participated portion of an interest rate swap on a loan. Interest rates on residential one- to four-family mortgage loan applications are typically rate locked (committed) to clients during the application stage for periods ranging from 30 to 60 days, the most typical period being 45 days. Traditionally, these loan applications with rate lock commitments had the pricing for the sale of these loans locked with various qualified investors under a best-efforts delivery program at or near the time the interest rate is locked with the client. The Bank then attempts to deliver these loans before their rate locks expired. This arrangement generally required delivery of the loans prior to the expiration of the rate lock. Delays in funding the loans would require a lock extension. The cost of a lock extension at times was borne by the client and at times by the Bank. These lock extension costs have not had a material impact to the Company’s operations. For mandatory delivery commitments the Company enters into forward commitments at specific prices and settlement dates to deliver either: (1) residential mortgage loans for purchase by secondary market investors (i.e., Freddie Mac or Fannie Mae), or (2) mortgage-backed securities to broker/dealers. The purpose of these forward commitments is to offset the movement in interest rates between the execution of its residential mortgage rate lock commitments with borrowers and the sale of those loans to the secondary market investor. There were no counterparty default losses on forward contracts during 2022 or 2021. Market risk with respect to forward contracts arises principally from changes in the value of contractual positions due to changes in interest rates. The Company limits its exposure to market risk by monitoring differences between commitments to clients and forward contracts with market investors and securities broker/dealers. In the event the Company has forward delivery contract commitments in excess of available mortgage loans, the transaction is completed by either paying or receiving a fee to or from the investor or broker/dealer equal to the increase or decrease in the market value of the forward contract. Changes in the value of rate lock commitments are recorded as assets and liabilities. In the normal course of business, the Company and/or its subsidiaries have various legal proceedings and other contingent matters outstanding. These proceedings and the associated legal claims are often contested and the outcome of individual matters is not always predictable. These claims and counter-claims typically arise during the course of collection efforts on problem loans or with respect to action to enforce liens on properties in which the Bank holds a security interest. Based upon the information known to management at this time, the Company has accrued $14.8 million related to outstanding legal proceedings. There are no other legal proceedings that management believes would have a material adverse effect on the results of operations or consolidated financial position at December 31, 2022. In connection with certain asset sales, the Bank typically makes representations and warranties about the underlying assets conforming to specified guidelines. If the underlying assets do not conform to the specifications, the Bank may have an obligation to repurchase the assets or indemnify the purchaser against any loss. The Bank believes that the potential for material loss under these arrangements is remote. Accordingly, the fair value of such obligations is not material. Note 21: DERIVATIVES AND HEDGING The Company, through its Banner Bank subsidiary, is party to various derivative instruments that are used for asset and liability management and client financing needs. Derivative instruments are contracts between two or more parties that have a notional amount and an underlying variable, require no net investment and allow for the net settlement of positions. The notional amount serves as the basis for the payment provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents a specified interest rate, index, or other component. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the market value of the derivative contract. The Company’s predominant derivative and hedging activities involve interest rate swaps related to certain term loans and forward sales contracts associated with mortgage banking activities. Generally, these instruments help the Company manage exposure to market risk and meet client financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors such as market-driven interest rates and prices or other economic factors. 138 As of December 31, 2022 and December 31, 2021, the notional values or contractual amounts and fair values of the Company’s derivatives were as follows (in thousands): Asset Derivatives Liability Derivatives December 31, 2021 December 31, 2022 Notional/ Contract Amount Fair Value $ — $ (1) — $ Notional/ Contract Amount December 31, 2022 Notional/ Contract Amount Fair Value (1) Fair Value (2) — $ 400,000 $ 26,485 $ 400,000 $ — $ Fair Value (2) Notional/ Contract Amount December 31, 2021 440,731 37,119 551,606 20,826 440,731 37,150 551,606 (17,780) — 19,339 (17,780) (8,705) 37,150 — — 1,283 15,920 — 66 74 $ 474,502 $ 19,481 $ 695,678 $ 22,381 $ 503,381 $ 37,335 $ 676,435 $ 11,476 47,283 12,367 87,986 16,568 98,500 56,086 26,329 1,467 3,000 81 — 67 42 — 76 61 88 279 11,336 Hedged interest rate swaps Interest rate swaps not designated in hedge relationships Less: Master netting agreements Less: Cash settlements Net interest rate swaps Risk participation agreements Mortgage loan commitments Forward sales contracts Total (1) (2) Included in Other assets on the Consolidated Statements of Financial Condition. Included in Accrued expenses and other liabilities on the Consolidated Statements of Financial Condition. Derivatives Designated in Hedge Relationships Interest Rate Swaps used in Cash Flow Hedges: The Company’s floating rate loans result in exposure to losses in value or net interest income as interest rates change. The risk management objectives in using interest rate derivatives are to reduce volatility in net interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. During the fourth quarter of 2021, the Company entered into interest rate swaps designated as cash flow hedges to hedge the variable cash flows associated with existing floating rate loans. These hedge contracts involve the receipt of fixed- rate amounts from a counterparty in exchange for the Company making floating-rate payments over the life of the agreements without exchange of the underlying notional amount. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the unrealized gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest income in the same period during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest income as interest payments are made on the Company’s variable-rate assets. During the next twelve months, the Company estimates that an additional $15.7 million will be reclassified as a decrease to interest income. The following table presents the effect of cash flow hedge accounting on AOCI for the years ended December 31, 2022 and December 31, 2021 (in thousands): For the Year Ended December 31, 2022 Amount of Gain or (Loss) Recognized in AOCI on Derivative Amount of Gain or (Loss) Recognized in AOCI Included Component Amount of Gain or (Loss) Recognized in AOCI Excluded Component Location of Gain or (Loss) Recognized from AOCI into Income Amount of Gain or (Loss) Reclassified from AOCI into Income Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component Interest rate swaps $ (28,418) $ (28,418) $ — Interest Income $ (3,195) $ (3,195) $ — 139 For the Year Ended December 31, 2021 Amount of Gain or (Loss) Recognized in AOCI on Derivative Amount of Gain or (Loss) Recognized in AOCI Included Component Amount of Gain or (Loss) Recognized in AOCI Excluded Component Location of Gain or (Loss) Recognized from AOCI into Income Amount of Gain or (Loss) Reclassified from AOCI into Income Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component Interest rate swaps $ (920) $ (920) $ — Interest Income $ 340 $ 340 $ — At December 31, 2022 and December 31, 2021, we had recorded total net unrealized losses on cash flow hedges in AOCI, net of taxes of $20.1 million and $958,000, respectively. Derivatives Not Designated in Hedge Relationships Interest Rate Swaps: The Bank uses an interest rate swap program for commercial loan clients, that provides the client with a variable-rate loan and enters into an interest rate swap in which the client receives a variable-rate payment in exchange for a fixed-rate payment. The Bank offsets its risk exposure by entering into an offsetting interest rate swap with a dealer counterparty for the same notional amount and length of term as the client interest rate swap providing the dealer counterparty with a fixed-rate payment in exchange for a variable-rate payment. These swaps do not qualify as designated hedges; therefore, each swap is accounted for as a freestanding derivative. Risk Participation Agreements: In conjunction with the purchase or sale of participating interests in loans, the Company also participates in related swaps through risk participation agreements. The existing credit derivatives resulting from these participations are not designated as hedges as they are not used to manage interest rate risk in the Company’s assets or liabilities and are not speculative. Mortgage Loan Commitments: The Company sells originated one- to four-family mortgage loans into the secondary mortgage loan markets. During the period of loan origination and prior to the sale of the loans in the secondary market, the Company has exposure to movements in interest rates associated with written interest rate lock commitments with potential borrowers to originate one- to four-family loans that are intended to be sold and for closed one- to four-family mortgage loans held for sale for which fair value accounting has been elected, that are awaiting sale and delivery into the secondary market. The Company economically hedges the risk of changing interest rates associated with these mortgage loan commitments by entering into forward sales contracts to sell one- to four-family mortgage loans or mortgage-backed securities to broker/dealers at specific prices and dates. Gains (losses) recognized in income within Mortgage banking operations on non-designated hedging instruments for the years ended December 31, 2022, 2021 and 2020 were as follows (in thousands): Mortgage loan commitments Forward sales contracts For the Years Ended December 31 2022 (1,427) $ 84 (1,343) $ 2021 (3,754) $ 1,243 (2,511) $ 2020 4,430 (1,334) 3,096 $ $ The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to these agreements. Credit risk of the financial contract is controlled through the credit approval, limits, and monitoring procedures and management does not expect the counterparties to fail their obligations. In connection with the interest rate swaps between the Bank and the dealer counterparties, the agreements contain a provision where if the Bank fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions and the Bank would be required to settle its obligations. Similarly, the Bank could be required to settle its obligations under certain of its agreements if specific regulatory events occur, such as a publicly issued prompt corrective action directive, cease and desist order, or a capital maintenance agreement that required the Bank to maintain a specific capital level. If the Bank had breached any of these provisions at December 31, 2022 or December 31, 2021, it could have been required to settle its obligations under the agreements at the termination value. As of December 31, 2022, the Company had no obligations to dealer counterparties related to these agreements. As of December 31, 2021, the termination value of derivatives in a net liability position related to these agreements was $24.9 million. The Company generally posts collateral against derivative liabilities in the form of cash, government agency-issued bonds, mortgage-backed securities, or commercial mortgage-backed securities. Collateral posted against derivative liabilities was $22.2 million and $45.8 million as of December 31, 2022 and 2021, respectively. The collateral posted included restricted cash of $15.9 million and $21.6 million as of December 31, 2022 and 2021, respectively. 140 Derivative assets and liabilities are recorded at fair value on the balance sheet. Master netting agreements allow the Company to settle all derivative contracts held with a single counterparty on a net basis and to offset net derivative positions with related collateral where applicable. In addition, some of interest rate swap derivatives between the Bank and the dealer counterparties are cleared through central clearing houses. These clearing houses characterize the variation margin payments as settlements of the derivative’s market exposure and not as collateral. The variation margin is treated as an adjustment to our cash collateral, as well as a corresponding adjustment to our derivative liability. As of December 31, 2022 and December 31, 2021, the variation margin adjustment was a negative adjustment of $8.7 million and $10.7 million, respectively. The following presents additional information related to the Company’s interest rate swaps, both designated and non-designated as hedged, as of December 31, 2022 and December 31, 2021 (in thousands): December 31, 2022 Gross Amounts of Financial Instruments Not Offset in the Consolidated Statement of Financial Condition Gross Amounts Recognized Amounts offset in the Statement of Financial Condition Net Amounts in the Statement of Financial Condition Netting Adjustment Per Applicable Master Netting Agreements Fair Value of Financial Collateral in the Statement of Financial Condition Net Amount $ $ $ $ 37,119 $ 37,119 $ (17,780) $ (17,780) $ 19,339 $ 19,339 $ 63,634 $ 63,634 $ (26,484) $ (26,484) $ 37,150 $ 37,150 $ — $ — $ — $ — $ — $ — $ 19,339 19,339 (14,972) $ (14,972) $ 22,178 22,178 December 31, 2021 Gross Amounts of Financial Instruments Not Offset in the Consolidated Statement of Financial Condition Gross Amounts Recognized Amounts offset in the Statement of Financial Condition Net Amounts in the Statement of Financial Condition Netting Adjustment Per Applicable Master Netting Agreements Fair Value of Financial Collateral in the Statement of Financial Condition Net Amount $ $ $ $ 20,826 $ 20,826 $ — $ — $ 20,826 $ 20,826 $ 11,615 $ 11,615 $ — $ — $ 11,615 $ 11,615 $ — $ — $ — $ — $ — $ — $ 20,826 20,826 (9,669) $ (9,669) $ 1,946 1,946 Derivative assets Interest rate swaps Derivative liabilities Interest rate swaps Derivative assets Interest rate swaps Derivative liabilities Interest rate swaps 141 Note 22: REVENUE FROM CONTRACTS WITH CLIENTS Disaggregation of Revenue: Deposit fees and other service charges for the years ended December 31, 2022, 2021 and 2020 are summarized as follows (in thousands): Deposit service charges Debit and credit card interchange fees Debit and credit card expense Merchant services income Merchant services expense Other service charges Total deposit fees and other service charges Deposit fees and other service charges Years Ended December 31 2021 2020 2022 23,710 23,766 (11,487) 15,551 (12,754) 5,673 44,459 19,162 23,271 (10,636) 14,973 (12,084) 4,809 39,495 16,428 20,052 (9,098) 12,554 (10,042) 4,490 34,384 Deposit fees and other service charges include transaction and non-transaction based deposit fees. Transaction based fees on deposit accounts are charged to deposit clients for specific services provided to the client. These fees include such items as wire fees, official check fees, and overdraft fees. These are contract specific to each individual transaction and do not extend beyond the individual transaction. The performance obligation is completed and the fees are recognized at the time the specific transactional service is provided to the client. Non- transactional deposit fees are typically monthly account maintenance fees charged on deposit accounts. These are day-to-day contracts that can be canceled by either party without notice. The performance obligation is satisfied and the fees are recognized on a monthly basis after the service period is completed. Debit and credit card interchange income and expenses Debit and credit card interchange income represent fees earned when a credit or debit card issued by the Bank is used to purchase goods or services at a merchant. The merchant’s bank pays the Bank a default interchange rate set by MasterCard on a transaction by transaction basis. The merchant acquiring bank can stop accepting the Bank’s cards at any time and the Bank can stop further use of cards issued by them at any time. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the Bank’s cardholders’ card. Direct expenses associated with the credit and debit card are recorded as a net reduction against the interchange income. Merchant services income Merchant services income represents fees earned by the Bank for card payment services provided to its merchant clients. The Bank has a contract with a third party to provide card payment services to the Bank’s merchants that contract for those services. The third party provider has contracts with the Bank’s merchants to provide the card payment services. The Bank does not have a direct contractual relationship with its merchants for these services. The Bank sets the rates for the services provided by the third party. The third party provider passes the payments made by the Bank’s merchants through to the Bank. The Bank, in turn, pays the third party provider for the services it provides to the Bank’s merchants. These payments to the third party provider are recorded as expenses as a net reduction against fee income. In addition, a portion of the payment received by the Bank represents interchange fees which are passed through to the card issuing bank. Income is primarily earned based on the dollar volume and number of transactions processed. The performance obligation is satisfied and the related fee is earned when each payment is accepted by the processing network. 142 Note 23: LEASES The Company leases 95 buildings and offices under non-cancelable operating leases. The leases contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule. Substantially all of the leases provide the Company with the option to extend the lease term one or more times following expiration of the initial term. The table below presents the lease right-of-use assets and lease liabilities recorded on the balance sheet at December 31, 2022 and December 31, 2021 (dollars in thousands): Assets Operating right-of-use lease assets Liabilities Operating lease liabilities Weighted-average remaining lease term Operating leases Weighted-average discount rate Operating leases $ $ December 31, 2022 December 31, 2021 49,283 $ 55,257 55,205 $ 59,756 5.1 years 5.5 years 3.0 % 2.8 % The table below presents certain information related to the lease costs for operating leases for the years ended December 31, 2022, 2021 and 2020 (in thousands): Operating lease cost Short-term lease cost Variable lease cost Less sublease income Total lease cost (1) Year Ended December 31, 2021 2022 2020 16,647 $ 125 2,189 (1,126) 17,835 $ 17,541 $ 100 2,584 (904) 19,321 $ 17,337 97 2,778 (946) 19,266 $ $ (1) Lease expenses and sublease income are classified within occupancy and equipment expense on the Consolidated Statements of Operations. Operating cash flows paid for operating lease amounts included in the measurement of lease liabilities were $15.4 million for the year ended December 31, 2022 and $18.0 million for the year ended December 31, 2021. The Company recorded $9.3 million of right-of-use lease assets in exchange for operating lease liabilities for the year ended December 31, 2022 and $16.7 million for the year ended December 31, 2021. The table below reconciles the undiscounted cash flows for each of the first five years beginning with 2023 and the total of the remaining years to the operating lease liabilities recorded on the Consolidated Statements of Financial Position (in thousands): Operating Leases 2023 2024 2025 2026 2027 Thereafter Total minimum lease payments Less: amount of lease payments representing interest Lease obligations $ $ 14,366 13,116 11,203 9,317 6,038 5,568 59,608 (4,403) 55,205 As of December 31, 2022, the Company had no undiscounted lease payments under an operating lease that had not yet commenced, compared to $353,000 undiscounted lease payments under an operating lease that had not yet commenced at December 31, 2021. 