What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-02-23 · 444 added, 451 removed, 821 unchanged (52% of the section changed)

3 unchanged sentences

Executive Overview

Banner Corporation’s successful execution of its super community bank model and strategic initiatives has delivered solid core operating results and profitability.

Highlights of this success have included solid asset quality, client acquisition and account growth, which have resulted in increased core deposit balances and strong revenue generation while maintaining the Company’s moderate risk profile.

Banner Corporation’s successful execution of its Super Community bank model and strategic initiatives have delivered solid core operating results and profitability over the last several years.

Banner’s longer term strategic initiatives continue to focus on originating high quality assets, new client acquisition and deepening existing client relationships which we believe will continue to generate strong revenue while maintaining the Company’s moderate risk profile.

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

Current year results were impacted by an increase in the provision for credit losses as a result of the COVID-19 pandemic, lower yields on earnings assets, decreased deposit fees and other service charges and increased non-interest expense these were partially offset by increased income from mortgage banking operations, growth in core deposit balances and decreased funding costs.

The decreases in the yields on interest earning assets compared to a year ago were driven by the low interest rate environment, which continues to put downward pressure on loan yields, as well as the impact of the low loan yields from the PPP loan portfolio.

The increase in the provision for credit losses for the current quarter compared to the same quarter a year ago primarily reflected expected lifetime credit losses due to the COVID-19 pandemic based upon the financial conditions and economic outlook that existed as of December 31, 2020.

Our results for the years ended December 31, 2020, 2019, and 2018 were also impacted by $2.1 million, $7.5 million, and $5.6 million of merger and acquisition-related expenses, respectively.

Our financial results for the year ended December 31, 2020 reflect the impact of the COVID-19 pandemic, which resulted in a substantial reduction in business activity or the closing of businesses in all of the states in which we operate.

We are continuing to offer payment and financial relief programs for borrowers impacted by COVID-19.

These programs include initial loan payment deferrals or interest-only payments for up to 90 days, waived late fees, and, on a more limited basis, waived interest and temporarily suspended foreclosure proceedings.

Deferred loans are re-evaluated at the end of the initial deferral period and will either return to the original loan terms or may be eligible for an additional deferral period for up to 90 days.

In addition, We have entered into payment forbearance agreements with other clients for periods of up to six months.

At December 31, 2020, we had 158 loans totaling $75.4 million still on deferral.

Of the loans still on deferral, 26 loans totaling $33.9 million have received a second deferral.

Since these loans were performing loans that were current on their payments prior to the COVID-19 pandemic, these modifications are not considered to be troubled debt restructurings at December 31, 2020 pursuant to applicable accounting and regulatory guidance.

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

The deadline for PPP loan applications to the SBA was August 8, 2020.

Under this program we funded 9,103 applications totaling $1.15 billion of loans in its service area and began processing applications for loan forgiveness in the fourth quarter of 2020.

As of December 31, 2020, we had received SBA forgiveness on 595 PPP loans totaling $112.3 million resulting in a remaining PPP loan balance of $1.04 billion.

The CAA renewed and extended the PPP until March 31, 2021 by authorizing an additional $284.5 billion for the program.

As a result, in January 2021, Banner Bank began accepting and processing loan applications under this second PPP program.

Banner Bank has begun taking steps to resume more normal branch activities with specific guidelines in place to help safeguard the safety of its clients and personnel.

To further the well-being of staff and clients, we implemented measures to allow employees to work from home to the extent practicable.

To facilitate this approach, we allocated additional computer equipment to staff and enhanced our network capabilities with several upgrades.

These expenses, plus other expenses incurred in response to the COVID-19 pandemic, resulted in $3.5 million of related costs during the year ended December 31, 2020.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Banner Forward is focused on accelerating growth in commercial banking, deepening relationships with retail clients, and advancing technology strategies to enhance our digital service channels, while streamlining underwriting and back office processes.

We incurred expenses of $11.6 million related to Banner Forward during the year ended December 31, 2021.

Our operating results depend primarily on our net interest income, which is the difference between interest income on interest-earning assets, consisting primarily of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of client deposits, FHLB advances, other borrowings, subordinated notes, and junior subordinated debentures.

Net interest income is primarily a function of our interest rate spread, which is the difference between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, as well as a function of the average balances of interest-earning assets, interest-bearing liabilities and non-interest-bearing funding sources including non-interest-bearing deposits.

Our net interest income before provision for credit losses increased 3% to $481.3 million for the year ended December 31, 2020, compared to $468.9 million for the prior year.

This increase in net interest income is a result of growth in total loans receivable and core deposits as well as decreased funding costs, partially offset by lower yields on interest-earning assets.

The growth in total loans receivable and core deposits was largely as the result of the origination of PPP loans during the second and third quarter of 2020.

During the year ended December 31, 2020, our interest spread decreased to 3.84% from 4.32% for the prior year while our net interest margin on a tax equivalent basis decreased to 3.85% compared to 4.35% for the prior year.

Our net interest income increased 3% to $496.9 million for the year ended December 31, 2021, compared to $481.3 million for the prior year.

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

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

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

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

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

The Federal Reserve reduced the targeted Fed Funds Rate by 75 basis points during the second half of 2019 and an additional 150 basis points during first quarter of 2020 to a range of 0.00% to 0.25% at December 31, 2020.

Our net interest margin was enhanced seven basis points in both 2020 and 2019 by acquisition

accounting adjustments, primarily the amortization of acquisition accounting discounts on purchased loans obtained from acquisitions, which are accreted into loan interest income.

We recorded a $64.3 million provision for credit losses - loans in the year ended December 31, 2020, primarily reflecting the expected lifetime credit losses due to the COVID-19 pandemic based upon the financial conditions and economic outlook that existed as of December 31, 2020, compared to an $10.0 million provision recorded in 2019 and a $8.5 million provision in 2018.

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

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

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

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

Our allowance for credit losses - loans at December 31, 2020 was $167.3 million, representing 470% of non-performing loans compared to $100.6 million, or 254% of non-performing loans at for the prior year.

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

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

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

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

Our net income is also affected by the level of our non-interest income, including deposit fees and other service charges, results of mortgage banking operations, which includes gains and losses on the sale of loans and servicing fees, gains and losses on the sale of securities, as well as our non-interest expenses and provisions for loan losses and income taxes.

In addition, our net income is affected by the net change in the value of certain financial instruments carried at fair value.

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

The increase from the prior year primarily reflects increased income from mortgage banking operations partially offset by decreased deposit fees and other service charges.

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

In comparison, for the year ended December 31, 2019, we recorded a net loss of $208,000 for fair value adjustments and $33,000 in net gains on the sale of securities.

Our total revenues (net interest income before the provision for credit losses plus total non-interest income) for the year ended December 31, 2020 increased $29.1 million, or 5%, to $579.9 million, compared to $550.9 million for the same period a year earlier, largely as a result of increases in both net interest income and non-interest income.

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

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

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

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

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

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

The increase was largely the result of the higher salary and employee benefits due to additional staffing related to the operations acquired from the acquisition of AltaPacific on November 1, 2019 and normal salary and wage adjustments, as well as increases in deposit insurance expenses and COVID-19 expenses.

In addition the provision for credit losses - unfunded loan commitments was $3.6 million for the year ended December 31, 2020, compared to none for the year ended December 31, 2019.

These increases were partially offset by increased capitalized loan origination costs and lower travel related expenses.

The increase was largely the result of increases in payment and card processing services expense and professional services expense, primarily due to an increase in consulting expenses related to the Banner Forward initiative, as well as a $2.3 million loss on extinguishment of debt as a result of the redemption of $8.2 million of junior subordinated debentures during the current year.

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

Selected Financial Data:

The following condensed consolidated statements of financial condition and operations and selected performance ratios as of December 31, 2021, 2020, and 2019 and for the years then ended have been derived from our audited consolidated financial statements.

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

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

FINANCIAL CONDITION DATA:

(In thousands) 2021 2020 2019

Total assets $ 16,804,872 $ 15,031,623 $ 12,604,031

Cash and securities (1)

6,321,196 4,003,469 2,121,022

Loans receivable, net 8,952,664 9,703,703 9,204,798

Deposits 14,326,933 12,567,296 10,048,641

Borrowings 434,305 451,759 687,778

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

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

Shares outstanding 34,253 35,159 35,752

OPERATING DATA:

For the Year Ended December 31

(In thousands) 2021 2020 2019

Interest income $ 520,500 $ 519,146 $ 525,687

Interest expense 23,609 37,845 56,768

Net interest income 496,891 481,301 468,919

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

Net interest income after provision for credit losses

530,279 413,426 458,919

Deposit fees and other service charges 39,495 34,384 46,632

Mortgage banking operations revenue 33,948 51,083 22,215

Net change in valuation of financial instruments carried at fair value

4,616 (656) (208)

All other non-interest income 18,357 13,805 13,302

Total non-interest income

96,416 98,616 81,941

Salary and employee benefits 244,351 245,400 226,409

All other non-interest expenses 135,750 124,189 131,319

Total non-interest expense

380,101 369,589 357,728

Income before provision for income tax expense

246,594 142,453 183,132

Provision for income tax expense 45,546 26,525 36,854

Net income $ 201,048 $ 115,928 $ 146,278

PER COMMON SHARE DATA:

At or For the Years Ended December 31

2021 2020 2019

Basic $ 5.81 $ 3.29 $ 4.20

Diluted 5.76 3.26 4.18

Common shareholders’ equity per share (2)

49.35 47.39 44.59

Common shareholders’ tangible equity per share (2)(9)

38.02 36.17 33.33

Cash dividends 1.64 1.23 2.64

Dividend payout ratio (basic) 28.23 % 37.39 % 62.86 %

Dividend payout ratio (diluted) 28.47 % 37.73 % 63.16 %

As of December 31

2021 2020 2019

Full time equivalent employees 1,891 2,061 2,198

Number of branches 150 155 178

KEY FINANCIAL RATIOS:

At or For the Years Ended December 31

2021 2020 2019

Performance Ratios:

Return on average assets (3)

1.24 % 0.83 % 1.22 %

Return on average common equity (4)

12.12 7.14 9.50

Average common equity to average assets 10.26 11.63 12.85

Net interest margin (tax equivalent) (5)

3.39 3.85 4.35

Non-interest income to average assets 0.60 0.71 0.68

Non-interest expense to average assets 2.35 2.65 2.98

Efficiency ratio (6)

64.06 63.73 64.94

Average interest-earning assets to funding liabilities

104.18 104.61 106.09

Loans to deposits ratio 64.08 80.48 94.70

Selected Financial Ratios:

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

1.45 1.69 1.08

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

Non-performing assets as a percent of total assets 0.14 0.24 0.32

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

578.47 469.70 253.95

Common shareholders’ tangible equity to tangible assets (9)

7.93 8.69 9.77

Consolidated Capital Ratios:

Total capital to risk-weighted assets 14.71 14.73 12.93

Tier 1 capital to risk-weighted assets 12.74 12.56 11.97

Tier 1 capital to average leverage assets 8.76 9.50 10.71

Common equity tier I capital to risk-weighted assets 11.54 11.25 10.63

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

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

(3) Net income divided by average assets.

(4) Net income divided by average common equity.

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

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

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

(8) Non-performing loans consist of nonaccrual and 90 days past due loans still accruing interest.

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

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

We calculate tangible assets by excluding the balance of goodwill and other intangible assets from total assets.

We believe that this is consistent with the treatment by our bank regulatory agencies, which exclude goodwill and other intangible assets from the calculation of risk-based capital ratios.

Management believes that these non-GAAP financial measures provide information to investors that is useful in understanding the basis of our capital position.

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

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

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

*Non-GAAP financial measures:

Net income, revenues and other earnings and expense information excluding fair value adjustments, gains or losses on the sale of securities, merger and acquisition-related expenses, FHLB prepayment penalties, COVID-19 expenses, amortization of CDI, REO operations, provision credit losses - unfunded loan commitments, state/municipal business and use tax and the related tax benefit, are non-GAAP financial measures.

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

Management has presented these and other non-GAAP financial measures in this discussion and analysis because it believes that they provide useful and comparative information to assess trends in our core operations and to facilitate the comparison of our performance with the performance of our peers.

8 unchanged sentences

ADJUSTED REVENUE:

Net interest income before provision for loan losses (GAAP) $ 481,301 $ 468,919 $ 430,988

Net interest income (GAAP) $ 496,891 $ 481,301 $ 468,919

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

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

Exclude net (gain) loss on sale of securities (1,012) (33) 837

Exclude change in valuation of financial instruments carried at fair value 656 208 (3,775)

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

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

Adjusted Revenue (non-GAAP)

2 unchanged sentences

Net income (GAAP) $ 201,048 $ 115,928 $ 146,278

Exclude net (gain) loss on sale of securities (1,012) (33) 837

Exclude change in valuation of financial instruments carried at fair value 656 208 (3,775)

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

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

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

Exclude FHLB prepayment penalties — 735 —

Exclude COVID-19 expenses 436 3,502 —

Exclude Banner Forward expenses 11,604 — —

Exclude loss on extinguishment of debt 2,284 — 735

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

Exclude tax adjustments related to tax reform and valuation reserves

Total adjusted earnings (non-GAAP)

9 unchanged sentences

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

Exclude Banner Forward expenses (11,604) — —

Exclude CDI amortization

3 unchanged sentences

Exclude REO operations

190 (303) (804)

Exclude FHLB prepayment penalties

Exclude provision for credit losses - unfunded loan commitments (3,559) — —

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

Adjusted non-interest expense (non-GAAP) $ 354,225 $ 352,128 $ 337,115

2 unchanged sentences

Total revenue 593,307 579,917 550,860

Exclude net (gain) loss on sale of securities

(1,012) (33) 837

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

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

21 unchanged sentences

Common shareholders’ equity (book value) per share (GAAP) $ 49.35 $ 47.39 $ 44.59

Tangible common shareholders’ equity (tangible book value) per share (non-GAAP) $ 36.17 $ 33.33 $ 31.45

Common shareholders’ tangible equity (tangible book value) per share (non-GAAP) $ 38.02 $ 36.17 $ 33.33

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.

Critical Accounting Policies

Summary of Critical Accounting Policies and Estimates

In the opinion of management, the accompanying Consolidated Statements of Financial Condition and related Consolidated Statements of Operations, Comprehensive Income, Changes in Shareholders’ Equity and Cash Flows reflect all adjustments (which include reclassification and normal recurring adjustments) that are necessary for a fair presentation in conformity with GAAP.

1 unchanged sentence

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments.

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

These policies relate to (i) the methodology for the recognition of interest income, (ii) determination of the provision and allowance for credit losses, (iii) the valuation of financial assets and liabilities recorded at fair value, (iv) the valuation of intangibles, such as goodwill, core deposit intangibles and mortgage servicing rights, (v) the valuation of real estate held for sale, (vi) the valuation of assets and liabilities acquired in business combinations and subsequent recognition of related income and expense, and (vii) the valuation of or recognition of deferred tax assets and liabilities.

These policies and judgments, estimates and assumptions are described in greater detail below.

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

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

1 unchanged sentence

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

There have been no significant changes in our application of accounting policies since December 31, 2019 except for the change related to the adoption of Financial Instruments - Credit Losses (ASC 326) as described below and in Notes 1 and 2 to the Consolidated Financial Statements.

For additional information concerning critical accounting policies, see Notes 1, 3, 5, 12, 16 and 17 of the Notes to the Consolidated Financial Statements and the following:

Interest Income:

(Notes 4 and 5) Interest on loans and securities is accrued as earned unless management doubts the collectability of the asset or the unpaid interest.

Interest accruals on loans are generally discontinued when loans become 90 days past due for payment of interest and the loans are then placed on nonaccrual status.

All previously accrued but uncollected interest is deducted from interest income upon transfer to nonaccrual status.

For any future payments collected, interest income is recognized only upon management’s assessment that there is a strong likelihood that the full amount of a loan will be repaid or recovered.

Management’s assessment of the likelihood of full repayment involves judgment including determining the fair value of the underlying collateral which can be impacted by the economic environment.

A loan may be put on nonaccrual status sooner than this policy would dictate if, in management’s judgment, the amounts owed, principal or interest, may be uncollectable.

While less common, similar interest reversal and nonaccrual treatment is applied to investment securities if their ultimate collectability becomes questionable.

Loans modified due to the COVID-19 pandemic are considered current if they are less than 30 days past due on the contractual payments at the time the loan modification program was put in place and therefore continue to accrue interest unless the interest is being waived.

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

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

Provision and Allowance for Credit Losses - Loans:

9 unchanged sentences

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans.

The Banks have elected to exclude accrued interest receivable from the amortized cost basis in their estimate of the allowance for credit losses.

The Bank has elected to exclude accrued interest receivable from the amortized cost basis in their estimate of the allowance for credit losses.

The provision for credit losses reflects the amount required to maintain the allowance for credit losses at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves.

1 unchanged sentence

The methodologies are set forth in a formal policy and take into consideration the need for a valuation allowance for loans evaluated on a collective (pool) basis which have similar risk characteristics as well as allowances that are tied to individual loans that do not share risk characteristics.

The Company increases its allowance for credit losses by charging provisions for credit losses on its consolidated statement of operations.

Losses related to specific assets are applied as a reduction of the carrying value of the assets and charged against the allowance for credit loss reserve when management believes the uncollectibility of a loan balance is confirmed.

Recoveries on previously charged off loans are credited to the allowance for credit losses.

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 loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio.

Management estimates the allowance for credit losses - loans using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

The allowance for credit losses - loans is maintained at a level sufficient to provide for expected credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio.

These factors include, among others, changes in the size and composition of the loan portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic conditions.

The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist.

In estimating the component of the allowance for credit losses for loans that share common risk characteristics, loans are pooled based on loan type and areas of risk

concentration.

For loans evaluated collectively, the allowance for credit losses is calculated using life of loan historical losses adjusted for economic forecasts and current conditions.

The allowance for credit losses - loans is measured on a collective (pool) basis when similar risk characteristics exist.

In estimating the component of the allowance for credit losses for loans that share common risk characteristics, loans are pooled based on loan type and areas of risk concentration.

For loans evaluated collectively, the allowance for credit losses - loans is calculated using life of loan historical losses adjusted for economic forecasts and current conditions.

For commercial real estate, multifamily real estate, construction and land, commercial business and agricultural loans with risk rating segmentation, historical credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and risk rating.

For one- to four- family residential loans, historical credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and delinquency status.

For one- to four- family residential loans, consumer loans, home equity lines of credit, small business loans, and small balance commercial real estate loans, historical credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and delinquency status.

These models calculate an expected life-of-loan loss percentage for each loan category by calculating the probability of default, based on the migration of loans from performing to loss by risk rating or delinquency categories using historical life-of-loan analysis and the severity of loss, based on the aggregate net lifetime losses incurred for each loan pool.

For commercial real estate, commercial business, and consumer loans without risk rating segmentation, historical credit loss assumptions are estimated using a model that calculates an expected life-of-loan loss percentage for each loan category by considering the historical cumulative losses based on the aggregate net lifetime losses incurred for each loan pool.

For credit cards, historical credit loss assumptions are estimated using a model that calculates an expected life-of-loan loss percentage for each loan category by considering the historical cumulative losses based on the aggregate net lifetime losses incurred for each loan pool.

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

1 unchanged sentence

These economic indicators are selected based on correlation to the Company’s historical credit loss experience and are evaluated for each loan category.

The economic indicators evaluated include unemployment, gross domestic product, real estate price indices and growth, yield curve spreads, treasury yields, the corporate yield, the market volatility index, the Dow Jones index, the consumer confidence index, and the prime rate.

Management considers various economic scenarios and forecasts when evaluating the economic indicators and probability weights the various scenarios to arrive at the forecast that most reflects management’s expectations of future conditions.

The allowance for credit losses is then adjusted for the period in which those forecasts are considered to be reasonable and supportable.

The economic indicators evaluated include the unemployment rate, gross domestic product, real estate price indices and growth, industrial employment, corporate profits, the household consumer debt service ratio, the household mortgage debt service ratio, and single family median home price growth.

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

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

The selection of a more optimistic or pessimistic economic forecast would result in a lower or higher allowance for credit losses.

The use of a protracted slump economic forecast would have increased the allowance for credit losses - loans by approximately 4% as of December 31, 2021, where the use of a stronger near-term growth economic forecast would result in a

negligible decrease in the allowance for credit losses - loans as of December 31, 2021.

The allowance for credit losses - loans is then adjusted for the period in which those forecasts are considered to be reasonable and supportable.

To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, the adjustments discontinue to be applied so that the model reverts back to the historical loss rates using a straight line reversion method.

Management selected an initial reasonable and supportable forecast period of 12 months with a reversion period of 12 months.

Management selected a reasonable and supportable forecast period of 12 months with a reversion period of 12 months.

Both the reasonable and supportable forecast period and the reversion period are periodically reviewed by management.

Further, for loans evaluated collectively, management also considers qualitative and environmental factors for each loan category to adjust for differences between the historical periods used to calculate historical loss rates and expected conditions over the remaining lives of the loans in the portfolio.

Further, for loans evaluated collectively, management also considers qualitative and environmental (QE) factors for each loan category to adjust for differences between the historical periods used to calculate historical loss rates and expected conditions over the remaining lives of the loans in the portfolio.

In determining the aggregate adjustment needed management considers the financial condition of the borrowers, the nature and volume of the loans, the remaining terms and the extent of prepayments on the loans, the volume and severity of past due and classified loans as well as the value of the underlying collateral on loans in which the collateral dependent practical expedient has not been used.

Management also considers the Company’s lending policies, the quality of the Company’s credit review system, the quality of the Company’s management and lending staff, and the regulatory and economic environments in the areas in which the Company’s lending activities are concentrated.

Loans that do not share risk characteristics with other loans in the portfolio are individually evaluated for impairment and are not included in the collective evaluation.

Factors involved in determining whether a loan should be individually evaluated include, but are not limited to, the financial condition of the borrower and the value of the underlying collateral.

Expected credit losses for loans evaluated individually are measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or when the Banks determine that foreclosure is probable, the expected credit loss is measured based on the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable.

As a practical expedient, the Banks measure the expected credit loss for a loan using the fair value of the collateral, if repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the Banks’ assessment as of the reporting date.

In both cases, if the fair value of the collateral is less than the amortized cost basis of the loan, the Banks will recognize an allowance as the difference between the fair value of the collateral, less costs to sell (if applicable), at the reporting date and the amortized cost basis of the loan.

If the fair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis will be limited to the amount previously charged-off.

Subsequent changes in the expected credit losses for loans evaluated individually are included within the provision for credit losses in the same manner in which the expected credit loss initially was recognized or as a reduction in the provision that would otherwise be reported.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate.

The contractual term excludes expected extensions, renewals, and modifications unless either management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Banks.

Some of the Banks’ loans are reported as troubled debt restructures (TDRs).

Loans are reported as TDRs when the Banks grant a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider.

Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for a transaction of similar risk.

The allowance for credit losses on a TDR is determined using the same method as all other loans held for investment, except when the value of the concession cannot be measured using a method other than the discounted cash flow method.

When the value of a concession is measured using the discounted cash flow method the allowance for credit losses is determined by discounting the expected future cash flows at the original interest rate of the loan.

The Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs.

This includes short-term (e.g.

six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or

other delays in payment that are insignificant.

Borrowers are considered current under the CARES Act and regulatory guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented.

Management also considers the Company’s lending policies, the quality of the Company’s credit review process, the quality of the Company’s management and lending staff, and the regulatory and economic environments in the areas in which the Company’s lending activities are concentrated.

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

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

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 3.4% as of December 31, 2021.

Fair Value Accounting and Measurement:

(Notes 1 and 17) We use fair value measurements to record fair value adjustments to certain financial assets and liabilities and to determine fair value disclosures.

We include in the Notes to the Consolidated Financial Statements information about the extent to which fair value is used to measure financial assets and liabilities, the valuation methodologies used and the impact on our results of operations and financial condition.

Additionally, for financial instruments not recorded at fair value we disclose, where required, our estimate of their fair value.

Business Combinations:

(Notes 1 and 3) Business combinations are accounted for using the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed, both tangible and intangible, and consideration exchanged are recorded at acquisition date fair values.

The determination of the fair value of assets acquired and liabilities assumed involves a significant amount of judgment.

The excess purchase consideration over the fair value of net assets acquired is recorded as goodwill.

In the event that the fair value of net assets acquired exceeds the purchase price, including fair value of liabilities assumed, a bargain purchase gain is recorded on that acquisition.

Expenses incurred in connection with a business combination are expensed as incurred.

Changes in deferred tax asset valuation allowances related to acquired tax uncertainties are recognized in net income after the measurement period.

Loans Acquired in Business Combinations:

(Notes 3 and 5) Loans acquired in business combinations are recorded at their fair value at the acquisition date.

Establishing the fair value of acquired loans involves a significant amount of judgment, including determining the credit discount based upon historical data adjusted for current economic conditions and other factors.

If any of these assumptions are inaccurate actual credit losses could vary significantly from the credit discount used to calculate the fair value of the acquired loans.

Acquired loans are evaluated upon acquisition and classified as either purchased credit-deteriorated or purchased non-credit-deteriorated.

Purchased credit-deteriorated (PCD) loans have experienced more than insignificant credit deterioration since origination.

For PCD loans, an allowance for credit losses is determined at the acquisition date using the same methodology as other loans held for investment.

The initial allowance for credit losses determined on a collective basis is allocated to individual loans.

The loan’s fair value grossed up for the allowance for credit losses becomes its initial amortized cost basis.

The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan.

Subsequent changes to the allowance for credit losses are recorded through a provision for credit losses.

For purchased non-credit-deteriorated loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income over the life of the loans.

While credit discounts are included in the determination of the fair value for non-credit-deteriorated loans, since these discounts are expected to be accreted over the life of the loans, they cannot be used to offset the allowance for credit losses that must be recorded at the acquisition date.

As a result, an allowance for credit losses is determined at the acquisition date using the same methodology as other loans held for investment and is recognized as a provision for credit losses.

Any subsequent deterioration (improvement) in credit quality is recognized by recording (recapturing) a provision for credit losses.

(Note 16) 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 $884,000 decrease or increase in the reporting fair value as of December 31, 2021, with an offsetting adjustment to our non-interest income.

A 25 basis-point increase or decrease in the discount rate used to calculate the fair value of our junior subordinated debentures would result in a $2.2 million decrease or increase in the reported fair value as of December 31, 2021, with an offsetting adjustment to our accumulated other comprehensive income.

(Notes 1 and 15) Goodwill represents the excess of the purchase consideration paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination and is not amortized but is reviewed annually, or more frequently as current circumstances and conditions warrant, for impairment.

1 unchanged sentence

The qualitative assessment involves judgment by management on determining whether there have been any triggering events that have occurred which would indicate potential impairment.

Such trigger events considered by management could include:

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

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

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

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

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

or litigation;

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

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

If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed.

The quantitative goodwill impairment test is used to identify the existence of impairment and the amount of impairment loss and compares the reporting unit’s estimated fair values, including goodwill, to its carrying amount.

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

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

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

The specific factors used in these various valuation methodologies that require judgment include the selection of comparable market transactions, discount rates, earnings capitalization rates and the future projected earnings of the reporting unit.

Changes in these assumptions could result in changes to the estimated fair value of the reporting unit.

If the fair value exceeds the carry amount, then goodwill is not considered impaired.

1 unchanged sentence

The impairment loss would be recognized as a charge to earnings.

The Company completed an assessment of qualitative factors as of December 31, 2020 and as a result of the economic impact of the COVID-19 pandemic concluded further analysis was required.

The Company completed a quantitative goodwill impairment test and concluded the fair value of the reporting unit exceeded the carrying value of the reporting unit including goodwill and therefore no impairment existed as of December 31, 2020.

Other Intangible Assets:

(Notes 1 and 16) Other intangible assets consists primarily of core deposit intangibles (CDI), which are amounts recorded in business combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the client relationships associated with the deposits.

Core deposit intangibles are being amortized on an accelerated basis over a weighted average estimated useful life of eight years.

The determination of the estimated useful life of the core deposit intangible involves judgment by management.

The actual life of the core deposit intangible could vary significantly from the estimated life.

These assets are reviewed at least annually for events or circumstances that could impact their recoverability.

These events could include loss of the underlying core deposits, increased competition or adverse changes in the economy.

To the extent other identifiable intangible assets are deemed unrecoverable, impairment losses are recorded in other non-interest expense to reduce the carrying amount of the assets.

Mortgage Servicing Rights:

(Note 16) Mortgage servicing rights (MSRs) are recognized as separate assets when rights are acquired through purchase or through sale of loans.

Generally, purchased MSRs are capitalized at the cost to acquire the rights.

For sales of mortgage loans, the value of the MSR is estimated and capitalized.

Fair value is based on market prices for comparable mortgage servicing contracts.

The fair value of the MSRs includes an estimate of the life of the underlying loans which is affected by estimated prepayment speeds.

The estimate of prepayment speeds is based on current market conditions.

Actual market conditions could vary significantly from current conditions which could result in the estimated life of the underlying loans being different which would change the fair value of the MSR.

Capitalized MSRs are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.

Real Estate Owned Held for Sale :

(Notes 1 and 6) Property acquired by foreclosure or deed in lieu of foreclosure is recorded at the estimated fair value of the property, less expected selling costs.

Development and improvement costs relating to the property may be capitalized, while other holding costs are expensed.

The carrying value of the property is periodically evaluated by management.

Property values are influenced by current economic and market conditions, changes in economic conditions could result in a decline in property value.

To the extent that property values decline, allowances are established to reduce the carrying value to net realizable value.

Gains or losses at the time the property is sold are charged or credited to operations in the period in which they are realized.

The amounts the Banks will ultimately recover from real estate held for sale may differ substantially from the carrying value of the assets because of market factors beyond the Banks’ control or because of changes in the Banks’ strategies for recovering the investment.

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

Income Taxes and Deferred Taxes :

4 unchanged sentences

The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

A 1% change in tax rates would result in a $2.5 million increase or decrease in our net deferred tax asset as

of December 31, 2021.

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

3 unchanged sentences

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.

8 unchanged sentences

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

The increase in assets in 2020 was largely the result of the origination of PPP loans and a related increase in deposits starting during the second quarter of 2020, which primarily funded the increases in interest bearing deposit balances and securities.

Net loans receivable (gross loans less deferred fees and discounts, and allowance for loan losses and excluding loans held for sale) increased $498.9 million, or 5%, to $9.70 billion at December 31, 2020, from $9.20 billion at December 31, 2019.

The increase in net loans receivable reflects the origination of PPP loans, which totaled $1.04 billion as of December 31, 2020, partially offset by a decrease in one- to four-family loans and lower commercial line of credit usage.

Loans held for sale increased to $243.8 million at December 31, 2020, compared to $210.4 million at December 31, 2019, principally as a result of one- to four- family loan originations exceeding one- to four- family loan sales.

Loans held for sale at December 31, 2020 included $122.0 million of multifamily loans and $121.8 million of one- to four-family loans.

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

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

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

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

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

Loans held for sale at December 31, 2021 included $49.9 million of multifamily loans and $46.6 million of one- to four-family loans, compared to $122.0 million of multifamily loans and $121.8 million of one- to four-family loans at December 31, 2020.

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

The aggregate total of securities and interest-bearing deposits increased $1.80 billion, or 96%, to $3.69 billion at December 31, 2020, compared to $1.89 billion a year earlier.

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

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

The fair value of our trading securities was $2.2 million less than their amortized cost at December 31, 2020.

In addition, fair value adjustments for securities designated as available-for-sale reflected an increase of $45.2 million for the year ended December 31, 2020, which was included net of the associated tax expense of $10.9 million as a component of other comprehensive income, and largely occurred as a result of decreased market interest rates.

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

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

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

1 unchanged sentence

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

Other intangibles decreased $7.7 million to $21.4 million at December 31, 2020, compared to $29.2 million at December 31, 2019, primarily due scheduled amortization of CDI.

Deposits increased $2.52 billion, or 25%, to $12.57 billion at December 31, 2020, from $10.05 billion at December 31, 2019, primarily due to SBA PPP loan funds deposited into client accounts and an increase in general client liquidity due to reduced business investment and consumer spending.

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

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

Core deposits were 94% of total deposits at December 31, 2021, compared to 93% of total deposits one year earlier.

Non-interest-bearing deposits increased by $1.55 billion, or 39%, to $5.49 billion from $3.95 billion at December 31, 2019;

interest-bearing transaction and savings accounts increased by $1.18 billion, to $6.16 billion at December 31, 2020 from $4.98 billion at December 31, 2019;

and certificates of deposit decreased $205.1 million, or 18%, to $915.3 million at December 31, 2020 from $1.12 billion at December 31, 2019.

We had no brokered deposits at December 31, 2020, compared to $202.9 million a year earlier.

FHLB advances decreased $300.0 million, to $150.0 million at December 31, 2020 from $450.0 million at December 31, 2019, as core deposits were used to fund the growth in the loan and securities portfolios.

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

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

and certificates of deposit decreased $76.7 million, or 8%, to $838.6 million at December 31, 2021 from $915.3 million at December 31, 2020.

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

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

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

No additional junior subordinated debentures, which are carried at fair value, were issued or matured during the year ended December 31, 2020;

however, the estimated fair value of these instruments decreased by $2.3 million to $117.0 million at December 31, 2020 from $119.3 million a year ago, reflecting wider market spreads.

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

No additional junior subordinated debentures, which are

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

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

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

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

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

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

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

The increase in equity primarily reflects $115.9 million of year-to-date net income, partially offset by the accrual of $44.2 million of dividends to common shareholders and the repurchase of $31.8 million of common stock.

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

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

1 unchanged sentence

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

At December 31, 2020, our consolidated investment securities portfolio totaled $2.77 billion and consisted principally of U.S.

Government and agency obligations, mortgage-backed and mortgage-related securities, municipal bonds, corporate debt obligations, and asset-backed securities.

At December 31, 2021, our consolidated investment securities portfolio totaled $4.19 billion and consisted principally of mortgage-backed and mortgage-related securities and municipal bonds and to a lesser extent U.S.

Government and agency obligations, corporate debt obligations, and asset-backed securities.

Our investment levels may be increased or decreased depending upon yields available on investment alternatives and management’s projections as to the demand for funds to be used in our loan origination, deposit and other activities.

During the year ended December 31, 2020, our aggregate investment in securities increased $956.0 million.

Securities purchased increased as we deployed excess balance sheet liquidity and market spreads for certain securities widened and exceeded sales, paydowns and maturities during the year ended December 31, 2020.

Holdings of U.S.

Government and agency obligations increased $52.1 million, municipal bonds increased $390.2 million, corporate debt obligations increased $216.6 million, mortgage-backed securities increased $295.9 million and asset-backed securities increased $1.3 million.

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

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

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

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

Government and Agency Obligations:

12 unchanged sentences

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 Idaho.

Our combined municipal bond portfolio is geographically diverse, with the majority within the states of Washington, Oregon, Texas and California.

At December 31, 2021, our municipal bond portfolio, including taxable and tax-exempt, had a weighted average maturity of approximately 19.5 years and a weighted average coupon rate of 3.37%.

Corporate Bonds:

Our corporate bond portfolio had a carrying value of $250.0 million ($249.5 million at amortized cost, with a net fair value adjustment of $460,000) at December 31, 2020.

The corporate bond portfolio at December 31, 2020 included $130.0 million of short term commercial paper.

Our corporate bond portfolio had a carrying value of $147.4 million ($144.7 million at amortized cost, with a net fair value adjustment of $2.7 million) at December 31, 2021.

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

Asset-Backed Securities:

At December 31, 2020, our asset-backed securities portfolio had a carrying value of $9.4 million (with an amortized cost of $9.4 million), and was comprised of securitized pools of student loans issued or guaranteed by the Student Loan Marketing Association and credit card receivables.

The weighted average coupon rate of these securities was 1.31% and the weighted average

contractual maturity was 13.1 years.

At December 31, 2021, our asset-backed securities portfolio had a carrying value of $206.4 million (with an amortized cost of $206.4 million), and was comprised of collateralized loan obligations, securitized pools of student loans issued or guaranteed by the Student Loan Marketing Association and credit card receivables.

The weighted average coupon rate of these securities was 1.84% and the weighted average contractual maturity was 13.0 years.

At December 31, 2021, 100% of these securities had adjustable interest rates tied to three-month LIBOR.

41 unchanged sentences

Total securities available-for-sale and held-to-maturity—estimated market value $ 26,260 $ 265,405 $ 870,175 $ 3,019,006 $ 4,180,846

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

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

Loans and Lending.

Loans are our most significant and generally highest yielding earning assets.

We attempt to maintain a portfolio of loans in a range of 90% to 95% of total deposits to enhance our revenues, while adhering to sound underwriting practices and appropriate diversification guidelines in order to maintain a moderate risk profile.

The unprecedented level of liquidity and growth of deposits experienced during 2020 has result in our loan to deposit ratio being below our target levels.

At December 31, 2020, our net loan portfolio totaled $9.70 billion compared to $9.20 billion at December 31, 2019.

Our total loan portfolio increased $565.6 million, or 6%, during the year ended December 31, 2020, compared to an increase of $620.8 million, or 7%, during the year ended December 31, 2019.

The increase in net loans receivable for the year ended December 31, 2020 primarily reflects the origination of PPP loans, primarily during the second quarter of 2020, which totaled $1.04 billion as of December 31, 2020.

The increase for the year ended December 31, 2019 included $332.4 million of portfolio loans acquired in the AltaPacific acquisition as well as organic loan growth.

We attempt to maintain a portfolio of loans to total deposits ratio at a level designed to enhance our revenues, while adhering to sound underwriting practices and appropriate diversification guidelines in order to maintain a moderate risk profile.

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

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

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

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

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

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

While we originate a variety of loans, our ability to originate each type of loan is dependent upon the relative client demand and competition in each market we serve.

We continue to implement strategies designed to capture more market share and achieve increases in targeted loans.

Nonetheless, looking forward, new loan originations and portfolio balances will continue to be significantly affected by the course of economic activity and changes in interest rates.

Originations of loans for sale increased to $1.46 billion for the year ended December 31, 2020 from $1.09 billion during 2019 and from $896.5 million during the year ended December 31, 2018.

Originations of loans for sale included $234.0 million, $340.0 million, and $372.8 million of multifamily held for sale loan production for the years ended December 31, 2020 , December 31, 2019, and December 31, 2018, respectively.

New loan originations and portfolio balances will continue to be significantly affected by the course of economic activity and changes in interest rates.

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

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

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

Proceeds from sales of loans for the years ended December 31, 2020, 2019 and 2018 totaled $1.49 billion, $1.10 billion and $791.7 million, respectively.

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

See “Loan Servicing Portfolio” below.

Loans held for sale increased $33.3 million to $243.8 million at December 31, 2020, compared to $210.4 million at December 31, 2019.

The increase in loans held for sale was primarily due to the increased volume of originations of one- to four-family residential mortgage loans held for sale, which exceeded sales during the year.

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

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

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

6 unchanged sentences

Commercial business 731,315 628,981 840,237

PPP 1,176,018 — —

SBA PPP 485,077 1,176,018 —

Agricultural business 61,997 76,096 85,663

2 unchanged sentences

Total loan originations (excluding loans held for sale) $ 4,602,377 $ 4,393,125 $ 3,322,039

The loan origination table above includes loan participations and loan purchases.

During the years ended December 31, 2020, 2019, and 2018 we purchased $2.5 million , $9.8 million, and $33.7 million respectively, of loans.

The loan purchases in 2020 were one- to four-family and commercial real estate loans compared to the loan purchases in 2019 which included one- to four-family loans and commercial loans.

The loan purchases in 2018 included one- to four-family loans.

One- to Four-Family Residential Real Estate Lending:

7 unchanged sentences

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.

Despite the strong originations during 2020 one-to four-family construction loans decreased by $36.5 million in 2020 to total $507.8 million at December 31, 2020, as the velocity of one- to four-family home sales increased during the year.

During the year ended December 31, 2020, land and land development loans (both residential and commercial) increased by $3.4 million to $248.9 million at December 31, 2020.

At December 31, 2020, construction, land and land

development loans totaled $1.29 billion (including $507.8 million of one- to four-family construction loans, $248.9 million land and land development loans (both residential and commercial), and $534.5 million of commercial and multifamily real estate construction loans), or 13% of total loans, compared to $1.23 billion, or 13%, at December 31, 2019.

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

One-to four-family construction loans increased by $60.9 million in 2021, as builders have expanded production and experienced strong home sales during the year.

During the year ended December 31, 2021, land and land development loans (both residential and commercial) increased by $64.5 million, primarily reflecting increased residential land and land development loans also due to the strong housing market.

Commercial and Multifamily Real Estate Lending:

8 unchanged sentences

At December 31, 2021, commercial business loans totaled $1.17 billion, or 13% of total loans, compared to $2.18 billion, or 22%, at December 31, 2020.

The increase reflects growth in PPP loans during 2020, offset partially by declines in commercial line of credit utilization.

In recent years our commercial lending has also included participation in certain national syndicated loans, including shared national credits, which totaled $122.2 million at December 31, 2020.

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

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

Our commercial business lending, to a lesser extent, includes participation in certain syndicated loans, including shared national credits that totaled $173.9 million at December 31, 2021.

Agricultural Lending:

7 unchanged sentences

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

As of December 31, 2020, 81% of our consumer loans were secured by one- to four-family real estate, including home equity lines of credit.

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

Credit card balances totaled $37.8 million at December 31, 2021 compared to $35.8 million a year earlier.

1 unchanged sentence

At December 31, 2021, we were servicing $3.04 billion of loans for others and held $12.4 million in escrow for our portfolio of loans serviced for others.

The loan servicing portfolio at December 31, 2020 was composed of $1.25 billion of Freddie Mac residential mortgage loans, $1.17 billion of Fannie Mae residential mortgage loans, $311.4 million of Oregon Housing residential mortgage loans and $297.3 million of other loans serviced for a variety of investors.

The loan servicing portfolio at December 31, 2021 was composed of $1.34 billion of Freddie Mac residential mortgage loans, $1.14 billion of Fannie Mae residential mortgage loans, $291.1 million of Oregon Housing residential mortgage loans, $80.4 million of SBA loans and $195.1 million of other loans serviced for a variety of investors.

The portfolio included loans secured by property located primarily in the states of Washington, Oregon, Idaho and California.

For the years ended December 31, 2021 and 2020, we recognized $7.7 million and $7.4 million of loan servicing income in our results of operations, respectively.

For the years ended December 31, 2020 and 2019 we recognized $7.7 million and $5.1 million of amortization for MSRs, respectively, and no impairment charges or reversals for a valuation adjustment to MSRs.

Mortgage Servicing Rights:

For the years ended December 31, 2020, 2019 and 2018, we capitalized $8.6 million, $4.4 million, and $3.6 million, respectively, of MSRs relating to loans sold with servicing retained.

Amortization of MSRs for the years ended December 31, 2020, 2019 and 2018 was $7.7 million, $5.1 million, and $3.9 million, respectively.

For the years ended December 31, 2021 and 2020 we recognized $6.6 million and $7.7 million of amortization for MSRs and SBA servicing rights, respectively, and no impairment charges or reversals for a valuation adjustment to MSRs.

