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. 2023 Financial Highlights • Revenues were $620.4 million for the year ended December 31, 2023, compared to $628.4 million for the prior year. • Net income of $183.6 million, or $5.33 per diluted share, for the year ended December 31, 2023, compared to net income of $195.4 million, or $5.67 per diluted share for the prior year. • Net interest income was $576.0 million for the year ended December 31, 2023, compared to $553.2 million for the prior year. • Net interest margin, on a tax equivalent basis, was 4.01% compared to 3.68% in the prior year. • Mortgage banking revenue was $11.8 million for the year ended December 31, 2023, compared to $10.8 million in the prior year. • Income from deposit fees and other service charges was $41.6 million for the year ended December 31, 2023, compared to $44.5 million for the prior year. • Non-interest expense was $382.5 million for the year ended December 31, 2023, compared to $377.3 million for the prior year. • Return on average assets was 1.18% for both 2023 and 2022. • Efficiency ratio was 61.66%, compared to 60.04% in the prior year. • Net loans receivable increased 7% to $10.66 billion at December 31, 2023, compared to $10.01 billion a year ago. • Non-performing assets were $30.1 million, or 0.19% of total assets, at December 31, 2023, compared to $23.4 million, or 0.15% of total assets, a year ago. • The allowance for credit losses - loans was $149.6 million, or 1.38% of total loans receivable, at December 31, 2023, compared to $141.5 million, or 1.39% of total loans receivable a year ago. • Total deposits were $13.03 billion at December 31, 2023, compared to $13.62 billion a year ago. • Core deposits represented 89% of total deposits at December 31, 2023. • Banner Bank’s estimated uninsured deposits were approximately 31% of total deposits at December 31, 2023. • Banner Bank’s estimated uninsured deposits, excluding collateralized public deposits and affiliate deposits, were approximately 28% of total deposits at December 31, 2023. • Available borrowing capacity was $4.65 billion at December 31, 2023. • On-balance sheet liquidity was $2.93 billion at December 31, 2023. • Cash dividends paid to shareholders were $1.92 per share, compared to $1.76 for the prior year. • Common shareholders’ equity per share increased to $48.12 at December 31, 2023, compared to $42.59 a year ago. • Tangible common shareholders’ equity per share* increased 12% to $37.09 at December 31, 2023, compared to $31.41 a year ago. * Represents a non-GAAP financial measure. For a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure, see “Non-GAAP Financial Measures” below. 39 Selected Financial Data: The following condensed consolidated statements of financial condition and operations and selected performance ratios as of December 31, 2023, 2022 and 2021, and for the years then ended have been derived from our audited consolidated financial statements. FINANCIAL CONDITION DATA: December 31 (In thousands, except shares) 2023 2022 2021 Total assets $ 15,670,391 $ 15,833,431 $ 16,804,872 Cash and securities (1) 3,687,302 4,178,375 6,321,196 Loans receivable, net 10,660,812 10,005,259 8,952,664 Deposits 13,029,497 13,620,059 14,326,933 Borrowings 665,141 456,603 532,869 Total shareholders’ equity 1,652,691 1,456,432 1,690,327 Shares outstanding 34,348,369 34,194,018 34,252,632 OPERATING DATA: For the Year Ended December 31 (In thousands) 2023 2022 2021 Interest income $ 701,572 $ 572,569 $ 520,500 Interest expense 125,567 19,390 23,609 Net interest income 576,005 553,179 496,891 Provision (recapture) for credit losses 10,789 10,364 (33,388) Net interest income after provision (recapture) for credit losses 565,216 542,815 530,279 Deposit fees and other service charges 41,638 44,459 39,495 Mortgage banking operations revenue 11,817 10,834 33,948 Net (loss) gain on sale of securities (19,242) (3,248) 482 Net change in valuation of financial instruments carried at fair value (4,218) 807 4,616 All other non-interest income 14,414 22,403 17,875 Total non-interest income 44,409 75,255 96,416 Salary and employee benefits 244,563 242,266 244,351 All other non-interest expenses 137,975 135,029 135,750 Total non-interest expense 382,538 377,295 380,101 Income before provision for income tax expense 227,087 240,775 246,594 Provision for income tax expense 43,463 45,397 45,546 Net income $ 183,624 $ 195,378 $ 201,048 PER COMMON SHARE DATA: At or For the Years Ended December 31 2023 2022 2021 Net income: Basic $ 5.35 $ 5.70 $ 5.81 Diluted 5.33 5.67 5.76 Diluted adjusted earnings per share (8) 5.88 5.69 5.97 Common shareholders’ equity per share (2) 48.12 42.59 49.35 Common shareholders’ tangible equity per share (2)(8) 37.09 31.41 38.02 Cash dividends 1.92 1.76 1.64 Dividend payout ratio (basic) 35.89 % 30.88 % 28.23 % Dividend payout ratio (diluted) 36.02 % 31.04 % 28.47 % 40 OTHER DATA: As of December 31 2023 2022 2021 Full-time equivalent employees 1,966 1,931 1,891 Number of branches 135 137 150 KEY FINANCIAL RATIOS: At or For the Years Ended December 31 2023 2022 2021 Performance Ratios: Return on average assets (3) 1.18 % 1.18 % 1.24 % Return on average common equity (4) 11.94 12.79 12.12 Average common equity to average assets 9.88 9.26 10.26 Net interest margin (tax equivalent) (5) 4.01 3.68 3.39 Non-interest income to average assets 0.29 0.46 0.60 Non-interest expense to average assets 2.46 2.29 2.35 Efficiency ratio (6) 61.66 60.04 64.06 Adjusted efficiency ratio (8) 57.89 57.99 60.22 Average interest-earning assets to funding liabilities 106.67 104.16 104.18 Loans to deposits ratio 83.05 74.92 64.08 Selected Financial Ratios: Allowance for credit losses - loans as a percent of total loans at end of period 1.38 1.39 1.45 Net (charge-offs)/recoveries as a percent of average outstanding loans during the period (0.03) 0.01 (0.02) Non-performing assets as a percent of total assets 0.19 0.15 0.14 Allowance for credit losses - loans as a percent of non-performing loans (7) 505.52 615.25 578.47 Common shareholders’ equity to total assets 10.55 9.20 10.06 Common shareholders’ tangible equity to tangible assets (8) 8.33 6.95 7.93 Consolidated Capital Ratios: Total capital to risk-weighted assets 14.58 14.04 14.71 Tier 1 capital to risk-weighted assets 12.64 12.13 12.74 Tier 1 capital to average leverage assets 10.56 9.45 8.76 Common equity tier I capital to risk-weighted assets 11.97 11.44 11.54 (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 on a tax equivalent basis. (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) Represents a non-GAAP financial measure. For a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measure, see, “Non-GAAP Financial Measures” below. 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. Adjusted revenue, diluted adjusted earnings per share and adjusted efficiency ratio are non-GAAP financial measures. To calculate the adjusted revenue, diluted adjusted earnings per share and adjusted efficiency ratio, we make adjustments to our GAAP revenues and expenses as reported on our Consolidated Statements of Operations. Management believes that these non-GAAP financial measures provide information to investors that is useful in evaluating the operating performance and trends of financial services companies, including the Company. The following tables set forth reconciliations of these non-GAAP financial measures (dollars in thousands, except share and per share data): 41 For the Years Ended December 31 2023 2022 2021 ADJUSTED REVENUE: Net interest income (GAAP) $ 576,005 $ 553,179 $ 496,891 Non-interest income (GAAP) 44,409 75,255 96,416 Total revenue (GAAP) 620,414 628,434 593,307 Exclude: Net loss (gain) on sale of securities 19,242 3,248 (482) Net change in valuation of financial instruments carried at fair value 4,218 (807) (4,616) Gain on sale of branches — (7,804) — Adjusted revenue (non-GAAP) $ 643,874 $ 623,071 $ 588,209 ADJUSTED EARNINGS: Net income (GAAP) $ 183,624 $ 195,378 $ 201,048 Exclude: Net loss (gain) on sale of securities 19,242 3,248 (482) Net change in valuation of financial instruments carried at fair value 4,218 (807) (4,616) Merger and acquisition-related costs — — 660 COVID-19 expenses — — 436 Gain on sale of branches — (7,804) — Banner Forward expenses (1) 1,334 5,293 11,604 Loss on extinguishment of debt — 793 2,284 Related tax benefit (5,951) (174) (2,373) Total adjusted earnings (non-GAAP) $ 202,467 $ 195,927 $ 208,561 Diluted earnings per share (GAAP) $ 5.33 $ 5.67 $ 5.76 Diluted adjusted earnings per share (non-GAAP) $ 5.88 $ 5.69 $ 5.97 For the Years Ended December 31 ADJUSTED EFFICIENCY RATIO: 2023 2022 2021 Non-interest expense (GAAP) $ 382,538 $ 377,295 $ 380,101 Exclude: Merger and acquisition-related costs — — (660) COVID-19 expenses — — (436) Banner Forward expenses (1) (1,334) (5,293) (11,604) CDI amortization (3,756) (5,279) (6,571) State/municipal tax expense (5,260) (4,693) (4,343) REO operations 538 104 22 Loss on extinguishment of debt — (793) (2,284) Adjusted non-interest expense (non-GAAP) $ 372,726 $ 361,341 $ 354,225 Net interest income (GAAP) $ 576,005 $ 553,179 $ 496,891 Non-interest income (GAAP) 44,409 75,255 96,416 Total revenue (GAAP) 620,414 628,434 593,307 Exclude: Net loss (gain) on sale of securities 19,242 3,248 (482) Net change in valuation of financial instruments carried at fair value 4,218 (807) (4,616) Gain on sale of branches — (7,804) — Adjusted revenue (non-GAAP) $ 643,874 $ 623,071 $ 588,209 Efficiency ratio (GAAP) 61.66 % 60.04 % 64.06 % Adjusted efficiency ratio (non-GAAP) 57.89 % 57.99 % 60.22 % (1) Included in miscellaneous expenses in the Consolidated Statement of Operations. 42 The ratio of tangible common shareholders’ equity to tangible assets is a non-GAAP financial measure. 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 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. The following table sets forth the reconciliation of tangible equity and tangible assets (dollars in thousands, except share and per share data). December 31 2023 2022 2021 Shareholders’ equity (GAAP) $ 1,652,691 $ 1,456,432 $ 1,690,327 Exclude goodwill and other intangible assets, net 378,805 382,561 387,976 Common shareholders’ tangible equity (non-GAAP) $ 1,273,886 $ 1,073,871 $ 1,302,351 Total assets (GAAP) $ 15,670,391 $ 15,833,431 $ 16,804,872 Exclude goodwill and other intangible assets, net 378,805 382,561 387,976 Total tangible assets (non-GAAP) $ 15,291,586 $ 15,450,870 $ 16,416,896 Common shareholders’ equity to total assets (GAAP) 10.55 % 9.20 % 10.06 % Common shareholders’ tangible equity to tangible assets (non-GAAP) 8.33 % 6.95 % 7.93 % Common shares outstanding 34,348,369 34,194,018 34,252,632 Common shareholders’ equity (book value) per share (GAAP) $ 48.12 $ 42.59 $ 49.35 Common shareholders’ tangible equity (tangible book value) per share (non-GAAP) $ 37.09 $ 31.41 $ 38.02 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 22% as of December 31, 2023, where the use of a stronger near-term growth economic forecast would have resulted in a negligible decrease in the allowance for credit losses - loans as of December 31, 2023. 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, 2023. 43 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 $491,000 decrease or increase in the reported fair value as of December 31, 2023, with an offsetting adjustment to our accumulated other comprehensive 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 $1.3 million decrease or increase in the reported fair value as of December 31, 2023, 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, 2023, 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 $6.3 million increase or decrease in our net deferred tax asset as of December 31, 2023. 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, 2023 and 2022 General. Total assets decreased to $15.67 billion at December 31, 2023, compared to $15.83 billion at December 31, 2022. The decrease in assets was primarily due to $300.0 million of reverse repurchase agreements maturing, as well as the sale of securities during 2023, partially offset by loan growth. Total loans receivable (gross loans less deferred fees and discounts and excluding loans held for sale) increased $663.7 million, or 7%, to $10.81 billion at December 31, 2023, from $10.15 billion at December 31, 2022. The increase in total loans receivable primarily reflects growth in one- to four-family residential, multifamily real estate and multifamily construction loan balances. Loans held for sale decreased to $11.2 million at December 31, 2023, compared to $56.9 million at December 31, 2022, as a result of the transfer of $43.5 million of multifamily loans held for sale to held for investment during the fourth quarter of 2023. Loans held for sale at December 31, 2023, included no multifamily loans and $11.2 million of one- to four-family loans, compared to $49.5 million of multifamily loans and $7.4 million of one- to four-family loans at December 31, 2022. 44 The aggregate of securities and interest-bearing deposits decreased $802.6 million, or 19%, to $3.48 billion at December 31, 2023, compared to $4.28 billion a year earlier, primarily due to a decrease in securities. Securities decreased to $3.43 billion at December 31, 2023, from $3.94 billion at December 31, 2022, primarily due to $300.0 million of reverse repurchase agreements maturing during 2023, as well as the sale of securities and normal security portfolio cash flows. Fair value adjustments for securities designated as available-for-sale reflected an increase of $54.3 million for the year ended December 31, 2023, which was included net of the associated tax expense as a component of other comprehensive income. Securities which are designated as trading decreased by $27.2 million from the prior year-end balance due to the transfer of TPS from trading to available-for-sale during the fourth quarter of 2023. The average effective duration of our securities portfolio was approximately 6.5 years at both December 31, 2023 and December 31, 2022. Deposits decreased $590.6 million, or 4%, to $13.03 billion at December 31, 2023, from $13.62 billion at December 31, 2022. The decline in deposits during the year ended 2023 was primarily due to interest rate-sensitive clients moving a portion of their non-operating deposit balances to higher yielding investments. Core deposits were 89% of total deposits at December 31, 2023, compared to 95% of total deposits one year earlier. Non-interest-bearing deposits decreased by $1.38 billion, or 22%, to $4.79 billion from $6.18 billion at December 31, 2022, while interest-bearing transaction and savings accounts increased by $40.1 million, or 1%, to $6.76 billion at December 31, 2023, from $6.72 billion at December 31, 2022. Certificates of deposit increased $753.9 million, or 104%, to $1.48 billion at December 31, 2023, from $723.5 million at December 31, 2022, reflecting higher rates attracting customers to these deposit types and a $108.1 million increase in brokered deposits. We had $108.1 million of brokered deposits at December 31, 2023, compared to none at December 31, 2022. We had $323.0 million and $50.0 million of FHLB advances at December 31, 2023 and December 31, 2022, respectively. Other borrowings, consisting of retail repurchase agreements primarily related to client cash management accounts, decreased $49.9 million to $182.9 million at December 31, 2023, compared to $232.8 million at December 31, 2022. Junior subordinated debentures totaled $66.4 million at December 31, 2023, compared to $74.9 million at December 31, 2022. Subordinated notes, net of issuance costs, were $92.9 million at December 31, 2023, compared to $98.9 million at December 31, 2022. Total shareholders’ equity increased $196.3 million, to $1.65 billion at December 31, 2023, compared to $1.46 billion at December 31, 2022. The increase in shareholders’ equity primarily reflects $183.6 million of year-to-date net income and a $73.6 million decrease in AOCI, primarily due to an increase in the fair value of the security portfolio. This increase was partially offset by the accrual of $66.7 million of cash dividends to common shareholders. There were no shares of common stock repurchased during the year ended December 31, 2023. Common shareholder’s equity to total assets was 10.55% and 9.20% at December 31, 2023 and 2022, respectively. Tangible common shareholders’ equity (a non-GAAP financial measure), which excludes goodwill and other intangible assets was $1.27 billion, or 8.33% of tangible assets at December 31, 2023, compared to $1.07 billion, or 6.95% at December 31, 2022. The increase in tangible common shareholders’ equity as a percentage of tangible assets was primarily due to the previously mentioned decrease in AOCI and an increase in retained earnings. The Company’s book value per share was $48.12 at December 31, 2023, compared to $42.59 per share a year ago, and its tangible book value per share (a non-GAAP financial measure) was $37.09 at December 31, 2023, compared to $31.41 per share a year ago. See, “Executive Overview - Non-GAAP Financial Measures” above for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures. Investments. At December 31, 2023, our securities portfolio totaled $3.43 billion and consisted principally of mortgage-backed and mortgage-related 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, 2023, our aggregate investment in securities decreased $502.5 million, primarily due to $300.0 million of reverse repurchase agreements maturing as well as the sale of securities and normal security portfolio cash flows. Mortgage-backed securities decreased $293.9 million and U.S. Government and agency obligations decreased $20.9 million, while municipal bonds decreased $165.5 million, corporate debt obligations decreased $30.1 million and asset-backed securities increased $9.3 million. U.S. Government and Agency Obligations: Our portfolio of U.S. Government and agency obligations had a carrying value of $34.5 million (with an amortized cost of $35.2 million) at December 31, 2023, a weighted average contractual maturity of 9.3 years and a weighted average coupon rate of 5.25%. 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, 2023, our mortgage-backed and mortgage-related securities had a carrying value of $2.46 billion ($2.77 billion at amortized cost, with a net unrealized loss adjustment of $313.2 million). The weighted average coupon rate of these securities was 2.60% and the weighted average contractual maturity was 26.2 years, although we receive principal payments on these securities each month resulting in a much shorter expected average life. As of December 31, 2023, 97% of the mortgage-backed and mortgage-related securities pay interest at a fixed rate. 45 Municipal Bonds: The carrying value of our tax-exempt bonds at December 31, 2023 was $512.5 million ($528.4 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, 2023 had a carrying value of $86.3 million ($98.9 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, 2023, our municipal bond portfolio, including taxable and tax-exempt, had a weighted average maturity of approximately 21.4 years and a weighted average coupon rate of 3.19%. Corporate Bonds: Our corporate bond portfolio had a carrying value of $121.7 million ($134.1 million at amortized cost) at December 31, 2023. At December 31, 2023, the portfolio had a weighted average maturity of 11.0 years and a weighted average coupon rate of 4.91%. Asset-Backed Securities: At December 31, 2023, our asset-backed securities portfolio had a carrying value of $220.9 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 7.36% and the weighted average contractual maturity was 12.9 years. At December 31, 2023, 100% of these securities had adjustable interest rates tied to three-month SOFR. 