ZIONS BANCORPORATION, NATIONAL ASSOCIATION /UT/ (ZION) FY 2022 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Key Corporate Objectives

We conduct our operations through seven separately managed affiliates, each with its own local branding and management team. Our affiliate banks are supported by an enterprise operating segment (referred to as the “Other” segment) that provides governance and risk management, allocates capital, establishes strategic objectives, and includes centralized technology, back-office functions, and certain lines of business not operated through our affiliate banks.

We focus our efforts and resources to achieve our strategic growth and profitability objectives. This includes providing high-quality products and services and deepening relationships with our commercial, small business, and retail customers. Serving as a trusted partner for our small business and commercial customers and supporting their operational needs affords us a major source of relatively stable, low-cost deposits.

We strive to achieve balanced growth of customers, pre-provision net revenue (“PPNR”), earnings per share (“EPS”), profitability, and shareholder returns. As depicted in the graphic below, we focus on four strategic growth areas: small businesses, commercial businesses, affluent customers, and capital markets.

To facilitate the achievement of our growth and profitability objectives, we invest in the following five key areas, referred to as “strategic enablers”:

•People and Empowerment — we invest in training our employees and providing them the tools and resources to build their capabilities, while promoting a diverse, inclusive, and equitable culture.

•Technology — we invest in technologies that will make us more efficient and enable us to remain competitive while helping to insulate us from the risks of bank-disrupting technology companies.

•Operational Excellence — we invest in and support ongoing improvements in how we safely and securely deliver value to our customers.

•Risk Management — we invest in enhanced risk management practices to ensure prudent risk-taking and appropriate oversight.

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•Data and Analytics — we invest in advanced enterprise data and analytics to support local execution and prudent decision making.

RESULTS OF OPERATIONS

Our Financial Performance

This section and other sections provide information about our recent financial performance. For information about our results of operations for 2021 compared with 2020, see the respective sections in MD&A included in our 2021 Form 10-K.

Our financial performance for 2022 relative to the prior year reflected:

•Strong net revenue growth, offset by increases in provision for credit losses and noninterest expense.

•Net interest income increased $312 million, or 14%, notwithstanding a $188 million decrease in interest income from U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans. The increase was primarily due to a higher interest rate environment and a favorable change in the composition of interest-earning assets.

•The net interest margin (“NIM”) was 3.06%, compared with 2.72%, reflecting higher yields on interest-earning assets and favorable funding costs associated with our noninterest-bearing deposits.

•Solid credit performance, as nonperforming assets decreased $123 million, or 45%, and classified loans decreased $307 million, or 25%. Net loan and lease charge-offs were $39 million, or 0.08% of average loans (ex-PPP) in 2022, compared with net charge-offs of $6 million, or 0.01% of average loans (ex-PPP), in 2021. Despite improvements in credit quality, the provision for credit losses was $122 million in 2022, compared with $(276) million in 2021, reflecting loan growth and deterioration in economic scenarios used for estimating future losses.

•A $39 million, or 7%, increase in customer-related noninterest income, primarily due to increases in commercial account fees, capital markets and foreign exchange fees, and card fees, partially offset by decreases in loan-related fees and retail and business banking fees. Decreases in noncustomer-related

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noninterest income were due largely to prior year securities gains in our Small Business Investment Company (“SBIC”) investment portfolio and gains on the sale of certain bank-owned facilities.

•An increase of $137 million, or 8%, in noninterest expense, primarily due to an increase in salaries and benefits expense, which was impacted by inflationary and competitive labor market pressures on wages and benefits, increased incentive compensation accruals arising from improvements in full-year profitability, and increased headcount.

•An increase of $1.4 billion, or 2%, in average interest-earning assets, driven by growth in average securities and average loans and leases (ex-PPP), largely offset by declines in average money market investments and PPP loans.

•Strong growth of $4.8 billion, or 9%, in total loans and leases, driven largely by increases in the commercial and industrial, consumer 1-4 family residential mortgage, commercial real estate term, and municipal loan portfolios.

•Total deposits decreased $11.1 billion, or 13%, primarily due to decreases in larger-balance and more rate-sensitive, nonoperating deposits. Our loan-to-deposit ratio was 78%, compared with 61% at the prior year- end, which continues to afford us flexibility in managing our funding costs.

The following schedule presents additional selected financial highlights. Prior period amounts have been reclassified to conform with the current period presentation, where applicable.

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Schedule 4

SELECTED FINANCIAL HIGHLIGHTS

1 See “Non-GAAP Financial Measures” on page 70 for more information.

2 The common dividend payout ratio is equal to common dividends paid divided by net earnings applicable to common shareholders.

3 This ratio is the common dividends paid plus share repurchases for the year, divided by net earnings applicable to common shareholders.

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Net Interest Income and Net Interest Margin

Net interest income is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities, and represented approximately 80% of our net revenue (net interest income plus noninterest income) for the year. The NIM is calculated as net interest income as a percent of interest-earning assets.

Schedule 5

NET INTEREST INCOME AND NET INTEREST MARGIN

1 Rates are calculated using amounts in thousands and a tax rate of 21% for the periods presented.

Net interest income increased $312 million, or 14%, in 2022, relative to the prior year, despite a $188 million decrease in interest income from PPP loans. The increase was driven largely by a higher interest rate environment and a favorable change in the composition of interest-earning assets.

Average interest-earning assets increased $1.4 billion, or 2%, primarily due to increases of $6.3 billion and $4.5 billion in average securities and average loans and leases (ex-PPP), respectively. These increases were largely offset by decreases of $5.5 billion and $3.8 billion in average money market investments and average PPP loans, respectively. Average securities increased to 30.4% of average interest-earning assets, compared with 23.3%.

The NIM was 3.06%, compared with 2.72%. The yield on average interest-earning assets was 3.28% in 2022, an increase of 49 basis points (“bps”), reflecting the higher interest rate environment and a change in the mix of interest-earning assets from money market investments to securities and loans. The yield on total loans increased 30 bps to 4.06%, and the yield on securities increased 39 bps to 2.06%. The yield on securities benefited from a decrease in the market value of available-for-sale (“AFS”) securities due to rising interest rates.

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Average loans and leases increased $0.6 billion, or 1%, to $52.6 billion. Excluding PPP loans, average loans and leases increased $4.5 billion, or 9%, to $51.9 billion, primarily in the commercial and industrial, consumer 1-4 family residential mortgage, commercial real estate term, and municipal loan portfolios.

During 2022 and 2021, PPP loans totaling approximately $1.5 billion and $6.5 billion, respectively, were forgiven by the SBA. PPP loans contributed $47 million and $235 million in interest income during the same time periods. The yield on PPP loans was 6.53% and 5.16% for the respective periods, and was positively impacted by accelerated amortization of deferred fees on paid off or forgiven PPP loans of $31 million and $138 million. At December 31, 2022 and 2021, the remaining unamortized net deferred fees on PPP loans totaled $2 million and $45 million, respectively.

Average deposits increased $2.2 billion, or 3%, during 2022, and period-end deposits decreased $11.1 billion, or 13%, compared with the prior year period. The average cost of deposits was 0.09% in 2022, compared with 0.04% in 2021. The rate paid on total deposits and interest-bearing liabilities was 0.23%, compared with 0.07%, reflecting the higher interest rate environment and increased short-term borrowings. Average noninterest-bearing deposits as a percentage of average deposits were 51%, up from 49% for the prior year. Our funding costs remained well controlled, reflecting the granularity of our deposit base and the extent of our noninterest-bearing deposits.

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Average AFS securities balances increased $4.8 billion, or 26%, to $23.2 billion in 2022, mainly due to an increase in our agency guaranteed mortgage-backed securities portfolio. During the fourth quarter of 2022, we transferred approximately $10.7 billion fair value ($13.1 billion amortized cost) of mortgage-backed AFS securities to the held-to-maturity (“HTM”) category to reflect our intent for these securities.

Average borrowed funds increased $1.5 billion, or 74%, to $3.5 billion in 2022, driven by increases in short-term borrowings as a result of significant loan growth and declines in total deposits. These increases were partially offset by a decrease in long-term debt, primarily due to the redemption and maturity of senior notes during 2022 and 2021.

For further discussion of the effects of market rates on net interest income and how we manage interest rate risk, refer to the “Interest Rate and Market Risk Management” section on page 13. For more information on how we manage liquidity risk, refer to the “Liquidity Risk Management” section on page 14.

The following schedule summarizes the average balances, the amount of interest earned or paid, and the applicable yields for interest-earning assets and the costs of interest-bearing liabilities.

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Schedule 6 - AVERAGE BALANCE SHEETS, YIELDS, AND RATES

1 Rates are calculated using amounts in thousands and a tax rate of 21% for the periods presented.

2 Net of unamortized purchase premiums, discounts, and deferred loan fees and costs. Loans include nonaccrual and restructured loans.

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The following schedule presents year-over-year changes in net interest income on a fully taxable-equivalent basis for the years indicated. For purposes of calculating the yields in this schedule, the average loan balances also include the principal amounts of nonaccrual and restructured loans. Interest payments received on nonaccrual loans are not recognized into interest income, but are applied as a reduction to the principal outstanding. In addition, interest on restructured loans is generally accrued at modified rates.

In the analysis of taxable-equivalent net interest income changes due to volume and rate, changes are allocated to volume with the following exceptions: when volume and rate both increase, the variance is allocated proportionately to both volume and rate; when the rate increases and volume decreases, the variance is allocated to rate.

Schedule 7

ANALYSIS OF TAXABLE-EQUIVALENT NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE

1 Taxable-equivalent rates used where applicable.

2 Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans.

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Provision for Credit Losses

The allowance for credit losses (“ACL”) is the combination of both the allowance for loan and lease losses (“ALLL”) and the reserve for unfunded lending commitments (“RULC”). The ALLL represents the estimated current expected credit losses related to the loan and lease portfolio as of the balance sheet date. The RULC represents the estimated reserve for current expected credit losses associated with off-balance sheet commitments. Changes in the ALLL and RULC, net of charge-offs and recoveries, are recorded as the provision for loan and lease losses and the provision for unfunded lending commitments, respectively, in the income statement. The ACL for debt securities is estimated separately from loans and is recorded in investment securities on the consolidated balance sheet.

The provision for credit losses, which is the combination of both the provision for loan and lease losses and the provision for unfunded lending commitments, was $122 million in 2022, compared with $(276) million in 2021. The ACL was $636 million at December 31, 2022, compared with $553 million at December 31, 2021. The increase in the ACL was primarily due to loan growth and deterioration in economic scenarios, partially offset by improvements in credit quality. The ratio of ACL to net loans and leases (ex-PPP) was 1.15% and 1.13% at December 31, 2022 and 2021, respectively. The provision for securities losses was less than $1 million during 2022 and 2021.

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The bar chart above illustrates the broad categories of change in the ACL from the prior year period. The second bar represents changes in economic scenarios and current economic conditions, which increased the ACL by $45 million from the prior year period.

The third bar represents changes in credit quality factors and includes risk-grade migration and specific reserves against loans, which, when combined, decreased the ACL by $6 million, indicating improvements in overall credit quality. Nonperforming assets decreased $123 million, or 45%, and classified loans decreased $307 million, or 25%. Net loan and lease charge-offs were $39 million, or 0.08% annualized of average loans (ex-PPP), in 2022, compared with $6 million, or 0.01% annualized of average loans (ex-PPP), in 2021.

The fourth bar represents loan portfolio changes, driven primarily by loan growth, as well as changes in portfolio mix, the aging of the portfolio, and other risk factors, all of which resulted in a $44 million increase in the ACL.

See Note 6 of the Notes to Consolidated Financial Statements for more information on how we determine the appropriate level of the ALLL and the RULC.

Noninterest Income

Noninterest income represents revenue we earn from products and services that generally have no associated interest rate or yield and is classified as either customer-related or noncustomer-related. Customer-related noninterest income excludes items such as securities gains and losses, dividends, insurance-related income, and mark-to-market adjustments on certain derivatives.

Total noninterest income decreased $71 million, or 10%, in 2022, relative to the prior year. Noninterest income accounted for 20% and 24% of net revenue during 2022 and 2021, respectively. The following schedule presents a comparison of the major components of noninterest income.

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Schedule 8

NONINTEREST INCOME

1 Wealth management fees for 2020 included certain retirement service-related fees of $3 million. Beginning in 2021, those fees, which totaled $4 million, were reported in other customer-related noninterest income.

Customer-related Noninterest Income

Customer-related noninterest income growth reflects our focus on our key corporate objectives. We continue to deepen existing relationships with our commercial, small business, and retail customers by providing high-quality treasury management products, capital market solutions, wealth management advisory services, and depository account services.

Total customer-related noninterest income increased $39 million, or 7%, in 2022, largely driven by improved customer transaction volume and activity during the year. Key drivers impacting customer-related revenue included:

•Commercial account fees increased $22 million or 16%, driven by increases in account analysis, treasury management, and merchant fees. Commercial account fees also benefited from a one-time adjustment of approximately $6 million during the first quarter of 2022.

•Capital markets and foreign exchange fees increased $13 million, or 19%, primarily due to improved customer swap, loan syndication, and foreign exchange activity.

•Card fees increased $9 million, or 9%, due to increased commercial and business bankcard interchange fees.

•Other customer-related fee income increased $6 million, or 11%, due to growth in corporate trust fees, reflecting new business growth.

•Wealth management fee income increased $5 million, or 10%, reflecting growth in assets and ongoing adoption of wealth and advisory services from our customer base. Our assets under management increased $1.2 billion, or 11%, to $12.2 billion at December 31, 2022, despite declines in market valuations.

•Loan-related fees decreased $15 million or 16%, in 2022, primarily due to an increased proportion of our 1-4 family residential mortgage production being retained versus sold. During 2022, we experienced a strong increase in demand for adjustable-rate mortgages, which we generally retain on our balance sheet.

•Retail and business banking fees decreased $1 million, primarily due to changes in our overdraft and non-sufficient funds practices, which were effected early in the third quarter of 2022. The impact of these changes on customer-related noninterest income is expected to be ongoing.

Noncustomer-related Noninterest Income

Total noncustomer-related noninterest income decreased $110 million in 2022. Net securities gains and losses decreased $86 million, due largely to net gains recorded during the prior year related to our SBIC investment

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portfolio. Dividends and other income declined $26 million, primarily due to a valuation loss recognized on one of our equity investments during the third quarter of 2022, as well as gains on the sale of certain bank-owned facilities during the prior year. These sales resulted from the consolidation of some of our technology and operations facilities in advance of occupying our new corporate technology center in July 2022.

Noninterest Expense

The following schedule presents a comparison of the major components of noninterest expense.

Schedule 9

NONINTEREST EXPENSE

Noninterest expense increased $137 million, or 8%, in 2022, relative to the prior year, primarily due to salaries and benefits expense, which represented the largest component of total noninterest expense during 2022 and 2021. The following schedule presents the major segments of salaries and employee benefits expense.

Schedule 10

SALARIES AND EMPLOYEE BENEFITS

Total salaries and benefits expense increased $108 million, or 10%, primarily due to the ongoing impact of inflationary and competitive labor market pressures on wages and benefits, increased incentive compensation accruals arising from improvements in full-year profitability, and increased headcount. We had 9,989 full-time equivalent employees at December 31, 2022, an increase of approximately 3% relative to the prior year.

Other noninterest expense increased $18 million, primarily due to a negative valuation adjustment in the prior year related to the termination of our defined benefit pension plan, as well as increased travel and various other expenses incurred during the current year. Deposit insurance and regulatory expense increased $16 million, driven largely by a higher FDIC insurance assessment resulting from changes in our balance sheet composition.

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Technology, telecom, and information processing expense increased $10 million, mainly due to increased software licensing and maintenance expense, reflecting our ongoing investments in strategic technology initiatives designed to improve our products and services and to simplify how we do business. Professional and legal services expense decreased $15 million, due to third-party assistance associated with PPP loan forgiveness and other technology-related and outsourced services utilized in the prior year.

The efficiency ratio was 58.8%, compared with 60.8%, as growth in net revenue significantly outpaced growth in noninterest expense. For information on non-GAAP financial measures, including differences between noninterest expense and adjusted noninterest expense, see page 70.

Technology Spend

As the banking industry continues to move toward information technology-based products and services, we recognize there are disparate ways of discussing expenditures associated with technology-related investments and operations. We generally describe these expenditures as total technology spend, which includes current period expenses reported on our consolidated statement of income, and capitalized investments, net of related amortization and depreciation, reported on our consolidated balance sheet. We believe these disclosures provide more relevant presentation and discussion regarding our technology-related investments and operations.

Total technology spend represents expenditures for technology systems and infrastructure and is reported as a combination of the following:

•Technology, telecom, and information processing expense — includes expenses related to application software licensing and maintenance, related amortization, telecommunications, and data processing;

•Other technology-related expenses — includes related noncapitalized salaries and employee benefits, occupancy and equipment, and professional and legal services; and

•Technology investments — includes capitalized technology infrastructure equipment, hardware, and purchased or internally developed software, less related amortization or depreciation.

The following schedule presents information related to our technology spend.

Schedule 11

TECHNOLOGY SPEND

Income Taxes

The following schedule summarizes the income tax expense and effective tax rates for the periods presented.

Schedule 12

INCOME TAXES

The effective tax rates for the periods presented above were decreased by nontaxable municipal interest income and nontaxable income from certain bank-owned life insurance (“BOLI”), and were increased by the nondeductibility of

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FDIC premiums, certain executive compensation, and other fringe benefits. The effective tax rate for 2020 was further reduced by the proportional increase in nontaxable items and tax credits relative to a lower pretax book income, compared with 2021 and 2022. Additionally, investments in technology initiatives, low-income housing, and municipal securities during 2022, 2021, and 2020, generated tax credits and nontaxable income that benefited the effective tax rate for each respective year.

We had a net deferred tax asset (“DTA”) of $1.1 billion at December 31, 2022, compared with $0.1 billion at December 31, 2021. The increase in the net DTA was driven largely by the increase in unrealized losses in accumulated other comprehensive income (“AOCI”) associated with investment securities and derivative instruments, the capitalization of certain expenses for tax purposes, and the provision for credit losses during 2022.

We had no valuation allowance at December 31, 2022. See Note 20 of the Notes to Consolidated Financial Statements for more information about the factors that impacted our effective tax rate, significant components of our DTAs and deferred tax liabilities (“DTLs”), including our assessment regarding valuation allowances, and unrecognized tax benefits for uncertain tax positions.

Preferred Stock Dividends

Preferred stock dividends totaled $29 million in 2022 and 2021, and $34 million in 2020. The decrease in preferred dividends was due to the redemption of the outstanding shares of our Series H preferred stock during the second quarter of 2021. See further details in Note 14 of the Notes to Consolidated Financial Statements.

Business Segment Results

We manage our operations through seven affiliate banks located in different geographic markets, each with its own local branding and management team. These affiliate banks comprise our primary business segments and include: Zions Bank, California Bank & Trust (“CB&T”), Amegy Bank (“Amegy”), National Bank of Arizona (“NBAZ”), Nevada State Bank (“NSB”), Vectra Bank Colorado (“Vectra”), and The Commerce Bank of Washington (“TCBW”). We emphasize local authority, responsibility, and pricing, with customization of certain products (as applicable) to maximize customer satisfaction and strengthen community relations. Our affiliate banks are supported by an enterprise operating segment (referred to as the “Other” segment) that provides governance and risk management, allocates capital, establishes strategic objectives, and includes centralized technology, back-office functions, and certain lines of business not operated through our affiliate banks.

We allocate the cost of centrally provided services to the business segments based upon estimated or actual usage of those services. We also allocate capital based on the risk-weighted assets held at each business segment. We use an internal funds transfer pricing (“FTP”) allocation process to report results of operations for business segments. This process is subject to change and refinement over time. Where applicable, prior period amounts have been revised to reflect the impact of these changes had they been instituted for the periods presented. For more performance information related to our business segments, including the Other segment, see Note 22 of the Notes to Consolidated Financial Statements.

The following schedule summarizes selected financial information of our business segments. Ratios are calculated based on amounts in thousands.

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Schedule 13

SELECTED SEGMENT INFORMATION

Zions Bank

Zions Bank is headquartered in Salt Lake City, Utah, and conducts operations in Utah, Idaho, and Wyoming. If it were a separately chartered bank, it would be the second largest full-service commercial bank in Utah and the sixth largest in Idaho, as measured by domestic deposits in these states.

Zions Bank’s income before income taxes increased $7 million, or 2%, during 2022. The increase was due to a $108 million increase in net interest income, partially offset by a $69 million increase in the provision for credit losses, a $31 million increase in noninterest expense, and a $1 million decrease in noninterest income. The loan portfolio

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increased $1.1 billion during 2022, including increases of $655 million, $369 million, and $68 million, in consumer, commercial, and CRE loans, respectively. The ratio of ACL to net loans and leases increased to 1.17% at December 31, 2022, compared with 1.08%. Nonperforming assets decreased $48 million, or 57%, from the prior year. Deposits decreased 19% in 2022.

California Bank & Trust

California Bank & Trust is headquartered in San Diego, California. If it were a separately chartered bank, it would be the 17th largest full-service commercial bank in California as measured by domestic deposits in the state.

CB&T’s income before income taxes decreased $91 million, or 22%, during 2022. The decrease was due to a $127 million increase in the provision for credit losses, and a $29 million increase in noninterest expense, partially offset by a $59 million increase in net interest income and a $6 million increase in noninterest income. The loan portfolio increased $937 million during 2022, including increases of $492 million, $361 million, and $84 million, in consumer, commercial, and CRE loans, respectively. The ratio of ACL to net loans and leases increased to 0.93% at December 31, 2022, compared with 0.70%. Nonperforming assets decreased $16 million, or 39%, from the prior year. Deposits decreased 10% in 2022.

Amegy Bank

Amegy Bank is headquartered in Houston, Texas. If it were a separately chartered bank, it would be the ninth largest full-service commercial bank in Texas as measured by domestic deposits in the state.

Amegy’s income before income taxes decreased $51 million, or 14%, during 2022. The decrease was due to a $101 million increase in the provision for credit losses, and an $18 million increase in noninterest expense, partially offset by a $51 million increase in net interest income and a $17 million increase in noninterest income. The loan portfolio increased $1.0 billion during 2022, including increases of $759 million and $322 million in commercial and consumer loans, respectively, and a decrease of $46 million in CRE loans. The ratio of ACL to net loans and leases decreased to 1.01% at December 31, 2022, compared with 1.05%. Nonperforming assets decreased $31 million, or 34%, from the prior year. Deposits decreased 14% in 2022.

National Bank of Arizona

National Bank of Arizona is headquartered in Phoenix, Arizona. If it were a separately chartered bank, it would be the fifth largest full-service commercial bank in Arizona as measured by domestic deposits in the state.

NBAZ’s income before income taxes decreased $15 million, or 12%, during 2022. The decrease was due to a $38 million increase in the provision for credit losses, and a $16 million increase in noninterest expense, partially offset by a $37 million increase in net interest income and a $2 million increase in noninterest income. The loan portfolio increased $484 million during 2022, including increases of $188 million, $170 million, and $126 million, in consumer, commercial, and CRE loans, respectively. The ratio of ACL to net loans and leases increased to 0.81% at December 31, 2022, compared with 0.79%. Nonperforming assets decreased $5 million, or 45%, from the prior year. Deposits decreased 8% in 2022.

Nevada State Bank

Nevada State Bank is headquartered in Las Vegas, Nevada. If it were a separately chartered bank, it would be the fifth largest full-service commercial bank in Nevada as measured by domestic deposits in the state.

NSB’s income before income taxes decreased $13 million, or 15%, during 2022. The decrease was due to a $39 million increase in the provision for credit losses, a $9 million increase in noninterest expense, and a $2 million decrease in noninterest income, partially offset by a $37 million increase in net interest income. The loan portfolio increased $467 million during 2022, including increases of $285 million, $93 million, and $89 million, in consumer, commercial, and CRE loans, respectively. The ratio of ACL to net loans and leases increased to 0.90% at December 31, 2022, compared with 0.86%. Nonperforming assets decreased $15 million, or 63%, from the prior year. Deposits decreased 5% in 2022.

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In July 2022, NSB purchased three Northern Nevada City National Bank branches and their associated deposit, credit card, and loan accounts. In addition to the three branches, the purchase included approximately $430 million in deposits and $95 million in commercial and consumer loans.

Vectra Bank Colorado

Vectra Bank Colorado is headquartered in Denver, Colorado. If it were a separately chartered bank, it would be the twelfth largest full-service commercial bank in Colorado as measured by domestic deposits in the state.

Vectra’s income before income taxes decreased $12 million, or 18%, during 2022. The decrease was due to a $21 million increase in the provision for credit losses, a $6 million increase in noninterest expense, and a $2 million decrease in noninterest income, partially offset by a $17 million increase in net interest income. The loan portfolio increased $533 million during 2022, including increases of $275 million, $131 million, and $127 million, in consumer, CRE, and commercial loans, respectively. The ratio of ACL to net loans and leases decreased to 0.99% at December 31, 2022, compared with 1.08%. Nonperforming assets decreased $4 million, or 22%, from the prior year. Deposits decreased 17% in 2022.

The Commerce Bank of Washington

The Commerce Bank of Washington is headquartered in Seattle, Washington, and operates in Washington under The Commerce Bank of Washington name and in Portland, Oregon, under The Commerce Bank of Oregon name. If it were a separately chartered bank, it would be the 22nd largest full-service commercial bank in Washington and the 35th largest in Oregon, as measured by domestic deposits in these states.

TCBW’s income before income taxes increased $4 million, or 10%, during 2022. The increase was due to a $10 million increase in net interest income, and a $1 million increase in noninterest income, partially offset by a $4 million increase in the provision for credit losses, and a $3 million increase in noninterest expense. The loan portfolio increased $153 million during 2022, including increases of $89 million and $83 million in CRE and commercial loans, respectively, partially offset by a decrease of $19 million in consumer loans. The ratio of ACL to net loans and leases increased to 0.55% at December 31, 2022, compared with 0.51%. Nonperforming assets decreased $1 million from the prior year. Deposits decreased 10% in 2022.

BALANCE SHEET ANALYSIS

Interest-earning Assets

Interest-earning assets are assets that have associated interest rates or yields, and generally consist of money market investments, securities, loans, and leases. We strive to maintain a high level of interest-earning assets relative to total assets. For more information regarding the average balances, associated revenue generated, and the respective yields of our interest-earning assets, see Schedule 6 on page 31.

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AVERAGE OUTSTANDING LOANS AND DEPOSITS

(at December 31)

Investment Securities Portfolio

We invest in securities to generate interest income and to actively manage liquidity and interest rate risk. Refer to the “Liquidity Risk Management” section on page 60 for additional information about how we manage our liquidity risk. See Note 3 and Note 5 of the Notes to Consolidated Financial Statements for more information on fair value measurements and the accounting for our investment securities portfolio. The following schedule presents the components of our investment securities portfolio.

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Schedule 14

INVESTMENT SECURITIES PORTFOLIO

1 During the fourth quarter of 2022, we transferred approximately $10.7 billion fair value ($13.1 billion amortized cost) of mortgage-backed AFS securities to the HTM category to reflect our intent for these securities. The amortized cost basis of these securities does not include $2.4 billion of unrealized losses in AOCI that is amortized over the life of the securities. The amortization of the unrealized losses reported in AOCI will offset the effect of the accretion of the discount in interest income that is created by adjusting the amortized cost basis to the securities' fair value on the date of the transfer.

The amortized cost of total HTM and AFS investment securities increased $21 million during 2022. Approximately 8% and 11% of the total HTM and AFS investment securities portfolio had a variable-rate at December 31, 2022 and December 31, 2021, respectively.

At December 31, 2022, the AFS investment securities portfolio included approximately $290 million of net premium that was distributed across various security types. Total taxable-equivalent premium amortization for these investment securities was $103 million in 2022, compared with $118 million in 2021.

In addition to HTM and AFS securities, we also have a Trading securities portfolio of $465 million and $372 million, at December 31, 2022 and December 31, 2021, respectively, which is comprised primarily of municipal securities and money market sweep transactions for customers. Refer to the “Capital Management” section on page 65 and Note 5 of the Notes to Consolidated Financial Statements for more discussion regarding our investment securities portfolio and related unrealized gains and losses.

Municipal Investments and Extensions of Credit

We support our communities by providing products and services to state and local governments (“municipalities”), including deposit services, loans, and investment banking services. We also invest in securities issued by municipalities. Our municipal lending products generally include loans in which the debt service is repaid from general funds or pledged revenues of the municipal entity, or to private commercial entities or 501(c)(3) not-for-profit entities utilizing a pass-through municipal entity to achieve favorable tax treatment.

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The following schedule summarizes our total investments and extensions of credit to municipalities:

Schedule 15

MUNICIPAL INVESTMENTS AND EXTENSIONS OF CREDIT

Our municipal loans and securities are primarily associated with municipalities located within our geographic footprint. The municipal loan and lease portfolio is primarily secured by general obligations of municipal entities. Other types of collateral also include real estate, revenue pledges, or equipment. At December 31, 2022, no municipal loans were on nonaccrual.

Municipal securities are internally graded, similar to loans, using risk-grading systems which vary based on the size and type of credit risk exposure. The internal risk grades assigned to our municipal securities follow our definitions of Pass, Special Mention, and Substandard, which are consistent with published definitions of regulatory risk classifications. At December 31, 2022, all municipal securities were graded as Pass. See Notes 5 and 6 of the Notes to Consolidated Financial Statements for additional information about the credit quality of these municipal loans and securities.

Loan and Lease Portfolio

We focus on serving and creating value for our customers and communities by helping them achieve their potential, optimize their daily operations, create economic opportunities for them, and grow their business. We do this by providing a wide range of lending products to commercial customers, generally small- and medium-sized businesses. We also provide various retail lending products and services to consumers and small businesses. The following schedule presents the composition of our loan and lease portfolio.

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Schedule 16

LOAN AND LEASE PORTFOLIO

Our loan and lease portfolio grew significantly during 2022. At December 31, 2022 and 2021, the ratio of loans and leases to total assets was 62% and 55%, respectively. The largest loan category was commercial and industrial loans, which constituted 29% and 27% of our total loan portfolio for the same time periods.

The loan and lease portfolio increased $4.8 billion, or 9%, to $55.7 billion at December 31, 2022. Excluding PPP loans, total loans and leases increased $6.5 billion, or 13%, to $55.5 billion. Loan growth was driven largely by increases of $2.3 billion in commercial and industrial loans, $1.2 billion in consumer 1-4 family residential mortgage loans, $0.8 billion in commercial real estate term loans, and $0.7 billion in municipal loans.

The following schedule presents the contractual maturity distribution of our loan and lease portfolio.

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Schedule 17

LOAN AND LEASE PORTFOLIO BY CONTRACTUAL MATURITY

Our loans and leases have predetermined (fixed) or variable interest rates. The following schedule presents the interest rate composition of our loan and lease portfolio with a contractual maturity date over one year. For more information on our interest rate risk management, see “Interest Rate Risk” on page 56.

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Schedule 18

LOAN AND LEASE PORTFOLIO WITH CONTRACTUAL MATURITIES OVER ONE YEAR BY INTEREST RATE TYPE

Other Noninterest-bearing Investments

Other noninterest-bearing investments are equity investments that are held primarily for capital appreciation, dividends, or for certain regulatory requirements. The following schedule summarizes our related investments:

Schedule 19

OTHER NONINTEREST-BEARING INVESTMENTS

Total other noninterest-bearing investments increased $279 million, or 33%, primarily due to a $283 million increase in FHLB stock. We are required to invest 4% of our FHLB borrowings in FHLB stock to maintain our borrowing capacity. The increase in FHLB stock was driven largely by increases in FHLB short-term borrowings during 2022 as a result of loan growth and declines in interest-bearing deposits.

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Premises, Equipment, and Software

Net premises, equipment, and software increased $89 million, or 7%, primarily due to capitalized costs related to the construction of a new corporate technology center in Midvale, Utah, which was completed in July 2022, and a new corporate center for Vectra in Denver, Colorado, which was completed in January 2023.

We are also in the final phase of a three-phase project to replace our core loan and deposit banking systems, and are on track to convert our deposit servicing system in 2023. Capitalized costs associated with the core system replacement project are generally amortized over ten years, and are summarized in the following schedule.

Schedule 20

CAPITALIZED COSTS ASSOCIATED WITH THE CORE SYSTEM REPLACEMENT PROJECT

Deposits

Deposits are our primary funding source. In recent years, we benefited from a significant influx of deposits, which was impacted by considerable fiscal and monetary policy decisions. Our strong liquidity position at the beginning of 2022 afforded us the ability to prioritize the quality of deposits over quantity. During 2022, with the withdrawal of stimulus by the federal government, our deposits declined to more normalized levels and remained above regulatory and internal Bank limits.

The following schedule presents our deposits by category and percentage of total deposits.

Schedule 21

DEPOSITS

Total deposits decreased $11.1 billion, or 13%, in 2022, primarily due to decreases in larger-balance and more rate-sensitive, nonoperating deposits. Interest-bearing deposits decreased $5.9 billion, or 14%, and noninterest-bearing deposits decreased $5.3 billion, or 13%. Total deposits included $0.9 billion and $0.4 billion of brokered deposits for the same time periods. Total deposits at December 31, 2022 also included approximately $347 million in deposits associated with the purchase of three Northern Nevada City National Bank branches by NSB in July 2022.

Our deposit costs remained well controlled, reflecting the granularity of our deposit base and the extent of our noninterest-bearing deposits. We continue to actively manage our deposit base and associated deposit costs in response to the rising interest rate environment. We expect our deposit costs to increase over the near term in view of increased competition for low-cost funding sources. Nevertheless, we expect our overall cost of funds to remain low relative to our peers. See Notes 12 and 13 of the Notes to Consolidated Financial Statements and “Liquidity Risk Management” on page 60 for additional information on funding and borrowed funds.

Total time deposits that exceed the current FDIC insurance limit of $250,000 totaled $527 million and $563 million at December 31, 2022 and December 31, 2021, respectively. The estimated total amount of uninsured deposits, including related interest accrued and unpaid, was $38 billion and $49 billion at December 31, 2022 and December 31, 2021, respectively.

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RISK MANAGEMENT

Risk management is an integral part of our operations and is a key determinant of our overall performance. We utilize the three lines of defense approach to risk management with responsibilities for each line of defense defined in our Risk Management Framework. The first line of defense represents units and functions throughout the Bank engaged in activities related to revenue generation, expense reduction, operational support, and technology services. These units and functions are accountable for owning and managing the risks associated with these activities. The second line of defense represents functions responsible for independently assessing and overseeing risk management activities. The third line of defense is our internal audit function that provides independent assessment of the effectiveness of the first and second lines of defense.

In support of management’s efforts, the Board has established certain committees to oversee our risk management processes. The Audit Committee oversees financial reporting risk, and the ROC oversees the other risk management processes. The ROC meets on a regular basis to monitor and review Enterprise Risk Management (“ERM”) activities. As required by its charter, the ROC provides oversight for various ERM activities and approves ERM policies and activities as detailed in the ROC charter.

We employ various strategies to reduce the risks to which our operations are exposed, including credit risk, market and interest rate risk, liquidity risk, strategic and business risk, operational risk, technology risk, cybersecurity risk, capital/financial reporting risk, legal/compliance risk (including regulatory risk), and reputational risk. These risks are overseen by various management committees of which the Enterprise Risk Management Committee is the focal point.

Credit Risk Management

Credit risk is the possibility of loss from the failure of a borrower, guarantor, or another obligor to fully perform under the terms of a credit-related contract. Credit risk arises primarily from our lending activities, as well as from off-balance sheet credit instruments. The Board, through the ROC, is responsible for approving the overall credit policies relating to the management of credit risk. The ROC also oversees and monitors adherence to key credit policies and the credit risk appetite as defined in the Risk Management Framework. The Board has delegated responsibility for managing credit risk and approving changes to credit policies to the Chief Credit Officer, who chairs the Credit Risk Committee.

Credit policies, credit risk management, and credit examination functions inform and support the oversight of credit risk. Our credit policies emphasize strong underwriting standards and early detection of potential problem credits in order to develop and implement action plans on a timely basis to mitigate potential losses. These formal credit policies and procedures provide us with a framework for consistent underwriting and a basis for sound credit decisions at the local banking affiliate level. Policies include standards for sensitivity and scenario analyses that assess the resilience of the borrower, including the borrower’s ability to service the loan in a rising interest rate environment.

Our credit policies and practices are also designed to help manage potential risks, including those arising from environmental issues. Environmental risk related to our lending practices is primarily covered in our environmental credit policy and by our environmental subject matter experts and management. The extent of environmental due diligence performed by our environmental risk team is based on the risks identified at each property and the loan amount. The extension of credit to certain borrowers, or those connected with certain activities, may be restricted or require escalated approval, by policy, because of various environmental risks.

Our credit risk management function is separate from the lending function and strengthens control over, and the independent evaluation of, credit activities. In addition, we have a well-defined set of standards for evaluating our loan portfolio, and we utilize a comprehensive loan risk-grading system to determine the risk potential in the portfolio.

The internal credit examination department, which is independent of the lending function, periodically conducts examinations of our lending departments and credit activities. These examinations are designed to review credit

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quality, adequacy of documentation, appropriate loan risk-grading administration, and compliance with credit policies. Credit examinations related to the ACL are reported to both the Audit Committee and the ROC.

Our overall credit risk management strategy includes diversification of our loan portfolio. Our business activity is conducted primarily within the geographic footprint of our banking affiliates. We strive to avoid the risk of undue concentrations of credit in any particular industry, collateral type, location, or with any individual customer or counterparty. We have adopted and adhere to concentration limits on certain commercial industries, including leveraged lending, municipal lending, oil and gas-related lending, and various types of CRE lending, particularly construction and land development lending. Concentration limits are regularly monitored and revised as necessary.

Government Agency Guaranteed Loans

We participate in various guaranteed lending programs sponsored by U.S. government agencies, such as the SBA, Federal Housing Authority, U.S. Department of Veterans Affairs, Export-Import Bank of the U.S., and the U.S. Department of Agriculture. At December 31, 2022, approximately $649 million of these loans were guaranteed, primarily by the SBA. The following schedule presents the composition of U.S. government agency guaranteed loans.

Schedule 22

U.S. GOVERNMENT AGENCY GUARANTEES

Commercial Lending

The following schedule provides information regarding lending exposures to certain industries in our commercial lending portfolio.

Schedule 23

COMMERCIAL LENDING BY INDUSTRY GROUP 1

1 Industry groups are determined by North American Industry Classification System (NAICS) codes.

2 Includes primarily utilities, power, and renewable energy.

3 At December 31, 2022, no other industry group individually exceeded 2.9%.

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Commercial Real Estate Loans

At December 31, 2022 and 2021, our CRE loan portfolio totaled $12.7 billion and $12.2 billion, representing approximately 23% and 24% of the total loan portfolio, respectively. The majority of our CRE loans are secured by real estate, which is primarily located within our geographic footprint.

At December 31, 2022, approximately 26% of the CRE loan portfolio matures in one year or less. Construction and land development loans generally mature in 18 to 36 months and contain full or partial recourse guarantee structures with one- to five-year extension options or roll-to-perm options that often result in term debt. Term CRE loans generally mature within a three- to seven-year period and consist of full, partial, and non-recourse guarantee structures. Typical term CRE loan structures include annually tested operating covenants that require loan rebalancing based on minimum debt service coverage, debt yield, or loan-to-value tests.

The following schedule provides information regarding lending exposures to certain collateral types in our commercial real estate lending portfolio.

Schedule 24

COMMERCIAL REAL ESTATE LENDING BY COLLATERAL TYPE

1 Included in the total amount of the “Other” category was approximately $301 million and $440 million of unsecured loans at December 31, 2022 and 2021, respectively.

Underwriting on commercial properties is primarily based on the economic viability of the project with significant consideration given to the creditworthiness and experience of the sponsor. We generally require that the owner’s equity be injected prior to any advances. Re-margining requirements (required equity infusions upon a decline in value or cash flow of the collateral) are often included in the loan agreement along with guarantees of the sponsor.

Within the residential construction and development sector, many of the requirements previously mentioned, such as creditworthiness and experience of the developer, up-front injection of the developer’s equity, principal curtailment requirements, and the viability of the project are also important in underwriting a residential development loan. Consideration is given to the expected market acceptance of the product, location, strength of the developer, and the ability of the developer to stay within budget. Progress inspections by qualified independent inspectors are routinely performed before disbursing loan funds. Advance rates will vary based on the collateral, viability of the project, and the creditworthiness of the sponsor, with exceptions granted on a case-by-case basis.

Real estate appraisals are performed in accordance with regulatory guidelines and are validated independently of the loan officer and the borrower, generally by our internal appraisal review team. In some cases, reports from automated valuation services are used or internal evaluations are performed. A new appraisal or evaluation is required when a loan deteriorates to a certain level of credit weakness.

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Loan agreements require regular financial information on the project and the sponsor in addition to lease schedules, rent rolls and, on construction projects, independent progress inspection reports. We monitor this financial information to ensure adherence to covenants set forth in the loan agreement.

The existence of a guarantee that improves the likelihood of repayment is taken into consideration when evaluating CRE loans for expected losses. If guarantor support is quantifiable and documented, it is considered in the potential cash flows and liquidity available for debt repayment. Our expected loss methodology also considers these sources of repayment. In general, we obtain and evaluate updated financial information for the guarantor as part of our determination to extend credit. The quality and frequency of financial reporting collected and analyzed varies depending on the contractual requirements for reporting, the size of the transaction, and the strength of the guarantor.

In the event of default, we pursue any and all available sources of repayment, including from collateral and guarantors. A number of factors are considered when deciding whether to pursue a guarantor, including, but not limited to, the value and liquidity of other sources of repayment (collateral), the financial strength and liquidity of the guarantor, possible statutory limitations, and the overall cost of pursuing a guarantee versus the amount we are likely to recover.

Consumer Loans

Residential Mortgages

We originate first-lien residential home mortgages considered to be of prime quality. We generally hold variable-rate loans in our portfolio and sell “conforming” fixed-rate loans to third parties, including Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, for which we make representations and warranties that the loans meet certain underwriting and collateral documentation standards.

Our 1-4 family residential mortgage loan portfolio increased $1.2 billion, or 20%, to $7.3 billion at December 31, 2022, primarily due to an increased demand for variable-rate mortgages, which we have retained as part of our overall interest rate risk management strategy.

Home Equity Credit Lines

We also originate home equity credit lines (“HECL”). At December 31, 2022 and 2021, the outstanding balance of our HECL portfolio totaled $3.4 billion and $3.0 billion, respectively. The following schedule presents the composition of our HECL portfolio by lien status.

Schedule 25

HECL PORTFOLIO BY LIEN STATUS

At December 31, 2022, loans representing less than 1% of the outstanding balance in the HECL portfolio were estimated to have combined loan-to-value (“CLTV”) ratios above 100%. An estimated CLTV ratio is the ratio of our loan plus any prior lien amounts divided by the estimated current collateral-value. At origination, underwriting standards for the HECL portfolio generally include a maximum 80% CLTV with high credit scores.

Approximately 91% of our HECL portfolio is still in the draw period, and about 18% of those loans are scheduled to begin amortizing within the next five years. We believe the risk of loss and borrower default in the event of a loan becoming fully amortizing and the effect of significant interest rate changes is minimal. The ratio of HECL net recoveries for the trailing twelve months to average balances at December 31, 2022 and 2021 was 0.03% and 0.01%, respectively. See Note 6 of the Notes to Consolidated Financial Statements for additional information on the credit quality of our 1-4 family residential mortgage portfolio and our HECL portfolio.

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Nonperforming Assets

Nonperforming assets include nonaccrual loans and other real estate owned (“OREO”) or foreclosed properties. Nonperforming assets as a percentage of loans and leases and OREO decreased to 0.27% at December 31, 2022, compared with 0.53% at December 31, 2021.

Total nonaccrual loans at December 31, 2022 decreased to $149 million from $271 million, reflecting strong credit quality improvements across most of our loan portfolios. The balance of nonaccrual loans can decrease due to paydowns, charge-offs, and the return of loans to accrual status under certain conditions. If a nonaccrual loan is refinanced or restructured, the new note is immediately placed on nonaccrual. If a restructured loan performs under the new terms for at least a period of six months, the loan can be considered for return to accrual status. See “Restructured Loans” and Note 6 of the Notes to Consolidated Financial Statements for more information on nonaccrual loans. The following schedule presents our nonperforming assets and accruing loans past due 90 days or more.

Schedule 26

NONPERFORMING ASSETS