143 BANNER CORPORATION Exhibit 3{a} Index of Exhibits Restated Articles of Incorporation of Banner Corporation [incorporated by reference to Exhibit 3.1 (b) to the Registrant’s Current Report on Form 8-K filed on May 24, 2022 (File No. 000-26584)]. 3{b} 4.2 4.3 10{a} 10{b} 10{c} 10{d} 10{e} 10{f} 10{g} 10{h} 10{i} 10{j} 14 21 23.1 31.1 31.2 Amended and Restated Bylaws of Banner Corporation [incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on May 24, 2022 (File No. 000-26584)] Description of Capital Stock Issuance of base indenture, first supplemental indenture and subordinated note [incorporated by reference to the exhibits filed with Form 8-K on June 30, 2020 (File No. 000-26584)] Amended and Restated Employment Agreement, with Mark J. Grescovich [incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on June 4, 2013 (File No. 000-26584]. Form of Supplemental Executive Retirement Program Agreement with Gary Sirmon, Michael K. Larsen, Lloyd W. Baker, Cynthia D. Purcell and Richard B. Barton [incorporated by reference to exhibits filed with the Annual Report on Form 10-K for the year ended December 31, 2001 and the exhibits filed with the Form 8-K on May 6, 2008 (File No. 000-26584)]. Form of entered into with Peter reference to exhibits filed with the Form 8-K on June 25, 2014 (File No. 000-26584)]. Employment Cynthia D. Contract Conner, Purcell J. and Judith A. Steiner [incorporated by 2005 Executive Officer and Director Stock Account Deferred Compensation Plan [incorporated by reference to exhibits filed with the Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 000-26584)]. Entry into an Indemnification Agreement the Form 8-K on January 29, 2010 (File No. 000-26584)]. with each of the Registrant’s Directors [incorporated by reference to exhibits filed with Amended and Restated Executive Severance and Change in Control Restated effective as of October 1, 2021) [incorporated by reference to exhibit 10{j} included in the Form 10-Q dated September 30, 2021 (File No. 000-26584)] 2014 Omnibus Incentive Plan [incorporated by reference as Appendix C to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on March 24, 2014 (File No. 000-26584)] and amendments [incorporated by reference to the Form 8-K filed on March 25, 2015 (File No. 000-26534)]. Plan and Summary Plan Description (Amended and Forms of Equity-Based Award Agreements: Incentive Stock Option Award Agreement, Non-Qualified Stock Option Award Agreement, Restricted Stock Award Agreement, Restricted Stock Unit Award Agreement, Stock Appreciation Right Award Agreement, and Performance Unit Award Agreement [incorporated by reference to Exhibits 10.2 - 10.7 included in the Registration Statement on Form S-8 dated May 9, 2014 (File No. 333-195835)]. 2018 Omnibus Incentive Plan [incorporated by reference as Appendix D to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on March 23, 2018 (File No. 000-26584)] Equity-Based Award Agreements: Incentive Stock Option Award Agreement, Forms of Non-Qualified Stock Option Award Agreement under the Banner Corporation 2018 Omnibus Incentive Plan; Director Restricted Stock Award Agreement; Director Restricted Stock Unit Award Agreement; Employee Time-based Restricted Stock Unit Award Agreement; Employee performance-based Restricted Stock Unit Award Agreement; Stock Appreciation Right Award Agreement; and Performance Unit Award Agreement [incorporated by reference to Exhibits 10.2 - 10.9 included in the Registration Statement on Form S-8 dated May 4, 2018 (File No. 333-224693)] Code of www.bannerbank.com in the section titled Corporate Overview: Governance Document Ethics [Registrant elects to satisfy Regulation S-K §229.406(c) by posting its Code of Ethics on its website at Subsidiaries of the Registrant. Consent of Registered Independent Public Accounting Firm – Moss Adams LLP. Certification of Chief Executive Officer pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Financial Officer pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS 101.SCH Inline XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the XBRL document. Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 144 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, formatted in Inline XBRL (included in Exhibit 101) 145 EXHIBIT 4.2 DESCRIPTION OF CAPITAL STOCK The following information summarizes certain features and rights of our capital stock. The summary does not purport to be exhaustive and is qualified in its entirety by reference to our articles of incorporation, bylaws, and to applicable Washington law. General Banner’s authorized capital stock consists of: • • • 50,000,000 shares of common stock, $0.01 par value per share; 5,000,000 shares of non-voting common stock, $0.01 par value per share; and 500,000 shares of preferred stock, $0.01 par value per share. As of January 31, 2023, there were 34,194,105 shares of Banner common stock issued and outstanding. No shares of Banner non-voting common stock and no shares of Banner preferred stock are currently outstanding. Banner’s common stock is traded on NASDAQ under the symbol “BANR.” Common Stock Each share of Banner common stock has the same relative rights and is identical in all respects with each other share of Banner common stock. Banner common stock represents non-withdrawable capital, is not of an insurable type and is not insured by the FDIC or any other government agency. Subject to any prior rights of the holders of any preferred or other stock of Banner then outstanding, holders of Banner common stock are entitled to receive such dividends as are declared by the board of directors of Banner out of funds legally available for dividends. Except with respect to greater than 10% stockholders, full voting rights are vested in the holders of Banner common stock and each share is entitled to one vote. See “—Anti-Takeover Effects—Restrictions on Voting Rights.” Subject to any prior rights of the holders of any Banner preferred stock then outstanding, in the event of a liquidation, dissolution or winding up of Banner, holders of shares of Banner common stock will be entitled to receive, pro rata, any assets distributable to stockholders in respect of shares held by them. Holders of shares of Banner common stock will not have any preemptive rights to subscribe for any additional securities which may be issued by Banner, nor do they have cumulative voting rights. Nonvoting Common Stock The holders of Banner nonvoting common stock have no voting rights except as required by the Washington Business Corporations Act, which we refer to as the “WBCA,” and as described in the next sentence. In addition to any other vote required by law, the affirmative vote of the holders of a majority of the outstanding shares of Banner nonvoting common stock, voting separately as a class, is required to amend Banner’s articles of incorporation to alter or change the designation, preferences, limitations or relative rights of all or part of the shares of Banner nonvoting common stock. Except with respect to voting, Banner nonvoting common stock and Banner common stock have the same rights, preferences and privileges, share ratably in all assets of the corporation upon its liquidation, dissolution or winding-up, are entitled to receive dividends (other than certain stock dividends described in the next sentence) in the same amount per share and at the same time, as and if declared by Banner’s board of directors, and are equal and identical in all other respects as to all other matters. In the event of any stock dividend having the effect of a stock split, stock combination or other reclassification of shares of either the Banner common stock or the Banner nonvoting common stock, the outstanding shares of the other class will be proportionately split, combined or reclassified in a similar manner, except that holders of Banner common stock will receive only shares of Banner common stock in respect of their shares of Banner common stock and holders of Banner nonvoting common stock will receive only shares of Banner nonvoting common stock in respect of their shares of Banner nonvoting common stock. No transfer of shares of Banner nonvoting common stock by the initial holders of those shares (or such holders’ affiliates) is permitted, except for specified permitted transfers or transfers to affiliates of the initial holders of the nonvoting common stock. Each share of nonvoting common stock will be converted automatically into one share of common stock upon a permitted transfer. 146 In the event of any merger, consolidation, reclassification or other transaction in which the shares of Banner common stock are exchanged for or changed into other stock or securities, cash and/or any other property, each share of Banner nonvoting common stock will simultaneously be similarly exchanged or changed into an amount per whole share equal to the aggregate amount of stock, securities, cash and/or any other property that such Banner nonvoting common stock would be entitled to receive if it were converted into a share of Banner common stock immediately prior to such transaction. In case of any offer to repurchase shares, pro rata subscription offer, rights offer or similar offer to holders of Banner common stock, Banner is required to provide the holders of Banner nonvoting common stock the right to participate. Preferred Stock Our Articles of Incorporation permit our board of directors to authorize the issuance of up to 500,000 shares of preferred stock, par value $0.01, in one or more series, at such time or times and for such consideration as the board of directors of Banner may determine, without stockholder action. The board of directors of Banner is expressly authorized at any time, and from time to time, to issue Banner preferred stock, with such voting and other powers, liquidation preferences and participating, optional or other special rights, and qualifications, limitations or restrictions, as are stated and expressed in the board resolution providing for the issuance. The board of directors of Banner is authorized to designate the series and the number of shares comprising such series, the dividend rate on the shares of such series, the redemption rights, if any, any purchase, retirement or sinking fund provisions, any conversion rights and any voting rights. The ability of Banner’s board of directors to approve the issuance of preferred or other stock without stockholder approval could dilute the voting power or other rights or adversely affect the market value of our common stock and may make an acquisition by an unwanted suitor of a controlling interest in Banner more difficult, time-consuming or costly, or otherwise discourage an attempt to acquire control of Banner. Shares of preferred stock redeemed or acquired by Banner may return to the status of authorized but unissued shares, without designation as to series, and may be reissued by Banner upon approval of its board of directors. Anti-Takeover Effects The provisions of our Articles of Incorporation, our Bylaws, and Washington law summarized in the following paragraphs may have anti- takeover effects and could delay, defer, or prevent a tender offer or takeover attempt that a stockholder might consider to be in such stockholder’s best interest, including those attempts that might result in a premium over the market price for the shares held by stockholders, and may make removal of the incumbent management and directors more difficult. Authorized Shares. Our Articles of Incorporation authorize the issuance of 50,000,000 shares of common stock, 5,000,000 shares of non- voting common stock and 500,000 shares of preferred stock. These shares of common stock and preferred stock provide our board of directors with as much flexibility as possible to effect, among other transactions, financings, acquisitions, stock dividends, stock splits and the exercise of employee stock options. However, these additional authorized shares may also be used by the board of directors consistent with its fiduciary duty to deter future attempts to gain control of us. The board of directors also has sole authority to determine the terms of any one or more series of preferred stock, including voting rights, conversion rates and liquidation preferences. As a result of the ability to fix voting rights for a series of preferred stock, the board of directors has the power to the extent consistent with its fiduciary duty to issue a series of preferred stock to persons friendly to management in order to attempt to block a tender offer, merger or other transaction by which a third party seeks control of us, and thereby assist members of management to retain their positions. Restrictions on Voting Rights. Our Articles of Incorporation provide for restrictions on voting rights of shares owned in excess of 10% of any class of our equity securities. Specifically, our Articles of Incorporation provide that if any person or group acting in concert acquires the beneficial ownership of more than 10% of any class of our equity securities without the prior approval by a two-thirds vote of our “Continuing Directors,” (as defined therein) then, with respect to each vote in excess of 10% of the voting power of our outstanding shares of voting stock which such person would otherwise have been entitled to cast, such person is entitled to cast only one-hundredth of one vote per share. Exceptions from this limitation are provided for, among other things, any proxy granted to one or more of our “Continuing Directors” and for our employee benefit plans. Under our Articles of Incorporation, the restriction on voting shares beneficially owned in violation of the foregoing limitations is imposed automatically, and the Articles of Incorporation provide that a majority of our Continuing Directors have the power to construe the forgoing restrictions and to make all determinations necessary or desirable to implement these restrictions. These restrictions would, among other things, restrict voting power of a beneficial owner of more than 10% of our outstanding shares of common stock in a proxy contest or on other matters on which such person is entitled to vote. Board of Directors. Our board of directors historically has been divided into three classes, each of which contains approximately one-third of the members of the board of directors. The members of each class historically have been elected for a term of three years, with the terms of office of all members of one class expiring each year so that approximately one-third of the total number of directors is elected each year. The classification of directors, together with the provisions in our Articles of Incorporation described below that limit the ability of stockholders to remove directors and that permit only the remaining directors to fill any vacancies on the board of directors, have the effect of making it more difficult for stockholders to change the composition of the board of directors. As a result, at least two annual meetings of stockholders would be required for the stockholders to change a majority of the directors, whether or not a change in the board of directors would be beneficial and whether or not a majority of stockholders believe that such a change would be desirable. However, following approval by our board of directors and/or our stockholders, as applicable, our Articles of Incorporation and our Bylaws were amended in May 2022 to eliminate staggered terms for directors and provide for the annual election of all directors. The transition to a declassified board structure is being 147 effected over time such that each director will be elected annually upon expiration of the director’s term, beginning with directors whose terms are expiring at the 2023 annual meeting of stockholders, and all directors will be subject to annual elections beginning with the 2025 annual meeting of stockholders. Our Articles of Incorporation provide that the size of the board of directors is not less than five or more than 25 as set in accordance with the Bylaws. The Articles of Incorporation provide that any vacancy occurring in the board of directors, including a vacancy created by an increase in the number of directors, will be filled by a vote of two-thirds of the directors then in office. Any director so chosen will hold office for a term expiring at the next annual meeting of stockholders. The classified board of directors is intended to provide for continuity of the board of directors and to make it more difficult and time consuming for a stockholder group to fully use its voting power to gain control of the board of directors without the consent of incumbent members of the board of directors. The Articles of Incorporation further provide that a director may be removed from the board of directors prior to the expiration of their term only for cause and only upon the vote of the holders of 80% of the total votes eligible to be cast thereon. In the absence of this provision, the vote of the holders of a majority of the shares could remove the entire board of directors, but only with cause, and replace it with persons of such holders’ choice. Cumulative Voting, Special Meetings and Action by Written Consent. Our Articles of Incorporation do not provide for cumulative voting for any purpose. Moreover, the Articles of Incorporation provide that special meetings of stockholders may be called only by our board of directors or by a committee of the board of directors. In addition, our Bylaws require that any action taken by written consent must receive the consent of all of the outstanding voting stock entitled to vote on the action taken. Stockholder Vote Required to Approve Business Combinations with Principal Stockholders. The Articles of Incorporation require the approval of the holders of (i) at least 80% of the outstanding shares entitled to vote thereon (and, if any class or series of shares is entitled to vote thereon separately, the approval of the holders of at least 80% of the outstanding shares of each such class or series) and (ii) at least a majority of the outstanding shares entitled to vote thereon, not including shares deemed beneficially owned by a “Related Person,” for certain “Business Combinations” involving a Related Person, except in cases where the proposed transaction has been approved in advance by two- thirds of those members of Banner’s board of directors who are unaffiliated with the Related Person and were directors prior to the time when the Related Person became a Related Person. The term “Related Person” is defined to include any individual, corporation, partnership or other entity (other than tax-qualified benefit plans of Banner) which owns beneficially or controls, directly or indirectly, 10% or more of the outstanding shares of common stock of Banner or an affiliate of such person or entity. The term “Business Combination” is defined to include: (i) any merger or consolidation of Banner with or into any Related Person; (ii) any sale, lease, exchange, mortgage, transfer, or other disposition of 25% or more of the assets of Banner to a Related Person; (iii) any merger or consolidation of a Related Person with or into Banner or a subsidiary of Banner; (iv) any sale, lease, exchange, transfer or other disposition of certain assets of a Related Person to Banner or a subsidiary of Banner; (v) the issuance of any securities of Banner or a subsidiary of Banner to a Related Person; (vi) the acquisition by Banner or a subsidiary of Banner of any securities of a Related Person; (vii) any reclassification of common stock of Banner or any recapitalization involving the common stock of Banner; or (viii) any agreement or other arrangement providing for any of the foregoing. Washington law imposes restrictions on certain transactions between a corporation and certain significant stockholders. Chapter 23B.19 of the WBCA prohibits a “target corporation,” with certain exceptions, from engaging in certain “significant business transactions” with an “Acquiring Person” who acquires 10% or more of the voting securities of a target corporation for a period of five years after such acquisition, unless (a) the transaction or acquisition of shares is approved by a majority of the members of the target corporation’s board of directors prior to the date of the acquisition or, (b) at or subsequent to the date of the acquisition, the transaction is approved by a majority of the members of the target corporation’s board of directors and authorized at a stockholders’ meeting by the affirmative vote of at least two-thirds of the votes entitled to be cast by the outstanding voting shares of the target corporation, excluding shares owned or controlled by the Acquiring Person. The prohibited transactions include, among others, a merger or consolidation with, or issuance or redemption of stock to or from, the Acquiring Person; the sale, lease, exchange, mortgage, pledge, transfer or other disposition or encumbrance of assets, to or with an Acquiring Person, with an aggregate market value equal to five percent or more of the aggregate market value of the target corporation’s consolidated assets, outstanding shares or consolidated net income; termination of 5% or more of the target corporation’s employees employed in Washington state, as a result of the Acquiring Person’s acquisition of 10% or more of the target corporation’s shares; or allowing the Acquiring Person to receive any disproportionate benefit as a stockholder. After the five-year period during which significant business transactions are prohibited, certain significant business transactions may occur if certain “fair price” criteria or stockholder approval requirements are met. Target corporations include all publicly-traded corporations incorporated under Washington law, as well as publicly traded foreign corporations that meet certain requirements. This summary of certain WBCA provisions does not purport to be complete. Amendment of Articles of Incorporation and Bylaws. Amendments to our Articles of Incorporation must be approved by our board of directors by a majority vote of the board of directors and by our stockholders by a majority of the voting group comprising all the votes entitled to be cast on the proposed amendment, and a majority of each other voting group entitled to vote separately on the proposed amendment; provided, however, that the affirmative vote of the holders of at least 80% of votes entitled to be cast by each separate voting group entitled to vote thereon (after giving effect to the provision limiting voting rights, if applicable) is required to amend or repeal certain provisions of the Articles of Incorporation, including the provision limiting voting rights, the provisions relating to the removal of directors, stockholder nominations and proposals, the approval of certain business combinations, calling special meetings, director and officer indemnification by us and amendment of our Bylaws and Articles of Incorporation. Our Bylaws may be amended by a majority vote of our board of directors, or by a vote of 80% of the total votes entitled to vote generally in the election of directors at a duly constituted meeting of stockholders. Stockholder Nominations and Proposals. Our Articles of Incorporation generally require a stockholder who intends to nominate a candidate for election to the board of directors, or to raise new business at a stockholder meeting to give not less than 30 nor more than 60 days’ 148 advance notice to the Secretary of Banner. The notice provision requires a stockholder who desires to raise new business to provide certain information to us concerning the nature of the new business, the stockholder and the stockholder’s interest in the business matter. Similarly, a stockholder wishing to nominate any person for election as a director must provide us with certain information concerning the nominee and the proposing stockholder. The cumulative effect of the restrictions on a potential acquisition of us that are contained in our Articles of Incorporation and Bylaws, and federal and Washington law, may be to discourage potential takeover attempts and perpetuate incumbent management, even though certain stockholders may deem a potential acquisition to be in their best interests, or deem existing management not to be acting in their best interests. 149 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT December 31, 2022 Parent Banner Corporation Subsidiaries Banner Bank (1) Banner Capital Trusts V, VI, and VII (1) Springer Development, LLC (2) Community Financial Corporation (2) Northwest Financial Corporation (2) Greater Sacramento Bancorp Statutory Trust II (1) Mission Oaks Statutory Trust I (1) (1) Wholly-owned by Banner Corporation. (2) Wholly-owned by Banner Bank. Percentage of Ownership Jurisdiction of State of Incorporation 100 % 100 % 100 % 100 % 100 % 100 % 100 % Washington Delaware Washington Oregon Washington Delaware Delaware 150 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-239159) and Form S-8 (No. 333-195835 and No. 333-224693) of Banner Corporation and Subsidiaries (the “Company”), of our report dated February 21, 2023, relating to the consolidated financial statements of the Company and the effectiveness of internal control over financial reporting of the Company, appearing in this Annual Report on Form 10-K of the Company for the year ended December 31, 2022. EXHIBIT 23.1 /s/ Moss Adams LLP Spokane, Washington February 21, 2023 151 EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF BANNER CORPORATION PURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES ACT OF 1934 I, Mark J. Grescovich, certify that: 1. 2. 3. 4. I have reviewed this Annual Report on Form 10-K of Banner Corporation; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; ablishing and maintaining disclosure controls and procedures (as ined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act The registrant’s other certifying officer and I are responsible for est def Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) b) c) d) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a) b) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. February 21, 2023 /s/Mark J. Grescovich Mark J. Grescovich Chief Executive Officer 152 EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER OF BANNER CORPORRATION PURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES ACT OF 1934 I, Peter J. Conner, certify that: 1. 2. 3. 4. I have reviewed this Annual Report on Form 10-K of Banner Corrporation; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial infformation included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as off, and for, the periods presented in this report; The registrant’s other certifying officer and I are responsible for estaablishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) b) c) d) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material infformation relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonaable assurance regarding the reliaability of financial reporting and the preparation of financial statements for external purrposes in accordance with generally accepted accounting principles; Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonaably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a) b) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonaably likely to adversely affect the registrant’s ability to record, process, summarize and report financial infformation; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Febrruary 21, 2023 /s/ Peter J. Conner Peter J. Conner Chief Financial Officer 153 EXHIBIT 32 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF BANNER CORPORRATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned hereby certif to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Annual Report on Form 10-K, that: cer of Banner Corrporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant city as an offi in his ca y pa • • the report fully complies with the requirements of Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, and the infformation contained in the report fairly presents, in all material respects, the Company’s financial condition and results of operations as of the dates and for the periods presented in the financial statements included in such report. Febrruary 21, 2023 Febrruary 21, 2023 /s/ Mark J. Grescovich Mark J. Grescovich Chief Executive Officer /s/ Peter J. Conner Peter J. Conner Chief Financial Officer 154 [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] Harnessing our momentum NET INCOME (MILLION) $200 $201.0 $195.4 $150 $136.5 $146.3 $115.9 $100 $50 $0 RETURN ON AVERAGE ASSETS 1.4% 1.24% 1.18% 1.29% 1.22% 0.83% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 NET INCOME AVAILABLE to common shareholders per diluted share MOBILE DEPOSITS (MILLION) all consumer, business and commercial $5.76 $5.67 $4.15 $4.18 $3.26 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 $923.8 $731.1 $1000 $800 $600 $400 $200 $0 $458.5 $199.1 2018 2019 2020 2021 2022 2019 2020 2021 2022 LOAN PORTFOLIO 11% 7% 8% 16% 42% $10.15 B 12% 6% 15% 25% CRE 8% Owner Occupied CRE 16% Investment Properties 12% Small Balance CRE 6% Multifamily Construction Commercial/Agriculture Consumer Residential Loans are our most significant and generally highest yielding earning assets. We continue to implement strategies designed to capture more market share and achieve increases in targeted loans. LOAN ORIGINATION VOLUME (MILLION) excluding loans held for sale $5,000 $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 $4,421 $4,620 $4,393 $545 $359 $90 $1,035 $1,935 $38 $419 2020 2021 2022 Consumer Commercial business One- to four- family residential Construction and land Multifamily real estate Agricultural business Commercial real estate SBA PPP Our Value Proposition Connected. Knowledgeable. Responsive. It’s not only what we do, it’s how we do it— with relentless effort. Our Vision Statement We strive to be the bank of choice in the markets we serve. We are committed to being the best provider of financial services in the West. VALUE PROP VISION MISSION VALUES Our Mission Statement Banner Bank is a dynamic, full-service financial institution operating safely and profitably within a framework of shared integrity. Working as a team, we will deliver superior products and services to our valued clients. We will emphasize strong client relationships and a high level of community involvement. We will provide a culture which attracts, empowers, rewards and provides growth opportunities for our employees. Our success will build long-term shareholder value. Values “Do the Right Thing.” This means we believe in: • Honesty and Integrity • Mutual Respect • Quality • Trust • Teamwork • Accountability DIRECTORS Roberto R. Herencia (Chairman) Connie R. Collingsworth Mark J. Grescovich John R. Layman Kevin F. Riordan Ellen R.M. Boyer Margot J. Copeland David A. Klaue John Pedersen Terry S. Schwakopf Paul J. Walsh (Photo unavailable) EXECUTIVE OFFICERS Mark J. Grescovich, President and Chief Executive Officer Janet M. Brown, EVP, Chief Information Officer James P.G. McLean, EVP, Commercial Real Estate Lending Division Peter J. Conner, EVP, Chief Financial Officer James M. Costa, EVP and Chief Risk Officer James P. Garcia, EVP, Chief Audit Executive Kayleen R. Kohler, EVP, Human Resources, Chief Diversity Officer Kenneth A. Larsen, EVP, Mortgage Banking Sherrey Luetjen, EVP, General Counsel Cynthia D. Purcell, EVP, Chief Strategy and Administration Officer M. Kirk Quillin, EVP, Chief Commercial Banking Executive James T. Reed, Jr., EVP, Commercial Banking Jill M. Rice, EVP, Chief Credit Officer Thank you to Kenneth W. Johnson, EVP, Operations, who retired in 2022. Director and Officer information is as of December 31, 2022. Corporate Headquarters 10 South First Avenue PO Box 907 Walla Walla, WA 99362-0265 509-527-3636 800-272-9933 Website: bannerbank.com Email: bannerbank@bannerbank.com Subsidiaries Banner Bank – bannerbank.com Community Financial Corporation Transfer Agent and Registrar Computershare Trust Company, N.A. 150 Royall St., Suite 101 Canton, MA 02021 Independent Public Accountants and Auditors Moss Adams LLP 805 SW Broadway, Suite 1200 Portland, OR 97205 Special Counsel Breyer & Associates PC 8180 Greensboro Drive, Suite 785 McLean, VA 22102 Annual Meeting of Shareholders 10 a.m. Pacific Time, Wednesday, May 24, 2023 The Annual Meeting of Shareholders will be conducted solely online via live webcast. You can attend by visiting: www.meetnow.global/MLDTADP No password is required, though to vote or ask a question, shareholders must provide their unique control number. Dividend Payments Dividend payments are reviewed quarterly by the board of directors and, if appropriate and authorized, typically would be paid in the months of February, May, August and November. To avoid delay or lost mail, and to reduce costs, we encourage you to request direct deposit of dividend payments to your bank account. To enroll in the Direct Deposit Plan, call the Company’s Investor Services Department at 800-272-9933. Dividend Reinvestment and Stock Purchase Plan Banner Corporation offers a dividend reinvestment program whereby shareholders may reinvest all or a portion of their dividends in additional shares of the Company’s common stock. Information concerning this optional program is available from the Investor Services Department or from Computershare Investor Services at 800-697-8924. Investor Information Shareholders and others will find the Company’s financial information, press releases and other information on the Company’s website at www.bannerbank.com. There is a direct link from the website to the Securities and Exchange Commission (SEC) filings via the EDGAR database, including Forms 10-K, 10-Q and 8-K. Shareholders May Contact: Investor Relations, Banner Corporation PO Box 907 Walla Walla, WA 99362 Or call 800-272-9933 to obtain a hard copy of these reports without charge. 2022 Banner Corporation Annual Report bannerbank.com Let’s create tomorrow, together. Corporate Headquarters 10 South First Ave. PO Box 907 Walla Walla, WA 99362-0265 509-527-3636 800-272-9933 bannerbank@bannerbank.com SKU: 001CSN53C0 Member FDIC 

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