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, net of the allowance for credit losses - securities as of December 31, 2023, 2022 and 2021 (dollars in thousands): Table 1: Securities December 31 2023 2022 2021 Carrying Value Percent of Total Carrying Value Percent of Total Carrying Value Percent of Total Trading Corporate bonds (1) $ — n/a $ 28,694 100 % $ 26,981 100 % Total securities—trading $ — n/a $ 28,694 100 % $ 26,981 100 % Available-for-Sale U.S. Government and agency obligations $ 34,189 1 % $ 55,108 2 % $ 201,332 6 % Municipal bonds 132,905 6 261,209 9 308,612 8 Corporate bonds 119,123 5 121,853 4 117,347 3 Mortgage-backed or related securities 1,866,714 79 2,139,336 77 2,805,268 77 Asset-backed securities 220,852 9 211,525 8 206,434 6 Total securities—available-for-sale $ 2,373,783 100 % $ 2,789,031 100 % $ 3,638,993 100 % Held-to-Maturity U.S. Government and agency obligations $ 307 — % $ 312 — % $ 316 — % Municipal bonds 465,875 44 503,117 45 420,555 80 Corporate bonds 2,606 — 2,961 — 3,092 1 Mortgage-backed or related securities 590,267 56 611,577 55 97,392 19 Total securities—held-to-maturity $ 1,059,055 100 % $ 1,117,967 100 % $ 521,355 100 % Estimated market value $ 907,514 $ 942,180 $ 541,853 (1) In the fourth quarter of 2023, our corporate bonds classified as trading were transferred to available-for-sale. 46 The following table shows the maturity or period to repricing of our available-for-sale and held-to-maturity securities as of December 31, 2023 (dollars in thousands): Table 2: Securities Available-for-Sale and Held-to-Maturity —Maturity/Repricing and Rates December 31, 2023 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 $ — — % $ 25,483 5.74 % $ 5,086 3.95 % $ 3,927 2.84 % $ 34,496 5.15 % Municipal bonds: Taxable 5,265 2.47 10,227 3.68 8,650 3.42 62,186 2.74 86,328 2.91 Tax exempt (1) 1,168 4.52 6,773 2.88 10,444 3.67 494,067 3.56 512,452 3.55 6,433 2.84 17,000 3.36 19,094 3.56 556,253 3.47 598,780 3.46 Corporate bonds 75 6.79 20,146 4.63 74,973 3.83 26,535 10.89 121,729 5.49 Mortgage-backed or related securities — — 108,557 2.58 199,826 2.41 2,148,598 2.68 2,456,981 2.65 Asset-backed securities — — — — 50,574 7.87 170,278 7.53 220,852 7.61 Total securities available-for-sale and held-to-maturity—carrying value $ 6,508 2.89 $ 171,186 3.37 $ 349,553 3.59 $ 2,905,591 3.19 $ 3,432,838 3.24 Total securities available-for-sale and held-to-maturity—estimated market value $ 6,446 $ 170,906 $ 348,595 $ 2,755,350 $ 3,281,297 (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%. 47 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 at December 31, 2023, was 83%. 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 commercial real estate and business loans. While we originate a variety of loans, our ability to originate each type of loan depends 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 origination activity (excluding loans held for sale) for the years ended December 31, 2023, 2022 and 2021 (in thousands): Table 3: Loan Originations Years Ended Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 Commercial real estate $ 309,022 $ 418,635 $ 565,809 Multifamily real estate 57,046 37,612 110,640 Construction and land 1,541,383 1,935,476 1,975,664 Commercial business: Commercial business 585,047 1,034,950 731,315 SBA PPP — — 485,077 Agricultural business 84,072 89,655 61,997 One- to four-family residential 167,951 358,976 206,662 Consumer 300,913 545,254 465,213 Total loan originations (excluding loans held for sale) $ 3,045,434 $ 4,420,558 $ 4,602,377 One- to Four-Family Residential Real Estate Lending: At December 31, 2023, $1.52 billion, or 14% 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. Our balance of loans for one- to four-family residences increased by $344.9 million in 2023, compared to the prior year. The increase in one- to four-family real estate loans during 2023 was primarily the result of a higher percentage of one- to four-family construction loans converting to one- to four-family residential loans and a larger percentage of new production being held in portfolio. 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, 2023, construction, land and land development loans totaled $1.54 billion, or 14% of total loans. The largest shifts in our construction, land and land development portfolio occurred in multifamily and one- to four-family construction loans. Multifamily construction loans increased $178.2 million, or 55%, to $504.0 million at December 31, 2023. Multifamily construction loans represented approximately 5% of our total loan portfolio at December 31, 2023 and is comprised of affordable housing projects and, to a lesser extent, market rate multifamily projects across our footprint. One- to four-family construction loans decreased $120.9 million, or 19%, to $526.4 million at December 31, 2023. One- to four-family construction loans represented approximately 5% of our total loan portfolio at December 31, 2023, and included speculative construction loans, as well as “all-in-one” construction loans made to owner occupants that convert to permanent loans upon completion of the homes that, depending on market conditions, may be subsequently sold into the secondary market. Commercial and Multifamily Real Estate Lending: We 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 10 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, 2023, our loan portfolio included $3.64 billion of commercial real estate loans, or 34% of the total loan portfolio, and $811.2 million of multifamily real estate loans, or 8% of the total loan portfolio. The increase in multifamily loans was the result of the transfer of $43.5 million of multifamily loans held for sale to the held for investment loan portfolio in the fourth quarter of 2023 and the conversion of affordable housing construction loans to the multifamily portfolio upon the completion of the construction phase. 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, 2023, commercial business loans, including small business scored, totaled $2.28 billion, or 21% of total loans. Our commercial business lending, to a lesser extent, includes participation in certain syndicated loans, including shared national credits which totaled $239.0 million, or 2% of our loan portfolio, at December 31, 2023. 48 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, 2023, agricultural loans totaled $331.1 million, or 3% of the loan portfolio. 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, 2023, our consumer loans increased $18.5 million to $699.4 million, or 6% of our loan portfolio, compared to December 31, 2022. As of December 31, 2023, 84% of our consumer loans were secured by one- to four-family residences, including home equity lines of credit. Credit card balances totaled $47.4 million at December 31, 2023. Loan Servicing Portfolio: At December 31, 2023, we were servicing $3.05 billion of loans for others and held $11.8 million in escrow for our portfolio of loans serviced for others. The loan servicing portfolio at December 31, 2023 was comprised of $1.34 billion of Freddie Mac residential mortgage loans, $1.05 billion of Fannie Mae residential mortgage loans, $395.6 million of Oregon Housing residential mortgage loans, $59.9 million of SBA loans and $206.0 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, 2023 and 2022, we recognized $7.8 million of loan servicing income in our results of operations. 49 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 presentation of loans receivable at December 31, 2021, has been revised to match the segmentation used in the current period presentation. December 31, 2023 December 31, 2022 December 31, 2021 Amount Percent of Total Amount Percent of Total Amount Percent of Total Commercial real estate: Owner-occupied $ 915,897 9 % $ 845,320 8 % $ 831,623 9 % Investment properties 1,541,344 14 1,589,975 16 1,674,027 18 Small balance CRE 1,178,500 11 1,200,251 12 1,281,863 14 Total commercial real estate 3,635,741 34 3,635,546 36 3,787,513 41 Multifamily real estate 811,232 8 645,071 6 530,885 6 Construction, land and land development: Commercial construction 170,011 1 184,876 2 167,998 2 Multifamily construction 503,993 5 325,816 3 259,116 3 One- to four-family construction 526,432 5 647,329 6 568,753 6 Land and land development 336,639 3 328,475 3 313,454 4 Total construction, land and land development 1,537,075 14 1,486,496 14 1,309,321 15 Commercial business: Commercial business 1,252,088 11 1,275,813 13 1,038,206 11 SBA PPP 3,646 — 7,594 — 132,574 2 Small business scored 1,022,154 10 947,092 9 792,310 9 Total commercial business 2,277,888 21 2,230,499 22 1,963,090 22 Agricultural business, including secured by farmland: Agricultural business, including secured by farmland 331,089 3 294,743 3 279,224 3 SBA PPP — — 334 — 1,354 — Total agricultural business, including secured by farmland 331,089 3 295,077 3 280,578 3 One- to four-family residential 1,518,046 14 1,173,112 12 657,474 7 Consumer: Consumer—home equity revolving lines of credit 588,703 5 566,291 6 458,533 5 Consumer—other 110,681 1 114,632 1 97,369 1 Total consumer 699,384 6 680,923 7 555,902 6 Total loans 10,810,455 100 % 10,146,724 100 % 9,084,763 100 % Less allowance for credit losses – loans (149,643) (141,465) (132,099) Net loans $ 10,660,812 $ 10,005,259 $ 8,952,664 50 The following table sets forth the Company’s loans by geographic concentration at December 31, 2023, 2022 and 2021 (dollars in thousands): Table 5: Loans by Geographic Concentration December 31, 2023 December 31, 2022 December 31, 2021 Amount Percent Amount Percent Amount Percent Washington $ 5,095,602 47 % $ 4,777,546 47 % $ 4,264,590 47 % California 2,670,923 25 2,484,980 25 2,138,340 24 Oregon 1,974,001 18 1,826,743 18 1,652,364 18 Idaho 610,064 5 565,586 5 525,141 5 Utah 68,931 1 75,967 1 74,913 1 Other 390,934 4 415,902 4 429,415 5 Total $ 10,810,455 100 % $ 10,146,724 100 % $ 9,084,763 100 % The following table sets forth certain information at December 31, 2023 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 $ 78,394 $ 123,800 $ 685,610 $ 28,093 $ 915,897 Investment properties 51,875 451,397 814,033 224,039 1,541,344 Small balance CRE 46,162 360,312 702,238 69,788 1,178,500 Total commercial real estate 176,431 935,509 2,201,881 321,920 3,635,741 Multifamily real estate 75,712 111,215 365,535 258,770 811,232 Construction, land and land development: Commercial construction 48,954 43,638 76,661 758 170,011 Multifamily construction 339,896 160,134 3,963 — 503,993 One- to four-family construction 479,624 46,261 — 547 526,432 Land and land development 122,231 66,256 144,142 4,010 336,639 Total construction, land and land development 990,705 316,289 224,766 5,315 1,537,075 Commercial business: Commercial business 383,631 312,189 398,767 157,501 1,252,088 SBA PPP — 3,646 — — 3,646 Small business scored 64,376 222,204 317,098 418,476 1,022,154 Total commercial business 448,007 538,039 715,865 575,977 2,277,888 Agricultural business, including secured by farmland 89,401 85,279 154,765 1,644 331,089 One- to four-family residential 3,745 10,891 60,545 1,442,865 1,518,046 Consumer: Consumer—home equity revolving lines of credit 3,776 11,736 4,415 568,776 588,703 Consumer—other 35,362 13,604 33,132 28,583 110,681 Total consumer 39,138 25,340 37,547 597,359 699,384 Total loans $ 1,823,139 $ 2,022,562 $ 3,760,904 $ 3,203,850 $ 10,810,455 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. 51 The following table sets forth the dollar amount of all loans maturing after December 31, 2024 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 $ 277,055 $ 560,448 $ 837,503 Investment properties 440,668 1,048,801 1,489,469 Small balance CRE 236,028 896,310 1,132,338 Total commercial real estate 953,751 2,505,559 3,459,310 Multifamily real estate 461,280 274,240 735,520 Construction, land and land development: Commercial construction 14,753 106,304 121,057 Multifamily construction 51,784 112,313 164,097 One- to four-family construction 1,486 45,322 46,808 Land and land development 46,249 168,159 214,408 Total construction, land and land development 114,272 432,098 546,370 Commercial business: Commercial business 570,277 298,180 868,457 SBA PPP 3,646 — 3,646 Small business scored 189,404 768,374 957,778 Total commercial business 763,327 1,066,554 1,829,881 Agricultural business, including secured by farmland 71,499 170,189 241,688 One- to four-family residential 1,083,593 430,708 1,514,301 Consumer: Consumer—home equity revolving lines of credit 4,435 580,492 584,927 Consumer—other 71,722 3,597 75,319 Total consumer 76,157 584,089 660,246 Total loans maturing after one year $ 3,523,879 $ 5,463,437 $ 8,987,316 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. 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, which has been challenging over the last couple of years due to intense competition for deposits. This strategy is intended to help control our cost of funds and increase the opportunity for deposit fee revenues, while stabilizing our funding base. Total deposits decreased $590.6 million, or 4%, to $13.03 billion at December 31, 2023 from $13.62 billion at December 31, 2022. The decline in deposits during the year ended December 31, 2023 was primarily due to interest rate-sensitive clients moving a portion of their non-operating deposit balances to higher yielding investments. Core deposits were 89% of total deposits at December 31, 2023, compared to 95% a year earlier. The Bank’s estimated uninsured deposits were $4.08 billion or 31% of total deposits at December 31, 2023, compared to $4.84 billion or 35% of total deposits at December 31, 2022. The estimated uninsured deposit calculation includes $305.3 million and $304.2 million of collateralized public deposits at December 31, 2023 and 2022, respectively. Estimated uninsured deposits also include cash held by Banner of $108.2 million and $77.2 million at December 31, 2023 and December 31, 2022, respectively. The Bank’s estimated uninsured deposits, excluding collateralized public deposits and cash held at the holding company, were 28% of total deposits at December 31, 2023, compared to 33% of total deposits at December 31, 2022. 52 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 2023 2022 2021 Amount Percent of Total Increase (Decrease) Amount Percent of Total Increase (Decrease) Amount Percent of Total Non-interest-bearing checking $ 4,792,369 37 % $ (1,384,629) $ 6,176,998 45 % $ (208,179) $ 6,385,177 45 % Interest-bearing checking 2,098,526 16 287,373 1,811,153 14 (136,261) 1,947,414 14 Regular savings 2,980,530 23 270,440 2,710,090 20 (74,626) 2,784,716 19 Money market 1,680,605 13 (517,683) 2,198,288 16 (172,707) 2,370,995 17 Total interest-bearing transaction and savings accounts 6,759,661 52 40,130 6,719,531 50 (383,594) 7,103,125 50 Certificates maturing: Within one year 1,399,873 11 868,230 531,643 4 (121,051) 652,694 5 After one year, but within two years 49,579 — (93,414) 142,993 1 25,980 117,013 1 After two years, but within five years 27,320 — (20,195) 47,515 — (19,952) 67,467 — After five years 695 — (684) 1,379 — (78) 1,457 — Total certificate accounts 1,477,467 11 753,937 723,530 5 (115,101) 838,631 6 Total deposits $ 13,029,497 100 % $ (590,562) $ 13,620,059 100 % $ (706,874) $ 14,326,933 100 % Included in Total Deposits: Public transaction accounts $ 356,615 3 % $ (36,244) $ 392,859 3 % $ 38,985 $ 353,874 3 % Public interest-bearing certificates 52,048 — 25,238 26,810 — (13,151) 39,961 — Total public deposits $ 408,663 3 % $ (11,006) $ 419,669 3 % $ 25,834 $ 393,835 3 % Total deposits in excess of the FDIC insurance limit $ 4,083,215 31 % $ (761,482) $ 4,844,697 36 % $ (299,689) $ 5,144,386 36 % 53 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, 2023 (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 $ 243,778 Maturing after three months through six months 86,991 Maturing after six months through 12 months 95,777 Maturing after 12 months 9,329 Total $ 435,875 The following table provides additional detail on geographic concentrations of our deposits at December 31, 2023, 2022 and 2021 (in thousands): Table 10: Geographic Concentration of Deposits December 31, 2023 December 31, 2022 December 31, 2021 Amount Percent Amount Percent Amount Percent Washington $ 7,247,392 56 % $ 7,563,056 56 % $ 7,952,376 56 % Oregon 2,852,677 22 2,998,572 22 3,067,054 21 California 2,269,557 17 2,331,524 17 2,524,296 18 Idaho 659,871 5 726,907 5 783,207 5 Total deposits $ 13,029,497 100 % $ 13,620,059 100 % $ 14,326,933 100 % Borrowings. We had $323.0 million in FHLB advances at December 31, 2023. At that date, based on pledged collateral, the Bank had $2.97 billion of available credit capacity with the FHLB. At December 31, 2023, based upon our available unencumbered collateral, the Bank was eligible to borrow $1.44 billion from the Federal Reserve Bank, however, at that date we had no funds borrowed under this arrangement. Retail repurchase agreements, which are primarily associated with client sweep account arrangements, decreased $49.9 million to $182.9 million at December 31, 2023 from $232.8 million at December 31, 2022. At December 31, 2023 retail repurchase agreements had a weighted average rate of 2.48% and were secured by pledges of certain mortgage-backed securities and agency securities. We had no borrowings under wholesale repurchase agreements at December 31, 2023. At December 31, 2023, 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 $66.4 million at December 31, 2023. At December 31, 2023, the TPS had a weighted average rate of 7.19%. Subordinated notes, net of issuance costs were $92.9 million at December 31, 2023, compared to $98.9 million at December 31, 2022, and a weighted average interest rate of 5.00%. The decrease in subordinated notes was due to the Bank’s purchase of $6.5 million of Banner’s subordinated debt during the second quarter of 2023. 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 increased to $30.1 million, or 0.19% of total assets, at December 31, 2023, from $23.4 million, or 0.15% of total assets, at December 31, 2022. At December 31, 2023, our allowance for credit losses - loans was $149.6 million, or 506% of non-performing loans, compared to $141.5 million, or 615% of non-performing loans, at December 31, 2022. 54 The following table sets forth information with respect to our non-performing assets at the dates indicated (dollars in thousands): Table 11: Non-Performing Assets December 31 2023 2022 2021 Nonaccrual loans: Secured by real estate: Commercial $ 2,677 $ 3,683 $ 14,159 Construction/land 3,105 181 479 One- to four-family 5,702 5,236 2,711 Commercial business 9,002 9,886 2,156 Agricultural business, including secured by farmland 3,167 594 1,022 Consumer 3,204 2,126 1,754 26,857 21,706 22,281 Loans more than 90 days delinquent, still on accrual: Secured by real estate: Construction/land 1,138 — — One- to four-family 1,205 1,023 436 Commercial business 1 — 2 Consumer 401 264 117 2,745 1,287 555 Total non-performing loans 29,602 22,993 22,836 REO assets held for sale, net 526 340 852 Other repossessed assets held for sale, net — 17 17 Total non-performing assets $ 30,128 $ 23,350 $ 23,705 Total non-performing assets to total assets 0.19 % 0.15 % 0.14 % Total nonaccrual loans to net loans before allowance for credit losses 0.25 % 0.21 % 0.25 % Loans 30-89 days past due and on accrual $ 19,744 $ 17,186 $ 11,558 For the year ended December 31, 2023, interest income was reduced by $1.6 million as a result of nonaccrual loan activity, which includes the reversal of $569,000 of accrued interest as of the date the loans were placed on nonaccrual. There was no interest income recognized on nonaccrual loans during the year ended December 31, 2023. 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, 2023 2022 2021 Pass $ 10,671,281 $ 10,000,493 $ 8,874,468 Special Mention 13,732 9,081 11,932 Substandard 125,442 137,150 198,363 Total $ 10,810,455 $ 10,146,724 $ 9,084,763 The decrease in substandard loans during the year ended December 31, 2023, primarily reflects the payoff of substandard loans as well as risk rating upgrades. 55 Comparison of Results of Operations for the Years Ended December 31, 2023 and 2022 General. For the year ended December 31, 2023, net income was $183.6 million, or $5.33 per diluted share, compared to net income of $195.4 million, or $5.67 per diluted share for the year ended December 31, 2022. Current year results included a decrease in non-interest income, primarily due to the loss on the sale of securities, and increases in the provision for credit losses and non-interest expense, partially offset by increased net interest income. Our operating results depend largely on net interest income which increased $22.8 million to $576.0 million for the year ended December 31, 2023, compared to the prior year, primarily reflecting increased yields on loans and investment securities due to rising interest rates during the year, as well as higher average loan balances, partially offset by increased funding costs during the period. Revenues (net interest income and non-interest income) decreased $8.0 million, or 1%, to $620.4 million for the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to increased funding costs, an increase in the net loss on the sale of securities and a net loss on financial instruments carried at fair value during the year ended December 31, 2023. We recorded a $10.8 million provision for credit losses for the year ended December 31, 2023, compared to a $10.4 million provision for credit losses for the year ended December 31, 2022. The provision for credit losses for the year ended December 31, 2023, reflects growth in loan balances and a deterioration in forecasted economic conditions. Total non-interest income for the year ended December 31, 2023 decreased to $44.4 million compared to $75.3 million for the year ended December 31, 2022, primarily due to an increase in the net loss on the sale of securities and a net loss relating to the fair value adjustments on financial instruments. The decrease was also impacted by the $7.8 million gain on the sale of branches, including related deposits, during the prior year. Total non-interest expense increased to $382.5 million for the year ended December 31, 2023, compared to $377.3 million for the year ended December 31, 2022, largely as a result of a decrease in capitalized loan origination costs and, to a lesser extent, increases in salary and employee benefits, information and computer data services and deposit insurance expense, partially offset by decreases in occupancy and equipment expense and professional and legal expense. Net Interest Income. Net interest income increased $22.8 million, or 4%, to $576.0 million for the year ended December 31, 2023, compared to $553.2 million for the year ended December 31, 2022, primarily due to increases in the average yields on and, to a lesser extent, the average balance of interest-earning assets, partially offset by increased funding costs. 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, 2023. The net interest margin on a tax equivalent basis of 4.01% for the year ended December 31, 2023, was 33 basis points higher than the prior year. The increase in net interest margin reflects a 107 basis-point increase in yields on average interest-earning assets, offset by a 78 basis-point increase 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. The increase in the overall cost of funding liabilities was primarily due to the increase in rates across all deposit and borrowing categories due to higher market rates generally, as well as a shift in the average balance of deposits to higher costing certificates of deposit. Interest Income. Interest income for the year ended December 31, 2023 was $701.6 million, compared to $572.6 million for the prior year, an increase of $129.0 million. The increase in interest income occurred as a result of the yields on interest-earnings assets increasing 107 basis points to 4.87%, partially offset by the average balance of interest-earning assets decreasing $682.3 million to $14.65 billion. The increased yield on interest-earning assets primarily reflects increases in the average yields on loans. Interest income on loans increased from the prior year $127.0 million to $577.9 million for the year ended December 31, 2023. The increase was primarily due to the average loan yields increasing 82 basis points to 5.58%, reflecting the impact of rising interest rates. Average loans receivable increased $887.7 million to $10.48 billion, primarily reflecting an increase in one- to four-family loans. Interest and dividend income on investment securities increased $1.7 million for the year ended December 31, 2023. The average yield on the combined portfolio increased 88 basis points to 3.08%, reflecting a 31 basis-point increase in the average yield on mortgage-backed securities and a 147 basis-point increase in the yield on other securities. The combined average balance of total investment securities decreased $1.57 billion to $4.17 billion (excluding the effect of fair value adjustments). Interest Expense. Interest expense for the year ended December 31, 2023 was $125.6 million, compared to $19.4 million for the prior year, an increase of $106.2 million, or 548%. The increase occurred as a result of a 78 basis-point increase in the average cost of all funding liabilities to 0.91%, partially offset by the average balance of funding liabilities decreasing $985.6 million to $13.73 billion. The decrease in the average balance of funding liabilities reflects decreases in non-interest-bearing deposits and interest-bearing transaction and savings accounts, partially offset by higher average balances of certificates of deposit and FHLB advances. 56 Deposit interest expense increased $90.0 million to $100.1 million for the year ended December 31, 2023, compared to the prior year as a result of the average cost of total deposits increasing 69 basis points to 0.76%, partially offset by the average balance of interest-bearing deposits decreasing by $115.1 million. The increase in the average cost of deposits between the periods was primarily due to the average cost of interest-bearing deposits increasing 117 basis points to 1.30% for the year ended December 31, 2023, compared to 0.13% in the prior year. The increase in the average cost of interest-bearing deposits was primarily the result of a 245 basis-point increase in the cost of certificates of deposit along with a $445.0 million increase in the average balance of certificates of deposit. The average rate paid on total borrowings increased 233 basis points to 4.37%, reflecting the 215 basis-point increase in the average cost of FHLB advances, the 154 basis-point increase in the average cost of other borrowings, and the 179 basis-point increase in the average cost of our subordinated debt. The increase in average total borrowings was largely due to a $181.5 million increase in average balance of FHLB advances, partially offset by a $50.4 million decrease in the average balance of other borrowings. 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. 57 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, 2023 Year Ended December 31, 2022 Year Ended December 31, 2021 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 $ 49,106 $ 2,621 5.34 % $ 82,030 $ 2,973 3.62 % $ 94,252 $ 3,066 3.25 % Mortgage loans 8,513,487 460,664 5.41 7,731,195 364,499 4.71 % 7,225,860 328,115 4.54 % Commercial/agricultural loans 1,777,099 113,078 6.36 1,617,191 77,309 4.78 % 1,498,808 62,479 4.17 % SBA PPP loans 5,042 172 3.41 41,167 4,677 11.36 % 770,041 49,854 6.47 % Consumer and other loans 138,196 8,715 6.31 123,667 7,332 5.93 % 122,520 7,298 5.96 % Total loans (1) 10,482,930 585,250 5.58 9,595,250 456,790 4.76 % 9,711,481 450,812 4.64 % Mortgage-backed securities 2,927,650 72,927 2.49 3,130,124 68,148 2.18 % 2,451,110 46,199 1.88 % Other securities 1,173,637 52,148 4.44 1,625,250 48,278 2.97 % 1,337,403 30,114 2.25 % Interest-bearing deposits with banks 46,815 2,200 4.70 969,952 9,633 0.99 % 1,392,619 1,955 0.14 % FHLB stock 17,903 847 4.73 10,628 357 3.36 % 13,966 592 4.24 % Total investment securities 4,166,005 128,122 3.08 5,735,954 126,416 2.20 % 5,195,098 78,860 1.52 % Total interest-earning assets 14,648,935 713,372 4.87 15,331,204 583,206 3.80 % 14,906,579 529,672 3.55 % Non-interest-earning assets 917,018 1,169,271 1,268,348 Total assets $ 15,565,953 $ 16,500,475 $ 16,174,927 Deposits: Interest-bearing checking accounts $ 1,921,326 $ 13,334 0.69 $ 1,890,917 $ 1,557 0.08 % $ 1,755,293 $ 1,188 0.07 % Savings accounts 2,674,936 27,739 1.04 2,810,264 2,053 0.07 % 2,652,018 1,833 0.07 % Money market accounts 1,908,983 24,089 1.26 2,364,122 3,143 0.13 % 2,305,814 2,670 0.12 % Certificates of deposit 1,209,261 34,964 2.89 764,255 3,371 0.44 % 876,509 6,079 0.69 % Total interest-bearing deposits 7,714,506 100,126 1.30 7,829,558 10,124 0.13 % 7,589,634 11,770 0.16 % Non-interest-bearing deposits 5,436,953 — — 6,434,670 — — % 6,132,875 — — % Total deposits 13,151,459 100,126 0.76 14,264,228 10,124 0.07 % 13,722,509 11,770 0.09 % Other interest-bearing liabilities: FHLB advances 196,819 10,524 5.35 15,285 489 3.20 % 97,945 2,592 2.65 % Other borrowings 199,291 3,376 1.69 249,681 377 0.15 % 240,817 467 0.19 % Subordinated debt 185,883 11,541 6.21 189,870 8,400 4.42 % 247,583 8,780 3.55 % Total borrowings 581,993 25,441 4.37 454,836 9,266 2.04 % 586,345 11,839 2.02 % Total funding liabilities 13,733,452 125,567 0.91 14,719,064 19,390 0.13 % 14,308,854 23,609 0.16 % Other non-interest-bearing liabilities (2) 295,098 253,983 206,774 Total liabilities 14,028,550 14,973,047 14,515,628 Shareholders’ equity 1,537,403 1,527,428 1,659,299 Total liabilities and shareholders’ equity $ 15,565,953 $ 16,500,475 $ 16,174,927 Net interest income/rate spread (tax equivalent) $ 587,805 3.96 % $ 563,816 3.67 % $ 506,063 3.39 % Net interest margin (tax equivalent) 4.01 % 3.68 % 3.39 % Reconciliation to reported net interest income: Adjustments for taxable equivalent basis (11,800) (10,637) (9,172) Net interest income and margin, as reported $ 576,005 3.93 % $ 553,179 3.61 % $ 496,891 3.33 % Average interest-earning assets / average interest-bearing liabilities 176.57 % 185.06 % 182.32 % Average interest-earning assets / average funding liabilities 106.67 % 104.16 % 104.18 % (footnotes follow) 58 (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 $7.4 million, $5.9 million, and $5.1 million for the years ended December 31, 2023, December 31, 2022, and December 31, 2021, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $4.4 million, $4.8 million, and $4.1 million for the years ended December 31, 2023, December 31, 2022, and December 31, 2021, 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, 2023 Compared to Year Ended December 31, 2022 Increase (Decrease) in Income/Expense Due to Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 Increase (Decrease) in Income/Expense Due to Rate Volume Net Rate Volume Net Interest-earning assets: Held for sale loans $ 1,100 $ (1,452) $ (352) $ 329 $ (422) $ (93) Mortgage loans 57,068 39,097 96,165 12,870 23,514 36,384 Commercial/agricultural loans 27,543 8,226 35,769 9,642 5,188 14,830 SBA PPP loans (1,999) (2,506) (4,505) 21,828 (67,005) (45,177) Consumer and other loans 486 897 1,383 (34) 68 34 Total loans 84,198 44,262 128,460 44,635 (38,657) 5,978 Mortgage-backed securities 9,384 (4,605) 4,779 7,878 14,071 21,949 Other securities 19,674 (15,804) 3,870 10,836 7,328 18,164 Interest-bearing deposits with banks 8,688 (16,121) (7,433) 8,443 (765) 7,678 FHLB stock 183 307 490 (109) (126) (235) Total investment securities 37,929 (36,223) 1,706 27,048 20,508 47,556 Total net change in interest income on interest-earning assets 122,127 8,039 130,166 71,683 (18,149) 53,534 Interest-bearing liabilities: Interest-bearing checking accounts 11,752 25 11,777 272 97 369 Savings accounts 25,790 (104) 25,686 107 113 220 Money market accounts 21,665 (719) 20,946 404 69 473 Certificates of deposit 28,596 2,997 31,593 (2,003) (705) (2,708) Total interest-bearing deposits 87,803 2,199 90,002 (1,220) (426) (1,646) FHLB advances 537 9,498 10,035 451 (2,554) (2,103) Other borrowings 3,090 (91) 2,999 (107) 17 (90) Subordinated debt 3,321 (180) 3,141 1,912 (2,292) (380) Total borrowings 6,948 9,227 16,175 2,256 (4,829) (2,573) Total net change in interest expense on interest-bearing liabilities 94,751 11,426 106,177 1,036 (5,255) (4,219) Net change in net interest income (tax equivalent) $ 27,376 $ (3,387) $ 23,989 $ 70,647 $ (12,894) $ 57,753 59 Provision and Allowance for Credit Losses . We recorded an $11.1 million provision for credit losses - loans in the year ended December 31, 2023, compared to an $8.2 million provision for credit losses - loans in 2022. 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 a deterioration in forecasted economic conditions and indicators utilized to estimate credit losses, as well as increased charge-offs for the year. The prior year provision for credit losses - loans primarily reflected 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. Future assessments of the expected credit losses will not only be impacted by changes to the reasonable and supportable forecast, but will also include an updated assessment of qualitative factors, as well as consideration of any required changes in the reasonable and supportable forecast reversion period. The following table sets forth an analysis of our allowance for credit losses - loans for the periods indicated (dollars in thousands): Table 15: Changes in Allowance for Credit Losses - Loans Years Ended December 31 2023 2022 2021 Balance, beginning of period $ 141,465 $ 132,099 $ 167,279 Provision (recapture) for credit losses – loans 11,097 8,158 (33,112) Recoveries of loans previously charged off: Commercial real estate 557 392 1,729 Construction and land 29 384 100 One- to four-family residential 230 181 199 Commercial business 1,283 1,923 1,797 Agricultural business, including secured by farmland 146 475 30 Consumer 543 566 760 Total recoveries 2,788 3,921 4,615 Loans charged off: Commercial real estate — (2) (3,767) Multifamily real estate — — (59) Construction and land (1,089) (30) — One- to four-family residential (42) — — Commercial business (2,650) (1,699) (1,762) Agricultural business, including secured by farmland (564) (42) (181) Consumer (1,362) (940) (914) Total charge-offs (5,707) (2,713) (6,683) Net (charge-offs) recoveries (2,919) 1,208 (2,068) Balance, end of period $ 149,643 $ 141,465 $ 132,099 Total loans $ 10,810,455 $ 10,146,724 $ 9,084,763 Average outstanding loans $ 10,433,824 $ 9,513,220 $ 9,617,229 Total nonaccrual loans $ 26,857 $ 21,706 $ 22,281 Allowance for credit losses - loans as a percent of total loans 1.38 % 1.39 % 1.45 % As a percent of average outstanding loans during the period: Net loan (charge-offs) recoveries (0.03) % 0.01 % (0.02) % Commercial real estate 0.01 % — % (0.02) % Multifamily real estate — % — % — % Construction and land (0.01) % — % — % One- to four-family residential — % — % — % Commercial business (0.01) % — % — % Agricultural business, including secured by farmland — % — % — % Consumer (0.01) % — % — % Allowance for credit losses - loans as a percent of nonaccrual loans 557 % 652 % 593 % 60 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 2023 2022 2021 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 $ 44,384 34 % 1.22 % $ 44,086 36 % 1.21 % $ 52,995 41 % 1.40 % Multifamily real estate 9,326 8 1.15 7,734 6 1.20 7,043 6 1.33 Construction and land 28,095 14 1.83 29,171 14 1.96 27,294 15 2.08 One- to four-family real estate 19,271 14 1.27 14,729 12 1.26 8,205 7 1.25 Commercial business 35,464 21 1.56 33,299 22 1.49 26,421 22 1.35 Agricultural business, including secured by farmland 3,865 3 1.17 3,475 3 1.18 3,190 3 1.14 Consumer 9,238 6 1.32 8,971 7 1.32 6,951 6 1.25 Total allowance for credit losses - loans $ 149,643 100 % 1.38 % $ 141,465 100 % 1.39 % $ 132,099 100 % 1.45 % The allowance for credit losses - unfunded loan commitments was $14.5 million at December 31, 2023 compared to $14.7 million at December 31, 2022. The decrease in the allowance for credit losses - unfunded loan commitments reflects a decrease in unfunded loan commitments. 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, 2023 2022 2021 Balance, beginning of period $ 14,721 $ 12,432 $ 13,297 (Recapture) provision for credit losses - unfunded loan commitments (237) 2,289 (865) Balance, end of period $ 14,484 $ 14,721 $ 12,432 61 Non-interest Income. The following table presents the key components of non-interest income for the years ended December 31, 2023, 2022 and 2021 (dollars in thousands): Table 18: Non-interest Income 2023 compared to 2022 2022 compared to 2021 2023 2022 Change Amount Change Percent 2022 2021 Change Amount Change Percent Deposit fees and other service charges $ 41,638 $ 44,459 $ (2,821) (6) % $ 44,459 $ 39,495 $ 4,964 13 % Mortgage banking operations 11,817 10,834 983 9 % 10,834 33,948 (23,114) (68) % Bank-owned life insurance 9,245 7,794 1,451 19 % 7,794 5,000 2,794 56 % Miscellaneous 5,169 6,805 (1,636) (24) % 6,805 12,875 (6,070) (47) % 67,869 69,892 (2,023) (3) % 69,892 91,318 (21,426) (23) % Net (loss) gain on sale of securities (19,242) (3,248) (15,994) 492 % (3,248) 482 (3,730) (774) % Net change in valuation of financial instruments carried at fair value (4,218) 807 (5,025) (623) % 807 4,616 (3,809) (83) % Gain on sale of branches, including related deposits — 7,804 (7,804) (100) % 7,804 — 7,804 nm Total non-interest income $ 44,409 $ 75,255 $ (30,846) (41) % $ 75,255 $ 96,416 $ (21,161) (22) % Non-interest income decreased for the year ended December 31, 2023, compared to the year ended December 31, 2022. The decrease was primarily due to the net loss recorded during the current period on the sale of securities, the recognition of a net loss for fair value adjustments on financial instruments carried at fair value, a decrease in deposit fees and other service charges and a gain on sale of branches recognized during the year ended December 31, 2022, with no similar gain recognized in 2023. Income from deposit fees and other service charges decreased primarily as a result of decreased deposit transaction activity and the discontinuation of certain deposit fees related to overdrafts during the current year. Revenue from mortgage banking operations, including gains on one- to four-family and multifamily loan sales and loan servicing fees, increased for the year ended December 31, 2023, compared to the prior year. The higher mortgage banking revenue primarily reflected a $2.5 million lower of cost or market upward adjustment on multifamily loans held for sale, attributed to the transfer of $43.5 million of multifamily loans from held for sale to portfolio during the fourth quarter of 2023, compared to a $2.5 million lower of cost or market downward adjustment for the year ended December 31, 2022. Sales of one- to four-family loans held for sale for the year ended December 31, 2023, resulted in gains of $5.1 million, compared to $9.9 million for the year ended December 31, 2022. 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 2023. The net loss on sale of securities during the year ended December 31, 2023, reflects strategic sales of securities to minimize the impact of increasing rates on our securities portfolio. The net loss on the valuation of financial instruments carried at fair value were due to declines during 2023 in the market valuation of investment securities carried at fair value. 62 Non-interest Expense. The following table represents key elements of non-interest expense for the years ended December 31, 2023, 2022 and 2021 (dollars in thousands). Table 19: Non-interest Expense 2023 compared to 2022 2022 compared to 2021 2023 2022 Change Amount Change Percent 2022 2021 Change Amount Change Percent Salary and employee benefits $ 244,563 $ 242,266 $ 2,297 1 % $ 242,266 $ 244,351 $ (2,085) (1) % Less capitalized loan origination costs (16,257) (24,313) 8,056 (33) % (24,313) (34,401) 10,088 (29) % Occupancy and equipment 47,886 52,018 (4,132) (8) % 52,018 52,850 (832) (2) % Information and computer data services 28,445 25,986 2,459 9 % 25,986 24,356 1,630 7 % Payment and card processing services 20,547 21,195 (648) (3) % 21,195 20,544 651 3 % Professional and legal expenses 9,830 14,005 (4,175) (30) % 14,005 22,274 (8,269) (37) % Advertising and marketing 4,794 3,959 835 21 % 3,959 6,036 (2,077) (34) % Deposit insurance 10,529 6,649 3,880 58 % 6,649 5,583 1,066 19 % State and municipal business and use taxes 5,260 4,693 567 12 % 4,693 4,343 350 8 % Real estate operations, net (538) (104) (434) 417 % (104) (22) (82) 373 % Amortization of core deposit intangibles 3,756 5,279 (1,523) (29) % 5,279 6,571 (1,292) (20) % Loss on extinguishment of debt — 793 (793) (100) % 793 2,284 (1,491) (65) % Miscellaneous 23,723 24,869 (1,146) (5) % 24,869 24,236 633 3 % $ 382,538 $ 377,295 $ 5,243 1 % $ 377,295 $ 379,005 $ (1,710) — % COVID-19 expenses — — — nm — 436 (436) (100) % Merger and acquisition-related expenses — — — nm — 660 (660) (100) % Total non-interest expense $ 382,538 $ 377,295 $ 5,243 1 % $ 377,295 $ 380,101 $ (2,806) (1) % Non-interest expense for the year ended December 31, 2023, increased as compared to the same period in 2022. The increase was primarily due to an increase in salary and employee benefits, a decrease in capitalized loan origination costs, and increases in information and computer data services and deposit insurance, partially offset by decreases in occupancy and equipment, professional and legal expenses, and amortization of core deposit intangibles. Salary and employee benefits increased for the year ended December 31, 2023, compared to the prior year, primarily reflecting normal annual salary and wage increases, partially offset by decreases in loan production related commission expense. Capitalized loan origination costs decreased primarily due to decreased loan production. Information and computer data services increased primarily due to an increase in computer software expenses. Deposit insurance expense increased due to an increase in the FDIC assessment rate in 2023. Occupancy and equipment decreased for the year ended December 31, 2023, compared to the prior year, primarily due to a reduction in building rent expense during the current year as a result of the consolidation of back-office space. Professional and legal expense decreased for the year ended December 31, 2023, from the year ended December 31, 2022, primarily due to a $3.5 million accrual recorded in the prior year related to a potential settlement of a pending litigation matter. Income Taxes. For the year ended December 31, 2023, we recognized $43.5 million in income tax expense for an effective rate of 19.1%, 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 23.7%, 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, 2022, we recognized $45.4 million in income tax expense for an effective tax rate of 18.9%. Comparison of Results of Operations for the Years Ended December 31, 2022 and 2021 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, 2022, previously filed with the SEC. 63 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 depends, 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 those of all financial institutions, inherently involve the assumption of interest rate risk. Interest rate risk is the risk that fluctuations 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 (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, 2023, our loans with interest rate floors totaled $4.79 billion and had a weighted average floor rate of 4.40% compared to a current average note rate of 6.54%. As of December 31, 2023, our loans with interest rates at their floors totaled $1.36 billion and had a weighted average note rate of 4.15%. The Company actively manages its exposure to interest rate risk through on-going adjustments to the mix of interest-earning assets and funding sources that affect the repricing speeds of loans, investments, interest-bearing deposits and borrowings. The principal objectives of asset/liability management are: to evaluate the interest rate risk exposure; to determine the appropriate level of risk given our operating environment, business plan strategies, performance objectives, capital and liquidity constraints, and asset and liability allocation alternatives; and to manage our interest rate risk consistent with regulatory guidelines and policies approved by the Board of Directors. Through such management, we seek to reduce the vulnerability of our earnings and capital position to changes in the level of interest rates. Our actions in this regard are taken under the guidance of the Asset/Liability Management Committee, which is comprised of members of our senior management. The Committee closely monitors our interest sensitivity exposure, asset and liability allocation decisions, liquidity and capital positions, and local and national economic conditions, and attempts to structure the loan and investment portfolios and funding sources to maximize earnings within acceptable risk tolerances. Sensitivity Analysis Our primary monitoring tool for assessing interest rate risk is asset/liability simulation modeling, which is designed to capture the dynamics of balance sheet, interest rate and spread movements and to quantify variations in net interest income resulting from those movements under different rate environments. The sensitivity of net interest income to changes in the modeled interest rate environments provides a measurement of interest rate risk. We also utilize economic value analysis, which addresses changes in estimated net economic value of equity arising from changes in the level of interest rates. The net economic value of equity is estimated by separately valuing our assets and liabilities under varying interest rate environments. The extent to which assets gain or lose value in relation to the gains or losses of liability values under the various interest rate assumptions determines the sensitivity of net economic value to changes in interest rates and provides an additional measure of interest rate risk. 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. 64 The following tables set forth, as of December 31, 2023, the estimated changes in our net interest income over one-year and two-year time horizons for our rate ramp and rate shock interest rate sensitivity scenarios and the estimated changes in economic value of equity for our rate shock interest rate sensitivity scenario based on the indicated interest rate environments (dollars in thousands): Table 20: Interest Rate Risk Indicators - Rate Ramp December 31, 2023 Estimated Increase (Decrease) in Change (in Basis Points) in Interest Rates (1) Net Interest Income Next 12 Months Net Interest Income Next 24 Months +300 $ (9,183) (1.6) % $ (24,249) (2.0) % +200 (2,847) (0.5) (437) — +100 219 — 7,683 0.6 0 — — — — -100 (7,791) (1.4) (37,550) (3.1) -200 (15,662) (2.8) (78,302) (6.6) -300 (23,933) (4.2) (123,593) (10.3) (1) Assumes a gradual change in market interest rates at all maturities during the first year; however, no rates are allowed to go below zero. The targeted Federal Funds Rate was between 5.25% and 5.50% at December 31, 2023. Table 21: Interest Rate Risk Indicators - Rate Shock December 31, 2023 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 $ (34,861) (6.2) % $ (33,761) (2.8) % $ (279,615) (10.7) % +200 (12,266) (2.2) 1,195 0.1 (153,764) (5.9) +100 (768) (0.1) 12,355 1.0 (69,021) (2.6) 0 — — — — — — -100 (19,866) (3.5) (57,064) (4.8) 21,363 0.8 -200 (41,167) (7.3) (119,813) (10.0) (35,179) (1.3) -300 (65,228) (11.5) (192,740) (16.1) (184,604) (7.1) (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 5.25% and 5.50% at December 31, 2023. Another monitoring tool for assessing interest rate risk is gap analysis. The matching of the repricing characteristics of assets and liabilities may be analyzed by examining the extent to which assets and liabilities are interest sensitive and by monitoring an institution’s interest sensitivity gap. An asset or liability is said to be interest sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated, based upon certain assumptions, to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated to mature or reprice, based upon certain assumptions, within that same time period. A gap is considered positive when the amount of interest-sensitive assets exceeds the amount of interest-sensitive liabilities. A gap is considered negative when the amount of interest-sensitive liabilities exceeds the amount of interest-sensitive assets. Generally, during a period of rising rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income. Certain shortcomings are inherent in gap analysis. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as 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. 65 Table 22, Interest Sensitivity Gap , presents our interest sensitivity gap between interest-earning assets and interest-bearing liabilities at December 31, 2023. 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, 2023, total interest-earning assets maturing or repricing within one year exceeded total interest-bearing liabilities maturing or repricing in the same time period by $2.10 billion, representing a one-year cumulative gap to total assets ratio of 13.40%. The interest rate risk indicators and interest sensitivity gaps as of December 31, 2023, are within our internal policy guidelines and Management considers that our current level of interest rate risk is reasonable. 66 The following table provides a GAP analysis as of December 31, 2023 (dollars in thousands): Table 22: Interest Sensitivity Gap December 31, 2023 Within 6 Months After 6 Months Within 1 Year After 1 Year Within 3 Years After 3 Years Within 5 Years After 5 Years Within 10 Years Over 10 Years Total Interest-earning assets: (1) Construction loans $ 1,010,576 $ 111,758 $ 129,617 $ 38,248 $ 32,494 $ 147 $ 1,322,840 Fixed-rate mortgage loans 246,333 210,811 757,251 592,448 725,202 249,263 2,781,308 Adjustable-rate mortgage loans 1,023,230 376,634 1,494,738 851,240 418,435 11,319 4,175,596 Fixed-rate mortgage-backed securities 95,058 99,172 362,051 414,953 860,049 898,931 2,730,214 Adjustable-rate mortgage-backed securities 292,717 46 195 214 4,076 — 297,248 Fixed-rate commercial/agricultural loans 97,680 83,115 265,443 134,524 145,808 26,627 753,197 Adjustable-rate commercial/agricultural loans 889,690 24,184 85,055 69,935 3,113 — 1,071,977 Consumer and other loans 496,893 57,536 45,335 36,908 27,534 44,524 708,730 Investment securities and interest-earning deposits 91,882 7,285 69,517 27,110 202,584 443,328 841,706 Total rate sensitive assets 4,244,059 970,541 3,209,202 2,165,580 2,419,295 1,674,139 14,682,816 Interest-bearing liabilities: (2) Interest-bearing checking accounts 265,053 174,882 590,468 449,147 712,291 788,690 2,980,531 Regular savings 270,538 121,222 394,617 286,633 440,231 585,285 2,098,526 Money market deposit accounts 189,414 98,917 333,300 252,314 395,293 411,367 1,680,605 Certificates of deposit 1,106,962 292,667 69,403 7,496 695 243 1,477,466 FHLB advances 323,000 — — — — — 323,000 Subordinated notes — — 93,500 — — — 93,500 Junior subordinated debentures 89,178 — — — — — 89,178 Retail repurchase agreements 182,877 — — — — — 182,877 Total rate sensitive liabilities 2,427,022 687,688 1,481,288 995,590 1,548,510 1,785,585 8,925,683 Excess (deficiency) of interest-sensitive assets over interest-sensitive liabilities $ 1,817,037 $ 282,853 $ 1,727,914 $ 1,169,990 $ 870,785 $ (111,446) $ 5,757,133 Cumulative excess of interest-sensitive assets $ 1,817,037 $ 2,099,890 $ 3,827,804 $ 4,997,794 $ 5,868,579 $ 5,757,133 $ 5,757,133 Cumulative ratio of interest-earning assets to interest-bearing liabilities 174.87 % 167.42 % 183.29 % 189.38 % 182.19 % 164.50 % 164.50 % Interest sensitivity gap to total assets 11.60 % 1.81 % 11.03 % 7.47 % 5.56 % (0.71) % 36.74 % Ratio of cumulative gap to total assets 11.60 % 13.40 % 24.43 % 31.89 % 37.45 % 36.74 % 36.74 % (footnotes follow) 67 (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 these accounts had been assumed to be short-term, the one-year cumulative gap of interest-sensitive assets would have been a negative $3.54 billion, or a negative 22.59% of total assets at December 31, 2023. Interest-bearing liabilities for this table exclude certain non-interest-bearing deposits that are included in the average balance calculations. Management is aware of the sources of interest rate risk and 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. The Bank also has 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 value of these types of interest rate swaps at December 31, 2023. Based on our analysis of the interest rate risk scenarios and our strategies for managing our risk, Management believes 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, 2023 and 2022, our loan originations, including originations of loans held for sale, exceeded our loan repayments by $886.8 million and $1.30 billion, respectively. There were no loan purchases during the year ended December 31, 2023, and $126.6 million of loans purchased during the year ended December 31, 2022. During the years ended December 31, 2023 and 2022, we received proceeds of $280.6 million and $429.7 million, respectively, from the sale of loans. Securities purchased during the years ended December 31, 2023 and 2022 totaled $58.2 million and $850.6 million, respectively, and securities repayments, maturities and sales in those same periods were $600.4 million and $639.4 million, respectively. Our primary funding source is deposits. Total deposits decreased by $590.6 million during the year ended December 31, 2023, with core deposits decreasing $1.34 billion and certificates of deposit increasing $753.9 million. At December 31, 2023, core deposits totaled $11.55 billion, or 89% of total deposits, compared with $12.90 billion, or 95% of total deposits at December 31, 2022. 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, 2023, certificates of deposit totaled $1.48 billion, or 11% of our total deposits, including $1.40 billion which were scheduled to mature within one year. Certificates of deposit increased from 5% of our total deposits at December 31, 2022 to 11% of our total deposits at December 31, 2023. The increase in certificates of deposit during 2023 was due to clients seeking higher yields moving funds from core deposit accounts to higher yielding certificates of deposit, as well as a $108.1 million increase in brokered deposits. We had $323.0 million of FHLB advances at December 31, 2023, compared to $50.0 million at December 31, 2022. Other borrowings at December 31, 2023 decreased $49.9 million to $182.9 million from $232.8 million at December 31, 2022. Both the FHLB advances and other borrowings outstanding at December 31, 2023 mature during 2024. We must maintain an adequate level of liquidity to ensure the availability of sufficient funds to accommodate deposit withdrawals. This is to support loan growth, satisfy financial commitments and take advantage of investment opportunities. We use our sources of funds primarily to fund loan growth and deposit outflows. At December 31, 2023, we had outstanding loan commitments totaling $4.01 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 ending December 31, 2024, we have $17.9 million of purchase obligations under contracts with our key vendors to provide services, mainly information technology related contracts. In addition, at December 31, 2023, we had $14.6 million of commitments under operating lease agreements. 68 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, subject to collateral requirements and a sufficient level of ownership of FHLB stock. At December 31, 2023, under these credit facilities based on pledged collateral, the Bank had $2.97 billion of available credit capacity. Advances under these credit facilities totaled $323.0 million at December 31, 2023. 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 $1.44 billion as of December 31, 2023, subject to certain collateral requirements, namely the collateral type and risk rating of eligible pledged loans. The Bank also had $120.4 million of additional borrowing capacity through the FRBSF’s bank term funding program. We had no funds borrowed from the FRBSF at December 31, 2023 or 2022. At December 31, 2023, 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, 2023 or 2022. 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 dividend payments during 2024 at this rate of $0.48 per share, our average total dividend paid each quarter would be approximately $16.5 million based on the number of outstanding shares at December 31, 2023. At December 31, 2023, Banner (on an unconsolidated basis) had liquid assets of $108.5 million. During the year ended December 31, 2023, total shareholders’ equity increased $196.3 million to $1.65 billion. At December 31, 2023, tangible common shareholders’ equity, a non-GAAP financial measure which excludes goodwill and other intangible assets, was $1.27 billion, or 8.33% of tangible assets. See “Executive Overview - Non-GAAP Financial Measures” above for a reconciliation of total shareholders’ equity to tangible common shareholders’ equity. 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 a 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, 2023, 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, 2023. Table 23: Regulatory Capital Ratios Capital Ratios Banner Corporation Banner Bank Total capital to risk-weighted assets 14.58 % 13.69 % Tier 1 capital to risk-weighted assets 12.64 12.52 Tier 1 capital to average leverage assets 10.56 10.46 Tier 1 common equity to risk-weighted assets 11.97 12.52 ITEM 7A – Quantitative and Qualitative Disclosures about Market Risk See pages 64 – 68 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 75 . 69 ITEM 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable.