BANNER CORP 10-K

Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Notes to the Consolidated Financial Statements contained in Item IV of this Form 10-K. Executive Overview Banner’s successful execution of its super community bank model and strategic initiatives has delivered solid core operating results and profitability over the last several years. The Company’s longer term strategic initiatives continue to focus on originating high quality assets and client acquisition, which we believe will continue to generate strong revenue while maintaining the Company’s moderate risk profile. 2022 Financial Highlights • Revenues increased 6%, to $628.4 million, compared to $593.3 million for the prior year. • Net income decreased to $195.4 million, or $5.67 per diluted share, compared to net income of $201.0 million, or $5.76 per diluted share for the prior year. • Net interest income increased 11% to $553.2 million, compared to $496.9 million for the prior year. • Net interest margin, on a tax equivalent basis, was 3.68% compared to 3.39% in the prior year. • Non-interest income decreased to $75.3 million, compared to $96.4 million for the prior year. • Non-interest expense decreased to $377.3 million, compared to $380.1 million for the prior year. • 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. 41 Selected Financial Data: The following condensed consolidated statements of financial condition and operations and selected performance ratios as of December 31, 2022, 2021, and 2020 and for the years then ended have been derived from our audited consolidated financial statements. FINANCIAL CONDITION DATA: December 31 (In thousands) 2022 2021 2020 Total assets $ 15,833,431 $ 16,804,872 $ 15,031,623 Cash and securities (1) 4,178,375 6,321,196 4,003,469 Loans receivable, net 10,005,259 8,952,664 9,703,703 Deposits 13,620,059 14,326,933 12,567,296 Borrowings 456,603 532,869 549,960 Total shareholders’ equity 1,456,432 1,690,327 1,666,264 Shares outstanding 34,194 34,253 35,159 OPERATING DATA: For the Year Ended December 31 (In thousands) 2022 2021 2020 Interest income $ 572,569 $ 520,500 $ 519,146 Interest expense 19,390 23,609 37,845 Net interest income 553,179 496,891 481,301 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 Deposit fees and other service charges 44,459 39,495 34,384 Mortgage banking operations revenue 10,834 33,948 51,083 Net change in valuation of financial instruments carried at fair value 807 4,616 (656) All other non-interest income 19,155 18,357 13,805 Total non-interest income 75,255 96,416 98,616 Salary and employee benefits 242,266 244,351 245,400 All other non-interest expenses 135,029 135,750 124,189 Total non-interest expense 377,295 380,101 369,589 Income before provision for income tax expense 240,775 246,594 142,453 Provision for income tax expense 45,397 45,546 26,525 Net income $ 195,378 $ 201,048 $ 115,928 PER COMMON SHARE DATA: At or For the Years Ended December 31 2022 2021 2020 Net income: Basic $ 5.70 $ 5.81 $ 3.29 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) 42.59 49.35 47.39 Common shareholders’ tangible equity per share (2)(8) 31.41 38.02 36.17 Cash dividends 1.76 1.64 1.23 Dividend payout ratio (basic) 30.88 % 28.23 % 37.39 % Dividend payout ratio (diluted) 31.04 % 28.47 % 37.73 % OTHER DATA: As of December 31 2022 2021 2020 Full time equivalent employees 1,931 1,891 2,061 Number of branches 137 150 155 42 KEY FINANCIAL RATIOS: At or For the Years Ended December 31 2022 2021 2020 Performance Ratios: Return on average assets (3) 1.18 % 1.24 % 0.83 % Return on average common equity (4) 12.79 12.12 7.14 Average common equity to average assets 9.26 10.26 11.63 Net interest margin (tax equivalent) (5) 3.68 3.39 3.85 Non-interest income to average assets 0.46 0.60 0.71 Non-interest expense to average assets 2.29 2.35 2.65 Efficiency ratio (6) 60.04 64.06 63.73 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 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 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) 6.95 7.93 8.69 Consolidated Capital Ratios: Total capital to risk-weighted assets 14.04 14.71 14.73 Tier 1 capital to risk-weighted assets 12.13 12.74 12.56 Tier 1 capital to average leverage assets 9.45 8.76 9.50 Common equity tier I capital to risk-weighted assets 11.44 11.54 11.25 (1) Includes securities available-for-sale and held-to-maturity. (2) Calculated using shares outstanding. (3) Net income divided by average assets. (4) Net income divided by average common equity. (5) Net interest income as a percent of average interest-earning assets. (6) Non-interest expenses divided by the total of net interest income and non-interest income. (7) Non-performing loans consist of nonaccrual and 90 days past due loans still accruing interest. (8) Represent non-GAAP financial measures.* *Non-GAAP financial measures: To calculate the adjusted revenue, the diluted adjusted earnings per share and the adjusted efficiency ratio, we make adjustments to our GAAP revenues and expenses as reported on our Consolidated Statements of Operations, which results in non-GAAP financial measures. To calculate tangible equity per share and the ratio of tangible common shareholders’ equity to tangible assets, we make adjustments to our GAAP assets and shareholders’ equity as reported on our Consolidated Statements of Financial Condition, which results in non-GAAP financial measures. Management has presented non-GAAP financial measures in this discussion and analysis because it believes that they provide useful and comparative information to assess trends in our core operations and to facilitate the comparison of our performance with the performance of our peers. However, these non-GAAP financial measures are supplemental and are not a substitute for any analysis based on GAAP. Where applicable, we have also presented comparable earnings information using GAAP financial measures. For a reconciliation of these non-GAAP financial measures, see the tables below. Because not all companies use the same calculations, our presentation may not be comparable to other similarly titled measures as calculated by other companies. 43 The following tables set forth reconciliations of non-GAAP financial measures discussed in this report (dollars in thousands, except share and per share data): For the Years Ended December 31 2022 2021 2020 ADJUSTED REVENUE: Net interest income (GAAP) $ 553,179 $ 496,891 $ 481,301 Non-interest income (GAAP) 75,255 96,416 98,616 Total revenue (GAAP) 628,434 593,307 579,917 Exclude: 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 ADJUSTED EARNINGS: Net income (GAAP) $ 195,378 $ 201,048 $ 115,928 Exclude: 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) $ 195,927 $ 208,561 $ 119,897 Diluted earnings per share (GAAP) $ 5.67 $ 5.76 $ 3.26 Diluted adjusted earnings per share (non-GAAP) $ 5.69 $ 5.97 $ 3.37 December 31 ADJUSTED EFFICIENCY RATIO: 2022 2021 2020 Non-interest expense (GAAP) $ 377,295 $ 380,101 $ 369,589 Exclude: 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 Net interest income (GAAP) $ 553,179 $ 496,891 $ 481,301 Non-interest income (GAAP) 75,255 96,416 98,616 Total revenue (GAAP) 628,434 593,307 579,917 Exclude: 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 Efficiency ratio (GAAP) 60.04 % 64.06 % 63.73 % Adjusted efficiency ratio (non-GAAP) 57.99 % 60.22 % 60.76 % 44 We calculate tangible common equity by excluding goodwill and other intangible assets from shareholders’ equity. We calculate tangible assets by excluding the balance of goodwill and other intangible assets from total assets. We believe that this is consistent with the treatment by our bank regulatory agencies, which exclude goodwill and other intangible assets from the calculation of risk-based capital ratios. Management believes that this non-GAAP financial measure provides information to investors that is useful in understanding the basis of our capital position (dollars in thousands). December 31 2022 2021 2020 Shareholders’ equity (GAAP) $ 1,456,432 $ 1,690,327 $ 1,666,264 Exclude goodwill and other intangible assets, net 382,561 387,976 394,547 Common shareholders’ tangible equity (non-GAAP) $ 1,073,871 $ 1,302,351 $ 1,271,717 Total assets (GAAP) $ 15,833,431 $ 16,804,872 $ 15,031,623 Exclude goodwill and other intangible assets, net 382,561 387,976 394,547 Total tangible assets (non-GAAP) $ 15,450,870 $ 16,416,896 $ 14,637,076 Common shareholders’ equity to total assets (GAAP) 9.20 % 10.06 % 11.09 % Common shareholders’ tangible equity to tangible assets (non-GAAP) 6.95 % 7.93 % 8.69 % Common shares outstanding 34,194,018 34,252,632 35,159,200 Common shareholders’ equity (book value) per share (GAAP) $ 42.59 $ 49.35 $ 47.39 Common shareholders’ tangible equity (tangible book value) per share (non-GAAP) $ 31.41 $ 38.02 $ 36.17 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; value of collateral; strength of guarantors; the amount and timing of future cash flows for loans individually evaluated; and determination of the qualitative loss factors. Management estimates the allowance for credit losses using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of the asset based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current portfolio. These factors include, among others, changes in the size and composition of the portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic conditions. Management considers various economic scenarios and forecasts to arrive at the estimate that most reflects management’s expectations of future conditions. The selection of a more optimistic or pessimistic economic forecast would result in a lower or higher allowance for credit losses. The use of a protracted slump economic forecast would have increased the allowance for credit losses - loans by approximately 28% as of December 31, 2022, where the use of a stronger near-term growth economic forecast would result in a negligible decrease in the allowance for credit losses - loans as of December 31, 2022. Management uses a scale to assign qualitative and environmental (QE) factor adjustments based on the level of estimated impact which requires a significant amount of judgment. Some QE factors impact all loan segments equally while others may impact some loan segments more or less than others. If management’s judgment were different for a QE factor that impacts all loan segments equally, a five basis-point change in this QE factor would increase or decrease the allowance for credit losses by 3.7% as of December 31, 2022. 45 Fair Value Accounting and Measurement: We use fair value measurements to record fair value adjustments to certain financial assets and liabilities. A hierarchical disclosure framework associated with the level of pricing observability is utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no pricing observability and a higher degree of judgment utilized in measuring fair value. Determining the fair value of financial instruments with unobservable inputs requires a significant amount of judgment. This includes the discount rate used to fair value our trust preferred securities and junior subordinated debentures. A 25 basis-point increase or decrease in the discount rate used to calculate the fair value of our trust preferred securities would result in a $643,000 decrease or increase in the reported fair value as of December 31, 2022, with an offsetting adjustment to our non-interest income. A 25 basis-point increase or decrease in the discount rate used to calculate the fair value of our junior subordinated debentures would result in a $1.6 million decrease or increase in the reported fair value as of December 31, 2022, with an offsetting adjustment to our accumulated other comprehensive income. Goodwill: An assessment of qualitative factors is completed to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The qualitative assessment involves judgment by management on determining whether there have been any triggering events that have occurred which would indicate potential impairment. If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed. Various valuation methodologies are considered when estimating the reporting unit’s fair value. The specific factors used in these various valuation methodologies that require judgment include the selection of comparable market transactions, discount rates, earnings capitalization rates and the future projected earnings of the reporting unit. Changes in these assumptions could result in changes to the estimated fair value of the reporting unit. The Company completed an assessment of qualitative factors as of December 31, 2022, and concluded that no further analysis was required as it is more likely than not that the fair value of the Bank, the reporting unit, exceeds the carrying value. Income Taxes and Deferred Taxes : The Company determines its deferred tax assets and liabilities based on the enacted tax rates that are expected to be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’s income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A 1% change in tax rates would result in a $7.3 million increase or decrease in our net deferred tax asset as of December 31, 2022. Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations by the tax authorities and newly enacted statutory, judicial and regulatory guidance that could impact the relative merits of tax positions. These changes, when they occur, impact accrued taxes and can materially affect our operating results. The evaluation pertaining to the tax expense and related deferred tax asset and liability balances involves a high degree of judgment and subjectivity around the measurement and resolution of these matters. This includes an evaluation of our ability to use our net operating loss carryforwards. The ultimate realization of the deferred tax assets is dependent upon the existence, or generation, of taxable income in the periods when those temporary differences and net operating loss and credit carryforwards are deductible. Legal Contingencies: In the normal course of our business, we have various legal proceedings and other contingent matters pending. We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We assess our potential liability by analyzing our litigation and regulatory matters using available information. We develop our views on estimated losses in consultation with outside counsel handling our defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. The estimated losses often involve a level of subjectivity and usually are a range of reasonable losses and not an exact number, in those situations we accrue the best estimate within the range or the low end of the range if no estimate within the range is better than another. C omparison of Financial Condition at December 31, 2022 and 2021 General. Total assets decreased to $15.83 billion at December 31, 2022, compared to $16.80 billion at December 31, 2021. The decrease in assets in 2022 was largely the result of a decrease in cash held and interest-bearing deposits, partially offset by loan growth. Total loans receivable (gross loans less deferred fees and discounts and excluding loans held for sale) increased $1.06 billion, or 12%, to $10.15 billion at December 31, 2022, from $9.08 billion at December 31, 2021. The increase in total loans receivable primarily reflects increased one-to-four family residential, multifamily real estate, commercial business, construction, land and land development, and consumer loan balances, partially offset by decreased commercial real estate loan balances. Excluding SBA PPP loans, total loans receivable increased $1.19 billion during the year ended December 31, 2022. Loans held for sale decreased to $56.9 million at December 31, 2022, compared to $96.5 million at December 31, 2021, principally as a result of a decrease in one- to four-family held for sale loan originations and the transfer of $54.0 million of multifamily held for sale loans to held for investment during the fourth quarter of 2022. Loans held for sale at December 31, 2022 included $49.5 million of multifamily loans and $7.4 million of one- to four-family loans, compared to $49.9 million of multifamily loans and $46.6 million of one- to four-family loans at December 31, 2021. 46 The aggregate of securities and interest-bearing deposits decreased $1.98 billion, or 32%, to $4.28 billion at December 31, 2022, compared to $6.26 billion a year earlier, primarily due to a decrease in interest-bearing deposits. Securities decreased to $3.94 billion at December 31, 2022, from $4.19 billion at December 31, 2021, as the fair value of securities available-for-sale declined as a result of an increase in interest rates during 2022. Fair value adjustments for securities designated as available-for-sale reflected a decrease of $418.8 million for the year ended December 31, 2022, which was included net of the associated tax benefit as a component of other comprehensive income, and largely occurred as a result of increases in market interest rates during 2022. Securities which are designated as held-to-maturity increased by $596.7 million from the prior year-end balance. This increase was primarily due to the transfer of $462.2 million of securities from available for sale to held to maturity during the first quarter of 2022 to limit the impact that potential future interest rates changes would have on AOCI. The average effective duration of our securities portfolio was approximately 6.5 years at December 31, 2022, compared to 4.6 years at December 31, 2021. Deposits decreased $706.9 million, or 5%, to $13.62 billion at December 31, 2022, from $14.33 billion at December 31, 2021. The decrease in deposits reflects the sale of four branches, which included the transfer of $178.2 million of related deposits, as well as an overall decline in market liquidity. Core deposits were 95% of total deposits at December 31, 2022, compared to 94% of total deposits one year earlier. Non-interest-bearing deposits decreased by $208.2 million, or 3%, to $6.18 billion from $6.39 billion at December 31, 2021; interest-bearing transaction and savings accounts decreased by $383.6 million or 5%, to $6.72 billion at December 31, 2022 from $7.10 billion at December 31, 2021; and certificates of deposit decreased $115.1 million, or 14%, to $723.5 million at December 31, 2022 from $838.6 million at December 31, 2021. We had $50.0 million of FHLB advances at both December 31, 2022 and December 31, 2021, as core deposits were a sufficient source of funding. Other borrowings, consisting of retail repurchase agreements primarily related to client cash management accounts, decreased $31.7 million to $232.8 million at December 31, 2022, compared to $264.5 million at December 31, 2021. Junior subordinated debentures totaled $74.9 million at December 31, 2022 compared to $119.8 million at December 31, 2021, as we redeemed $50.5 million of junior subordinated debentures during the first quarter of 2022. Subordinated notes, net of issuance costs, were $98.9 million at December 31, 2022 compared to $98.6 million at December 31, 2021. Total shareholders’ equity decreased $233.9 million, to $1.46 billion at December 31, 2022, compared to $1.69 billion at December 31, 2021. The decrease in shareholders’ equity is primarily due to the $363.0 million decrease in AOCI, primarily due to an increase in the unrealized loss and related decrease in the fair value of securities available-for-sale, net of tax, as a result of an increase in interest rates during 2022, the accrual of $60.9 million of cash dividends to common shareholders, and the repurchase of 200,000 shares of common stock at a total cost of $11.0 million, partially offset by the $195.4 million of year-to-date net income. Common shareholder’s equity to total assets was 9.20% and 10.06% at December 31, 2022 and 2021, respectively. Tangible common shareholders’ equity (a non-GAAP financial measure), which excludes goodwill and other intangible assets was $1.07 billion, or 6.95% of tangible assets at December 31, 2022, compared to $1.30 billion, or 7.93% at December 31, 2021. The decrease in tangible common shareholders’ equity as a percentage of tangible assets was primarily due to the previously mentioned decrease in AOCI. The Company’s book value per share was $42.59 at December 31, 2022, compared to $49.35 per share a year ago, and its tangible book value per share (a non-GAAP financial measure) was $31.41 at December 31, 2022, compared to $38.02 per share a year ago. See, “Executive Overview” above for a reconciliation of these non-GAAP financial measures. Investments. At December 31, 2022, our consolidated investment securities portfolio totaled $3.94 billion and consisted principally of mortgage-backed and mortgage-related securities and municipal bonds and to a lesser extent U.S. Government and agency obligations, corporate debt obligations, and asset-backed securities. Our investment levels may be increased or decreased depending upon management’s projections as to the demand for funds to be used in our loan origination, deposit and other activities and upon yields available on investment alternatives. During the year ended December 31, 2022, our aggregate investment in securities decreased $251.6 million primarily due to a decrease in the fair value of securities available-for-sale as a result of an increase in interest rates during 2022. Holdings of mortgage-backed securities decreased $151.7 million and U.S. Government and agency obligations decreased $146.2 million, while municipal bonds increased $35.2 million, corporate debt obligations increased $8.1 million and asset-backed securities increased $5.1 million. U.S. Government and Agency Obligations: Our portfolio of U.S. Government and agency obligations had a carrying value of $55.4 million (with an amortized cost of $56.7 million) at December 31, 2022, a weighted average contractual maturity of 10.3 years and a weighted average coupon rate of 4.84%. Many of the U.S. Government and agency obligations we own include call features which allow the issuing agency the right to call the securities at various dates prior to the final maturity. Mortgage-Backed Obligations: At December 31, 2022, our mortgage-backed and mortgage-related securities had a carrying value of $2.75 billion ($3.12 billion at amortized cost, with a net fair value adjustment of $365.8 million). The weighted average coupon rate of these securities was 2.62% and the weighted average contractual maturity was 24.9 years, although we receive principal payments on these securities each month resulting in a much shorter expected average life. As of December 31, 2022, 98% of the mortgage-backed and mortgage-related securities pay interest at a fixed rate. 47 Municipal Bonds: The carrying value of our tax-exempt bonds at December 31, 2022 was $653.1 million ($678.9 million at amortized cost), comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and, to a lesser extent, revenue bonds (i.e., backed by revenues from the specific project being financed) issued by cities and counties and various housing authorities, and hospital, school, water and sanitation districts. We also had taxable bonds in our municipal bond portfolio, which at December 31, 2022 had a carrying value of $111.2 million ($125.6 million at amortized cost). Many of our qualifying municipal bonds are not rated by a nationally recognized credit rating agency due to the smaller size of the total issuance and a portion of these bonds have been acquired through direct private placement by the issuers. We have not experienced any defaults or payment deferrals on our current portfolio of municipal bonds. Our combined municipal bond portfolio is geographically diverse, with the majority within the states of Washington, Oregon, Texas and California. At December 31, 2022, our municipal bond portfolio, including taxable and tax-exempt, had a weighted average maturity of approximately 20.5 years and a weighted average coupon rate of 3.44%. Corporate Bonds: Our corporate bond portfolio had a carrying value of $153.5 million ($163.5 million at amortized cost, with a net fair value adjustment of $10.0 million) at December 31, 2022. At December 31, 2022, the portfolio had a weighted average maturity of 9.9 years and a weighted average coupon rate of 4.30%. Asset-Backed Securities: At December 31, 2022, our asset-backed securities portfolio had a carrying value of $211.5 million (with an amortized cost of $222.5 million), and was comprised of collateralized loan obligations. The weighted average coupon rate of these securities was 5.93% and the weighted average contractual maturity was 12.9 years. At December 31, 2022, 100% of these securities had adjustable interest rates tied to three-month LIBOR. The following tables set forth certain information regarding carrying values and percentage of total carrying values of our portfolio of securities—trading and securities—available-for-sale, both carried at estimated fair market value, and securities—held-to-maturity, carried at amortized cost as of December 31, 2022, 2021 and 2020 (dollars in thousands): Table 1: Securities December 31 2022 2021 2020 Carrying Value Percent of Total Carrying Value Percent of Total Carrying Value Percent of Total Trading Corporate bonds $ 28,694 100.0 % $ 26,981 100.0 % $ 24,980 100.0 % Total securities—trading $ 28,694 100.0 % $ 26,981 100.0 % $ 24,980 100.0 % Available-for-Sale U.S. Government and agency obligations $ 55,108 2.0 % $ 201,332 5.5 % $ 141,735 6.1 % Municipal bonds 261,209 9.3 308,612 8.5 303,518 13.1 Corporate bonds 121,853 4.4 117,347 3.2 221,769 9.5 Mortgage-backed or related securities 2,139,336 76.7 2,805,268 77.1 1,646,152 70.9 Asset-backed securities 211,525 7.6 206,434 5.7 9,419 0.4 Total securities—available-for-sale $ 2,789,031 100.0 % $ 3,638,993 100.0 % $ 2,322,593 100.0 % Held-to-Maturity U.S. Government and agency obligations $ 312 — % $ 316 0.1 % $ 340 0.1 % Municipal bonds 503,117 45.0 420,555 80.6 370,998 87.9 Corporate bonds 2,961 0.3 3,092 0.6 3,222 0.8 Mortgage-backed or related securities 611,577 54.7 97,392 18.7 47,247 11.2 Total securities—held-to-maturity $ 1,117,967 100.0 % $ 521,355 100.0 % $ 421,807 100.0 % Estimated market value $ 942,180 $ 541,853 $ 448,681 48 The following table shows the maturity or period to repricing of our consolidated portfolio of available-for-sale and held-to-maturity securities as of December 31, 2022 (dollars in thousands): Table 2: Securities Available-for-Sale and Held-to-Maturity —Maturity/Repricing and Rates December 31, 2022 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 U.S. Government and agency obligations $ — — % $ 744 3.49 % $ 41,507 3.85 % $ 13,169 2.58 % $ 55,420 3.54 % Municipal bonds: Taxable 14,370 2.81 16,355 3.31 2,241 4.15 78,224 2.71 111,190 2.84 Tax exempt (1) 1,501 4.56 9,224 3.12 43,933 3.35 598,478 3.50 653,136 3.48 15,871 2.97 25,579 3.24 46,174 3.39 676,702 3.41 764,326 3.39 Corporate bonds 1,050 3.53 44,894 3.98 77,459 3.83 1,411 — 124,814 5.98 Mortgage-backed or related securities 6,036 2.90 182,759 2.70 279,864 1.96 2,282,254 2.63 2,750,913 2.56 Asset-backed securities — — — — 48,854 6.29 162,671 6.08 211,525 6.13 Total securities available-for-sale and held-to-maturity—carrying value $ 22,957 2.98 $ 253,976 2.98 $ 493,858 2.97 $ 3,136,207 2.97 $ 3,906,998 3.04 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 tax disallowance of 10%. 49 Loans and Lending. Loans are our most significant and generally highest yielding earning assets. We attempt to maintain a portfolio of loans to total deposits ratio at a level designed to enhance our revenues, while adhering to sound underwriting practices and appropriate diversification guidelines in order to maintain a moderate risk profile. Our loan to deposit ratio typically ranges from 90% to 95%. Our loan to deposit ratio at December 31, 2022 was 75%. During the most recent quarters our loan to deposit ratio has begun to trend upward as the unprecedented level of market liquidity begins to contract. We offer a wide range of loan products to meet the demands of our clients. Our lending activities are primarily directed toward the origination of real estate and commercial loans. Total loans receivable increased $1.06 billion, or 12%, to $10.15 billion at December 31, 2022, from $9.08 billion at December 31, 2021. The increase in total loans receivable for the year ended December 31, 2022 primarily reflects increased one-to-four family residential, multifamily real estate, commercial business, construction, land and land development, and consumer loan balances, partially offset by decreased commercial real estate loan balances. While we originate a variety of loans, our ability to originate each type of loan is dependent upon the relative client demand and competition in each market we serve. We continue to implement strategies designed to capture more market share and achieve increases in targeted loans. New loan originations and portfolio balances will continue to be significantly affected by economic activity and changes in interest rates. The following table shows loan originations (excluding loans held for sale) activity for the years ended December 31, 2022, 2021, and 2020 (in thousands): Table 3: Loan Originations Years Ended Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 Commercial real estate $ 418,635 $ 565,809 $ 356,361 Multifamily real estate 37,612 110,640 27,119 Construction and land 1,935,476 1,975,664 1,588,311 Commercial business: Commercial business 1,034,950 731,315 628,981 SBA PPP — 485,077 1,176,018 Agricultural business 89,655 61,997 76,096 One-to four- family residential 358,976 206,662 116,713 Consumer 545,254 465,213 423,526 Total loan originations (excluding loans held for sale) $ 4,420,558 $ 4,602,377 $ 4,393,125 One- to Four-Family Residential Real Estate Lending: At December 31, 2022, $1.17 billion, or 12% of our loan portfolio, consisted of permanent loans on one- to four-family residences. We are active originators of one- to four-family residential loans in most communities where we have established offices in Washington, Oregon, California and Idaho. Originations of portfolio one- to four-family residential loans have recently been relatively strong, despite increases in interest rates during the current year. Our balance of loans for one- to four-family residences increased by $515.6 million in 2022, compared to the prior year. The increase in one-to-four family real estate loans during 2022 was primarily the result of one- to four-family construction loans converting to one- to four-family residential portfolio loans and a higher percentage of new production originated as held for investment during the year due to the higher interest rate environment. Construction and Land Lending: Our construction loan originations have been relatively strong in recent years as builders have expanded production and experienced strong home sales in many markets where we operate. At December 31, 2022, construction, land and land development loans totaled $1.49 billion, or 15% of total loans, compared to $1.31 billion, or 14%, at December 31, 2021. One-to four-family construction loans increased by $78.6 million in 2022, as builders have expanded production and experienced strong home sales during the year. During the year ended December 31, 2022, land and land development loans (both residential and commercial) increased by $15.0 million, primarily reflecting increased residential land and land development loans also due to the strong housing market. Commercial and Multifamily Real Estate Lending: We also originate loans secured by commercial and multifamily real estate. Commercial and multifamily real estate loans originated by us include both fixed- and adjustable-rate loans with intermediate terms of generally five to ten years. Our commercial real estate portfolio consists of loans on a variety of property types with no significant concentrations by property type, borrowers or locations. At December 31, 2022, our loan portfolio included $3.64 billion of commercial real estate loans, or 36% of the total loan portfolio, and $645.1 million of multifamily real estate loans, or 6% of the total loan portfolio, compared to $3.79 billion, or 42%, and $530.9 million, or 6%, at December 31, 2021, respectively. Commercial Business Lending: Our commercial business lending is directed toward meeting the credit and related deposit needs of various small- to medium-sized business and agribusiness borrowers operating in our primary market areas. In addition to providing earning assets, this type of lending has helped increase our deposit base. At December 31, 2022, commercial business loans totaled $1.28 billion, or 13% of total loans, compared to $1.17 billion, or 13%, at December 31, 2021. SBA PPP loans decreased 94% to $7.9 million at December 31, 2022, compared to $133.9 million at December 31, 2021. Our commercial business lending, to a lesser extent, includes participation in certain syndicated loans, including shared national credits that totaled $234.1 million at December 31, 2022. 50 Agricultural Lending: Agriculture is a major industry in many Washington, Oregon, California and Idaho locations in our service area. While agricultural loans are not a large part of our portfolio, we routinely make agricultural loans to borrowers with a strong capital base, sufficient management depth, proven ability to operate through agricultural cycles, reliable cash flows and adequate financial reporting. Payments on agricultural loans depend, to a large degree, on the results of operation of the related farm entity. The repayment is also subject to other economic and weather conditions as well as market prices for agricultural products, which can be highly volatile at times. At December 31, 2022, agricultural loans totaled $295.1 million, or 3% of the loan portfolio, compared to $280.6 million, or 3%, at December 31, 2021. Consumer and Other Lending: Consumer lending has traditionally been a modest part of our business with loans made primarily to accommodate our existing client base. At December 31, 2022, our consumer loans increased $125.0 million to $680.9 million, or 7% of our loan portfolio, compared to $555.9 million, or 6%, at December 31, 2021. The increase from December 31, 2021 was primarily due to a home equity loan marketing campaign during the second and third quarters of 2022. As of December 31, 2022, 83% of our consumer loans were secured by one- to four-family residences, including home equity lines of credit. Credit card balances totaled $42.9 million at December 31, 2022 compared to $37.8 million a year earlier. Loan Servicing Portfolio: At December 31, 2022, we were servicing $3.01 billion of loans for others and held $11.4 million in escrow for our portfolio of loans serviced for others. The loan servicing portfolio at December 31, 2022 was comprised of $1.35 billion of Freddie Mac residential mortgage loans, $1.09 billion of Fannie Mae residential mortgage loans, $328.5 million of Oregon Housing residential mortgage loans, $69.9 million of SBA loans and $171.4 million of other loans serviced for a variety of investors. The portfolio included loans secured by property located primarily in the states of Washington, Oregon, Idaho and California. For the years ended December 31, 2022 and 2021, we recognized $7.5 million and $7.7 million of loan servicing income in our results of operations, respectively. For the years ended December 31, 2022 and 2021, we recognized $4.2 million and $6.6 million of amortization for MSRs and SBA servicing rights, respectively. 