Baker Boyer Bancorp : 2021 Baker Boyer Bancorp Annual Report

A Letter to our Shareholders

e Butterfly

Mark H. Kajita

I know, the title is a strange way to start a shareholder's letter but hear me out. I have always been fascinated by the butterfly that lays eggs, then out comes a caterpillar. Finally, after the caterpillar has lived for a number of weeks, it works earnestly to create a new home where it can focus on transforming itself into a butterfly. In order to create the new home, it takes a lot of patience, hard work and diligence. But once it has crafted its new home it is safe to focus on its transformation. It doesn't end there though. When the butterfly emerges, it quickly lays its eggs to start a new transformation: generation after generation.

Like the caterpillar and butterfly, Baker Boyer has constantly gone through transformations throughout its 152 years and generations of Baker family leadership. It began with Dr. Dorsey Baker, who started Baker Boyer for a very different reason than most other entrepreneurs focus on.

In 1869, the brief Idaho gold and silver rush had started to run dry. Dr. Baker was still running his mercantile store but understood that sooner or later the throngs of miners would come to an end. He had owned a mercantile in California during the 1849 gold rush prior to moving to Walla Walla. He understood that a community could quickly disintegrate without the proper business, charitable, and educational infrastructure to sustain it after the rush had subsided. After living in Missouri, Portland, Oregon, and California, he had grown to love the Walla Walla Valley and wanted to create a permanent community. One that wouldn't be erased after the fever of a rush had vanished.

Walla Walla had become the territorial capital of Washington and, in fact, his son-in-law, Miles C. Moore, would become the last territorial governor of Washington prior to its admittance into the Union. As the miners subsided, Dr. Baker remembered the need for a strong business community to continue. e area needed financial backing to strengthen the entrepreneurial spirit of the area. us, Baker Boyer was born. Baker Boyer filled a void that the community needed. e mercantile, which had the only safe in the territory, became a financial institution. He filled the need that would make the community prosper, trusting that if it prospered, he would prosper as well. And thus, our journey began in 1869.

Dr. Baker and then his brother-in-law John Boyer were Presidents of Baker Boyer. Once Washington had become a State and was admitted into the Union in 1889, Baker Boyer once again transformed to become a National Bank so that it could provide support for the entire Walla Walla Valley as it spanned into Oregon's Umatilla County.

But it wasn't enough to just bank the community. Baker Boyer had to think forward to the future even as it matured and prospered. e economy needed to evolve, diversify, and prepare for great transformational events. e Walla Walla Valley would need the support of financing and civic leadership to not only survive but thrive.

roughout the generations of Baker Family members, Baker Boyer continued to look out for our communities. Its focus on providing

Similar to the butterfly, Baker Boyer has always transformed into what our communities need us to become. e community expects a forward-thinking company that helps lead it through change on an exciting, albeit

sometimes scary, path forward.

educational opportunities came through the donation of land to Whitman Seminary, which became Whitman College, and donating to the future Walla Walla University. Baker Boyer developed tourism through taking leadership positions, from establishing the Whitman Hotel to being a pioneer in financing the burgeoning wine industry of Eastern Washington and Oregon. We have taken ecological leadership by understanding both the natural beauty and fragility of the Walla Walla Valley river systems, as well as the risk it poses to all those who live in the Valley. at includes Baker Boyer taking leadership roles in both the Watershed Alliance and the effort to strengthen and rebuild the Mill Creek Channel, which protects from flood damage every citizen south of Mill Creek.

As we continued to accept civic, financial, and charitable leadership in the Walla Walla Valley, we have also expanded our presence and dedication to communities in Yakima and the Tri-Cities. With that continues a dedication to our enduring ethos of, "If we can help make a community prosper, we will prosper."

roughout the current pandemic, we have invested in our communities' most financially vulnerable and our own local hometown heroes (our medical community). If you would like to see where our charitable investments in our communities went, please see our 2020 and 2021 Annual Reports of Giving located at bakerboyer. com/communityimpact. Baker Boyer has also helped provide financial support to our local entrepreneurs through the extension of Payroll Protection Programs (PPP) that took place in both 2020 and 2021. We also provided additional loan modifications to our entrepreneurs who needed our support during one of the most difficult financial disruptions in history.

Although we hope that we are nearing the end of this historic pandemic, we remain vigilant in nurturing the financial health of the communities we serve, as well as protecting those most at risk: the homeless and those who have seen a severe toll from the pandemic. Like the caterpillar, we have spun a cocoon of protection around our communities to keep them safe throughout the next phase we must now commence - that of transformation for the future.

Like the butterfly, Baker Boyer has always transformed into what our communities need us to become. e community expects a forward-thinking company who helps lead it through change as well as one who will evolve with it towards what might become a scarier albeit exciting path forward. We are at one of those critical points in time once again.

As we have witnessed during the Industrial Revolution of the late 19th century, the coming change to society will be both threatening for some and an enormous leap forward in efficiency and convenience for others. I speak of the coming age of Artificial Intelligence (AI) and robotics. A time where we leap past the mere conveniences of accident avoiding cars, industrial robots, and digital computing, to an era that marries AI, robotics, and quantum computing. It is not a stretch to believe that the next 15 years we will witness new technology that will make the science fiction we grew up with seem quaint and outdated. In fact, many of the technologies are not only here, but some of them are quite well-developed.

ere are some distinct advantages to an increasingly digital future for both our future clients as well as our shareholders. Many of the transaction-based interactions with our clients can be automated, and studies show that many clients of the next generation prefer technology driven transactions to those performed by people. is has already begun with the trend accelerating through the pandemic. at should help continue to dramatically lower the cost structure of providing simple transactions to our clients. ere is another advantage. At the same time, people also need human interaction to assist them with the emotional hurdles they experience when making major financial decisions. In other words, they want someone to talk to, when they are worried about the outcome of a decision. Baker Boyer will need to evolve to provide the technology preferred by some clients while providing the traditional and continually improving Baker Boyer experience of empowerment to others.

Baker Boyer has been preparing for this AI revolution for the better part of a decade. It has undergone a redeployment of resources (both dollars and labor), toward a revamp of our entire Information Technology (IT) Department. We have focused on building out our infrastructure, designing unique solutions to deploy the Baker Boyer experience and training of our own employees. is has been a massive undertaking that we catapulted even further in 2019 through the direction of our Chief Technology Officer, Kain Evans.

Baker Boyer also saw the threat to communities that might lose their trusted advisors to the algorithm driven approach of AI. We have proven over the last decade that clients value the sense of empowerment our advisors give them and also to the community: and our shareholders can profit from this approach. us, we have greatly expanded our advisory services over the decade. We have expanded the unique services of our Family Advisors, who aim to help understand the emotional issues at the heart of any financial decision.

e Baker Boyer experience of empowerment is realized as we assist our clients through those emotional pain points and deploy the best financial solutions for their specific situation.

Our community will also need someone to spearhead the innovations that we will need to deploy in the upcoming years. is includes an evaluation of what will add to our customer experience and what technology isn't right for our unique service. In 2022, we have added a new position to our Executive Committee, Chief Innovation Officer. Brian Bruggeman, who leads our financial planning group, has been promoted to this new and exciting position.

Finally, every strong community will need a strong entrepreneur base. But, as the technological, legal, and business environments evolve rapidly, entrepreneurs will need a "leg up," to give them the best chance of future success. Baker Boyer is looking at ways to assist our local entrepreneurs during this AI revolution. We are designing education programs as well as exploring new spaces and access to technology for those who will need them to be successful.

All of these projects take resources. A big part of our ongoing strategic planning involves consideration for where to deploy resources and from where resources may need to be diverted in-order-to successfully prepare for the future. After a burst pipe caused extensive damage and flooding to our Milton-Freewater Branch in early 2022, we have had to make the difficult decision to close the branch permanently. is was in part due to the evolution of banking we have already seen. Milton-Freewater residents were shopping and banking in Walla Walla. All Oregon commercial loans were being advised through business advisors at our Downtown Walla Walla Branch. In addition, through the Pandemic we have seen our digital and mobile banking platforms gain in popularity, lessening the need for the expensive infrastructure of a brick-and-mortar branch in the area. e resources that would have been deployed to our Milton-Freewater Branch will be redirected towards preparing all of our communities for the digital and AI revolution.

roughout the pandemic and our evolution, Baker Boyer continues to be strong and shows a healthy profit. In 2021, the net income of the Bank was $5.4 million. Baker Boyer has seen overall growth in 2021 average assets of 12%. Baker Boyer Asset Management has also seen a new high of $1.7 billion of assets under management. is is an enviable position for any financial institution to be in during a pandemic, and we will utilize this momentum towards preparing the Bank for our future.

Baker Boyer is excited about the future and our place in it. Your Executive Committee and the employees are geared up to make our transformation successful and profitable for our shareholders.

So back to the beginning. Like the butterfly, we are constantly evolving to adapt to the needs of our communities. ose same communities we are dependent on to be continually profitable in the future. Over the last five years, and especially during the pandemic, we have protected ourselves by preparing a strong cocoon around our communities to help them not only survive but to thrive. We have also put into place the pieces we will need to once again transform for the future. We are starting the process of transformation once again with one eye on the future: both to the risks and the opportunities we see. e other eye is on the past and the values that have led us to be so successful through numerous transformations of the past. Service to community, service to clients, service to employees and service to shareholders is not just a mantra but a way of life for Baker Boyer. We honor that and want to extend these values through our transformation into the future.

Mark H. Kajita President & CEO