Mortgage and SBA Servicing Rights:

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

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

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

At December 31, 2020, our MSRs were carried at a value of $15.2 million, net of amortization, compared to $14.1 million at December 31, 2019.

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

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):

2 unchanged sentences

The following table presents the loans receivable at December 31, 2021, 2020 and 2019 by class (dollars in thousands).

The presentation of loans receivable at December 31, 2019 and 2018 have been updated to conform to the loan portfolio segmentation that became effective on January 1, 2020.

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

December 31, 2021 December 31, 2020 December 31, 2019

12 unchanged sentences

Commercial business 1,039,502 11.4 1,133,989 11.5 1,364,650 14.7

2,178,461 22.1 1,364,650 14.7 1,146,015 13.2

SBA PPP 132,574 1.5 1,044,472 10.6 — —

Small business scored 792,310 8.7 743,451 7.5 772,657 8.3

Agricultural business, including secured by farmland:

299,949 3.0 337,271 3.6 371,987 4.3

Agricultural business, including secured by farmland 284,399 3.1 299,949 3.0 337,271 3.6

SBA PPP 1,354 — — — — —

One- to four-family residential 683,268 7.5 717,939 7.3 925,531 9.9

5 unchanged sentences

Net loans $ 8,952,664 $ 9,703,703 $ 9,204,798

(1) Includes $1.04 billion of PPP loans as of December 31, 2020.

The following table sets forth the Company’s loans by geographic concentration at December 31, 2021, 2020 and 2019 (dollars in thousands):

11 unchanged sentences

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 and the allowance for credit losses (in thousands):

Loan balances are net of unamortized premiums and discounts and exclude loans held for sale (in thousands):

Loans by Maturity

12 unchanged sentences

Commercial business 262,759 282,601 376,834 117,308 1,039,502

PPP — 1,044,472 — — 1,044,472

SBA PPP 13,926 118,648 — — 132,574

Small business scored 63,485 225,092 237,934 265,799 792,310

Agricultural business, including secured by farmland:

Agricultural business, including secured by farmland 80,260 59,272 144,433 434 284,399

SBA PPP 548 806 — — 1,354

One- to four-family residential 9,890 18,421 62,548 592,409 683,268

21 unchanged sentences

Commercial business 494,635 282,108 776,743

PPP 1,044,472 — 1,044,472

SBA PPP 118,648 — 118,648

Small business scored 197,956 530,869 728,825

Agricultural business, including secured by farmland:

Agricultural business, including secured by farmland 78,182 125,957 204,139

SBA PPP 806 — 806

One- to four-family residential 543,601 129,777 673,378

10 unchanged sentences

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

The increase in total deposits from year end was due primarily to PPP loan funds deposited into client accounts and an increase in general client liquidity due to reduced business investment and consumer spending.

Non-interest-bearing deposits increased by $1.55 billion, or 39%, to $5.49 billion at year end from $3.95 billion at December 31, 2019.

Interest-bearing transaction and savings accounts increased by $1.18 billion, to $6.16 billion at December 31, 2020 compared to $4.98 billion a year earlier.

Certificates of deposit decreased $205.1 million, or 18%, to $915.3 million at December 31, 2020 from $1.12 billion at December 31, 2019.

The decrease in certificates of deposit balances in 2020 was largely due to the $202.9 million decrease in brokered deposits.

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

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

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

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

Certificates of deposit decreased $76.7 million, or 8%, to $838.6 million at December 31, 2021 from $915.3 million at December 31, 2020.

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):

2021 2020 2019

18 unchanged sentences

Total deposits in excess of the FDIC insurance limit $ 5,144,386 35.9 % $ 736,451 $ 4,407,935 35.1 % $ 1,579,962 $ 2,827,973 28.1 %

The following table indicates the amount of the Banks’ certificates of deposit with balances in excess of the FDIC insurance limit by time remaining until maturity as of December 31, 2020 (in thousands):

Maturity Period— CDs in excess of the FDIC insurance limit

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, 2021 (in thousands):

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

Certificates of

14 unchanged sentences

Total deposits $ 14,326,933 100.0 % $ 12,567,296 100.0 % $ 10,048,641 100.0 %

The FHLB-Des Moines serves as our primary borrowing source.

The FHLB serves as our primary borrowing source.

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

1 unchanged sentence

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

At that date, based on pledged collateral, Banner Bank had $2.28 billion of available credit capacity and Islanders Bank $32.5 million of available credit capacity with the FHLB-Des Moines.

The following table provides additional detail on our FHLB advances as of December 31, 2020 and 2019 (dollars in thousands):

FHLB Advances Outstanding

2020 2019 2018

Amount Weighted Average Rate Amount Weighted Average Rate Amount Weighted Average Rate

Maturing in one year or less $ 100,000 2.51 % $ 300,000 1.84 % $ 540,000 2.64 %

Maturing after one year through three years 50,000 2.72 150,000 2.58 — —

Maturing after three years through five years — — — — — —

Maturing after five years — — — — 189 5.94

Total FHLB advances $ 150,000 2.58 % $ 450,000 2.09 % $ 540,189 2.64 %

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

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

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

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

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

2 unchanged sentences

At December 31, 2021, retail repurchase agreements totaled $264.5 million, had a weighted average rate of 0.13%, and were secured by pledges of certain mortgage-backed securities and agency securities.

Retail repurchase agreement balances,

which are primarily associated with client sweep account arrangements, increased $66.3 million, from the 2019 year-end balance.

Retail repurchase agreement balances, which are primarily associated with client sweep account arrangements, increased $79.7 million, from the 2020 year-end balance.

We had no borrowings under wholesale repurchase agreements at December 31, 2021 or December 31, 2020.

At December 31, 2020, we had an aggregate of $143.5 million, net of repayments, of Trust Preferred Securities (TPS).

At December 31, 2021, we had an aggregate of $135.5 million of TPS.

This includes $120.0 million issued by us and $15.5 million acquired in our bank acquisitions.

1 unchanged sentence

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

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

At December 31, 2021, the TPS had a weighted average rate of 2.24%.

In addition, on June 30, 2020, Banner issued and sold in an underwritten offer $100.0 million of Subordinated Notes, resulting in net proceeds, after underwriting discounts and offering expenses, of $98.1 million.

At December 31, 2020, the Subordinated Notes had a weighted average interest rate of 5.00%.

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

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

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

2 unchanged sentences

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.

During 2020, we continued to be actively engaged with our borrowers in resolving remaining problem assets and with the effective management of real estate owned as a result of foreclosures.

Non-performing assets decreased to $36.5 million, or 0.24% of total assets, at December 31, 2020, from $40.5 million, or 0.32% of total assets, at December 31, 2019, and increased from $18.9 million, or 0.16% of total assets, at December 31, 2018.

At December 31, 2020, our allowance for credit losses was $167.3 million, or 470% of non-performing loans, compared to $100.6 million, or 254% of non-performing loans at December 31, 2019.

Non-performing assets decreased to $23.7 million, or 0.14% of total assets, at December 31, 2021, from $36.5 million, or 0.24% of total assets, at December 31, 2020.

At December 31, 2021, our allowance for credit losses - loans was $132.1 million, or 578% of non-performing loans, compared to $167.3 million, or 470% of non-performing loans at December 31, 2020.

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

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

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

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

At December 31, 2020, we had $6.7 million of TDR loans currently performing under their restructured terms.

We are continuing to offer payment and financial relief programs for borrowers impacted by COVID-19.

Deferred loans are re-evaluated at the end of the initial deferral period and will either return to the original loan terms or may be eligible for an additional deferral period for up to 90 days.

In addition, we have entered into payment forbearance agreements with other clients for periods of up to six months.

At December 31, 2020, we had 158 loans totaling $75.4 million still on deferral.

Of the loans still on deferral, 26 loans totaling $33.9 million have received a second deferral.

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

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

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

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

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

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

Prior to the implementation of Financial Instruments—Credit Losses (ASC 326) on January 1, 2020, loans acquired in merger transactions with deteriorated credit quality were accounted for as purchased credit-impaired pools.

Typically, this would include loans that were considered non-performing or restructured as of the acquisition date.

Accordingly, subsequent to acquisition, loans included in the purchased credit-impaired pools were not reported as non-performing loans based upon their individual performance status, so the loan categories of nonaccrual, impaired and 90 days past due and accruing did not include any purchased credit-impaired loans.

Purchased credit-impaired loans were $15.9 million at December 31, 2019.

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

21 unchanged sentences

REO assets held for sale, net 852 816 814

816 814 2,611

Other repossessed assets held for sale, net 17 51 122

Total non-performing assets $ 23,705 $ 36,481 $ 40,534

Total non-performing loans to net loans before allowance for credit losses/allowance for loan losses 0.36 % 0.43 % 0.18 %

Total non-performing loans to total assets 0.24 % 0.31 % 0.13 %

Total non-performing assets to total assets 0.14 % 0.24 % 0.32 %

Total nonaccrual loans to net loans before allowance for credit losses 0.33 % 0.40 % 0.17 %

TDR loans (3)

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

0.25 % 0.33 % 0.40 %

Restructured loans performing under their restructured terms (3)

$ 5,309 $ 6,673 $ 6,466

Loans 30-89 days past due and on accrual (4)

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

(1) Includes $1.22 million of nonaccrual TDR loans as of December 31, 2020.

For the year ended December 31, 2020, interest income was reduced by $1.5 million as a result of nonaccrual loan activity, which includes the reversal of $846,000 of accrued interest as of the date the loan was placed on nonaccrual.

(1) Includes $233,000 of nonaccrual TDR loans as of December 31, 2021.

For the year ended December 31, 2021, interest income was reduced by $970,000 as a result of nonaccrual loan activity, which includes the reversal of $154,000 of accrued interest as of the date the loan was placed on nonaccrual.

There was no interest income recognized on nonaccrual loans during the year ended December 31, 2021.

(2) Real estate acquired by us as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate held for sale until it is sold.

When property is acquired, it is recorded at the estimated fair value of the property, less expected selling costs.

Subsequent to foreclosure, the property is carried at the lower of the foreclosed amount or net realizable value.

Upon receipt of a new appraisal and market analysis, the carrying value is written down through the establishment of a specific reserve to the anticipated sales price, less selling and holding costs.

(3) These loans were performing under their restructured terms.

(4) PCI loans are included at December 31, 2019 and December 31, 2018.

In addition to the non-performing loans as of December 31, 2020, we had other classified loans with an aggregate outstanding balance of $305.2 million that are not on nonaccrual status, with respect to which known information concerning possible credit problems with the borrowers or the cash flows of the properties securing the respective loans has caused management to be concerned about the ability of the borrowers to comply with present loan repayment terms.

This may result in the future inclusion of such loans in the nonaccrual loan category.

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

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

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

The following table presents the Company’s portfolio of risk-rated loans and non-risk-rated loans by grade at the dates indicated (in thousands):

7 unchanged sentences

Total $ 9,084,763 $ 9,870,982 $ 9,305,357

The increase in substandard loans during the year ended December 31, 2020 primarily reflects Banner Bank proactively downgrading loans in industries the most at risk due to COVID-19.

The following table presents the REO activity for the years ended December 31, 2020, 2019 and 2018 (in thousands):

For the years ended December 31,

2020 2019 2018

Balance, beginning of the period $ 814 $ 2,611 $ 360

Additions from loan foreclosures

1,588 109 641

Additions from acquisitions

Proceeds from dispositions of REO

(2,360) (2,588) (838)

Gain on sale of REO

Valuation adjustments in period

Balance, end of period $ 816 $ 814 $ 2,611

REO increased $2,000, to $816,000 at December 31, 2020 compared to $814,000 at December 31, 2019 and decreased compared to $2.6 million at December 31, 2018.

The decrease during 2019 primarily reflects the sale of REO properties acquired in the Skagit Bank acquisition.

Non-recurring fair value adjustments to REO are recorded to reflect partial write-downs based on an observable market price or current appraised value of property.

The individual carrying values of these assets are reviewed for impairment at least annually and any additional impairment charges are expensed to operations.

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

Comparison of Results of Operations for the Years Ended December 31, 2021 and 2020

Current year results were impacted by an increase in the provision for credit losses as a result of the COVID-19 pandemic, lower yields on earnings assets, decreased deposit fees and other service charges and increased non-interest expense these were partially offset by increased volume and gain on sale spreads on one- to four-family held for sale loans, growth in interest-earnings assets, driven by increases in core deposits and decreased funding costs.

Our net income for the year ended December 31, 2020 included a provision for credit losses of $64.3 million, increased non-interest expense, including $3.5 million of COVID-19 related expenses and $2.1 million of merger and acquisition-related expenses, partially offset by increased non-interest income, including $51.6 million of mortgage banking income.

Our results for the year ended December 31, 2019 included $7.5 million of merger and acquisition-related expenses.

The results for year ended December 31, 2020 also included the operations acquired in the AltaPacific acquisition which closed in the fourth quarter of 2019 and reflect the impact of the COVID-19 pandemic resulting in a substantial reduction in business activity or the closing of businesses in all the western states Banner Bank operates.

Our operating results depend largely on our net interest income which increased by $12.4 million to $481.3 million, primarily reflecting an increase in the average balance of interest-earning assets, due to the origination of PPP loans and organic growth, as well as the AltaPacific acquisition, and a decrease in funding costs, partially offset by lower yields on interest-earning assets.

The increase in net interest income contributed to an increase of $29.1 million, or 5%, in revenue to $579.9 million for the year ended December 31, 2020, compared to $550.9

million for the year ended December 31, 2019.

Our operating results for the year ended December 31, 2020 also reflected a $16.7 million increase in non-interest income primarily as a result of increased mortgage banking revenues due to increased volume and gain on sale spreads on one- to four-family held for sale loans.

The decrease in deposit fees and other service charges is a result of our becoming subject to the Durbin Amendment on July 1, 2019, which reduced interchange fee income during the second half of 2019 compared to the full year of 2020 as well as fee waivers and reduced transaction deposit account activity since the start of the COVID-19 pandemic.

Non-interest expense increased to $373.1 million for the year ended December 31, 2020 compared with $357.7 million for the year ended December 31, 2019, largely as a result of an increase in the provision for credit losses - unfunded commitments, higher salary and employee benefits due to additional staffing related to the operations acquired from the inclusion of the acquired AltaPacific operations for a full year and normal salary and wage adjustments, increased deposit insurance expense due to the receipt of an FDIC credit of $2.7 million during 2019 for previously paid deposit insurance premiums, and COVID-19 expenses, partially offset by increases in capitalized loan origination costs, decreased travel expenses and reduced merger and acquisition-related expenses.

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

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

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

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

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

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

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

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

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

Non-interest expense increased to $380.1 million for the year ended December 31, 2021 compared with $369.6 million for the year ended December 31, 2020, largely as a result of increases in payment and card processing services expense and professional services expense, primarily due to an increase in consulting expenses related to the Banner Forward initiative, as well as a $2.3 million loss on extinguishment of debt as a result of the redemption of $8.2 million of junior subordinated debentures during the current year.

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

Net Interest Income.

Net interest income before provision for credit losses increased by $12.4 million, or 3%, to $481.3 million for the year ended December 31, 2020, compared to $468.9 million one year earlier, as an increase in the average balance of interest-earning assets produced growth for this key source of revenue.

The growth in the average balance of interest-earning assets reflects the origination of PPP loans and organic growth, as well as the AltaPacific acquisition.

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

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

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

The net interest margin included seven basis points from acquisition accounting adjustments for both the years ended December 31, 2020 and 2019.

The decrease in net interest margin compared to a year earlier primarily reflects lower yields on average interest-earning assets, partially offset by decreases in the cost of funding liabilities.

The average yield on interest-earning assets of 4.15% for the year ended December 31, 2020 decreased 72 basis points compared to the prior year, largely due to the impact of decreases to the targeted Fed Funds Rate on floating rate loan yields indexed to prime and LIBOR rates and low loan yields on the PPP loan portfolio as well as excess deposit liquidity being invested in low yielding short term investments and interest bearing deposits.

Funding costs were also lower, as the average cost of funding liabilities increased by 24 basis points to 0.31% as compared to the prior year.

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

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

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

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

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

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

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

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

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

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

Interest Income.

Interest income for the year ended December 31, 2020 was $519.1 million, compared to $525.7 million for the prior year, a decrease of $6.5 million, or 1%.

The decrease in interest income occurred as a result of the decrease in the yield on interest-earning assets, partially offset by increases in the average balance of both loans and investment securities.

Interest income for the year ended December 31, 2021 was $520.5 million, compared to $519.1 million for the prior year, an increase of $1.4 million.

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

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

1 unchanged sentence

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

Average loan yields decreased 63 basis points to 4.66% for the year ended December 31, 2020 compared to 5.29% in the preceding year, reflecting the impact of lower interest rates over the last year as well as the impact of the low loan yields for the PPP loan portfolio.

The acquisition accounting loan discount accretion and related balance sheet impact added ten basis points to the loan yield for the year ended December 31, 2020, compared to nine basis points for the year ended December 31, 2019.

Average loans receivable for the year ended December 31, 2020 increased $1.12 billion, or 12%, to $10.12 billion, compared to $9.00 billion for the prior year, principally as a result of the PPP loan program and AltaPacific acquisition.

Interest income on loans decreased by $5.1 million, or 1%, to $466.4 million for the year ended December 31, 2020, from $471.5 million for the prior year, reflecting the impact of the 63 basis point decrease in the average yield on total loans, partially offset by the $1.12 billion increase in average loan balances.

The combined average balance of mortgage-backed securities, other investment securities, equity securities, daily interest-bearing deposits and FHLB stock increased to $2.58 billion for the year ended December 31, 2020 (excluding the effect of fair value adjustments), compared to $1.91 billion for the year ended December 31, 2019, contributing to the $455,000 increase in interest and dividend income compared to the prior year.

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

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

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

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

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

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

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

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

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

Interest Expense.

Interest expense for the year ended December 31, 2020 was $37.8 million, compared to $56.8 million for the prior year, an increase of $18.9 million, or 33%.

Interest expense for the year ended December 31, 2021 was $23.6 million, compared to $37.8 million for the prior year, a decrease of $14.2 million, or 38%.

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

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

Deposit interest expense decreased $12.6 million, or 34%, to $25.0 million for the year ended December 31, 2020 compared to $37.6 million for the prior year as a result of a 17 basis point decrease in the average cost of deposits, partially offset by an $1.99 billion, or 21%, increase in the average balance of deposits.

Average deposit balances increased to $11.54 billion for the year ended December 31, 2020, from $9.54 billion for the year ended December 31, 2019, while the average rate paid on deposit balances decreased to 0.22% in the current year from

0.39% for the prior year.

The cost of interest-bearing deposits decreased by 27 basis points to 0.38% for the year ended December 31, 2020 compared to 0.65% in the prior year.

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

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

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

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

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

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

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

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

The decrease in average FHLB advances was partially offset by the previously mentioned issuance of the Subordinated Notes and an increase in average other borrowings due to increases in retail repurchase agreements primarily related to client cash management accounts.

The average rate paid on total borrowings decreased 47 basis points to 2.11% from 2.58% reflecting the 102 basis point decrease in the average cost for our subordinated debt due to a decrease in the average cost of our junior subordinated debentures (which reprice every three months based on changes in the three-month LIBOR index) partially offset by the higher average cost of our Subordinated Notes and a 22 basis point decrease in the average cost of FHLB advances.

The decrease in the average cost of total borrowings was the primary reason for the $6.3 million decrease in the related interest expense to $12.8 million for the year ended December 31, 2020, from $19.1 million in the prior year.

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

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

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

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.

12 unchanged sentences

Commercial/agricultural loans 1,498,808 62,479 4.17 1,765,265 80,567 4.56 1,784,468 95,915 5.37

SBA PPP loans 770,041 49,854 6.47 760,912 23,133 3.04 — — —

Consumer and other loans 122,520 7,298 5.96 147,827 9,208 6.23 176,373 11,230 6.37

62 unchanged sentences

Commercial/agricultural loans (6,509) (11,579) (18,088) (14,309) (1,039) (15,348)

SBA PPP loans 26,409 312 26,721 3,939 19,194 23,133

Consumer and other loans (385) (1,525) (1,910) (242) (1,780) (2,022)

Total loans (2,186) (18,270) (20,456) (46,207) 41,746 (4,461)

(46,207) 41,746 (4,461) 4,232 55,517 59,749

Mortgage-backed securities (5,003) 19,014 14,011 (5,480) (1,141) (6,621)

5 unchanged sentences

Total investment securities (8,641) 31,247 22,606 (6,384) 6,839 455

(6,384) 6,839 455 785 3,322 4,107

Total net change in interest income on interest-earning assets

13 unchanged sentences

Net change in net interest income (tax equivalent) $ 3,286 $ 13,100 $ 16,386 $ (32,579) $ 47,496 $ 14,917

(1) Includes 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) Tax-exempt income is calculated on a tax equivalent basis.

The tax equivalent yield adjustment to interest earned on loans was $4.9 million, $4.3 million, and $2.6 million for the years ended December 31, 2020, December 31, 2019, and December 31, 2018, respectively.

The tax equivalent yield adjustment to interest earned on tax exempt securities was $3.5 million, $1.6 million, and $1.4 million for the years ended December 31, 2020, December 31, 2019, and December 31, 2018, respectively.

Provision and Allowance for Credit Losses .

We recorded a $64.3 million provision for credit losses - loans in the year ended December 31, 2020, compared to a $10.0 million provision recorded in 2019.

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

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

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 increased provisions for loan credit losses for the current year primarily reflects expected lifetime credit losses based upon current economic conditions, as well as the impact of COVID-19 on the economic indicators included in our reasonable and supportable forecast as of December 31, 2020.

In addition, the current year provision for credit losses also reflects risk rating downgrades on loans that are considered at heightened risk due to the COVID-19 pandemic.

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

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

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

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

Future assessments of the expected credit losses will not only be impacted by changes to the reasonable and supportable forecast, but will also include an updated assessment of qualitative factors, as well as consideration of any required changes in the reasonable and supportable forecast reversion period.

No allowance for credit losses-loans was recorded on the $1.04 billion balance of PPP loans at December 31, 2020 as these loans are fully guaranteed by the SBA.

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

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

Non-performing loans decreased by $4.0 million during the year to $35.6 million at December 31, 2020, compared to $39.6 million at December 31, 2019.

A comparison of the allowance for credit losses - loans at December 31, 2020 and 2019 reflects an increase of $66.7 million, or 66%, to $167.3 million at December 31, 2020, from $100.6 million at December 31, 2019.

The allowance for credit losses - loans as a percentage of total loans (loans receivable excluding allowance for credit losses) increased to 1.69% at December 31, 2020, compared to 1.08% at December 31, 2019.

The increase in the allowance for credit losses - loans as a percentage of loans reflects the adoption of Financial Instruments - Credit Losses (ASC 326) as well as the increased provision for credit losses - loans recorded during the year ended December 31 31, 2020, primarily as the result of forecasted credit deterioration due to the COVID-19 pandemic.

The reduction in net charge-offs in 2021 reflects the improvement in overall loan portfolio performance during 2021.

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

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

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

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

The allowance for credit losses - loans as a percentage of total loans (loans receivable excluding allowance for credit losses) decreased to 1.45% at December 31, 2021, compared to 1.69% at December 31, 2020.

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

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

4 unchanged sentences

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

Provision 64,285 10,000 8,500

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

Recoveries of loans previously charged off:

1 unchanged sentence

Construction and land 100 105 208

One- to four-family real estate 467 561 750

One- to four-family residential 199 467 561

Commercial business 1,797 3,265 625

4 unchanged sentences

Commercial real estate (3,767) (1,854) (1,138)

Multifamily real estate (59) (66) —

Construction and land — (100) (45)

One- to four-family real estate (136) (86) (43)

One- to four-family residential — (136) (86)

Commercial business (1,762) (7,253) (4,171)

4 unchanged sentences

Balance, end of period $ 132,099 $ 167,279 $ 100,559

Total loans $ 9,084,763 $ 9,870,982 $ 9,305,357

Average outstanding loans $ 9,711,481 $ 10,121,808 $ 8,997,994

Total nonaccrual loans $ 22,281 $ 32,560 $ 37,501

Allowance for credit losses - loans as a percent of total loans 1.45 % 1.69 % 1.08 %

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

Allowance for credit losses - loans as a percent of non-performing loans 470 % 254 % 616 %

Allowance for credit losses - loans as a percent of nonaccrual loans 593 % 514 % 268 %

18 unchanged sentences

The allowance for credit losses - unfunded loan commitments was $12.4 million at December 31, 2021 compared to $13.3 million at December 31, 2020.

The increase in the allowance for credit losses - unfunded loan commitments reflects the adoption of Financial Instruments - Credit Losses (ASC 326) as well as the increased provision for credit losses - unfunded loan commitments recorded during year ended December 31, 2020.

During the year ended December 31, 2020, we recorded a provision for credit losses - unfunded loan commitments of $3.6 million, compared to no provision for loan losses - unfunded loan commitments during the prior year.

The provision for loan credit losses - unfunded loan commitments for the year ended December 31, 2020 was primarily due to the economic impacts of COVID-19 as well as forecasted changes to economic indicators in our reasonable and supportable forecast.

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

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

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

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

4 unchanged sentences

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

Provision/recapture for credit losses - unfunded loan commitments 3,559 — —

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

Additions through acquisitions — — 117

10 unchanged sentences

91,318 98,260 (6,942) (7.1) % 98,260 82,116 16,144 19.7 %

Net gain (loss) on sale of securities 1,012 33 979 nm 33 (837) 870 (103.9) %

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

Net change in valuation of financial instruments carried at fair value 4,616 (656) 5,272 (803.7) % (656) (208) (448) 215.4 %

Total non-interest income $ 96,416 $ 98,616 $ (2,200) (2.2) % $ 98,616 $ 81,941 $ 16,675 20.4 %

Non-interest income increased $16.7 million, or 20%, to $98.6 million for the year ended December 31, 2020, compared to $81.9 million for the year ended December 31, 2019.

This increase was primarily due an increase in income from mortgage banking operations, partially offset a decrease in deposit fees and other service charges and miscellaneous income.

Income from deposit fees and other service charges decreased by $12.2 million, or 26%, to $34.4 million for the year ended December 31, 2020, compared to $46.6 million for the prior year as a result of reduced transaction deposit account activity since the start of the COVID-19 pandemic as well as fee waivers in response to the COVID-19 pandemic primarily in the second quarter of 2020.

In addition, interchange fee income decreased as we were subject to the Durbin Amendment for the full year 2020 compared to only the second half of 2019.

Mortgage banking income, including gains on one- to four-family and multifamily loan sales and loan servicing fees, increased by $29.4 million to $51.6 million for the year ended December 31, 2020, compared to $22.2 million in the prior year.

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

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

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

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

Sales of one- to four-family loans held for sale for the year ended December 31, 2021 resulted in gains of $28.7 million, compared to $50.1 million for the year ended December 31, 2020.

In addition, for the year ended December 31, 2021, mortgage banking income included $5.8 million of gains on the sale of multifamily loans, compared to $1.8 million for the year ended December 31, 2020.

The higher mortgage banking income reflected increased loan production of one- to four-family held-for-sale loans primarily related to refinance activity as well as an increase in the gain on sale spreads on one- to four-family held for sale loans during the current year.

The increase in bank owned life insurance income for year ended December 31, 2020 compared to the prior year was due to a death benefit payment.

The $2.3 million decrease in miscellaneous income was primarily driven by lower gains on the sales of SBA loans as well as an increase in losses related to the disposition of assets related to branch consolidation activity.

Securities sales for the year ended December 31, 2020 resulted in a gain of $1.0 million, primarily as a result of the gain recognized on the sale of Visa Class B shares held by us, compared to a $33,000 gain for securities sold for the year ended December 31, 2019.

For the year ended December 31, 2020, we recorded a net loss of $656,000 for changes in the valuation of financial instruments carried at fair value, compared to a net loss of $208,000 for the year ended December 31, 2019.

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

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

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

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

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

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

Non-interest Expense.

14 unchanged sentences

Amortization of core deposit intangibles 6,571 7,732 (1,161) (15.0) % 7,732 8,151 (419) (5.1) %

Provision for credit losses -

unfunded loan commitments 3,559 — 3,559 nm — — — nm

Loss on extinguishment of debt 2,284 — 2,284 nm — 735 (735) (100.0) %

Miscellaneous 24,236 22,712 1,524 6.7 % 22,712 27,387 (4,675) (17.1) %

$ 379,005 $ 364,025 $ 14,980 4.1 % $ 364,025 $ 350,184 $ 13,841 4.0 %

COVID-19 expenses 3,502 — 3,502 nm — — — nm

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

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

1 unchanged sentence

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

The increase was primarily due to increases in salaries and employee benefits expenses, deposit insurance expenses, and provision for credit losses – unfunded loan commitments, partially offset by increases in capitalized loan origination costs and decreases in merger and acquisition-related costs.

In addition, the year ended December 31, 2020 included $3.5 million of COVID-19 expenses.

The increase was primarily due to increases in payment and card processing services expense and professional services expense, primarily due to an increase in consulting expenses related to the Banner Forward initiative, as well as a $2.3 million loss on extinguishment of debt as a result of the redemption of $8.2 million of junior subordinated debentures during the current year.

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

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

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

Salary and employee benefits expenses increased $19.0 million to $245.4 million for the year ended December 31, 2020 from $226.4 million for the year ended December 31, 2019, primarily reflecting additional staffing related to the operations acquired from the acquisition of AltaPacific on November 1, 2019, as well as normal salary and wage adjustments.

Capitalized loan origination costs increased $5.9 million for the year ended December 31, 2020, compared to the prior year, reflecting the increase in loan originations, primarily PPP loans.

Occupancy and equipment expenses increased $1.0 million, or 2%, to $53.4 million in 2020, compared to $52.4 million in 2019, primarily reflecting the operations acquired from the AltaPacific acquisition.

Information and computer data services expense increased $1.9 million, or 9%, to $24.4 million in the current year, compared to $22.5 million in the prior year, reflecting incremental costs as the Company continued to grow.

Professional and legal expense increased $2.4 million to $12.1 million for the year ended December 31, 2020 from $9.7 million for the year ended December 31, 2019 due to a $2.5 million accrual related to pending litigation.

Advertising and marketing expenses decreased $1.4 million to $6.4 million for the year ended December 31, 2020 from $7.8 million for the year ended December 31, 2019, reflecting curtailment of direct mail and marketing campaigns in response to the COVID-19 pandemic.

The provision for credit losses - unfunded loan commitments increased $3.6 million for the year ended December 31, 2019, compared to the prior year, primarily due to the economic impacts of COVID-19.

Deposit insurance expense increased $3.7 million for the year ended December 31, 2020, compared to the same period in 2019 as the result of a credit of $2.7 million recognized in 2019 for previously paid deposit insurance premiums.

REO operations for the year ended December 31, 2020 resulted in $190,000 of benefit, compared to $303,000 of expense in the prior year as we realized gains on the sale of REO.

There were $2.1 million of merger and acquisition-related costs added to non-interest expense in the

current year, compared to $7.5 million in the year ended December 31, 2019.

Miscellaneous expenses decreased $5.4 million for the year ended December 31, 2020, compared to the prior year, reflecting a reduction in employee travel, conferences and training expenses.

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

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

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

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

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

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

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

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

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

Income Taxes.

18 unchanged sentences

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, 2020, our loans with interest rate floors totaled approximately $3.10 billion and had a weighted average floor rate of 4.40% compared to a current average note rate of 4.61%.

As of December 31, 2021, our loans with interest rate floors totaled $3.56 billion and had a weighted average floor rate of 4.17% compared to a current average note rate of 4.32%.

As of December 31, 2021, our loans with interest rates at their floors totaled $2.28 billion and had a weighted average note rate of 4.22% and our loans with interest rates below their floors totaled $344.2 million and had a weighted average note rate of 4.23%.

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.

13 unchanged sentences

The interest rate sensitivity analysis performed by us incorporates beginning-of-the-period rate, balance and maturity data, using various levels of aggregation of that data, as well as certain assumptions concerning the maturity, repricing, amortization and prepayment characteristics of loans and other interest-earning assets and the repricing and withdrawal of deposits and other interest-bearing liabilities into an asset/liability computer simulation model.

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

and the directors.

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

We believe the data and assumptions are realistic representations of our portfolio and possible outcomes under the various interest rate scenarios.

17 unchanged sentences

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

Interest Rate Swaps:

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

The Bank simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms.

The net result of these interest rate swaps is that the client pays a fixed rate of interest and the Bank receives a floating rate.

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

Cash Flow Hedges of Interest Rate Risk:

The Bank’s objectives in using interest rate derivatives are to reduce volatility in net interest income and to manage its exposure to interest rate movements.

To accomplish this objective, the Bank primarily uses interest rate swaps as part of its interest rate risk management strategy.

During the fourth quarter of 2021, the Bank entered into interest rate swaps designated as cash flow hedges to hedge the variable cash flows associated with existing floating rate loans.

These hedge contracts involve the receipt of fixed-rate amounts from a counterparty in exchange for the Bank making floating-rate payments over the life of the agreements without exchange of the underlying notional amount.

Another (although less reliable) monitoring tool for assessing interest rate risk is gap analysis.

65 unchanged sentences

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 and purchase of loans and, in certain periods, the purchase of securities.

During the years ended December 31, 2020, 2019 and 2018, our loan originations exceeded our loan repayments by $2.02 billion, $1.40 billion and $1.31 billion, respectively.

During those periods we purchased loans of $2.5 million, $9.8 million and $33.7 million, respectively.

Our primary investing activity is the origination of loans and, in certain periods, the purchase of securities or loans.

During the years ended December 31, 2021 and 2020, our loan originations, including originations of loans held for sale, exceeded our loan repayments by $306.8 million and $2.02 billion, respectively.

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

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

During the years ended December 31, 2020, 2019 and 2018, we sold $1.49 billion, $1.10 billion, and $791.7 million, respectively, of loans.

Securities purchased during the years ended December 31, 2020, 2019 and 2018 totaled $1.58 billion, $332.4 million, and $923.6 million, respectively, and securities repayments, maturities and sales in those periods were $659.1 million, $458.6 million, and $421.3 million, respectively.

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

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

Our primary financing activity is gathering deposits.

Our deposits increased by $2.52 billion during the year ended December 31, 2020, as core deposits increased by $2.72 billion and certificates of deposits, primarily brokered deposits, decreased by $205.1 million.

The increase in total deposits during 2020 was due primarily to PPP loan funds deposited into client accounts, fiscal stimulus payments, and an increase in average deposit account balances due to an increase in general client liquidity due to reduced business investment and consumer spending.

At December 31, 2020, core deposits totaled $11.65 billion, or 93% of total deposits, compared with $8.93 billion, or 89% of total deposits at December 31, 2019, and $8.16 billion, or 86% of total deposits at December 31, 2018.

Certificates of deposit are generally 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, 2020, certificates of deposit amounted to $915.3 million, or 7% of our total deposits, including $701.5 million which were scheduled to mature within one year.

Certificates of deposit decreased from 11% of our total deposits at December 31, 2019, due to the decrease in brokered certificates of deposit and were 14% of total deposits at December 31, 2018.

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

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

At December 31, 2021, core deposits totaled $13.49 billion, or 94% of total deposits, compared with $11.65 billion, or 93% of total deposits at December 31, 2020.

Certificates of deposit are generally more vulnerable to competition and more price sensitive than other retail deposits and our pricing of those deposits varies significantly based upon our liquidity management strategies at any point in time.

At December 31, 2021, certificates of deposit totaled to $838.6 million, or 6% of our total deposits, including $652.7 million which were scheduled to mature within one year.

Certificates of deposit decreased from 7% of our total deposits at December 31, 2020.

While no assurance can be given as to future periods, historically, we have been able to retain a significant amount of our deposits as they mature.

FHLB advances (excluding fair value adjustments) decreased $300.0 million for the year ended December 31, 2020, after decreasing $90.2 million for the year ended December 31, 2019.

Other borrowings at December 31, 2020 increased $66.3 million to $184.8 million following a decrease of $521,000 in 2019.

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

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

Both the FHLB advances and other borrowings outstanding at December 31, 2021 mature during 2022.

We must maintain an adequate level of liquidity to ensure the availability of sufficient funds to accommodate deposit withdrawals, to support loan growth, to satisfy financial commitments and to take advantage of investment opportunities.

During the years ended December 31, 2021 and 2020, we used our sources of funds primarily to fund loan commitments and purchase securities.

At December 31, 2020, we had outstanding commitments to extend credit, originate loans and for letters of credit totaling $3.54 billion.

At December 31, 2021, we had outstanding loan commitments totaling $3.80 billion, primarily relating to undisbursed loans in process and unused credit lines.

While representing potential growth in the loan portfolio and lending activities, this level of commitments is proportionally consistent with our historical experience and does not represent a departure from normal operations.

For the year ended December 31, 2022, we have $26.6 million of purchase obligations under contracts with vendors to provide services, for which our financial obligations are dependent upon acceptable performance by the vendor.

In addition, for the year ended December 31, 2022, we have $14.4 million of commitments under operating lease agreements.

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

“Commitments and Contingencies” and Note 23:

We generally maintain sufficient cash and readily marketable securities to meet short-term liquidity needs;

however, our primary liquidity management practice to supplement deposits is to increase or decrease short-term borrowings, including FHLB advances and Federal Reserve Bank of San Francisco (FRBSF) borrowings.

We maintain credit facilities with the FHLB-Des Moines, which provided for advances that in the aggregate would equal the lesser of 45% of Banner Bank’s assets or adjusted qualifying collateral (subject to a sufficient level of ownership of FHLB stock) and 45% of Islanders Bank’s assets or adjusted qualifying collateral.

At December 31, 2020, under these credit facilities based on pledged collateral, Banner Bank had $2.28 billion of available credit capacity and Islanders Bank $32.5 million of available credit capacity.

We maintain credit facilities with the FHLB, which provided for advances that in the aggregate would equal the lesser of 45% of Banner Bank’s assets or adjusted qualifying collateral (subject to a sufficient level of ownership of FHLB stock).

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

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

2 unchanged sentences

We had no funds borrowed from the FRBSF at December 31, 2021 or 2020.

At December 31, 2020, Banner Bank also had uncommitted federal funds line of credit agreements with other financial institutions totaling $125.0 million, while Islanders Bank had an uncommitted federal funds line of credit agreement with another

financial institution totaling $5.0 million.

No balances were outstanding under these agreements as of December 31, 2020.

At December 31, 2021, Banner 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, 2021 or 2020.

Availability of lines is subject to federal funds balances available for loan and continued borrower eligibility.

1 unchanged sentence

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

Additionally, the Federal Reserve recently established the Paycheck Protection Program Liquidity Facility (PPPLF) to bolster the effectiveness of the PPP.

As of December 31, 2020, Banner Bank was approved to utilize the PPPLF.

Banner Bank may utilize the PPPLF pursuant to which it will pledge PPP loans at face value as collateral to obtain FRB non-recourse advances.

Banner Bank utilized and repaid outstanding advances from the PPPLF during the year ended December 31, 2020.

There were no borrowings outstanding under this program during the quarter ended December 31, 2020.

Banner Corporation is a separate legal entity from the Banks 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 Banks, although there are regulatory restrictions on the ability of the Banks to pay dividends.

Banner Corporation is a separate legal entity from the Bank and, on a stand-alone level, must provide for its own liquidity and pay its own operating expenses and cash dividends.

Banner Corporation’s primary sources of funds consist of capital raised through dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends.

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 $0.44 per share, as approved by our Board of Directors, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank, and returning a substantial portion of our cash to our shareholders.

Assuming continued payment during 2022 at this rate of $0.44 per share, our average total dividend paid each quarter would be approximately $15.1 million based on the number of outstanding shares at December 31, 2021.

At December 31, 2021, Banner Corporation (on an unconsolidated basis) had liquid assets of $106.3 million.

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

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

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

During the year ended December 31, 2020, total equity increased $72.2 million to $1.67 billion.

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

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

At December 31, 2021, tangible common shareholders’ equity, which excludes goodwill and other intangible assets, was $1.30 billion, or 7.93% of tangible assets.

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

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

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

2 unchanged sentences

Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended (BHCA), and the regulations of the Federal Reserve.

Banner Bank and Islanders Bank, as state-chartered, federally insured commercial banks, are subject to the capital requirements established by the FDIC.

The capital adequacy requirements are quantitative measures established by regulation that require Banner Corporation and the Banks to maintain minimum amounts and ratios of capital.

Banner Bank, as state-chartered, federally insured commercial bank, is subject to the capital requirements established by the FDIC.

The capital adequacy requirements are quantitative measures established by regulation that require Banner Corporation and the Bank to maintain minimum amounts and ratios of capital.

The Federal Reserve requires Banner Corporation to maintain capital adequacy that generally parallels the FDIC requirements.

The FDIC requires the Banks 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 Banks have 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, 2020, Banner Corporation and the Banks each exceeded all current regulatory capital requirements and the fully phased-in capital conservation buffer requirement.

The following table shows the regulatory capital ratios of Banner Corporation and its subsidiaries, Banner Bank and Islanders Bank, as of December 31, 2020.

The FDIC requires the Bank to maintain minimum ratios of Total Capital, Tier 1 Capital, and Common Equity Tier 1 Capital to risk-weighted assets as well as Tier 1 leverage capital to average assets.

In addition to the minimum capital ratios, the Bank has to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses.

At December 31, 2021, Banner Corporation and the Bank each exceeded all current regulatory capital requirements and the fully phased-in capital conservation buffer requirement.

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

Regulatory Capital Ratios

Capital Ratios Banner Corporation Banner Bank Islanders Bank

Capital Ratios Banner Corporation Banner Bank

Total capital to risk-weighted assets 14.71 % 13.73 %

3 unchanged sentences

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

Effect of Inflation and Changing Prices

The Consolidated Financial Statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering the changes in relative purchasing power of money over time due to inflation.

The primary effect of inflation on our operations is reflected in increased operating costs.

Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature.

As a result, interest rates generally have a more significant effect on a financial institution’s performance than do general levels of inflation.

Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Contractual Obligations

The following table shows the obligations of Banner Corporation and its subsidiaries as of December 31, 2020 by maturity (in thousands):

Contractual Obligations

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

Advances from Federal Home Loan Bank $ 100,000 $ 50,000 $ — $ — $ 150,000

Subordinated notes — — — 100,000 100,000

Junior subordinated debentures — — — 147,944 147,944

Repurchase agreements 184,785 — — — 184,785

Certificates of Deposit 701,473 188,384 23,455 2,008 915,320

Operating lease obligations 16,020 23,151 13,973 12,217 65,361

Purchase obligation 28,553 25,612 4,660 123 58,948

Total $ 1,030,831 $ 287,147 $ 42,088 $ 262,292 $ 1,622,358

In addition, we have contracts with various vendors to provide services, including information processing, for periods generally ranging from one to five years, for which our financial obligations are dependent upon acceptable performance by the vendor.

“Commitments and Contingencies.”

ITEM 7A – Quantitative and Qualitative Disclosures about Market Risk

5 unchanged sentences

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

What changed 10-K

Item 7. Management’s Discussion and Analysis