51 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): Table 4: Loan Portfolio Analysis 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, 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 Amount Percent of Total Amount Percent of Total Amount Percent of Total Commercial real estate: Owner-occupied $ 845,320 8.3 % $ 831,623 9.2 % $ 796,180 8.1 % Investment properties 1,589,975 15.7 1,674,027 18.4 1,639,115 16.6 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 Construction, land and land development: Commercial construction 184,876 1.8 167,998 1.8 227,366 2.3 Multifamily construction 325,816 3.2 259,116 2.9 305,527 3.1 One- to four-family construction 647,329 6.4 568,753 6.3 506,638 5.1 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: Commercial business 1,275,813 12.6 1,038,206 11.4 1,132,621 11.5 SBA PPP 7,594 0.1 132,574 1.5 1,044,472 10.6 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: Agricultural business, including secured by farmland 294,743 2.9 279,224 3.1 293,553 3.0 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 Consumer: Consumer—home equity revolving lines of credit 566,291 5.6 458,533 5.0 490,487 5.0 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 % Less allowance for credit losses – loans (141,465) (132,099) (167,279) Net loans $ 10,005,259 $ 8,952,664 $ 9,703,703 52 The following table sets forth the Company’s loans by geographic concentration at December 31, 2022, 2021 and 2020 (dollars in thousands): Table 5: Loans by Geographic Concentration December 31, 2022 December 31, 2021 December 31, 2020 Amount Percent Amount Percent Amount Percent Washington $ 4,777,546 47.1 % $ 4,264,590 47.0 % $ 4,647,553 47.0 % California 2,484,980 24.5 2,138,340 23.5 2,279,749 23.1 Oregon 1,826,743 18.0 1,652,364 18.2 1,792,156 18.2 Idaho 565,586 5.6 525,141 5.8 537,996 5.5 Utah 75,967 0.7 74,913 0.8 80,704 0.8 Other 415,902 4.1 429,415 4.7 532,824 5.4 Total $ 10,146,724 100.0 % $ 9,084,763 100.0 % $ 9,870,982 100.0 % The following table sets forth certain information at December 31, 2022 regarding the dollar amount of loans maturing in our portfolio based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances are net of unamortized premiums and discounts and exclude loans held for sale (in thousands): Table 6: Loans by Maturity Maturing in One Year or Less Maturing After One to Five Years Maturing After Five to Fifteen Years Maturing After Fifteen Years Total Commercial real estate: Owner-occupied $ 61,124 $ 113,952 $ 637,574 $ 32,670 $ 845,320 Investment properties 90,292 315,592 929,061 255,030 1,589,975 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 Construction, land and land development: Commercial construction 103,467 13,547 62,069 5,793 184,876 Multifamily construction 143,078 149,765 15,350 17,623 325,816 One- to four-family construction 608,249 38,858 — 222 647,329 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: Commercial business 393,951 340,383 383,118 158,361 1,275,813 SBA PPP — 7,594 — — 7,594 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: Agricultural business, including secured by farmland 84,445 72,289 136,200 1,809 294,743 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: 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 Contractual maturities of loans do not necessarily reflect the actual life of such assets. The average life of loans typically is substantially less than their contractual maturities because of principal repayments and prepayments. In addition, due-on-sale clauses on certain mortgage loans generally give us the right to declare loans immediately due and payable in the event that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase however when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and, conversely, decreases when rates on existing mortgage loans are substantially higher than current mortgage loan market rates. 53 The following table sets forth the dollar amount of all loans maturing after December 31, 2023 which have fixed interest rates and floating or adjustable interest rates (in thousands): Table 7: Loans Maturing after One Year Fixed Rates Floating or Adjustable Rates Total Commercial real estate: Owner-occupied $ 269,471 $ 514,725 $ 784,196 Investment properties 450,189 1,049,494 1,499,683 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 Construction, land and land development: Commercial construction 10,780 70,629 81,409 Multifamily construction 90,834 91,904 182,738 One- to four-family construction 766 38,314 39,080 Land and land development 18,267 175,698 193,965 Total Construction, land and land development 120,647 376,545 497,192 Commercial business: Commercial business 569,452 312,410 881,862 SBA PPP 7,594 — 7,594 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: Agricultural business, including secured by farmland 74,415 135,883 210,298 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: 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 Deposits. We compete with other financial institutions and financial intermediaries in attracting deposits and we generally attract deposits within our primary market areas. Much of the focus of our expansion and current marketing efforts have been directed toward attracting additional deposit client relationships and balances. The long-term success of our deposit gathering activities is reflected not only in the growth of core deposit balances, but also in the level of deposit fees, service charges and other payment processing revenues compared to prior periods. One of our key strategies is to strengthen our franchise by emphasizing core deposit activity in non-interest-bearing and other transaction and savings accounts with less reliance on higher cost certificates of deposit. Increasing core deposits is a fundamental element of our business strategy. This strategy continues to help control our cost of funds and increase the opportunity for deposit fee revenues, while stabilizing our funding base. Total deposits decreased $706.9 million, or 5%, to $13.62 billion at December 31, 2022 from $14.33 billion at December 31, 2021. The decrease in total deposits from the prior year end reflects the sale of four branches during 2022, which included the transfer of $178.2 million of related deposits as well as an overall decrease in market liquidity. Non-interest-bearing deposits decreased by $208.2 million, or 3%, to $6.18 billion at year end from $6.39 billion at December 31, 2021. Interest-bearing transaction and savings accounts decreased by $383.6 million, or 5%, to $6.72 billion at December 31, 2022 compared to $7.10 billion a year earlier. Certificates of deposit decreased $115.1 million, or 14%, to $723.5 million at December 31, 2022 from $838.6 million at December 31, 2021. Core deposits were 95% of total deposits at December 31, 2022, compared to 94% a year earlier. 54 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): Table 8: Deposits December 31 2022 2021 2020 Amount Percent of Total Increase (Decrease) Amount Percent of Total Increase (Decrease) Amount Percent of Total Non-interest-bearing checking $ 6,176,998 45.4 % $ (208,179) $ 6,385,177 44.6 % $ 892,253 $ 5,492,924 43.7 % Interest-bearing checking 1,811,153 13.3 (136,261) 1,947,414 13.6 377,979 1,569,435 12.5 Regular savings 2,710,090 19.9 (74,626) 2,784,716 19.4 386,234 2,398,482 19.1 Money market 2,198,288 16.1 (172,707) 2,370,995 16.5 179,860 2,191,135 17.4 Total interest-bearing transaction and savings accounts 6,719,531 49.3 (383,594) 7,103,125 49.5 944,073 6,159,052 49.0 Certificates maturing: Within one year 531,643 3.9 (121,051) 652,694 4.6 (48,779) 701,473 5.6 After one year, but within two years 142,993 1.1 25,980 117,013 0.8 (6,277) 123,290 1.0 After two years, but within five years 47,515 0.3 (19,952) 67,467 0.5 (21,082) 88,549 0.7 After five years 1,379 — (78) 1,457 — (551) 2,008 — Total certificate accounts 723,530 5.3 (115,101) 838,631 5.9 (76,689) 915,320 7.3 Total Deposits $ 13,620,059 100.0 % $ (706,874) $ 14,326,933 100.0 % $ 1,759,637 $ 12,567,296 100.0 % Included in Total Deposits: Public transaction accounts $ 392,859 2.9 % $ 38,985 $ 353,874 2.5 % $ 50,999 $ 302,875 2.4 % Public interest-bearing certificates 26,810 0.2 (13,151) 39,961 0.3 (19,166) 59,127 0.5 Total public deposits $ 419,669 3.1 % $ 25,834 $ 393,835 2.8 % $ 31,833 $ 362,002 2.9 % 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 % 55 The following table indicates the amount of the Bank’s certificates of deposit with balances in excess of the FDIC insurance limit by time remaining until maturity as of December 31, 2022 (in thousands): Table 9: Maturity Period— Certificates of Deposit in excess of the FDIC insurance limit Certificates of Deposit in Excess of FDIC Insurance Limit Maturing in three months or less $ 47,716 Maturing after three months through six months 26,195 Maturing after six months through twelve months 48,543 Maturing after twelve months 48,870 Total $ 171,324 The following table provides additional detail on geographic concentrations of our deposits at December 31, 2022, 2021, and 2020 (in thousands): Table 10: Geographic Concentration of Deposits December 31, 2022 December 31, 2021 December 31, 2020 Amount Percent Amount Percent Amount Percent Washington $ 7,563,056 55.6 % $ 7,952,376 55.5 % $ 7,058,404 56.2 % Oregon 2,998,572 22.0 3,067,054 21.4 2,604,908 20.7 California 2,331,524 17.1 2,524,296 17.6 2,237,949 17.8 Idaho 726,907 5.3 783,207 5.5 666,035 5.3 Total deposits $ 13,620,059 100.0 % $ 14,326,933 100.0 % $ 12,567,296 100.0 % Borrowings. We had $50.0 million FHLB advances at both December 31, 2022 and December 31, 2021, as core deposits were a sufficient source of funding. At that date, based on pledged collateral, the Bank had $2.99 billion of available credit capacity with the FHLB. At December 31, 2022, based upon our available unencumbered collateral, the Bank was eligible to borrow $1.19 billion from the Federal Reserve Bank, however, at that date we had no funds borrowed under this arrangement. At December 31, 2022, retail repurchase agreements totaled $232.8 million, had a weighted average rate of 0.35%, and were secured by pledges of certain mortgage-backed securities and agency securities. Retail repurchase agreement balances, which are primarily associated with client sweep account arrangements, decreased $31.7 million, from the 2021 year-end balance. We had no borrowings under wholesale repurchase agreements at December 31, 2022 or December 31, 2021. At December 31, 2022, we had an aggregate of $86.5 million of TPS. This includes $75.0 million issued by us and $11.5 million acquired in our bank acquisitions. The junior subordinated debentures are carried at their estimated fair value of $74.9 million at December 31, 2022. Banner redeemed $50.5 million of junior subordinated debentures during the first quarter of 2022 and redeemed $8.2 million of junior subordinated debentures during the fourth quarter of 2021. At December 31, 2022, the TPS had a weighted average rate of 5.99%. At December 31, 2022, subordinated notes, net of issuance costs were $98.9 million and had a weighted average interest rate of 5.00%. Asset Quality. Maintaining a moderate risk profile by employing appropriate underwriting standards, avoiding excessive asset concentrations and aggressively managing troubled assets has been and will continue to be a primary focus for us. Non-performing assets decreased to $23.4 million, or 0.15% of total assets, at December 31, 2022, from $23.7 million, or 0.14% of total assets, at December 31, 2021. At December 31, 2022, our allowance for credit losses - loans was $141.5 million, or 615% of non-performing loans, compared to $132.1 million, or 578% of non-performing loans at December 31, 2021. 56 The following table sets forth information with respect to our non-performing assets and restructured loans, at the dates indicated (dollars in thousands): Table 11: Non-Performing Assets December 31 2022 2021 2020 Nonaccrual loans: (1) Secured by real estate: Commercial $ 3,683 $ 14,159 $ 18,199 Construction/land 181 479 936 One- to four-family 5,236 2,711 3,556 Commercial business 9,886 2,156 5,407 Agricultural business, including secured by farmland 594 1,022 1,743 Consumer 2,126 1,754 2,719 21,706 22,281 32,560 Loans more than 90 days delinquent, still on accrual: One- to four-family 1,023 436 1,899 Commercial business — 2 1,025 Consumer 264 117 130 1,287 555 3,054 Total non-performing loans 22,993 22,836 35,614 REO assets held for sale, net 340 852 816 Other repossessed assets held for sale, net 17 17 51 Total non-performing assets $ 23,350 $ 23,705 $ 36,481 Total non-performing assets to total assets 0.15 % 0.14 % 0.24 % 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) $ 4,241 $ 5,309 $ 6,673 Loans 30-89 days past due and on accrual $ 17,186 $ 11,558 $ 12,291 (1) Includes $44,000 of nonaccrual TDR loans as of December 31, 2022. For the year ended December 31, 2022, interest income was reduced by $725,000 as a result of nonaccrual loan activity, which includes the reversal of $322,000 of accrued interest as of the date the loan was placed on nonaccrual. There was no interest income recognized on nonaccrual loans during the year ended December 31, 2022. (2) These loans were performing under their restructured repayment terms at the dates indicated. The following table presents the Company’s portfolio of risk-rated loans and non-risk-rated loans by grade at the dates indicated (in thousands): Table 12: Loans by Grade For the years ended December 31, 2022 2021 2020 Pass $ 10,000,493 $ 8,874,468 $ 9,494,147 Special Mention 9,081 11,932 36,598 Substandard 137,150 198,363 340,237 Doubtful — — — Total $ 10,146,724 $ 9,084,763 $ 9,870,982 The decrease in substandard loans during the year ended December 31, 2022 primarily reflects the payoff of substandard loans as well as risk rating upgrades. 57 Comparison of Results of Operations for the Years Ended December 31, 2022 and 2021 For the year ended December 31, 2022, our net income was $195.4 million, or $5.67 per diluted share, compared to net income of $201.0 million, or $5.76 per diluted share for the year ended December 31, 2021. Current year results were positively impacted by increased interest income, decreased funding costs and a $7.8 million gain recognized on the branch sale completed during the second quarter of 2022, partially offset by a $23.1 million decrease in mortgage banking income and a provision for credit losses of $10.4 million. Our operating results depend largely on our net interest income which increased $56.3 million to $553.2 million, primarily reflecting increased yields on loans and investment securities due to rising interest rates during the year as well as an increase in average interest-earning assets, particularly growth in investment securities balances. Revenues (net interest income and non-interest income) increased $35.1 million, or 6%, to $628.4 million for the year ended December 31, 2022, compared to $593.3 million for the year ended December 31, 2021, which also reflected a $21.2 million decrease in non-interest income primarily as a result of lower income from mortgage banking operations, partially offset by the gain recognized on the branch sale. The decrease in mortgage banking income reflects a reduction in the volume and a decrease in the gain on sale margin for one- to four-family loans sold during the year along with a negative fair market adjustment on multifamily held for sale loans. Non-interest expense decreased to $377.3 million for the year ended December 31, 2022 compared with $380.1 million for the year ended December 31, 2021, largely as a result of a decrease in professional and legal expenses, a decrease in salary and employee benefits expense, and a decrease in advertising and marketing expense, partially offset by a decrease in capitalized loan origination costs. Net Interest Income. Net interest income increased by $56.3 million, or 11%, to $553.2 million for the year ended December 31, 2022, compared to $496.9 million for the year ended December 31, 2021, primarily due to an increase in the average balance of interest-earning assets, increased yields on average interest-earning assets and decreased funding costs, partially offset by a decline in the recognition of deferred loan fee income due to SBA PPP loan repayments from SBA loan forgiveness. The higher average yield on interest-earning assets compared to same prior year period reflects rising market interest rates during the year ended December 31, 2022. The net interest margin on a tax equivalent basis of 3.68% for the year ended December 31, 2022 was 29 basis points higher than the prior year. The increase in net interest margin compared to a year earlier primarily reflects a 25 basis-point increase in yields on average interest-earning assets and a three basis-point decrease in the cost of funding liabilities. The increase in average yields on interest-earning assets during the current year reflects the benefit of variable rate interest-earning assets repricing higher due to rising interest rates, as well as new loans being originated at higher interest rates, partially offset by a higher percentage of assets being invested in low yielding short term investments and interest-bearing deposits. Since March 2022, in response to inflation, the FOMC of the Federal Reserve System has increased the target range for the federal funds rate by 425 basis points, including 125 basis points during the fourth quarter of 2022, to a range of 4.25% to 4.50%. The decrease in the overall cost of funding liabilities compared to a year earlier was largely due to an increase in the average balance of low-cost core deposits, including non-interest-bearing transaction and savings accounts Interest Income. Interest income for the year ended December 31, 2022 was $572.6 million, compared to $520.5 million for the prior year, an increase of $52.1 million. The increase in interest income occurred as a result of the yields on interest-earnings assets increasing the 25 basis points to 3.80% and the average balance of interest-earning assets increasing $424.6 million to $15.33 billion. The increased yield on interest-earning assets reflects increases in the average yields on loans and securities. Interest income on loans increased by $5.2 million to $450.9 million for the year ended December 31, 2022, from the prior year. The increased interest income on loans is primarily due to the average loan yields increasing 12 basis points to 4.76%, reflecting the impact of rising interest rates. The acquisition accounting loan discount accretion and related balance sheet impact added four basis points to the loan yield for the year ended December 31, 2022, compared to seven basis points for the year ended December 31, 2021. Average loans receivable decreased $116.2 million to $9.60 billion, principally as a result of the forgiveness of SBA PPP loans. The combined average balance of mortgage-backed securities, other investment securities, equity securities, daily interest-bearing deposits and FHLB stock increased $540.9 million to $5.74 billion (excluding the effect of fair value adjustments), contributing to the $47.6 million increase in interest and dividend income compared to the prior year. The average yield on the combined portfolio increased 68 basis points to 2.20%, reflecting a 30 basis-point increase in the average yield on mortgage-backed securities and a 72 basis-point increase in the yield on other securities. Interest Expense. Interest expense for the year ended December 31, 2022 was $19.4 million, compared to $23.6 million for the prior year, a decrease of $4.2 million, or 18%. The decrease in interest expense occurred as a result of a three basis-point decrease in the average cost of all funding liabilities to 0.13%, partially offset by the average balance of funding liabilities increasing $410.2 million to $14.40 billion. The increase in average balance of funding liabilities reflects increases in low-cost core deposits, including non-interest-bearing deposits and interest-bearing transaction and savings accounts, partially offset by lower average balances of certificates of deposit, FHLB advances and subordinated debt. Deposit interest expense decreased $1.6 million, or 14%, to $10.1 million for the year ended December 31, 2022 compared to $11.8 million for the prior year as a result of the average cost of deposits, including non-interest bearing deposits, decreasing two basis points to 0.07%, partially offset by the average balance of interest-bearing deposits increasing $239.9 million to $7.83 billion. The decrease in the average cost of deposits between the periods was primarily due to a $301.8 million increase in the average balance of non-interest-bearing accounts, a higher percentage of our interest-bearing deposits being lower-cost core deposits and a 25 basis-point decrease in the average rate paid on certificates of deposit. 58 The average rate paid on total borrowings increased two basis points to 2.04%, reflecting the 87 basis-point increase in the average cost of our subordinated debt and the 55 basis-point increase in the average cost of FHLB advances, partially offset by the $131.5 million decrease in average balance of total borrowings. The decrease in average total borrowings was largely due to a $82.7 million decrease in average balance of FHLB advances and a $57.7 million decrease in the average balance of subordinated debt. The decrease in average total borrowings was the primary reason for the $2.6 million decrease in the related interest expense to $9.3 million for the year ended December 31, 2022, from $11.8 million in the prior year. Table 13, Analysis of Net Interest Spread , presents, for the periods indicated, our condensed average balance sheet information, together with interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities. Average balances are computed using daily average balances. 59 The following table provides an analysis of our net interest spread for the last three years (dollars in thousands): Table 13: Analysis of Net Interest Spread Year Ended December 31, 2022 Year Ended December 31, 2021 Year Ended December 31, 2020 Average Balance Interest and Dividends Yield/ Cost (3) Average Balance Interest and Dividends Yield/ Cost (3) Average Balance Interest and Dividends Yield/ Cost (3) Interest-earning assets: Held for sale loans $ 82,030 $ 2,973 3.62 % $ 94,252 $ 3,066 3.25 % $ 144,220 $ 5,482 3.80 % Mortgage loans 7,731,195 364,499 4.71 7,225,860 328,115 4.54 7,303,584 352,878 4.83 Commercial/agricultural loans 1,617,191 77,309 4.78 1,498,808 62,479 4.17 1,765,265 80,567 4.56 SBA PPP loans 41,167 4,677 11.36 770,041 49,854 6.47 760,912 23,133 3.04 Consumer and other loans 123,667 7,332 5.93 122,520 7,298 5.96 147,827 9,208 6.23 Total loans (1) 9,595,250 456,790 4.76 9,711,481 450,812 4.64 10,121,808 471,268 4.66 Mortgage-backed securities 3,130,124 68,148 2.18 2,451,110 46,199 1.88 1,330,355 32,188 2.42 Other securities 1,625,250 48,278 2.97 1,336,974 30,114 2.25 777,378 21,839 2.81 Equity securities — — — 429 — — 182,846 373 0.20 Interest-bearing deposits with banks 969,952 9,633 0.99 1,392,619 1,955 0.14 272,725 907 0.33 FHLB stock 10,628 357 3.36 13,966 592 4.24 18,952 947 5.00 Total investment securities 5,735,954 126,416 2.20 5,195,098 78,860 1.52 2,582,256 56,254 2.18 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 Non-interest-earning assets 1,169,271 1,268,348 1,262,170 Total assets $ 16,500,475 $ 16,174,927 $ 13,966,234 Deposits: Interest-bearing checking accounts $ 1,890,917 $ 1,557 0.08 $ 1,755,293 $ 1,188 0.07 $ 1,385,252 $ 1,479 0.11 Savings accounts 2,810,264 2,053 0.07 2,652,018 1,833 0.07 2,194,418 4,257 0.19 Money market accounts 2,364,122 3,143 0.13 2,305,814 2,670 0.12 1,996,870 6,275 0.31 Certificates of deposit 764,255 3,371 0.44 876,509 6,079 0.69 1,030,722 13,004 1.26 Total interest-bearing deposits 7,829,558 10,124 0.13 7,589,634 11,770 0.16 6,607,262 25,015 0.38 Non-interest-bearing deposits 6,434,670 — — 6,132,875 — — 4,929,768 — — Total deposits 14,264,228 10,124 0.07 13,722,509 11,770 0.09 11,537,030 25,015 0.22 Other interest-bearing liabilities: FHLB advances 15,285 489 3.20 97,945 2,592 2.65 215,093 5,023 2.34 Other borrowings 249,681 377 0.15 240,817 467 0.19 193,862 603 0.31 Subordinated debt 189,870 8,400 4.42 247,583 8,780 3.55 198,490 7,204 3.63 Total borrowings 454,836 9,266 2.04 586,345 11,839 2.02 607,445 12,830 2.11 Total funding liabilities 14,719,064 19,390 0.13 14,308,854 23,609 0.16 12,144,475 37,845 0.31 Other non-interest-bearing liabilities (2) 253,983 206,774 197,422 Total liabilities 14,973,047 14,515,628 12,341,897 Shareholders’ equity 1,527,428 1,659,299 1,624,337 Total liabilities and shareholders’ equity $ 16,500,475 $ 16,174,927 $ 13,966,234 Net interest income/rate spread (tax equivalent) $ 563,816 3.67 % $ 506,063 3.39 % $ 489,677 3.84 % Net interest margin (tax equivalent) 3.68 % 3.39 % 3.85 % Reconciliation to reported net interest income: Adjustments for taxable equivalent basis (10,637) (9,172) (8,376) Net interest income and margin, as reported $ 553,179 3.61 % $ 496,891 3.33 % $ 481,301 3.79 % Average interest-earning assets / average interest-bearing liabilities 185.06 % 182.32 % 176.09 % Average interest-earning assets / average funding liabilities 104.16 % 104.18 % 104.61 % (footnotes follow) 60 (1) Average balances include loans accounted for on a nonaccrual basis and loans 90 days or more past due. Amortization of net deferred loan fees/costs is included with interest on loans. (2) Average other non-interest-bearing liabilities include fair value adjustments related to junior subordinated debentures. (3) Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $5.9 million, $5.1 million, and $4.9 million for the years ended December 31, 2022, December 31, 2021, and December 31, 2020, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $4.8 million, $4.1 million, and $3.5 million for the years ended December 31, 2022, December 31, 2021, and December 31, 2020, respectively. The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown (in thousands). Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Effects on interest income attributable to changes in rate and volume (changes in rate multiplied by changes in volume) have been allocated between changes in rate and changes in volume (in thousands): Table 14: Rate/Volume Analysis Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 Increase (Decrease) in Income/Expense Due to Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 Increase (Decrease) in Income/Expense Due to Rate Volume Net Rate Volume Net Interest-earning assets: Held for sale loans $ 329 $ (422) $ (93) $ (712) $ (1,704) $ (2,416) Mortgage loans 12,870 23,514 36,384 (20,989) (3,774) (24,763) Commercial/agricultural loans 9,642 5,188 14,830 (6,509) (11,579) (18,088) SBA PPP loans 21,828 (67,005) (45,177) 26,409 312 26,721 Consumer and other loans (34) 68 34 (385) (1,525) (1,910) Total loans 44,635 (38,657) 5,978 (2,186) (18,270) (20,456) Mortgage-backed securities 7,878 14,071 21,949 (5,003) 19,014 14,011 Other securities 10,836 7,328 18,164 (3,154) 11,429 8,275 Equity securities — — — (183) (190) (373) Interest-bearing deposits with banks 8,443 (765) 7,678 (171) 1,219 1,048 FHLB stock (109) (126) (235) (130) (225) (355) Total investment securities 27,048 20,508 47,556 (8,641) 31,247 22,606 Total net change in interest income on interest-earning assets 71,683 (18,149) 53,534 (10,827) 12,977 2,150 Interest-bearing liabilities: Interest-bearing checking accounts 272 97 369 (1,112) 821 (291) Savings accounts 107 113 220 (3,453) 1,029 (2,424) Money market accounts 404 69 473 (4,579) 974 (3,605) Certificates of deposit (2,003) (705) (2,708) (5,215) (1,710) (6,925) Total interest-bearing deposits (1,220) (426) (1,646) (14,359) 1,114 (13,245) FHLB advances 451 (2,554) (2,103) 784 (3,215) (2,431) Other borrowings (107) 17 (90) (383) 247 (136) Subordinated debt 1,912 (2,292) (380) (155) 1,731 1,576 Total borrowings 2,256 (4,829) (2,573) 246 (1,237) (991) Total net change in interest expense on interest-bearing liabilities 1,036 (5,255) (4,219) (14,113) (123) (14,236) Net change in net interest income (tax equivalent) $ 70,647 $ (12,894) $ 57,753 $ 3,286 $ 13,100 $ 16,386 61 Provision and Allowance for Credit Losses . We recorded an $8.2 million provision for credit losses - loans in the year ended December 31, 2022, compared to a $33.1 million recapture of provision for credit losses - loans recorded in 2021. The provision and allowance for credit losses is one of the most critical accounting estimates included in our Consolidated Financial Statements. The provision for credit losses - loans reflects the amount required to maintain the allowance for credit losses - loans at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves. The provision for credit losses - loans for the current year primarily reflects loan growth and, to a lesser extent, a deterioration in forecasted economic conditions and indicators utilized to estimate credit losses, partially offset by an improvement in the level of adversely classified loans. The prior year recapture of provision for credit losses - loans primarily reflected an improvement in forecasted economic indicators and a decrease in adversely classified loans. Future assessments of the expected credit losses will not only be impacted by changes to the reasonable and supportable forecast, but will also include an updated assessment of qualitative factors, as well as consideration of any required changes in the reasonable and supportable forecast reversion period. We recorded net recoveries of $1.2 million for the year ended December 31, 2022, compared to net charge-offs of $2.1 million for the prior year. The reduction in net charge-offs in 2022 reflects the improvement in overall loan portfolio performance during 2022. A comparison of the allowance for credit losses - loans at December 31, 2022 and 2021 reflects an increase of $9.4 million, or 7%, to $141.5 million at December 31, 2022, from $132.1 million at December 31, 2021. The allowance for credit losses - loans as a percentage of total loans (loans receivable excluding allowance for credit losses) decreased to 1.39% at December 31, 2022, compared to 1.45% at December 31, 2021. The decrease in the allowance for credit losses - loans as a percentage of loans reflects an improvement in the level of adversely classified loans during 2022. The following table sets forth an analysis of our allowance for credit losses - loans for the periods indicated (dollars in thousands): Table 15: Changes in Allowance for Credit Losses - Loans Years Ended December 31 2022 2021 2020 Balance, beginning of period $ 132,099 $ 167,279 $ 100,559 Beginning balance adjustment for adoption of ASC 326 — — 7,812 Provision (recapture) for credit losses – loans 8,158 (33,112) 64,285 Recoveries of loans previously charged off: Commercial real estate 392 1,729 275 Construction and land 384 100 105 One- to four-family residential 181 199 467 Commercial business 1,923 1,797 3,265 Agricultural business, including secured by farmland 475 30 1,823 Consumer 566 760 328 Total recoveries 3,921 4,615 6,263 Loans charged off: Commercial real estate (2) (3,767) (1,854) Multifamily real estate — (59) (66) Construction and land (30) — (100) One- to four-family residential — — (136) Commercial business (1,699) (1,762) (7,253) Agricultural business, including secured by farmland (42) (181) (591) Consumer (940) (914) (1,640) 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 Total loans $ 10,146,724 $ 9,084,763 $ 9,870,982 Average outstanding loans $ 9,595,250 $ 9,711,481 $ 10,121,808 Total nonaccrual loans $ 21,706 $ 22,281 $ 32,560 Allowance for credit losses - loans as a percent of total loans 1.39 % 1.45 % 1.69 % 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 % 62 The following table sets forth the breakdown of the allowance for credit losses - loans by loan category at the dates indicated (dollars in thousands): Table 16: Allocation of Allowance for Credit Losses - Loans December 31 2022 2021 2020 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: Commercial real estate $ 44,086 35.7 % 1.21 % $ 52,995 41.7 % 1.40 % $ 57,791 37.3 % 1.57 % Multifamily real estate 7,734 6.4 1.20 7,043 5.8 1.33 3,893 3.9 1.00 Construction and land 29,171 14.7 1.96 27,294 14.5 2.08 41,295 13.0 3.21 One-to-four-family real estate 14,729 11.6 1.26 8,205 7.2 1.25 9,913 7.0 1.42 Commercial business 33,299 22.0 1.49 26,421 21.6 1.35 35,007 29.6 1.20 Agricultural business, including secured by farmland 3,475 2.9 1.18 3,190 3.1 1.14 4,914 3.0 1.67 Consumer 8,971 6.7 1.32 6,951 6.1 1.25 14,466 6.2 2.39 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 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): Table 17: Changes in Allowance for Credit Losses - Unfunded Loan Commitments Years Ended, December 31, 2022 2021 2020 Balance, beginning of period $ 12,432 $ 13,297 $ 2,716 Beginning balance adjustment for adoption of ASC 326 — — 7,022 Provision/ (recapture) for credit losses - unfunded loan commitments 2,289 (865) 3,559 Balance, end of period $ 14,721 $ 12,432 $ 13,297 63 Non-interest Income. The following table presents the key components of non-interest income for the years ended December 31, 2022, 2021, and 2020 (dollars in thousands): Table 18: Non-interest Income 2022 compared to 2021 2021 compared to 2020 2022 2021 Change Amount Change Percent 2021 2020 Change Amount Change Percent Deposit fees and other service charges $ 44,459 $ 39,495 $ 4,964 12.6 % $ 39,495 $ 34,384 $ 5,111 14.9 % Mortgage banking operations 10,834 33,948 (23,114) (68.1) % 33,948 51,083 (17,135) (33.5) % Bank-owned life insurance 7,794 5,000 2,794 55.9 % 5,000 5,972 (972) (16.3) % Miscellaneous 6,805 12,875 (6,070) (47.1) % 12,875 6,821 6,054 88.8 % 69,892 91,318 (21,426) (23.5) % 91,318 98,260 (6,942) (7.1) % 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 for the year ended December 31, 2022, compared to the year ended December 31, 2021. The decrease from the prior year primarily reflects lower income from mortgage banking operations, partially offset by the gain recognized on the branch sale and increased deposit fees and other service charges. Income from deposit fees and other service charges increased for the year ended December 31, 2022, compared to the prior year, primarily as a result of increased transaction deposit account activity and the benefits from implementing Banner Forward initiatives. Mortgage banking income, including gains on one- to four-family and multifamily loan sales and loan servicing fees, decreased for the year ended December 31, 2022, compared to the prior year. Sales of one- to four-family loans held for sale for the year ended December 31, 2022, resulted in gains of $9.9 million, compared to $28.7 million for the year ended December 31, 2021. In addition, for the year ended December 31, 2022, mortgage banking income included $2.1 million of gains on the sale of multifamily loans, compared to $5.8 million for the year ended December 31, 2021. The lower mortgage banking revenue reflected a reduction in the volume and a decrease in the gain on sale margin on one- to four-family loans sold along with a negative fair market adjustment on multifamily held for sale loans. The reduction in one-to four family loans sold primarily reflects a reduction in refinancing activity, as well as decreased purchase activity as interest rates increased during 2022. The increase in bank owned life insurance income for year ended December 31, 2022 compared to the prior year was due to new bank-owned life insurance investments made at the end of 2021 and early in 2022. The $6.1 million decrease in miscellaneous income was primarily driven by a valuation adjustment on the SBA servicing asset recognized during the prior year as well as lower gains on the sale of SBA loans and higher gains related to the disposition of assets from closed branch locations recognized during the prior year. 64 Non-interest Expense. The following table represents key elements of non-interest expense for the years ended December 31, 2022, 2021, and 2020 (dollars in thousands). Table 19: Non-interest Expense 2022 compared to 2021 2021 compared to 2020 2022 2021 Change Amount Change Percent 2021 2020 Change Amount Change Percent Salary and employee benefits $ 242,266 $ 244,351 $ (2,085) (0.9) % $ 244,351 $ 245,400 $ (1,049) (0.4) % Less capitalized loan origination costs (24,313) (34,401) 10,088 (29.3) % (34,401) (34,848) 447 (1.3) % Occupancy and equipment 52,018 52,850 (832) (1.6) % 52,850 53,362 (512) (1.0) % 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 % Advertising and marketing 3,959 6,036 (2,077) (34.4) % 6,036 6,412 (376) (5.9) % Deposit insurance 6,649 5,583 1,066 19.1 % 5,583 6,516 (933) (14.3) % 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) % Loss on extinguishment of debt 793 2,284 (1,491) (65.3) % 2,284 — 2,284 nm Miscellaneous 24,869 24,236 633 2.6 % 24,236 22,712 1,524 6.7 % $ 377,295 $ 379,005 $ (1,710) (0.5) % $ 379,005 $ 364,025 $ 14,980 4.1 % 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, 2022 decreased as compared to the same period in 2021. The decrease was primarily due to a decrease in professional and legal expenses, a decrease in salary and employee benefits expense, and a decrease in advertising and marketing expense, partially offset by a decrease in capitalized loan origination costs. Salary and employee benefits expenses decreased for the year ended December 31, 2022, compared to the prior year, primarily reflecting a reduction in staffing, partially offset by increases in salaries. Capitalized loan origination costs decreased for the year ended December 31, 2022, compared to the prior year, primarily due to decreases in production of one- to four-family residential and construction loans and the origination of SBA PPP loans during 2021. Information and computer data services expenses increased for the year ended December 31, 2022, compared to 2021, primarily due to an increase in computer software expenses. Professional and legal expense decreased for the year ended December 31, 2022 from the year ended December 31, 2021, primarily due to a decrease in consulting expense. Advertising and marketing expenses decreased for the year ended December 31, 2022 from the year ended December 31, 2021, primarily due to a reduction in direct mail marketing expenses. Deposit insurance expense increased for the year ended December 31, 2022, compared to the same period in 2021, due to an increase in our assessment rate during the second quarter of 2022. For the year ended December 31, 2022, the Company recognized a $793,000 loss on extinguishment of debt as a result of the redemption of $50.5 million of junior subordinated debentures during the year, compared to a $2.3 million loss on extinguishment of debt as a result of the redemption of $8.2 million of junior subordinated debentures during the year ended December 31, 2021. Income Taxes. For the year ended December 31, 2022, we recognized $45.4 million in income tax expense for an effective rate of 18.9%, which reflects our statutory tax rate reduced by the effect of tax-exempt income, certain tax credits, and tax benefits related to restricted stock vesting. Our blended federal and state statutory income tax rate is 23.5%, representing a blend of the statutory federal income tax rate of 21.0% and apportioned effects of the state and local jurisdictions where we do business. For the year ended December 31, 2021, we recognized $45.5 million in income tax expense for an effective tax rate of 18.5%. Comparison of Results of Operations for the Years Ended December 31, 2021 and 2020 See Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021 previously filed with the SEC. 65 Market Risk and Asset/Liability Management Our financial condition and operations are influenced significantly by general economic conditions, including the absolute level of interest rates as well as changes in interest rates and the slope of the yield curve. Our profitability is dependent to a large extent on our net interest income, which is the difference between the interest received from our interest-earning assets and the interest expense incurred on our interest-bearing liabilities. Our activities, like all financial institutions, inherently involve the assumption of interest rate risk. Interest rate risk is the risk that changes in market interest rates will have an adverse impact on the institution’s earnings and underlying economic value. Interest rate risk is determined by the maturity and repricing characteristics of an institution’s assets, liabilities and off-balance-sheet contracts. Interest rate risk is measured by the variability of financial performance and economic value resulting from changes in interest rates. Interest rate risk is the primary market risk affecting our financial performance. The greatest source of interest rate risk to us results from the mismatch of maturities or repricing intervals for rate sensitive assets, liabilities and off-balance-sheet contracts. This mismatch or gap is generally characterized by a substantially shorter maturity structure for interest-bearing liabilities than interest-earning assets, although our floating-rate assets tend to be more immediately responsive to changes in market rates than most deposit liabilities. Additional interest rate risk results from mismatched repricing indices and formula (basis risk and yield curve risk), and product caps and floors and early repayment or withdrawal provisions (option risk), which may be contractual or market driven, that are generally more favorable to clients than to us. An exception to this generalization is the beneficial effect of interest rate floors on a portion of our performing floating-rate loans, which help us maintain higher loan yields in periods when market interest rates decline significantly. However, in a declining interest rate environment, as loans with floors are repaid they generally are replaced with new loans which have lower interest rate floors. As of December 31, 2022, our loans with interest rate floors totaled $4.40 billion and had a weighted average floor rate of 4.15% compared to a current average note rate of 5.91%. As of December 31, 2022, our loans with interest rates at their floors totaled $1.58 billion and had a weighted average note rate of 4.09%. The Company actively manages its exposure to interest rate risk through on-going adjustments to the mix of interest-earning assets and funding sources that affect the repricing speeds of loans, investments, interest-bearing deposits and borrowings. The principal objectives of asset/liability management are: to evaluate the interest rate risk exposure; to determine the level of risk appropriate given our operating environment, business plan strategies, performance objectives, capital and liquidity constraints, and asset and liability allocation alternatives; and to manage our interest rate risk consistent with regulatory guidelines and policies approved by the Board of Directors. Through such management, we seek to reduce the vulnerability of our earnings and capital position to changes in the level of interest rates. Our actions in this regard are taken under the guidance of the Asset/Liability Management Committee, which is comprised of members of our senior management. The Committee closely monitors our interest sensitivity exposure, asset and liability allocation decisions, liquidity and capital positions, and local and national economic conditions and attempts to structure the loan and investment portfolios and funding sources to maximize earnings within acceptable risk tolerances. Sensitivity Analysis Our primary monitoring tool for assessing interest rate risk is asset/liability simulation modeling, which is designed to capture the dynamics of balance sheet, interest rate and spread movements and to quantify variations in net interest income resulting from those movements under different rate environments. The sensitivity of net interest income to changes in the modeled interest rate environments provides a measurement of interest rate risk. We also utilize economic value analysis, which addresses changes in estimated net economic value of equity arising from changes in the level of interest rates. The net economic value of equity is estimated by separately valuing our assets and liabilities under varying interest rate environments. The extent to which assets gain or lose value in relation to the gains or losses of liability values under the various interest rate assumptions determines the sensitivity of net economic value to changes in interest rates and provides an additional measure of interest rate risk. The interest rate sensitivity analysis performed by us incorporates beginning-of-the-period rate, balance and maturity data, using various levels of aggregation of that data, as well as certain assumptions concerning the maturity, repricing, amortization and prepayment characteristics of loans and other interest-earning assets and the repricing and withdrawal of deposits and other interest-bearing liabilities into an asset/liability simulation model. We update and prepare simulation modeling at least quarterly for review by senior management and oversight by the directors. We believe the data and assumptions are realistic representations of our portfolio and possible outcomes under the various interest rate scenarios. Nonetheless, the interest rate sensitivity of our net interest income and net economic value of equity could vary substantially if different assumptions were used or if actual experience differs from the assumptions used. 66 The following table sets forth as of December 31, 2022, the estimated changes in our net interest income over one-year and two-year time horizons and the estimated changes in economic value of equity based on the indicated interest rate environments (dollars in thousands): Table 20: Interest Rate Risk Indicators December 31, 2022 Estimated Increase (Decrease) in Change (in Basis Points) in Interest Rates (1) Net Interest Income Next 12 Months Net Interest Income Next 24 Months Economic Value of Equity +300 17,134 2.6 % 44,449 3.3 % (424,550) (11.6) % +200 20,389 3.1 51,108 3.8 (251,748) (6.9) +100 14,509 2.2 36,020 2.6 (94,389) (2.6) 0 — — — — — — -100 (25,785) (3.9) (65,771) (4.8) (10,575) (0.3) -200 (60,927) (9.2) (156,244) (11.5) (138,455) (3.8) (1) Assumes an instantaneous and sustained uniform change in market interest rates at all maturities; however, no rates are allowed to go below zero. The targeted Federal Funds Rate was between 4.25% and 4.50% at December 31, 2022. Another (although less reliable) monitoring tool for assessing interest rate risk is gap analysis. The matching of the repricing characteristics of assets and liabilities may be analyzed by examining the extent to which assets and liabilities are interest sensitive and by monitoring an institution’s interest sensitivity gap. An asset or liability is said to be interest sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated, based upon certain assumptions, to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated to mature or reprice, based upon certain assumptions, within that same time period. A gap is considered positive when the amount of interest-sensitive assets exceeds the amount of interest-sensitive liabilities. A gap is considered negative when the amount of interest-sensitive liabilities exceeds the amount of interest-sensitive assets. Generally, during a period of rising rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income. Certain shortcomings are inherent in gap analysis. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of some borrowers to service their debt may decrease in the event of a severe change in market rates. Table 21, Interest Sensitivity Gap , presents our interest sensitivity gap between interest-earning assets and interest-bearing liabilities at December 31, 2022. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities which are anticipated by us, based upon certain assumptions, to reprice or mature in each of the future periods shown. At December 31, 2022, total interest-earning assets maturing or repricing within one year exceeded total interest-bearing liabilities maturing or repricing in the same time period by $3.16 billion, representing a one-year cumulative gap to total assets ratio of 19.96%. 67 The following table provides a GAP analysis as of December 31, 2022 (dollars in thousands): Table 21: Interest Sensitivity Gap December 31, 2022 Within 6 Months After 6 Months Within 1 Year After 1 Year Within 3 Years After 3 Years Within 5 Years After 5 Years Within 10 Years Over 10 Years Total Interest-earning assets: (1) Construction loans $ 862,008 $ 63,509 $ 164,954 $ 29,937 $ 17,310 $ 1,234 $ 1,138,952 Fixed-rate mortgage loans 218,070 184,169 645,351 541,448 917,583 140,548 2,647,169 Adjustable-rate mortgage loans 1,043,322 282,077 1,012,983 1,194,247 413,931 38,226 3,984,786 Fixed-rate mortgage-backed securities 90,114 98,368 418,498 477,688 948,412 1,032,923 3,066,003 Adjustable-rate mortgage-backed securities 311,857 438 3,505 207 4,184 — 320,191 Fixed-rate commercial/agricultural loans 82,340 77,353 233,257 134,543 150,082 85,760 763,335 Adjustable-rate commercial/agricultural loans 826,123 23,418 62,506 55,838 11,620 38 979,543 Consumer and other loans 447,758 55,746 87,340 27,187 27,634 46,341 692,006 Investment securities and interest-earning deposits 394,088 23,160 103,580 54,165 315,570 428,694 1,319,257 Total rate sensitive assets 4,275,680 808,238 2,731,974 2,515,260 2,806,326 1,773,764 14,911,242 Interest-bearing liabilities: (2) Interest-bearing checking accounts 265,119 162,582 546,341 412,136 644,069 679,842 2,710,089 Regular savings 160,141 72,702 259,125 215,274 393,542 710,370 1,811,154 Money market deposit accounts 233,241 126,887 428,290 326,618 520,835 562,416 2,198,287 Certificates of deposit 325,148 206,388 176,771 13,736 1,379 107 723,529 FHLB advances 50,000 — — — — — 50,000 Subordinated notes — — 100,000 — — — 100,000 Junior subordinated debentures 89,178 — — — — — 89,178 Retail repurchase agreements 232,799 — — — — — 232,799 Total rate sensitive liabilities 1,355,626 568,559 1,510,527 967,764 1,559,825 1,952,735 7,915,036 Excess (deficiency) of interest-sensitive assets over interest-sensitive liabilities $ 2,920,054 $ 239,679 $ 1,221,447 $ 1,547,496 $ 1,246,501 $ (178,971) $ 6,996,206 Cumulative excess of interest-sensitive assets $ 2,920,054 $ 3,159,733 $ 4,381,180 $ 5,928,676 $ 7,175,177 $ 6,996,206 $ 6,996,206 Cumulative ratio of interest-earning assets to interest-bearing liabilities 315.40 % 264.21 % 227.56 % 234.67 % 220.34 % 188.39 % 188.39 % Interest sensitivity gap to total assets 18.44 % 1.51 % 7.71 % 9.77 % 7.87 % (1.13) % 44.19 % Ratio of cumulative gap to total assets 18.44 % 19.96 % 27.67 % 37.44 % 45.32 % 44.19 % 44.19 % (footnotes follow) 68 (1) Adjustable-rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due to mature, and fixed-rate assets are included in the period in which they are scheduled to be repaid based upon scheduled amortization, in each case adjusted to take into account estimated prepayments. Mortgage loans and other loans are not reduced for allowances for credit losses and non-performing loans. Mortgage loans, mortgage-backed securities, other loans and investment securities are not adjusted for deferred fees and unamortized acquisition premiums and discounts. (2) Adjustable-rate liabilities are included in the period in which interest rates are next scheduled to adjust rather than in the period they are due to mature. Although regular savings, demand, interest-bearing checking, and money market deposit accounts are subject to immediate withdrawal, based on historical experience management considers a substantial amount of such accounts to be core deposits having significantly longer maturities. For the purpose of the gap analysis, these accounts have been assigned decay rates to reflect their longer effective maturities. If all of these accounts had been assumed to be short-term, the one-year cumulative gap of interest-sensitive assets would have been $(2.54) billion, or (16.04)% of total assets at December 31, 2022. Interest-bearing liabilities for this table exclude certain non-interest-bearing deposits that are included in the average balance calculations reflected in Table 13, Analysis of Net Interest Spread. Management is aware of the sources of interest rate risk and in its opinion actively monitors and manages it to the extent possible. The Bank’s objectives in using interest rate derivatives are to reduce volatility in net interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Bank uses interest rate swaps as part of its interest rate risk management strategy. The Bank enters into interest rate swaps with certain qualifying commercial loan clients. The Bank simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the client pays a fixed rate of interest and the Bank receives a floating rate. During the fourth quarter of 2021, the Bank entered into interest rate swaps designated as cash flow hedges to hedge the variable cash flows associated with existing floating rate loans. These hedge contracts involve the receipt of fixed-rate amounts from a counterparty in exchange for the Bank making floating-rate payments over the life of the agreements without exchange of the underlying notional amount. The Bank is a party to $400.0 million in notional amounts of these types of interest rate swaps at December 31, 2022 Based on our analysis of the interest rate risk scenarios and our strategies for managing our risk, management believes that our current level of interest rate risk is reasonable. Liquidity and Capital Resources Our primary sources of funds are deposits, borrowings, proceeds from loan principal and interest payments and sales of loans, and the maturity of and interest income on mortgage-backed and investment securities. While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, competition and our pricing strategies. Our primary investing activity is the origination of loans and, in certain periods, the purchase of securities or loans. During the years ended December 31, 2022 and 2021, our loan originations, including originations of loans held for sale, exceeded our loan repayments by $1.30 billion and $306.8 million, respectively. During those same periods we purchased loans of $126.6 million and $5.1 million, respectively. This activity was funded primarily by the reduction in the balance of cash held as interest-bearing deposits. During the years ended December 31, 2022 and 2021, we received proceeds of $429.7 million and $1.32 billion, respectively, from the sale of loans. Securities purchased during the years ended December 31, 2022 and 2021 totaled $850.6 million and $2.94 billion, respectively, and securities repayments, maturities and sales in those same periods were $639.4 million and $1.43 billion, respectively. Our primary financing activity is gathering deposits. Total deposits decreased by $706.9 million during the year ended December 31, 2022, as core deposits decreased by $591.8 million and certificates of deposit decreased by $115.1 million. The decrease in total deposits during 2022 reflects the sale of four branches, which included the transfer of $178.2 million of related deposits, as well as an overall decline in market liquidity. At December 31, 2022, core deposits totaled $12.90 billion, or 95% of total deposits, compared with $13.49 billion, or 94% of total deposits at December 31, 2021. Certificates of deposit are generally more vulnerable to competition and more price sensitive than other retail deposits and our pricing of those deposits varies significantly based upon our liquidity management strategies at any point in time. At December 31, 2022, certificates of deposit totaled $723.5 million, or 5% of our total deposits, including $531.6 million which were scheduled to mature within one year. Certificates of deposit decreased from 6% of our total deposits at December 31, 2021. While no assurance can be given as to future periods, historically, we have been able to retain a significant amount of our certificates of deposit as they mature. We had $50.0 million of FHLB advances at both December 31, 2022 and December 31, 2021. Other borrowings at December 31, 2022 decreased $31.7 million to $232.8 million following an increase of $79.7 million in 2021. Both the FHLB advances and other borrowings outstanding at December 31, 2022 mature during 2023. 69 We must maintain an adequate level of liquidity to ensure the availability of sufficient funds to accommodate deposit withdrawals, to support loan growth, to satisfy financial commitments and to take advantage of investment opportunities. During the years ended December 31, 2022 and 2021, we used our sources of funds primarily to fund loan commitments and purchase securities. At December 31, 2022, we had outstanding loan commitments totaling $4.17 billion, primarily relating to undisbursed loans in process and unused credit lines. While representing potential growth in the loan portfolio and lending activities, this level of commitments is proportionally consistent with our historical experience and does not represent a departure from normal operations. For the year ended December 31, 2023, we have $20.6 million of purchase obligations under contracts with our key vendors to provide services, mainly information technology related contracts. In addition, for the year ended December 31, 2023, we have $14.4 million of commitments under operating lease agreements. We generally maintain sufficient cash and readily marketable securities to meet short-term liquidity needs; however, our primary liquidity management practice to supplement deposits is to increase or decrease short-term borrowings, including FHLB advances and Federal Reserve Bank of San Francisco (FRBSF) borrowings. We maintain credit facilities with the FHLB, which provided for advances that in the aggregate would equal the lesser of 45% of the Bank’s assets or adjusted qualifying collateral (subject to a sufficient level of ownership of FHLB stock). At December 31, 2022, under these credit facilities based on pledged collateral, the Bank had $2.99 billion of available credit capacity. Advances under these credit facilities totaled $50.0 million at December 31, 2022. In addition, the Bank has been approved for participation in the FRBSF’s Borrower-In-Custody program. Under this program, based on pledged collateral, the Bank had available lines of credit of approximately $1.19 billion as of December 31, 2022, subject to certain collateral requirements, namely the collateral type and risk rating of eligible pledged loans. We had no funds borrowed from the FRBSF at December 31, 2022 or 2021. At December 31, 2022, the Bank also had uncommitted federal funds line of credit agreements with other financial institutions totaling $125.0 million. No balances were outstanding under these agreements as of December 31, 2022 or 2021. Availability of lines is subject to federal funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs and the agreements may restrict consecutive day usage. Management believes it has adequate resources and funding potential to meet our foreseeable liquidity requirements. Banner is a separate legal entity from the Bank and, on a stand-alone level, must provide for its own liquidity and pay its own operating expenses and cash dividends. Banner’s primary sources of funds consist of capital raised through dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. We currently expect to continue our current practice of paying quarterly cash dividends on our common stock subject to our Board of Directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is $0.48 per share, as approved by our Board of Directors, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank, and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2023 at this rate of $0.48 per share, our average total dividend paid each quarter would be approximately $16.4 million based on the number of outstanding shares at December 31, 2022. At December 31, 2022, Banner (on an unconsolidated basis) had liquid assets of $77.5 million. During the year ended December 31, 2022, total shareholders’ equity decreased $233.9 million to $1.46 billion. At December 31, 2022, tangible common shareholders’ equity, which excludes goodwill and other intangible assets, was $1.07 billion, or 6.95% of tangible assets. See “Executive Overview” above for a reconciliation of total shareholders’ equity to tangible common shareholders’ equity, which is a non-GAAP financial measure. Capital Requirements Banner is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. The Bank, as state-chartered, federally insured commercial bank, is subject to the capital requirements established by the FDIC. The capital adequacy requirements are quantitative measures established by regulation that require Banner and the Bank to maintain minimum amounts and ratios of capital. The Federal Reserve requires Banner to maintain capital adequacy that generally parallels the FDIC requirements. The FDIC requires the Bank to maintain minimum ratios of Total Capital, Tier 1 Capital, and Common Equity Tier 1 Capital to risk-weighted assets as well as Tier 1 leverage capital to average assets. In addition to the minimum capital ratios, the Bank has to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. At December 31, 2022, Banner and the Bank each exceeded all current regulatory capital requirements to be “well-capitalized” and the fully phased-in capital conservation buffer requirement. The following table shows the regulatory capital ratios for Banner and the Bank, as of December 31, 2022. Table 22: Regulatory Capital Ratios Capital Ratios Banner Corporation Banner Bank Total capital to risk-weighted assets 14.04 % 13.38 % Tier 1 capital to risk-weighted assets 12.13 12.27 Tier 1 capital to average leverage assets 9.45 9.55 Tier 1 common equity to risk-weighted assets 11.44 12.27 70 ITEM 7A – Quantitative and Qualitative Disclosures about Market Risk See pages 66 – 69 of Management’s Discussion and Analysis of Financial Condition and Results of Operations. ITEM 8 – Financial Statements and Supplementary Data For financial statements, see index on page 77 . ITEM 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable.