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Item 7. Management’s Discussion and Analysis

2023-02-21 compared with 2022-02-24 · 306 added, 494 removed, 771 unchanged (51% of the section changed)

Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of 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 of this Form 10-K.

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 Corporation’s successful execution of its 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, new client acquisition and deepening existing client relationships which we believe will continue to generate strong revenue while maintaining the Company’s moderate risk profile.

For the year ended December 31, 2021, our net income was $201.0 million, or $5.76 per diluted share, compared to net income of $115.9 million, or $3.26 per diluted share for the year ended December 31, 2020 and $146.3 million, or $4.18 per diluted share for the year ended December 31, 2019.

Current year results were impacted by the low interest rate environment and the unprecedented level of market liquidity.

The current year results include a recapture of provision for credit losses, primarily due to the improvement in the level of adversely classified loans and forecasted economic indicators utilized to estimate credit losses as well as an acceleration of SBA PPP deferred loan fee income, a decrease in mortgage banking income, increased non-interest expense, a decrease in the yield on earnings-assets as a result of the decline in market interest rates and excess liquidity being invested in short term investments.

Both the current year and prior year results were positively impacted by growth in interest-earnings assets and decreased funding costs.

Our financial results for the year ended December 31, 2021 also reflect the reduction in business activity in some of our markets due the lingering impacts of the COVID-19 pandemic.

At December 31, 2021, we had 21 mortgage loans totaling $6.4 million operating under forbearance agreements due to COVID-19.

Since these loans were performing loans that were current on their payments prior to the COVID-19 pandemic, these modifications are not considered to be troubled debt restructurings pursuant to applicable accounting and regulatory guidance at December 31, 2021.

In addition, the SBA provided assistance to small businesses impacted by COVID-19 through the SBA PPP, which was designed to provide near-term relief to help small businesses sustain operations.

As of December 31, 2021, Banner had provided SBA PPP loans totaling nearly $1.61 billion and received SBA forgiveness for SBA PPP loans totaling $1.48 billion.

Our essential onsite employees, such as those working in our branches, continue to serve clients in person.

In July 2021, we began to normalize our operations by returning additional groups of employees back to bank worksites.

However, a late summer spike in COVID-19 cases resulted in a suspension of our return to work process.

We are currently reviewing our initiatives for allowing remaining staff to return to bank worksites.

Expenses incurred in response to the COVID-19 pandemic resulted in $436,000 of related costs during the year ended December 31, 2021, compared to $3.5 million for the year ended December 31, 2020.

During 2021, we began implementing Banner Forward, a Bank-wide initiative to drive revenue growth and reduce operating expense.

Full implementation is expected by 2023, with the goal of delivering sequential improvements in operating performance during the next six quarters while staying true to our mission and value proposition of being connected, knowledgeable and responsive to our clients, communities and employees.

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 incurred expenses of $11.6 million related to Banner Forward during the year ended December 31, 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, FHLB advances, other borrowings, subordinated notes, and junior subordinated debentures.

Net interest income is primarily a function of our interest rate spread, which is the difference between the yield earned on interest-earning assets and the 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 interest income increased 3% to $496.9 million for the year ended December 31, 2021, compared to $481.3 million for the prior year.

The increase in net interest income in 2021 is a result of growth in both total interest-earning assets and core deposits as well as acceleration of deferred loan fees on SBA PPP loans due to SBA loan forgiveness, partially offset by lower yields on interest-earning assets, due to declines in market rates.

The growth in total interest-earning assets and core deposits was largely the result of SBA PPP loan funds deposited into client accounts, fiscal stimulus payments and an increase in general client liquidity due to reduced business investment and consumer spending during the COVID-19 pandemic.

During the year ended December 31, 2021, our net interest margin on a tax equivalent basis decreased to 3.39% compared to 3.85% for the prior year.

The decrease in net interest margin on a tax equivalent basis during 2021 primarily reflects lower yields on average interest-earning assets, partially offset by decreases in the cost of funding liabilities.

The lower yields on average interest-earning assets compared to a year earlier was largely due to the impact of the continuing low targeted Fed Funds Rate resulting in lower yields on new loan originations and further declines on floating rate loan yields as well as excess liquidity being invested in low yielding short term investments and interest-bearing deposits.

We recorded a $33.4 million recapture of provision for credit losses in the year ended December 31, 2021, primarily reflecting a decrease in the expected lifetime credit losses due to an improvement in the forecasted economic indicators used to calculate credit losses and a decrease in adversely classified loans during the year ended December 31, 2021, compared to a $67.9 million provision for credit losses in 2020 and a $10.0 million provision in 2019.

Non-performing loans decreased to $22.8 million at December 31, 2021, compared to $35.6 million a year earlier.

Net charge-offs decreased to $2.1 million for the year ended December 31, 2021, compared to net charge-offs of $5.4 million for the prior year.

Our allowance for credit losses - loans at December 31, 2021 was $132.1 million, representing 578% of non-performing loans

compared to $167.3 million, or 470% of non-performing loans for the prior year.

In addition to the allowance for credit losses - loans, we maintain an allowance for credit losses - unfunded loan commitments which was $12.4 million at December 31, 2021 compared to $13.3 million at December 31, 2020.

(See Note 4, Loans Receivable and the Allowance for Credit Losses, as well as “Asset Quality” below in this Form 10-K.)

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.

Our total non-interest income was $96.4 million for the year ended December 31, 2021, compared to $98.6 million for the year ended December 31, 2020.

The decrease from the prior year primarily reflects decreased mortgage banking income, partially offset by an increase in deposit fees and other services charges and a net gain recognized for fair value adjustments as a result of changes in the valuation of financial instruments carried at fair value.

For the year ended December 31, 2021, we recorded a net gain of $4.6 million for fair value adjustments and $482,000 in net gains on the sale of securities.

In comparison, for the year ended December 31, 2020, we recorded a net loss of $656,000 for fair value adjustments and $1.0 million in net gains on the sale of securities.

Our total revenues (net interest income plus total non-interest income) for the year ended December 31, 2021 increased $13.4 million, or 2%, to $593.3 million, compared to $579.9 million for the same period a year earlier, largely as a result of increases in net interest income.

Our total adjusted revenues (a non-GAAP financial measure), which excludes net gains and losses on sale of securities and fair value adjustments increased by $8.6 million, or 1%, to $588.2 million for the year ended December 31, 2021, compared to $579.6 million a year earlier.

For the year ended December 31, 2021, non-interest expense increased 3% to $380.1 million, compared to $369.6 million for the year ended December 31, 2020.

The increase was largely the result of increases in payment and card processing services expense and professional services expense, primarily due to an increase in consulting expenses related to the Banner Forward initiative, as well as 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 current year.

These increases were partially offset by decreases in COVID-19 expenses and merger and acquisition-related expenses.

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.

• 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.

• 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 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.

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.

The information below is qualified in its entirety by the detailed information included elsewhere herein and should be read along with this “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8, Financial Statement and Supplementary Data.”

FINANCIAL CONDITION DATA:

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Borrowings 456,603 532,869 549,960

Common shareholders’ equity 1,690,327 1,666,264 1,594,034

Total shareholders’ equity 1,456,432 1,690,327 1,666,264

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Net interest income 553,179 496,891 481,301

(Recapture) provision for credit losses (33,388) 67,875 10,000

Net interest income after provision for credit losses

Provision (recapture) for credit losses 10,364 (33,388) 67,875

Net interest income after provision (recapture) for credit losses

542,815 530,279 413,426

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Diluted 5.67 5.76 3.26

Diluted adjusted earnings per share (8)

5.69 5.97 3.37

Common shareholders’ equity per share (2)

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60.04 64.06 63.73

Average interest-earning assets to funding liabilities

Adjusted efficiency ratio (8)

57.99 60.22 60.76

Average interest-earning assets to funding liabilities 104.16 104.18 104.61

Loans to deposits ratio 74.92 64.08 80.48

Selected Financial Ratios:

Allowance for credit/loan losses as a percent of total loans at end of period (7)

1.45 1.69 1.08

Net charge-offs as a percent of average outstanding loans during the period (0.02) (0.05) (0.07)

Allowance for credit losses - loans as a percent of total loans at end of period 1.39 1.45 1.69

Net recoveries (charge-offs) as a percent of average outstanding loans during the period 0.01 (0.02) (0.05)

Non-performing assets as a percent of total assets 0.15 0.14 0.24

Allowance for credit/loan losses as a percent of non-performing loans (7)(8)

Allowance for credit losses - loans as a percent of non-performing loans (7)

615.25 578.47 469.70

Common shareholders’ equity to total assets 9.20 10.06 11.09

Common shareholders’ tangible equity to tangible assets (8)

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(1) Includes securities available-for-sale and held-to-maturity.

(2) Calculated using shares outstanding, excluding unearned restricted shares held in ESOP.

(2) Calculated using shares outstanding.

(3) Net income divided by average assets.

(4) Net income divided by average common equity.

(5) Net interest income before provision for credit losses as a percent of average interest-earning assets.

(6) Non-interest expenses divided by the total of net interest income before loan losses and non-interest income.

(7) The allowance for credit losses - loans as a percentage of loans and as a percentage of non-performing assets for 2020 and 2021 reflects the adoption of Financial Instruments - Credit Losses (ASC 326) on January 1, 2020.

(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.

(9) Common shareholders’ tangible equity per share and the ratio of tangible common shareholders’ equity to tangible assets are non-GAAP financial measures.

We calculate tangible common equity by excluding the balance of 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 these non-GAAP financial measures provide information to investors that is useful in understanding the basis of our capital position.

However, these non-GAAP financial measures are supplemental and are not a substitute for any analysis based on GAAP.

Because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures as calculated by other companies.

For a reconciliation of these non–GAAP measures, see Item 7 of this report, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Overview.”

(8) Represent non-GAAP financial measures.*

*Non-GAAP financial measures:

Net income, revenues and other earnings and expense information excluding fair value adjustments, gains or losses on the sale of securities, merger and acquisition-related expenses, losses on extinguishment of debt, COVID-19 expenses, Banner Forward expenses, amortization of CDI, REO operations, state/municipal tax expense and the related tax benefit, are non-GAAP financial

Management has presented these and other 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.

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.

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Because not all companies use the same calculations, our presentation may not be comparable to other similarly titled measures as calculated by other companies.

See “Comparison of Results of Operations for the Years Ended December 31, 2021 and 2020” for more detailed information about our financial performance.

The following tables set forth reconciliations of non-GAAP financial measures discussed in this report (dollars in thousands, except share and per share data):

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Net interest income (GAAP) $ 553,179 $ 496,891 $ 481,301

Total non-interest income 96,416 98,616 81,941

Total GAAP revenue 593,307 579,917 550,860

Exclude net gain on sale of securities (482) (1,012) (33)

Exclude net change in valuation of financial instruments carried at fair value (4,616) 656 208

Non-interest income (GAAP) 75,255 96,416 98,616

Total revenue (GAAP) 628,434 593,307 579,917

Net loss (gain) on sale of securities 3,248 (482) (1,012)

Net change in valuation of financial instruments carried at fair value (807) (4,616) 656

Gain on sale of branches, including related deposits (7,804) — —

Adjusted Revenue (non-GAAP)

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Net income (GAAP) $ 195,378 $ 201,048 $ 115,928

Exclude net gain on sale of securities (482) (1,012) (33)

Exclude net change in valuation of financial instruments carried at fair value (4,616) 656 208

Exclude merger and acquisition-related costs 660 2,062 7,544

Exclude COVID-19 expenses 436 3,502 —

Exclude Banner Forward expenses 11,604 — —

Exclude loss on extinguishment of debt 2,284 — 735

Exclude related tax benefit (2,373) (1,239) (1,741)

Net gain on sale of securities 3,248 (482) (1,012)

Net change in valuation of financial instruments carried at fair value (807) (4,616) 656

Merger and acquisition-related costs — 660 2,062

COVID-19 expenses — 436 3,502

Gain on sale of branches, including related deposits (7,804) — —

Banner Forward expenses 5,293 11,604 —

Loss on extinguishment of debt 793 2,284 —

Related tax benefit (174) (2,373) (1,239)

Total adjusted earnings (non-GAAP)

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Non-interest expense (GAAP) $ 377,295 $ 380,101 $ 369,589

Exclude merger and acquisition-related costs (660) (2,062) (7,544)

Exclude COVID-19 expenses (436) (3,502) —

Exclude Banner Forward expenses (11,604) — —

Exclude CDI amortization

(6,571) (7,732) (8,151)

Exclude state/municipal tax expense

(4,343) (4,355) (3,880)

Exclude REO operations

Exclude loss on extinguishment of debt (2,284) — (735)

Merger and acquisition-related costs — (660) (2,062)

COVID-19 expenses — (436) (3,502)

Banner Forward expenses (5,293) (11,604) —

CDI amortization (5,279) (6,571) (7,732)

State/municipal tax expense (4,693) (4,343) (4,355)

REO operations 104 22 190

Loss on extinguishment of debt (793) (2,284) —

Adjusted non-interest expense (non-GAAP) $ 361,341 $ 354,225 $ 352,128

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Non-interest income (GAAP) 75,255 96,416 98,616

Total revenue 593,307 579,917 550,860

Exclude net gain on sale of securities (482) (1,012) (33)

Exclude net change in valuation of financial instruments carried at fair value

(4,616) 656 208

Total revenue (GAAP) 628,434 593,307 579,917

Net loss (gain) on sale of securities 3,248 (482) (1,012)

Net change in valuation of financial instruments carried at fair value (807) (4,616) 656

Gain on sale of branches, including related deposits (7,804) — —

Adjusted revenue (non-GAAP) $ 623,071 $ 588,209 $ 579,561

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Adjusted efficiency ratio (non-GAAP) 57.99 % 60.22 % 60.76 %

Common shareholders’ tangible equity per share and the ratio of common shareholders’ tangible equity to tangible assets referred to in footnote (9) to Item 6, Selected Financial Data above are also non-GAAP financial measures.

We calculate tangible common equity by excluding goodwill and other intangible assets from shareholders’ equity.

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Common shareholders’ tangible equity (tangible book value) per share (non-GAAP) $ 31.41 $ 38.02 $ 36.17

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.

Summary of Critical Accounting Policies and Estimates

In the opinion of management, the accompanying Consolidated Statements of Financial Condition and related 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 our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments.

In particular, management has identified certain accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our financial statements.

Management believes the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate based on the factual circumstances at the time.

However, given the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition.

Further, subsequent changes in economic or market conditions could have a material impact on these estimates and our financial condition and operating results in future periods.

There have been no significant changes in our application of accounting policies since December 31, 2020.

For additional information concerning critical accounting policies, see the Selected Notes to the Consolidated Financial Statements and the following:

Provision and Allowance for Credit Losses - Loans:

(Note 4) The methodology for determining the allowance for credit losses - loans is considered a critical accounting policy 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.

Among the material estimates required to establish the allowance for credit losses - loans are:

a reasonable and supportable forecast;

Critical Accounting Estimates

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;

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and determination of the qualitative loss factors.

All of these estimates are susceptible to significant change.

The allowance for credit losses 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.

The provision for credit losses reflects the amount required to maintain the allowance for credit losses 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.

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.

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 - loans is calculated using life of loan historical losses adjusted for economic forecasts and current conditions.

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.

The model captures historical loss data back to the first quarter of 2008.

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 uses a third party baseline economic forecast as its standard reasonable and supportable forecast.

Management does consider other more optimistic and pessimistic economic forecasts, however, when evaluating the economic indicators and under certain circumstances will probability weight the various forecasts to arrive at the forecast that most reflects management’s expectations of future conditions.

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 4% as of December 31, 2021, 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, 2021.

The allowance for credit losses - loans 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 (QE) 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 process, 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.

Management uses a scale to assign QE factor adjustments based on the level of estimated impact which requires a significant amount of judgment.

Generally, adjustments to QE factors are made in five basis-point increments.

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.

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Fair Value Accounting and Measurement:

(Note 16) We use fair value measurements to record fair value adjustments to certain financial assets and liabilities.

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.

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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 $884,000 decrease or increase in the reporting fair value as of December 31, 2021, 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 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.

(Notes 1 and 15) 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.

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.

Such trigger events considered by management could include:

a) macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, or other developments in equity and credit markets;

b) industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (consider in both absolute terms and relative to peers), a change in the market for an entity’s products or services, or a regulatory or political development;

c) cost factors such as increases in labor, or other costs that have a negative effect on earnings and cash flows;

d) overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods;

e) other relevant entity-specific events such as changes in management, key personnel, strategy, or clients;

or litigation;

f) events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing of all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit;

g) if applicable, a sustained decrease in share price (consider in both absolute terms and relative to peers).

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 a quantitative goodwill impairment test is required, management would engage a third-party valuation firm to estimate the fair value of the reporting unit.

Various valuation methodologies are considered when estimating the reporting unit’s fair value.

These methodologies could include a comparable transaction approach, a control premium approach and a discounted cash flow approach, as well as others.

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.

If the fair value exceeds the carry 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 Company completed an assessment of qualitative factors and the potential triggering events noted above as of December 31, 2021 and concluded that no further analysis was required as it is more likely than not that the fair value of Banner, the reporting unit, exceeds the carrying value.

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 :

(Note 11) The Company and its wholly-owned subsidiaries file consolidated U.S.

federal income tax returns, as well as state income tax returns in Oregon, California, Utah, Idaho and Montana.

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 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 $2.5 million increase or decrease in our net deferred tax asset as

of December 31, 2021.

We assess the appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other pertinent information and maintain tax accruals consistent with our evaluation.

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.

A valuation allowance is required to be recognized if it is more likely than not that all or a portion of our deferred tax assets will not be realized.

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.

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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.

Accounting Standards Recently Adopted or Issued - See Note 2 of the Notes to the Consolidated Financial Statements for a description of recently adopted and new accounting pronouncements, including the respective dates of adoption and expected effects on the Company’s financial position and results of operations.

C omparison of Financial Condition at December 31, 2022 and 2021

Total assets increased to $16.80 billion at December 31, 2021, compared to $15.03 billion at December 31, 2020.

The increase in assets in 2021 was largely the result of excess liquidity from increases in retail deposits being invested in short term investments, including interest-bearing deposits and securities, partially offset by a decrease in total loans receivable due to SBA PPP loan forgiveness.

Total loans receivable (gross loans less deferred fees and discounts and excluding loans held for sale) decreased $786.2 million, or 8%, to $9.08 billion at December 31, 2021, from $9.87 billion at December 31, 2020.

The decrease in total loans receivable reflects decreased commercial business loan balances due to SBA PPP loan forgiveness repayments, as well as decreased commercial construction, multifamily construction, one-to-four family residential, consumer, and agricultural business loan balances, partially offset by increased commercial real estate, multifamily real estate, one- to four-family construction, and land and land development loan balances.

Excluding SBA PPP loans, total loans receivable increased $124.3 million during the year ended December 31, 2021.

Loans held for sale decreased to $96.5 million at December 31, 2021, compared to $243.8 million at December 31, 2020, principally as a result of one- to four- family and multifamily loan sales exceeding one- to four- family and multifamily originations.

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.

Securities increased to $4.19 billion at December 31, 2021, from $2.77 billion at December 31, 2020, as the Company invested excess liquidity.

The aggregate of securities and interest-bearing deposits increased $2.57 billion, or 70%, to $6.26 billion at December 31, 2021, compared to $3.69 billion a year earlier.

The average effective duration of our securities portfolio was approximately 4.6 years at December 31, 2021.

The fair value of our trading securities was $222,000 less than their amortized cost at December 31, 2021.

In addition, fair value adjustments for securities designated as available-for-sale reflected a decrease of $80.1 million for the year ended December 31, 2021, which was included net of the associated tax benefit of $19.2 million as a component of other comprehensive income, and largely occurred as a result of decreased market yields and spreads on certain types of securities.

We also acquire securities (primarily municipal bonds) which are designated as held-to-maturity and this portfolio increased by $99.2 million from the prior year-end balance.

(See Notes 3 and 16 of the Notes to the Consolidated Financial Statements.)

Goodwill was $373.1 million at both December 31, 2021 and December 31, 2020.

Other intangibles decreased $6.6 million to $14.9 million at December 31, 2021, compared to $21.4 million at December 31, 2020, primarily due to scheduled amortization of CDI.

Deposits increased $1.76 billion, or 14%, to $14.33 billion at December 31, 2021, from $12.57 billion at December 31, 2020, primarily due to SBA PPP loan funds deposited into client accounts, fiscal stimulus payments, and an increase in client deposit accounts due to reduced business investment, fiscal stimulus payments and changes in consumer spending habits during the COVID-19 pandemic.

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 increased by $892.3 million, or 16%, to $6.39 billion from $5.49 billion at December 31, 2020;

interest-bearing transaction and savings accounts increased by $944.1 million, to $7.10 billion at December 31, 2021 from $6.16 billion at December 31, 2020;

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.

FHLB advances decreased $100.0 million, to $50.0 million at December 31, 2021 from $150.0 million at December 31, 2020, as borrowings have been allowed to mature without replacement due to increased core deposits.

Other borrowings, consisting of retail repurchase agreements primarily related to client cash management accounts, increased $79.7 million to $264.5 million at December 31, 2021, compared to $184.8 million at December 31, 2020.

On June 30, 2020, Banner issued and sold in an underwritten offer subordinated notes, resulting in net proceeds, after underwriting discounts and offering expenses, of $98.1 million.

No additional junior subordinated debentures, which are

carried at fair value, were issued or matured during the year ended December 31, 2021;

however, $8.2 million of junior subordinated debentures were redeemed during the year.

In addition, the estimated fair value of these instruments increased by $10.4 million, reflecting tighter market spreads.

Junior subordinated debentures totaled $119.8 million at December 31, 2021 compared to $117.0 million at December 31, 2020.

Subsequent to December 31, 2021, we redeemed an additional $50.5 million of junior subordinated debentures.

For more information, see Notes 8, 9 and 10 of the Notes to the Consolidated Financial Statements.

Total shareholders’ equity increased $24.1 million, to $1.69 billion at December 31, 2021, compared to $1.67 billion at December 31, 2020.

The increase in equity primarily reflects $201.0 million of net income, partially offset by the $68.9 million decrease in accumulated other comprehensive income, primarily representing the decrease in the fair value of securities available-for-sale, net of tax, the accrual of $57.6 million of dividends to common shareholders and the repurchase of $56.5 million of common stock.

In the year ended December 31, 2021, we repurchased 1,050,000 shares of our common stock at an average price of $53.84 per share.

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.

Banner’s tangible book value per share (a non-GAAP financial measure) was $38.02 at December 31, 2021, compared to $36.17 per share a year ago.

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.

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 yields available on investment alternatives and management’s projections as to the demand for funds to be used in our loan origination, deposit and other activities.

During the year ended December 31, 2021, our aggregate investment in securities increased $1.42 billion.

Securities purchased increased as we deployed excess balance sheet liquidity during the year ended December 31, 2021.

Holdings of mortgage-backed securities increased $1.21 billion, U.S.

Government and agency obligations increased $59.6 million, municipal bonds increased $54.7 million, corporate debt obligations decreased $102.6 million and asset-backed securities increased $197.0 million.

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.

Government and Agency Obligations:

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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, 2021, 94% of the mortgage-backed and mortgage-related securities pay interest at a fixed rate and 6% pay at an adjustable interest rate.

As of December 31, 2022, 98% of the mortgage-backed and mortgage-related securities pay interest at a fixed rate.

Municipal Bonds:

The carrying value of our tax-exempt bonds at December 31, 2021 was $605.8 million ($592.0 million at amortized cost), comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and 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.

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).

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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.

(See “Critical Accounting Policies” above and Note 16 of the Notes to the Consolidated Financial Statements.) At December 31, 2021, the portfolio had a weighted average maturity of 9.6 years and a weighted average coupon rate of 3.55%.

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, 2021, our asset-backed securities portfolio had a carrying value of $206.4 million (with an amortized cost of $206.4 million), and was comprised of collateralized loan obligations, securitized pools of student loans issued or guaranteed by the Student Loan Marketing Association and credit card receivables.

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.

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2022 2021 2020

Value Percent of

Total Carrying

Value Percent of

Total Carrying

Value Percent of

Carrying Value Percent of Total Carrying Value Percent of Total Carrying Value Percent of Total

Corporate bonds $ 28,694 100.0 % $ 26,981 100.0 % $ 24,980 100.0 %

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One Year or Less After One to Five Years After Five to Ten Years After Ten Years Total

Carrying Value Weighted Average Yield Carrying

Value Weighted Average Yield Carrying

Value Weighted Average Yield Carrying Value Weighted Average Yield

Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield

Government and agency obligations $ — — % $ 744 3.49 % $ 41,507 3.85 % $ 13,169 2.58 % $ 55,420 3.54 %

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Total securities available-for-sale and held-to-maturity—estimated market value $ 22,747 $ 253,213 $ 492,783 $ 2,962,468 $ 3,731,211

(1) Tax-exempt weighted average yield is calculated on a tax equivalent basis using a federal tax rate of 21% and a TEFRA disallowance of 10%.

(1) Tax-exempt weighted average yield is calculated on a tax equivalent basis using a federal tax rate of 21% and a tax disallowance of 10%.

Loans and Lending.

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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 at December 31, 2021 was 64%, which reflects the unprecedented level of market liquidity and decrease in business activity due to the impacts of the COVID-19 pandemic and is below our historical range of 90% to 95%.

We expect the loan to deposit ratio to remain below historical levels for the foreseeable future.

At December 31, 2021, our total loan portfolio totaled $9.08 billion compared to $9.87 billion at December 31, 2020.

Our total loan portfolio decreased $786.2 million, or 8%, during the year ended December 31, 2021, compared to an increase of $565.6 million, or 6%, during the year ended December 31, 2020.

The decrease in total loans receivable for the year ended December 31, 2021 primarily reflects $1.48 billion of SBA PPP loan forgiveness repayments during 2021.

The increase for the year ended December 31, 2020 primarily reflected the origination of SBA PPP loans, which totaled $1.04 billion as of December 31, 2020.

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 the course of economic activity and changes in interest rates.

Originations of loans for sale decreased to $1.10 billion for the year ended December 31, 2021 from $1.46 billion during 2020, primarily due to decreased refinance activity for one- to four-family loans residential mortgage loans.

Originations of loans for sale included $225.0 million and $234.0 million of multifamily held for sale loan production for the years ended December 31, 2021 and December 31, 2020, respectively.

We generally sell a significant portion of our newly originated one- to four-family residential mortgage loans and multifamily loans to secondary market purchasers.

Proceeds from sales of loans for the years ended December 31, 2021 and 2020 totaled $1.32 billion and $1.49 billion, respectively.

See “Loan Servicing Portfolio” below.

Loans held for sale decreased $147.3 million to $96.5 million at December 31, 2021, compared to $243.8 million at December 31, 2020.

The decrease in loans held for sale was primarily due to one- to four- family residential and multifamily loan sales exceeding the volume of originations of one- to four-family residential and multifamily loans held for sale during the year.

The following table shows loan origination (excluding loans held for sale) activity for the years ended December 31, 2021, 2020, and 2019 (in thousands):

Loan Origination

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):

Loan Originations

Dec 31, 2022 Dec 31, 2021 Dec 31, 2020

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One- to Four-Family Residential Real Estate Lending:

At December 31, 2021, $683.3 million, or 8% of our loan portfolio, consisted of permanent loans on one- to four-family residences.

Our residential mortgage loan originations have been relatively strong in recent years, as interest rates have been low and declined during the current year.

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.

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.

Our balance of loans for one- to four-family residences decreased by $34.7 million in 2021, compared to the prior year.

The decrease in one-to-four family real estate loans during 2021 reflects portfolio loans being refinanced and sold as held for sale loans.

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, 2021, construction, land and land development loans totaled $1.31 billion (including $568.8 million of one- to four-family construction loans, $313.5 million of land and land development loans (both residential and commercial), and $428.6 million of commercial and multifamily real estate construction loans), or 14% of total loans, compared to $1.29 billion, or 13%, at December 31, 2020.

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.

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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, 2021, our loan portfolio included $3.72 billion of commercial real estate loans, or 41% of the total loan portfolio, compared to $3.61 billion, or 37%, at December 31, 2020.

Our portfolio of multifamily real estate loans was $564.1 million, or 6% of total loans at December 31, 2021, compared to $428.2 million, or 4%, at December 31, 2020.

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:

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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.

The decrease reflects $1.48 billion of SBA PPP loan repayments from SBA loan forgiveness during 2021 and to a lesser extent lower line of credit usage due to decreased business activity and seasonal decreases in agricultural loan balances.

SBA PPP loans decreased 87% to $133.9 million at December 31, 2021, compared to $1.04 billion at December 31, 2020.

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.

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Consumer lending has traditionally been a modest part of our business with loans made primarily to accommodate our existing client base.

At December 31, 2021, our consumer loans decreased $49.9 million to $555.9 million, or 6% of our loan portfolio, compared to $605.8 million, or 6%, at December 31, 2020.

As of December 31, 2021, 82% of our consumer loans were secured by one- to four-family residential, including home equity lines of credit.

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.

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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, 2021 was composed of $1.34 billion of Freddie Mac residential mortgage loans, $1.14 billion of Fannie Mae residential mortgage loans, $291.1 million of Oregon Housing residential mortgage loans, $80.4 million of SBA loans and $195.1 million of other loans serviced for a variety of investors.

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, 2021 and 2020 we recognized $6.6 million and $7.7 million of amortization for MSRs and SBA servicing rights, respectively, and no impairment charges or reversals for a valuation adjustment to MSRs.

Mortgage and SBA Servicing Rights:

For the years ended December 31, 2021 and 2020, we capitalized $7.3 million and $8.6 million, respectively, of servicing rights relating to loans sold with servicing retained.

Amortization of MSRs and SBA Servicing rights for the years ended December 31, 2021 and 2020 was $6.6 million and $7.7 million, respectively.

Management periodically evaluates the estimates and assumptions used to determine the carrying values of MSRs and the amortization of MSRs.

At December 31, 2021, our MSRs and SBA serving rights were carried at a value of $17.2 million, net of amortization, compared to $15.2 million at December 31, 2020.

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.

The following table sets forth the composition of the Company’s loan portfolio, net of discounts and deferred fees and costs, by type of loan as of the dates indicated (dollars in thousands):

Loan Portfolio Analysis

As a result of the adoption of Financial Instruments - Credit Losses (ASC 326), effective January 1, 2020, the Company changed the segmentation of its loan portfolio based on the common risk characteristics used to measure 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.

The following table presents the loans receivable at December 31, 2022, 2021 and 2020 by class (dollars in thousands).

The presentation of loans receivable at December 31, 2019 has been updated to conform to the loan portfolio segmentation that became effective on January 1, 2020.

The presentation of loans receivable at December 31, 2021 and 2020 has been revised to match the segmentation used in the current period presentation.

December 31, 2022 December 31, 2021 December 31, 2020

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Small balance CRE 1,200,251 11.8 1,281,863 14.1 1,243,281 12.6

Total Commercial real estate 3,635,546 35.8 3,787,513 41.7 3,678,576 37.3

Multifamily real estate 645,071 6.4 530,885 5.8 388,822 3.9

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Land and land development 328,475 3.2 313,454 3.5 248,915 2.5

Total Construction, land and land development 1,486,496 14.6 1,309,321 14.5 1,288,446 13.0

Commercial business:

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Small business scored 947,092 9.3 792,310 8.7 743,451 7.5

Total Commercial business 2,230,499 22.0 1,963,090 21.6 2,920,544 29.6

Agricultural business, including secured by farmland:

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SBA PPP 334 — 1,354 — — —

Total Agricultural business, including secured by farmland 295,077 2.9 280,578 3.1 293,553 3.0

One- to four-family residential 1,173,112 11.6 657,474 7.2 696,596 7.0

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Consumer—other 114,632 1.1 97,369 1.1 113,958 1.2

Total Consumer 680,923 6.7 555,902 6.1 604,445 6.2

Total loans 10,146,724 100.0 % 9,084,763 100.0 % 9,870,982 100.0 %

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Small balance CRE 55,253 318,981 777,653 48,364 1,200,251

Total Commercial real estate 206,669 748,525 2,344,288 336,064 3,635,546

Multifamily real estate 13,865 66,797 321,067 243,342 645,071

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Land and land development 134,510 62,278 127,070 4,617 328,475

Total Construction, land and land development 989,304 264,448 204,489 28,255 1,486,496

Commercial business:

2 unchanged sentences

Small business scored 63,168 218,041 309,395 356,488 947,092

Total Commercial business 457,119 566,018 692,513 514,849 2,230,499

Agricultural business, including secured by farmland:

1 unchanged sentence

SBA PPP — 334 — — 334

Total Agricultural business, including secured by farmland 84,445 72,623 136,200 1,809 295,077

One- to four-family residential 9,012 10,347 48,159 1,105,594 1,173,112

Consumer—home equity revolving lines of credit

3,328 10,161 6,622 546,180 566,291

Consumer—other 31,594 16,410 35,989 30,639 114,632

Total Consumer 34,922 26,571 42,611 576,819 680,923

Total loans $ 1,795,336 $ 1,755,329 $ 3,789,327 $ 2,806,732 $ 10,146,724

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Small balance CRE 250,146 894,852 1,144,998

Total Commercial real estate 969,806 2,459,071 3,428,877

Multifamily real estate 362,820 268,386 631,206

4 unchanged sentences

Land and land development 18,267 175,698 193,965

Total Construction, land and land development 120,647 376,545 497,192

Commercial business:

2 unchanged sentences

Small business scored 201,336 682,588 883,924

Total Commercial business 778,382 994,998 1,773,380

Agricultural business, including secured by farmland:

1 unchanged sentence

SBA PPP 334 — 334

Total Agricultural business, including secured by farmland 74,749 135,883 210,632

One- to four-family residential 945,943 218,157 1,164,100

Consumer—home equity revolving lines of credit

2,971 559,992 562,963

Consumer—other 78,521 4,517 83,038

Total Consumer 81,492 564,509 646,001

Total loans maturing after one year $ 3,333,839 $ 5,017,549 $ 8,351,388

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Much of the focus of our expansion and current marketing efforts have been directed toward attracting additional deposit client relationships and balances.

This effort has been particularly directed towards increasing transaction and savings accounts which has contributed to us being very successful in increasing these core deposit balances.

The long-term success of our deposit gathering activities is reflected not only in the growth of deposit balances, but also in increases in the level of deposit fees, service charges and other payment processing revenues.

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.

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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 increased $1.76 billion, or 14%, to $14.33 billion at December 31, 2021 from $12.57 billion at December 31, 2020.

The increase in total deposits from the prior year end was primarily due to SBA PPP loan funds deposited into client accounts, fiscal stimulus payments, and an increase in client deposit accounts due to reduced business investment and changes in consumer spending habits during the COVID-19 pandemic.

Non-interest-bearing deposits increased by $892.3 million, or 16%, to $6.39 billion at year end from $5.49 billion at December 31, 2020.

Interest-bearing transaction and savings accounts increased by $944.1 million, to $7.10 billion at December 31, 2021 compared to $6.16 billion a year earlier.

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.

The following table sets forth the balances of deposits in the various types of accounts offered by the Bank at the dates indicated (dollars in thousands):

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Total public deposits $ 419,669 3.1 % $ 25,834 $ 393,835 2.8 % $ 31,833 $ 362,002 2.9 %

Total brokered deposits $ — — % $ — $ — — % $ (202,884) $ 202,884 2.0 %

Total deposits in excess of the FDIC insurance limit $ 4,927,701 36.2 % $ (216,685) $ 5,144,386 35.9 % $ 736,451 $ 4,407,935 35.1 %

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Maturity Period— Certificates of Deposit in excess of the FDIC insurance limit

Certificates of

Deposit in Excess of FDIC Insurance Limit

Certificates of Deposit in Excess of FDIC Insurance Limit

Maturing in three months or less $ 47,716

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Total deposits $ 13,620,059 100.0 % $ 14,326,933 100.0 % $ 12,567,296 100.0 %

The FHLB serves as our primary borrowing source.

To access funds, we are required to own a sufficient level of capital stock in the FHLB-Des Moines and may apply for advances on the security of such stock and certain of our mortgage loans and securities provided that certain creditworthiness standards have been met.

At December 31, 2021, we had $50.0 million of FHLB advances outstanding at a weighted average rate of 2.72%, a decrease of $100.0 million compared to a year earlier, as core deposits were used to fund a larger portion of the balance sheet.

Also, at December 31, 2021, we had an investment of $12.0 million in FHLB capital stock.

At that date, based on pledged collateral, Banner Bank had $2.38 billion of available credit capacity with the FHLB.

At certain times the Federal Reserve Bank has also served as an important source of borrowings.

The Federal Reserve Bank provides credit based upon acceptable loan collateral, which includes certain loan types not eligible for pledging to the FHLB.

At December 31, 2021, based upon our available unencumbered collateral, Banner Bank was eligible to borrow $782.3 million from the Federal Reserve Bank, however, at that date we had no funds borrowed under this arrangement.

We also issue retail repurchase agreements to clients that are primarily related to client cash management accounts and in the past have borrowed funds through the use of secured wholesale repurchase agreements with securities brokers.

In each case, the repurchase agreements are generally due within 90 days.

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, increased $79.7 million, from the 2020 year-end balance.

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.

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This includes $75.0 million issued by us and $11.5 million acquired in our bank acquisitions.

The junior subordinated debentures associated with the TPS have been recorded as liabilities on our Consolidated Statements of Financial Condition, although the TPS qualifies as Tier 1 capital for regulatory capital purposes.

The junior subordinated debentures are carried at fair value on our Consolidated Statements of Financial Condition and had an estimated fair value of $119.8 million at December 31, 2021.

Banner redeemed $8.2 million of junior subordinated debentures during the fourth quarter of 2021 and subsequent to December 31, 2021 redeemed an additional $50.5 million of junior subordinated debentures.

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%.

In addition, on June 30, 2020, Banner issued and sold in an underwritten offering Subordinated Notes, resulting in net proceeds, after underwriting discounts and offering expenses, of $98.1 million.

At December 31, 2021, the Subordinated Notes had a remaining balance of $98.6 million and weighted average interest rate of 5.00%.

The Subordinated Notes qualify as Tier 2 capital for regulatory capital purposes.

See Note 11, Subordinated Debt and Mandatorily Redeemable Trust Preferred Securities, of the Notes to the Consolidated Financial Statements for additional information with respect to the TPS and Subordinated Notes.

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.

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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.

In addition to the allowance for credit losses - loans, the Company maintains an allowance for credit losses - unfunded loan commitments which was $12.4 million at December 31, 2021 compared to $13.3 million at December 31, 2020.

We continue to believe our level of non-performing loans and other assets is manageable and further believe that we have sufficient capital and human resources to manage the collection of our non-performing assets in an orderly fashion.

Loans are reported as troubled debt restructures when we grant concessions to a borrower experiencing financial difficulties that we would not otherwise consider.

If any TDR loan becomes delinquent or other matters call into question the borrower’s ability to repay full interest and principal in accordance with the restructured terms, the TDR loan would be reclassified as nonaccrual.

At December 31, 2021, we had $5.5 million of TDR loans of which $5.3 million were currently performing under their restructured terms.

At December 31, 2021, we had 21 mortgage loans totaling $6.4 million operating under forbearance agreements due to COVID-19.

Since these loans were performing loans that were current on their payments prior to the COVID-19 pandemic, these modifications are not considered to be troubled debt restructurings at December 31, 2021 pursuant to applicable accounting and regulatory guidance.

The following table sets forth information with respect to our non-performing assets and restructured loans, at the dates indicated (dollars in thousands):

4 unchanged sentences

Commercial $ 3,683 $ 14,159 $ 18,199

Multifamily — — 85

Construction/land 181 479 936

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Loans more than 90 days delinquent, still on accrual:

Secured by real estate:

Commercial — — 89

Construction/land — — 332

One- to four-family 1,023 436 1,899

7 unchanged sentences

Total non-performing assets to total assets 0.15 % 0.14 % 0.24 %

Total nonaccrual loans to net loans before allowance for credit losses/allowance for loan losses (2)

0.25 % 0.33 % 0.40 %

Total nonaccrual loans to net loans before allowance for credit losses 0.21 % 0.25 % 0.33 %

Restructured loans performing under their restructured terms (2)

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Loans 30-89 days past due and on accrual $ 17,186 $ 11,558 $ 12,291

$ 11,558 $ 12,291 $ 20,178

(1) Includes $44,000 of nonaccrual TDR loans as of December 31, 2022.

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There was no interest income recognized on nonaccrual loans during the year ended December 31, 2022.

(2) The reduction in the ratio of nonaccrual loans to total loans is due a decrease in nonaccrual loans during 2021 as the number of borrowers being impacted by the COVID-19 pandemic lessened.

(2) These loans were performing under their restructured repayment terms at the dates indicated.

(4) Purchased credit-impaired (PCI) loans are included at December 31, 2019.

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):

7 unchanged sentences

Total $ 10,146,724 $ 9,084,763 $ 9,870,982

The decrease in substandard loans during the year ended December 31, 2021 primarily reflects the payoff and balance paydowns of substandard loans as well as risk rating upgrades as certain industries impacted by the COVID-19 pandemic have begun to stabilize.

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.

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 a recapture of provision for credit losses, primarily due to the improvement in the level of adversely classified loans and forecasted economic indicators utilized to calculate credit losses, increased interest income and decreased funding costs, partially offset by decreased mortgage banking income and increased non-interest expense.

Our net income for the year ended December 31, 2021 included a recapture of provision for credit losses of $33.4 million, partially offset by decreased non-interest income, including a $17.1 million decrease in mortgage banking income and increased non-interest expense, including increases of $4.4 million in payment and card processing services expense and $10.2 million in professional services expense.

Our results for the year ended December 31, 2021 included $436,000 of COVID-19 related expenses and $660,000 of merger and acquisition-related expenses as compared to $3.5 million of COVID-19 related expenses and $2.1 million of merger and acquisition-related expenses in the prior year.

The results for year ended December 31, 2021 reflect the impact of the low interest rate environment, the unprecedented level of market liquidity and the reduction in business activity in some of our markets due the lingering impacts of the COVID-19 pandemic.

Our operating results depend largely on our net interest income which increased by $15.6 million to $496.9 million, primarily reflecting an acceleration of deferred loan fee income due to SBA PPP loan repayments from SBA loan forgiveness coupled with growth in the balance of average interest-earning assets and decreased funding costs, partially offset by the decline in the average yield on interest-earning assets.

The increase in net interest income contributed to an increase of $13.4 million, or 2%, in revenue to $593.3 million for the year ended December 31, 2021, compared to $579.9 million for the year ended December 31, 2020.

Our operating results for the year ended December 31, 2021 also reflected a $2.2 million decrease in non-interest income primarily as a result of decreased mortgage banking income, partially offset by an increase in deposit fees and other services charges and a net gain recognized for fair value adjustments as a result of changes in the valuation of financial instruments carried at fair value.

The increase in deposit fees and other service charges is primarily a result of increased transaction deposit account activity and higher fees on certain transactions.

The decrease in mortgage banking income reflects a reduction in the volume of one- to four-family loans sold as well as a decrease in the gain on sale margin on one- to four-family held-for-sale loans.

Non-interest expense increased to $380.1 million for the year ended December 31, 2021 compared with $369.6 million for the year ended December 31, 2020, largely as a result of increases in payment and card processing services expense and professional services expense, primarily due to an increase in consulting expenses related to the Banner Forward initiative, as well as 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 current year.

These increases were partially offset by decreases in COVID-19 expenses and merger and acquisition-related expenses.

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 $15.6 million, or 3%, to $496.9 million for the year ended December 31, 2021, compared to $481.3 million one year earlier, due to an acceleration of deferred loan fee income due to SBA PPP loan repayments from SBA loan forgiveness, decreases in the cost of funding liabilities and an increase in the average balance of interest-earning assets, partially offset by lower yields on other average interest-earning assets.

The lower yields reflect the growth in the average balance of interest-earning assets primarily being invested in short term investments including interest-bearing deposits and securities available for sale.

The net interest margin on a tax equivalent basis of 3.39% for the year ended December 31, 2021 was 46 basis points lower than the prior year.

The net interest margin included four basis points from acquisition accounting adjustments for the year ended December 31, 2021 and seven basis points for 2020.

The decrease in net interest margin compared to a year earlier primarily reflects lower yields on average interest-earning assets and a larger percentage of interest-earnings assets being invested in short term investments and interest-bearing deposits, partially offset by decreases in the cost of funding liabilities.

The average yield on interest-earning assets of 3.55% for the year ended December 31, 2021 decreased 60 basis points compared to the prior year, largely due to the impact of decreases to the targeted Fed Funds Rate during the first quarter of 2020, resulting in a prolonged low rate environment which resulted in the yields on adjustable rate loan repricing lower and the yields on new loan originations and security purchases being lower than the existing portfolios as well as a higher percentage of assets being invested in low yielding short term investments and interest-bearing deposits.

The Federal Reserve has held the targeted Fed Funds Rate constant since reducing it 150 basis points during first quarter of 2020 to a range of 0.00% to 0.25%;

however, it has indicated that the targeted Fed Funds Rate will be increased commencing in the first quarter of 2022 which should benefit our net interest income.

decreases in interest-earnings asset yields were partially offset by decreases in the costs of funding liabilities compared to a year earlier which were also largely due to the prolonged low rate environment.

The average cost of funding liabilities decreased by 15 basis points to 0.16% as compared to the prior year.

The decreases in the costs of funding liabilities compared to a year earlier were also largely due to the impact of decreases to the targeted Fed Funds Rate on the interest rate environment, although the pace of decline in the cost of funding liabilities typically lags the effect on the yield earned on interest-earning assets primarily because offer rates on interest-bearing deposit accounts typically reprice more slowly than loans for a given change in market rates.

As a result, the net interest spread decreased to 3.39% for the year ended December 31, 2021 compared to 3.84% for the prior year.

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 an acceleration of deferred loan fee income due to SBA PPP loan repayments from SBA loan forgiveness and increases in the average balances of investment securities, partially offset by the decrease in the yield on total interest-earning assets.

The average balance of total interest-earning assets was $14.91 billion for the year ended December 31, 2021, an increase of $2.20 billion, or 17%, compared to $12.70 billion one year earlier.

The yield on average interest-earning assets was 3.55% for the year ended December 31, 2021, compared to 4.15% for the year ended December 31, 2020.

The decreased yield on interest-earning assets reflects decreases in the average yields on loans and securities and excess liquidity being invested in short term investments and interest-bearing deposits.

Average loan yields decreased two basis points to 4.64% for the year ended December 31, 2021 compared to 4.66% in the preceding year, reflecting the impact of lower interest rates, partially offset by an acceleration of deferred loan fee income due to SBA PPP loan repayments from SBA loan forgiveness during the current year.

The acquisition accounting loan discount accretion and related balance sheet impact added seven basis points to the loan yield for the year ended December 31, 2021, compared to ten basis points for the year ended December 31, 2020.

Average loans receivable for the year ended December 31, 2021 decreased $410.3 million, or 4%, to $9.71 billion, compared to $10.12 billion for the prior year, principally as a result of the forgiveness of SBA PPP loans.

Interest income on loans decreased by $20.6 million, or 4%, to $445.7 million for the year ended December 31, 2021, from $466.4 million for the prior year, reflecting the impact of the decrease in the balance of average loans receivable.

The combined average balance of mortgage-backed securities, other investment securities, equity securities, daily interest-bearing deposits and FHLB stock increased to $5.20 billion for the year ended December 31, 2021 (excluding the effect of fair value adjustments), compared to $2.58 billion for the year ended December 31, 2020, contributing to the $22.6 million increase in interest and dividend income compared to the prior year.

The average yield on the combined portfolio decreased to 1.52% for the year ended December 31, 2021, from 2.18% for the prior year.

For the year ended December 31, 2021, the average yield on mortgage-backed securities decreased 54 basis points to 1.88% compared to the prior year, while the yield on other securities decreased 56 basis points to 2.25% compared to the prior year.

The decrease in yield reflects the overall decline in market interest rates as well as the investment of excess liquidity in low yielding short term investments and interest-bearing deposits.

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 15 basis point decrease in the average cost of all funding liabilities to 0.16% for the year ended December 31, 2021, compared to 0.31% for the year ended December 31, 2020, partially offset by a $2.16 billion, or 18%, increase in average funding liabilities.

The increase in average funding liabilities reflects increases in low costing core deposits, including non-interest-bearing deposits and interest-bearing transaction and savings accounts.

Deposit interest expense decreased $13.2 million, or 53%, to $11.8 million for the year ended December 31, 2021 compared to $25.0 million for the prior year as a result of a 13 basis point decrease in the average cost of deposits, partially offset by a $2.19 billion, or 19%, increase in the average balance of deposits.

Average deposit balances increased to $13.72 billion for the year ended December 31, 2021, from $11.54 billion for the year ended December 31, 2020, while the average rate paid on deposit balances decreased to 0.09% in the current year from 0.22% for the prior year.

The average cost of interest-bearing deposits decreased by 22 basis points to 0.16% for the year ended December 31, 2021 compared to 0.38% in the prior year.

The $1.20 billion increase in the average balance of non-interest-bearing accounts also contributed to the decrease in total deposit costs.

The decrease in the cost of interest-bearing deposits between the periods was driven by market and competitive factors following decreases in the target Fed Funds Rate during the first quarter of 2020 as well as a higher percentage of our interest-bearing deposits being lower costing core deposits.

Average total borrowings decreased to $586.3 million for the year end December 31, 2021, compared to $607.4 million for the prior year.

The decrease in average total borrowings was largely due to a $117.1 million decrease in average FHLB advances.

The decrease in average FHLB advances was partially offset by an increase in average other borrowings due to increases in retail repurchase agreements primarily related to client cash management accounts and the first full year of interest expense for the subordinated debt issued in 2020.

The average rate paid on total borrowings decreased nine basis points to 2.02% from 2.11%, reflecting the eight basis point decrease in the average cost of our subordinated debt partially offset by a 31 basis point increase in the average cost of FHLB advances.

The decrease in average total borrowings was the primary reason for the $991,000 decrease in the related interest expense to $11.8 million for the year ended December 31, 2021, from $12.8 million in the prior year.

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.

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.

(See the footnotes to the tables for more information on average balances.)

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

1 unchanged sentence

Year Ended December 31, 2022 Year Ended December 31, 2021 Year Ended December 31, 2020

Balance Interest and Dividends Yield/

Balance Interest and

Dividends Yield/

Balance Interest and Dividends Yield/

Average Balance Interest and Dividends Yield/ Cost (3)

Interest-earning assets:

12 unchanged sentences

Total investment securities 5,735,954 126,416 2.20 5,195,098 78,860 1.52 2,582,256 56,254 2.18

5,195,098 78,860 1.52 2,582,256 56,254 2.18 1,912,586 55,799 2.92

Total interest-earning assets 15,331,204 583,206 3.80 14,906,579 529,672 3.55 12,704,064 527,522 4.15

38 unchanged sentences

Year Ended December 31, 2022

Compared to Year Ended

December 31, 2020

Increase (Decrease) in

Income/Expense Due to

Compared to Year Ended December 31, 2021

Increase (Decrease) in Income/Expense Due to

Year Ended December 31, 2021

Compared to Year Ended

December 31, 2019

Increase (Decrease) in

Income/Expense Due to

Compared to Year Ended December 31, 2020

Increase (Decrease) in Income/Expense Due to

Rate Volume Net Rate Volume Net

29 unchanged sentences

Provision and Allowance for Credit Losses .

We recorded a $33.1 million recapture of provision for credit losses - loans in the year ended December 31, 2021, compared to a $64.3 million provision for credit losses - loans recorded in 2020.

As discussed in the “Summary of Critical Accounting Policies” section above and in Note 1 of the Notes to the Consolidated Financial Statements, the provision and allowance for credit losses is one of the most critical accounting estimates included in our Consolidated Financial Statements.

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 recapture of provision for credit losses - loans for the current year primarily reflects improvement in forecasted economic indicators and a decrease in adversely classified loans.

In addition, management has updated its assessment of qualitative factors including assessing the current conditions within the specific markets we serve compared to the nationally forecasted economic indicators.

The prior year provision for credit losses reflected the forecasted economic deterioration during 2020 and risk rating downgrades on loans that were considered at heightened risk due to the COVID-19 pandemic.

In addition, the change for the year ended December 31, 2020 included a $7.8 million increase related to the adoption of CECL.

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.

No allowance for credit losses-loans was recorded on the $133.9 million balance of SBA PPP loans at December 31, 2021 as these loans are fully guaranteed by the SBA.

We recorded net charge-offs of $2.1 million for the year ended December 31, 2021, compared to net charge-offs of $5.4 million for the prior year.

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.

Nonaccrual loans decreased by $10.3 million during the year to $22.3 million at December 31, 2021, compared to $32.6 million at December 31, 2020.

The allowance for credit losses – loans as a percentage of nonaccrual loans increased to 593% at December 31, 2021, compared to 514% at December 31, 2020.

The increase in the allowance for credit losses – loans as a percentage of nonaccrual loans is due to the decrease in nonaccrual loans during 2021 as the number of borrowers being impacted by the COVID-19 pandemic lessened.

A comparison of the allowance for credit losses - loans at December 31, 2021 and 2020 reflects a decrease of $35.2 million, or 21%, to $132.1 million at December 31, 2021, from $167.3 million at December 31, 2020.

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 the recapture of provision for credit losses - loans recorded during the year ended December 31, 2021, primarily as the result of the improvement in the level of adversely classified loans and forecasted economic indicators utilized to calculate credit losses.

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):

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Beginning balance adjustment for adoption of ASC 326 — — 7,812

(Recapture)/provision for credit losses – loans (33,112) 64,285 10,000

Provision (recapture) for credit losses – loans 8,158 (33,112) 64,285

Recoveries of loans previously charged off:

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Consumer 566 760 328

4,615 6,263 2,465

Total recoveries 3,921 4,615 6,263

Loans charged off:

6 unchanged sentences

Consumer (940) (914) (1,640)

(6,683) (11,640) (8,391)

Net charge-offs (2,068) (5,377) (5,926)

Total charge-offs (2,713) (6,683) (11,640)

Net recoveries (charge-offs) 1,208 (2,068) (5,377)

Balance, end of period $ 141,465 $ 132,099 $ 167,279

3 unchanged sentences

Allowance for credit losses - loans as a percent of total loans 1.39 % 1.45 % 1.69 %

Net loan charge-offs as a percent of average outstanding loans during the period (0.02) % (0.05) % (0.07) %

Net loan recoveries (charge-offs) as a percent of average outstanding loans during the period 0.01 % (0.02) % (0.05) %

Allowance for credit losses - loans as a percent of nonaccrual loans 652 % 593 % 514 %

2 unchanged sentences

2022 2021 2020

Amount Percent

Loans Amount Percent

Amount Percent of Loans in Each Category to Total Loans Percent of Allowance to Loans in Each Category Amount Percent of Loans in Each Category to Total Loans Percent of Allowance to Loans in Each Category Amount Percent of Loans in Each Category to Total Loans Percent of Allowance to Loans in Each Category

Allowance for credit losses - loans:

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Consumer 8,971 6.7 1.32 6,951 6.1 1.25 14,466 6.2 2.39

Total allocated 132,099 167,279 98,167

Unallocated — n/a — n/a 2,392 n/a

Total allowance for credit losses - loans $ 141,465 100.0 % 1.39 % $ 132,099 100.0 % 1.45 % $ 167,279 100.0 % 1.69 %

The allowance for credit losses - unfunded loan commitments was $14.7 million at December 31, 2022 compared to $12.4 million at December 31, 2021.

The decrease in the allowance for credit losses - unfunded loan commitments reflects the recapture of provision for credit losses - unfunded loan commitments recorded during year ended December 31, 2021.

During the year ended December 31, 2021, we recorded a recapture of provision for credit losses - unfunded loan commitments of $865,000, compared to a $3.6 million provision for loan losses - unfunded loan commitments during the prior year.

The recapture of provision for loan credit losses - unfunded loan commitments for the year ended December 31, 2021 was primarily the result of an improvement in the forecasted economic indicators.

The increase in the allowance for credit losses - unfunded loan commitments reflects the provision for credit losses - unfunded loan commitments recorded during year ended December 31, 2022, primarily the result of an increase in unfunded loan commitments.

During the year ended December 31, 2022, we recorded a provision for credit losses - unfunded loan commitments of $2.3 million, compared to an $865,000 recapture of provision for credit losses - unfunded loan commitments during the prior year.

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

4 unchanged sentences

Beginning balance adjustment for adoption of ASC 326 — — 7,022

(Recapture)/provision for credit losses - unfunded loan commitments (865) 3,559 —

Additions through acquisitions — — 117

Provision/ (recapture) for credit losses - unfunded loan commitments 2,289 (865) 3,559

Balance, end of period $ 14,721 $ 12,432 $ 13,297

Non-interest Income.

The following table presents the key components of non-interest income for the years ended December 31, 2021, 2020, 2019 (dollars in thousands):

The following table presents the key components of non-interest income for the years ended December 31, 2022, 2021, and 2020 (dollars in thousands):

Non-interest Income

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69,892 91,318 (21,426) (23.5) % 91,318 98,260 (6,942) (7.1) %

Net gain on sale of securities 482 1,012 (530) (52.4) % 1,012 33 979 nm

Net (loss) gain on sale of securities (3,248) 482 (3,730) (773.9) % 482 1,012 (530) (52.4) %

Net change in valuation of financial instruments carried at fair value 807 4,616 (3,809) (82.5) % 4,616 (656) 5,272 (803.7) %

Gain on sale of branches, including related deposits 7,804 — 7,804 nm — — — — %

Total non-interest income $ 75,255 $ 96,416 $ (21,161) (21.9) % $ 96,416 $ 98,616 $ (2,200) (2.2) %

Non-interest income decreased $2.2 million, or 2%, to $96.4 million for the year ended December 31, 2021, compared to $98.6 million for the year ended December 31, 2020.

This decrease was primarily due to the decrease in mortgage banking income, partially offset by increases in deposit fees and other services charges and miscellaneous income as well as a net gain recognized for fair value adjustments as a result of changes in the valuation of financial instruments carried at fair value.

Income from deposit fees and other service charges increased by $5.1 million, or 15%, to $39.5 million for the year ended December 31, 2021, compared to $34.4 million for the prior year, primarily as a result of increased transaction deposit account activity and higher fees on certain transactions.

Mortgage banking income, including gains on one- to four-family and multifamily loan sales and loan servicing fees, decreased by $17.1 million to $33.9 million for the year ended December 31, 2021, compared to $51.1 million in the prior year.

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 decrease in the gain on sale margin on one- to four-family held-for-sale loans, as well as a reduction in the volume of one- to four-family loans sold, reflecting a decrease in refinance activity, partially offset by higher gains on the sale of multifamily held-for-sale loans.

The decrease in bank owned life insurance income for year ended December 31, 2021 compared to the prior year was due to death benefit proceeds received in the second quarter of 2020.

The $6.1 million increase in miscellaneous income was primarily driven by a valuation adjustment on the SBA servicing asset, higher gains on the sales of SBA loans and higher gains related to the disposition of closed branch locations.

Securities sales for the year ended December 31, 2021 resulted in a gain of $482,000, compared to a $1.0 million gain for securities sold for the year ended December 31, 2020.

The higher gain recognized in 2020 was primarily the result of the gain recognized on the sale of Visa Class B shares held by us.

For the year ended December 31, 2021, we recorded a net gain of $4.6 million for changes in the valuation of financial instruments carried at fair value, compared to a net loss of $656,000 for the year ended December 31, 2020.

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.

Non-interest Expense.

The following table represents key elements of non-interest expense for the years ended December 31, 2021, 2020, 2019 (dollars in thousands).

The following table represents key elements of non-interest expense for the years ended December 31, 2022, 2021, and 2020 (dollars in thousands).

Non-interest Expense

4 unchanged sentences

Occupancy and equipment 52,018 52,850 (832) (1.6) % 52,850 53,362 (512) (1.0) %

Information/computer data services 24,356 24,386 (30) (0.1) % 24,386 22,458 1,928 8.6 %

Payment and card processing expenses 20,544 16,095 4,449 27.6 % 16,095 16,993 (898) (5.3) %

Information and computer data services 25,986 24,356 1,630 6.7 % 24,356 24,386 (30) (0.1) %

Payment and card processing services 21,195 20,544 651 3.2 % 20,544 16,095 4,449 27.6 %

Professional and legal expenses 14,005 22,274 (8,269) (37.1) % 22,274 12,093 10,181 84.2 %

1 unchanged sentence

Deposit insurance 6,649 5,583 1,066 19.1 % 5,583 6,516 (933) (14.3) %

State/Municipal business and use taxes 4,343 4,355 (12) (0.3) % 4,355 3,880 475 12.2 %

REO operations (22) (190) 168 (88.4) % (190) 303 (493) (162.7) %

State and municipal business and use taxes 4,693 4,343 350 8.1 % 4,343 4,355 (12) (0.3) %

Real estate operations, net (104) (22) (82) 372.7 % (22) (190) 168 (88.4) %

Amortization of core deposit intangibles 5,279 6,571 (1,292) (19.7) % 6,571 7,732 (1,161) (15.0) %

2 unchanged sentences

$ 377,295 $ 379,005 $ (1,710) (0.5) % $ 379,005 $ 364,025 $ 14,980 4.1 %

COVID-19 expenses 436 3,502 (3,066) (87.5) % 3,502 — 3,502 nm

Merger and acquisition-related costs 660 2,062 (1,402) (68.0) % 2,062 7,544 (5,482) (72.7) %

COVID-19 expenses — 436 (436) (100.0) % 436 3,502 (3,066) (87.5) %

Merger and acquisition-related expenses — 660 (660) (100.0) % 660 2,062 (1,402) (68.0) %

Total non-interest expense $ 377,295 $ 380,101 $ (2,806) (0.7) % $ 380,101 $ 369,589 $ 10,512 2.8 %

Non-interest expense for the year ended December 31, 2021 was $380.1 million, an increase of $10.5 million, or 3%, as compared to the same period in 2020.

The increase was primarily due to increases in payment and card processing services expense and professional services expense, primarily due to an increase in consulting expenses related to the Banner Forward initiative, as well as 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 current year.

These increases were partially offset by decreases in COVID-19 expenses and merger and acquisition-related expenses.

There were $436,000 of COVID-19 expenses in the current year, compared to $3.5 million in the year ended December 31, 2020.

We expect to see COVID-19 expenses continue throughout the duration of the current pandemic.

Salary and employee benefits expenses decreased $1.0 million to $244.4 million for the year ended December 31, 2021 from $245.4 million for the year ended December 31, 2020, primarily reflecting a reduction in staffing, partially offset by severance related expenses.

Capitalized loan origination costs decreased $447,000 for the year ended December 31, 2021, compared to the prior year, primarily due to higher originations of SBA PPP loans during 2020.

Occupancy and equipment expenses decreased $512,000, or 1%, to $52.9 million in 2021, compared to $53.4 million in 2020.

Payment and card processing services expense increased $4.4 million to $20.5 million for the year ended December 31, 2021 from $16.1 million for the year ended December 31, 2020, primarily reflecting an increase in client rewards program expenses as well as an increase in fraud related losses.

Professional and legal expense increased $10.2 million to $22.3 million for the year ended December 31, 2021 from $12.1 million for the year ended December 31, 2020, primarily due to an increase in consulting expenses, which included $8.3 million of expense related to the Banner Forward initiative as well as a $4.0 million accrual recorded during the current year related to pending litigation.

Advertising and marketing expenses decreased $376,000 to $6.0 million for the year ended December 31, 2021 from $6.4 million for the year ended December 31, 2020.

Deposit insurance expense decreased $933,000 for the year ended December 31, 2021, compared to the same period in 2020.

There were $660,000 of merger and acquisition-related costs in the current year, compared to $2.1 million in the year ended December 31, 2020.

Miscellaneous expenses increased $1.5 million for the year ended December 31, 2021, compared to the prior year, primarily reflecting increased loan related expenses.

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.

2 unchanged sentences

For the year ended December 31, 2021, we recognized $45.5 million in income tax expense for an effective tax rate of 18.5%.

For more information on income taxes and deferred taxes, see Note 11 of the Notes to the Consolidated Financial Statements.

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, 2020 filed with the SEC.

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.

Market Risk and Asset/Liability Management

7 unchanged sentences

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 funding 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 substantial portion of our performing floating-rate loans, which help us maintain higher loan yields in periods when market interest rates decline significantly.

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, 2021, our loans with interest rates at their floors totaled $2.28 billion and had a weighted average note rate of 4.22% and our loans with interest rates below their floors totaled $344.2 million and had a weighted average note rate of 4.23%.

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.

12 unchanged sentences

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 computer simulation model.

We update and prepare simulation modeling at least quarterly for review by senior management and the directors.

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.

5 unchanged sentences

Change (in Basis Points) in Interest Rates (1)

Net Interest Income

Next 12 Months Net Interest Income

Next 24 Months Economic Value of Equity

Net Interest Income Next 12 Months Net Interest Income Next 24 Months Economic Value of Equity

+300 17,134 2.6 % 44,449 3.3 % (424,550) (11.6) %

6 unchanged sentences

however, no rates are allowed to go below zero.

The current targeted federal funds rate is between 0.00% and 0.25%.

Interest Rate Swaps:

The Bank enters into interest rate swaps with certain qualifying commercial loan clients to meet their interest rate risk management needs.

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.

These interest rate swaps are derivative financial instruments and the gross fair values are recorded in other assets and liabilities on the consolidated balance sheets, with changes in fair value during the period recorded in other non-interest expense on the consolidated statements of income.

Cash Flow Hedges of Interest Rate Risk:

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 primarily uses interest rate swaps as part of its interest rate risk management strategy.

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 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.

15 unchanged sentences

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%.

Management is aware of the sources of interest rate risk and in its opinion actively monitors and manages it to the extent possible.

Management believes that our current level of interest rate risk is reasonable.

The following table provides a GAP analysis as of December 31, 2022 (dollars in thousands):

1 unchanged sentence

December 31, 2022

6 Months After 6

Within 6 Months After 6 Months

Within 1 Year After 1 Year

Within 3 Years After 3 Years

Years After 5 Years

Within 10 Years Over

10 Years Total

Within 5 Years After 5 Years

Within 10 Years Over 10 Years Total

Interest-earning assets:

27 unchanged sentences

(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 loan losses and non-performing loans.

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 unchanged sentences

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 $(783,558), or (4.66)% of total assets at December 31, 2021.

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.

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

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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, 2021 and 2020, our loan originations, including originations of loans held for sale, exceeded our loan repayments by $306.8 million and $2.02 billion, respectively.

During those periods we purchased loans of $5.1 million and $2.5 million, respectively.

This activity was funded primarily by increased core deposits and the sale of loans in 2021 and by principal repayment and maturities of securities in 2020.

During the years ended December 31, 2021 and 2020, we received proceeds of $1.32 billion and $1.49 billion, respectively, from the sale of loans.

Securities purchased during the years ended December 31, 2021 and 2020 totaled $2.94 billion and $1.58 billion, respectively, and securities repayments, maturities and sales in those periods were $1.43 billion and $659.1 million, respectively.

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 increased by $1.76 billion during the year ended December 31, 2021, as core deposits increased by $1.84 billion, partially offset by certificates of deposits decreasing by $76.7 million.

The increase in total deposits during 2021 was due primarily to SBA PPP loan funds deposited into client accounts, fiscal stimulus payments, and an increase in average deposit account balances due to an increase in general client liquidity due to client’s maintaining a higher level of liquidity during the COVID-19 pandemic.

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, 2021, certificates of deposit totaled to $838.6 million, or 6% of our total deposits, including $652.7 million which were scheduled to mature within one year.

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 deposits as they mature.

FHLB advances decreased $100.0 million during 2021 to $50.0 million at December 31, 2021, after decreasing $300.0 million for the year ended December 31, 2020.

Other borrowings at December 31, 2021 increased $79.7 million to $264.5 million following an increase of $66.3 million in 2020.

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.

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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, 2022, we have $26.6 million of purchase obligations under contracts with vendors to provide services, for which our financial obligations are dependent upon acceptable performance by the vendor.

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.

For additional information regarding future financial commitments, this discussion should be read in conjunction with our Consolidated Financial Statements and related notes included elsewhere in this filing, including Note 20:

“Commitments and Contingencies” and Note 23:

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 Banner Bank’s assets or adjusted qualifying collateral (subject to a sufficient level of ownership of FHLB stock).

At December 31, 2021, under these credit facilities based on pledged collateral, Banner Bank had $2.38 billion of available credit capacity.

Advances under these credit facilities (excluding fair value adjustments) totaled $50.0 million at December 31, 2021.

In addition, Banner Bank has been approved for participation in the FRBSF’s Borrower-In-Custody (BIC) program.

Under this program, based on pledged collateral, Banner Bank had available lines of credit of approximately $782.3 million as of December 31, 2021, subject to certain collateral requirements, namely the collateral type and risk rating of eligible pledged loans.

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, 2021, Banner Bank also had uncommitted federal funds line of credit agreements with other

financial institutions totaling $125.0 million.

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.

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Management believes it has adequate resources and funding potential to meet our foreseeable liquidity requirements.

Banner Corporation 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 Corporation’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.

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.

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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, 2021, Banner Corporation (on an unconsolidated basis) had liquid assets of $106.3 million.

As noted below, Banner Corporation and its subsidiary bank continued to maintain capital levels in excess of the requirements to be categorized as “Well-Capitalized” under applicable regulatory standards.

During the year ended December 31, 2021, total shareholders’ equity increased $24.1 million to $1.69 billion.

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 the discussion and reconciliation of non-GAAP financial information in the Executive Overview section of this Management’s Discussion and Analysis of Financial Condition and Results of Operation for more detailed information with respect to tangible common shareholders’ equity.

Also, see the capital requirements discussion and table below with respect to our regulatory capital positions.

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 Corporation 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 (BHCA), and the regulations of the Federal Reserve.

Banner 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 Corporation and the Bank to maintain minimum amounts and ratios of capital.

The Federal Reserve requires Banner Corporation to maintain capital adequacy that generally parallels the FDIC 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, 2021, Banner Corporation and the Bank each exceeded all current regulatory capital requirements and the fully phased-in capital conservation buffer requirement.

The following table shows the regulatory capital ratios for Banner Corporation and Banner Bank, as of December 31, 2021.

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.

Regulatory Capital Ratios

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Tier 1 common equity to risk-weighted assets 11.44 12.27

(See Item 1, “Business–Regulation,” and Note 14 of the Notes to the Consolidated Financial Statements for additional information regarding Banner Corporation’s and Banner Bank’s regulatory capital requirements.)

ITEM 7A – Quantitative and Qualitative Disclosures about Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis