BANNER CORP 10-K

ITEM 9A – Controls and Procedures The management of Banner Corporation is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934 (Exchange Act). A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that its objectives are met. Also, because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. As a result of these inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Further, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. (a) Evaluation of Disclosure Controls and Procedures: An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management as of the end of the period covered by this report. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2021, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. (b) Changes in Internal Controls Over Financial Reporting: For the year ended December 31, 2021, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Management’s Annual Report on Internal Control over Financial Reporting: Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we included a report of management’s assessment of the effectiveness of its internal controls as part of this Annual Report on Form 10-K for the year ended December 31, 2021. ITEM 9B – Other Information None. ITEM 9C-Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable 77 PART III ITEM 10 – Directors, Executive Officers and Corporate Governance The information required by this item contained under the section captioned “Proposal 1– Election of Directors,” “Meetings and Committees of the Board of Directors” and “Shareholder Proposals” in the Proxy Statement for the Annual Meeting of Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year, is incorporated herein by reference. Information regarding the executive officers of the Registrant is provided herein in Part I, Item 1 hereof. The information regarding our Audit Committee and Financial Expert included under the sections captioned “Meetings and Committees of the Board of Directors” and “Audit Committee Matters” in the Proxy Statement for the Annual Meeting of Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year, is incorporated herein by reference. Reference is made to the cover page of this Annual Report and the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” of the Proxy Statement for the Annual Meeting of the Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year, regarding compliance with Section 16(a) of the Securities Exchange Act of 1934. Code of Ethics The Board of Directors has adopted a Code of Ethics and Business Conduct for our directors, officers (including its senior financial officers), and employees. The Code of Ethics and Business Conduct was most recently approved by the Board of Directors on July 28, 2021; and the Code of Ethics and Business Conduct is reviewed by the Board on an annual basis. The Code of Ethics and Business Conduct requires our officers, directors, and employees to maintain the highest standards of professional conduct. A copy of the Code of Ethics and Business Conduct in substantially its current form was filed as an exhibit with Form 8-K on August 11, 2021 and is available without charge, upon request to Investor Relations, Banner Corporation, P.O. Box 907, Walla Walla, WA 99362. The Code is also available on Banner’s website at www.bannerbank.com. Whistleblower Program and Protections We subscribe to the Ethicspoint reporting system and encourage employees, clients, and vendors to call the Ethicspoint hotline at 1-866-ETHICSP (384-4277) or visit its website at www.Ethicspoint.com to report any concerns regarding financial statement disclosures, accounting, internal controls, or auditing matters. We will not retaliate against any of our officers or employees who raise legitimate concerns or questions about an ethics matter or a suspected accounting, internal control, financial reporting, or auditing discrepancy or otherwise assists in investigations regarding conduct that the employee reasonably believes to be a violation of Federal Securities Laws or any rule or regulation of the SEC, federal securities laws relating to fraud against shareholders or violations of applicable banking laws. Non-retaliation against employees is fundamental to our Code of Ethics and there are strong legal protections for those who, in good faith, raise an ethical concern or a complaint about their employer. ITEM 11 – Executive Compensation Information required by this item regarding management compensation and employment contracts, director compensation, and Compensation Committee interlocks and insider participation in compensation decisions is incorporated by reference to the sections captioned “Executive Compensation,” “Directors’ Compensation,” and “Compensation Discussion and Analysis,” respectively, in the Proxy Statement for the Annual Meeting of Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year. ITEM 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters (a) Security Ownership of Certain Beneficial Owners and Management Information required by this item is incorporated herein by reference to the section captioned “Security Ownership of Certain Beneficial Owners and Management” in the proxy statement for the Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year. (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the section captioned “Security Ownership of Certain Beneficial Owners and Management” in the proxy statement for the Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year. (c) Change in Control Banner Corporation is not aware of any arrangements, including any pledge by any person of securities of Banner Corporation, the operation of which may at a subsequent date result in a change in control of Banner Corporation. 78 (d) Equity Compensation Plan Information The following table sets forth information about equity compensation plans that provide for the award of securities or the grant of options to purchase securities to employees and directors of Banner Corporation and its subsidiaries that were in effect at December 31, 2021: (A) (B) (C) Plan category Number of securities to be issued upon exercise of outstanding options or vesting of outstanding restricted stock and unit grants Weighted average exercise price of outstanding options and rights Number of securities remaining available for future issuance under equity compensation plans excluding securities reflected in column (A) Equity compensation plans approved by security holders 2012 Restricted Stock and Incentive Bonus Plan — n/a 30,189 2014 Omnibus Incentive Plan 98,828 n/a 183,030 2018 Omnibus Incentive Plan 377,394 n/a 432,396 476,222 645,615 Equity compensation plans not approved by security holders — — Total 476,222 645,615 ITEM 13 – Certain Relationships and Related Transactions, and Director Independence The information required by this item contained under the sections captioned “Related Party Transactions” and “Director Independence” in the Proxy Statement for the Annual Meeting of Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year, is incorporated herein by reference. ITEM 14 – Principal Accounting Fees and Services The information required by this item contained under the section captioned “Proposal 4– Ratification of Selection of Independent Registered Public Accounting Firm” in the Proxy Statement for the Annual Meeting of Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year, is incorporated herein by reference. 79 PART IV ITEM 15 – Exhibits and Financial Statement Schedules (a) (1) Financial Statements See Index to Consolidated Financial Statements on page 83 . (2) Financial Statement Schedules All financial statement schedules are omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements or the Notes thereto or in Part 1, Item 1. (3) Exhibits See Index of Exhibits on page 154 . (b) Exhibits See Index of Exhibits on page 154 . 80 Item 16 - Form 10-K Summary. None. 81 S ignatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Banner Corporation Date: February 24, 2022 /s/ Mark J. Grescovich Mark J. Grescovich President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Mark J. Grescovich /s/ Peter J. Conner Mark J. Grescovich Peter J. Conner President and Chief Executive Officer; Director Executive Vice President and Chief Financial Officer (Principal Executive Officer) (Principal Financial and Accounting Officer) Date: February 24, 2022 Date: February 24, 2022 /s/ John R. Layman /s/ David I. Matson John R. Layman David I. Matson Director Director Date: February 24, 2022 Date: February 24, 2022 /s/ Connie R. Collingsworth /s/ Merline Saintil Connie R. Collingsworth Merline Saintil Director Director Date: February 24, 2022 Date: February 24, 2022 /s/ Brent A. Orrico /s/ David A. Klaue Brent A. Orrico David A. Klaue Chairman of the Board Director Date: February 24, 2022 Date: February 24, 2022 /s/ Terry Schwakopf /s/ Kevin F. Riordan Terry Schwakopf Kevin F. Riordan Director Director Date: February 24, 2022 Date: February 24, 2022 /s/ Roberto R. Herencia /s/ Ellen R.M. Boyer Roberto R. Herencia Ellen R.M. Boyer Director Director Date: February 24, 2022 Date: February 24, 2022 /s/ John Pedersen John Pedersen Director Date: February 24, 2022 82 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS BANNER CORPORATION AND SUBSIDIARIES (Item 8 and Item 15(a)(1)) Page Report of Management 84 Management Report on Internal Control Over Financial Reporting 84 Report of Independent Registered Public Accounting Firm ( Moss Adams LLP , Spokane, Washington , PCAOB ID: 659 ) 86 Consolidated Statements of Financial Condition as of December 31, 2021 and 2020 89 Consolidated Statements of Operations for the Years Ended December 31, 2021, 2020 and 2019 90 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2021, 2020 and 2019 91 Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2021, 2020 and 2019 92 Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019 94 Notes to the Consolidated Financial Statements 96 83 February 24, 2022 Report of Management To the Shareholders: The management of Banner Corporation (the Company) is responsible for the preparation, integrity, and fair presentation of its published financial statements and all other information presented in this annual report. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, as such, include amounts based on informed judgments and estimates made by management. In the opinion of management, the financial statements and other information herein present fairly the financial condition and operations of the Company at the dates indicated in conformity with accounting principles generally accepted in the United States of America. Management is responsible for establishing and maintaining an effective system of internal control over financial reporting. The internal control system is augmented by written policies and procedures and by audits performed by an internal audit staff (assisted in certain instances by contracted external audit resources other than the independent registered public accounting firm), which reports to the Audit Committee of the Board of Directors. Internal auditors monitor the operation of the internal and external control system and report findings to management and the Audit Committee. When appropriate, corrective actions are taken to address identified control deficiencies and other opportunities for improving the system. The Audit Committee provides oversight to the financial reporting process. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time. The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of the Company’s management. The Audit Committee is responsible for the selection of the independent auditors. It meets periodically with management, the independent auditors and the internal auditors to ensure that they are carrying out their responsibilities. The Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting, and auditing procedures of the Company in addition to reviewing the Company’s financial reports. The independent auditors and the internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the adequacy of the internal control structure for financial reporting and any other matters which they believe should be brought to the attention of the Committee. Mark J. Grescovich, Chief Executive Officer Peter J. Conner, Chief Financial Officer Management Report on Internal Control over Financial Reporting February 24, 2022 The management of Banner Corporation is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that: Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with the authorizations of management and directors of the Company; and Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, including the possibility of human error and circumvention or overriding of controls, internal control over financial reporting may not prevent or detect misstatements. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. This assessment was based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - 84 Integrated Framework (2013) . Based on this assessment and those criteria, management believes that, as of December 31, 2021, the Company maintained effective internal control over financial reporting. The Company’s independent registered public accounting firm has audited the Company’s Consolidated Financial Statements that are included in this annual report and the effectiveness of our internal control over financial reporting as of December 31, 2021 and issued their Report of Independent Registered Public Accounting Firm, appearing under Item 8. The audit report expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. 85 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Banner Corporation and Subsidiaries Opinions on the Consolidated Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated statements of financial condition of Banner Corporation and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021 and 2020, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. Change in Accounting Principle On January 1, 2020, the Company adopted ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” applicable to financial assets measured at amortized cost including loan receivables and held to maturity debt securities. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to 86 the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. As described in Notes 1 and 4 to the consolidated financial statements, the balance of the Company’s consolidated allowance for credit losses – loans was $132.1 million at December 31, 2021. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans held for investments to present the net carrying value at the amount expected to be collected on such financial assets. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. 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. 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. We identified the estimation and application of forecasted economic conditions used in the allowance for credit losses – loans as a critical audit matter. The economic forecast component of the allowance for credit losses - loans is used to compare the conditions that existed during the historical period to current conditions and future expectations, and to make adjustments to the historical data accordingly. Auditing management’s judgments regarding the estimation of forecasted economic conditions and the method by which management applied these forecasts to the allowance for credit losses - loans involved a high degree of subjectivity. The primary procedures we performed to address this critical audit matter included: • Testing the design, implementation, and operating effectiveness of controls relating to management’s calculation of the allowance for credit losses, including controls over the selection and implementation of the forecasted economic conditions used. • Obtaining management’s analysis and supporting documentation related to the forecasted economic conditions, and testing whether the forecasts used in the calculation of the allowance for credit losses are reasonable and supportable based on the analysis provided by management. • Testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for credit losses, and testing completeness and accuracy of the data used in the calculation, application of the forecasted economic conditions determined by management and used in the calculation, and recalculation of the impact of the forecast on the allowance for credit losses balance. We identified the estimation of qualitative and environmental factors used in the allowance for credit losses – loans as a critical audit matter. The qualitative and environmental factors are used to estimate credit losses related to matters that are not captured in the historical loss rates, and are based on management’s evaluation of available internal and external data. Auditing management’s judgments regarding the qualitative and environmental factors applied to the allowance for credit losses - loans involved a high degree of subjectivity. The primary procedures we performed to address this critical audit matter included: • Testing the design, implementation, and operating effectiveness of controls relating to management’s calculation of the allowance for credit losses, including controls over the determination of the qualitative and environmental factors used. • Obtaining management’s analysis and supporting documentation related to the qualitative and environmental factors, and testing whether the environmental and qualitative factors used in the calculation of the allowance for credit losses are supported by the analysis provided by management. • Testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for credit losses, and testing completeness and accuracy of the data used in the calculation, application of the environmental and qualitative factors determined by management and used in the calculation, and recalculation of the allowance for credit losses balance. We identified management’s risk ratings of loans which are used in the allowance for credit losses – loans as a critical audit matter. The Company uses internally determined risk ratings as credit indicators to classify loans into pools and to estimate expected loss rates for each of the loan pools. Those loan pools are then included in the calculation of the allowance for credit losses. Auditing management’s judgments regarding risk ratings of loans involved a high degree of subjectivity. The primary procedures we performed to address this critical audit matter included: • Testing the design, implementation, and operating effectiveness of controls over the accuracy of risk ratings of loans. • Testing a risk-based targeted selection of loans to gain substantive evidence that the Company is appropriately rating these loans in accordance with its policies, and that the risk ratings for the loans are reasonable. • Testing the completeness and accuracy of the loan data used in the allowance for credit losses calculation, including application of the loan risk ratings determined by management and used in the calculation, and recalculation of the allowance for credit losses balance. /s/ Moss Adams LLP Spokane, Washington 87 February 24, 2022 We have served as the Company’s auditor since 2004. 88 BANNER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands, except shares) December 31, 2021 and 2020 ASSETS December 31, 2021 December 31, 2020 Cash and due from banks $ 358,461 $ 311,899 Interest bearing deposits 1,775,839 922,284 Total cash and cash equivalents 2,134,300 1,234,183 Securities—trading 26,981 24,980 Securities—available-for-sale, amortized cost $ 3,653,160 and $ 2,256,189 , respectively 3,638,993 2,322,593 Securities—held-to-maturity, net of allowance for credit losses of $ 433 and $ 94 , respectively, fair value $ 541,853 and $ 448,681 , respectively 520,922 421,713 Total securities 4,186,896 2,769,286 Federal Home Loan Bank (FHLB) stock 12,000 16,358 Securities purchased under agreements to resell 300,000 — Loans held for sale (includes $ 39,775 and $ 133,554 , at fair value, respectively) 96,487 243,795 Loans receivable 9,084,763 9,870,982 Allowance for credit losses - loans ( 132,099 ) ( 167,279 ) Net loans receivable 8,952,664 9,703,703 Accrued interest receivable 42,916 46,617 Real estate owned (REO), held for sale, net 852 816 Property and equipment, net 148,759 164,556 Goodwill 373,121 373,121 Other intangibles, net 14,855 21,426 Bank-owned life insurance (BOLI) 244,156 191,830 Deferred tax assets, net 71,138 65,742 Operating lease right-of-use assets 55,257 55,367 Other assets 171,471 144,823 Total assets $ 16,804,872 $ 15,031,623 LIABILITIES Deposits: Non-interest-bearing $ 6,385,177 $ 5,492,924 Interest-bearing transaction and savings accounts 7,103,125 6,159,052 Interest-bearing certificates 838,631 915,320 Total deposits 14,326,933 12,567,296 Advances from FHLB 50,000 150,000 Other borrowings 264,490 184,785 Subordinated notes, net 98,564 98,201 Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities) 119,815 116,974 Operating lease liabilities 59,756 59,343 Accrued expenses and other liabilities 148,303 143,300 Deferred compensation 46,684 45,460 Total liabilities 15,114,545 13,365,359 COMMITMENTS AND CONTINGENCIES (Note 20) SHAREHOLDERS’ EQUITY Preferred stock - $ 0.01 par value per share, 500,000 shares authorized; no shares outstanding at December 31, 2021 and December 31, 2020 — — Common stock and paid in capital - $ 0.01 par value per share, 50,000,000 shares authorized; 34,252,632 shares issued and outstanding at December 31, 2021; 35,159,200 shares issued and outstanding at December 31, 2020 1,299,381 1,349,879 Common stock (non-voting) and paid in capital - $ 0.01 par value per share, 5,000,000 shares authorized; no shares issued and outstanding at December 31, 2021; no shares issued and outstanding at December 31, 2020 — — Retained earnings 390,762 247,316 Carrying value of shares held in trust for stock-based compensation plans ( 7,435 ) ( 7,636 ) Liability for common stock issued to stock related compensation plans 7,435 7,636 Accumulated other comprehensive income 184 69,069 Total shareholders’ equity 1,690,327 1,666,264 Total liabilities and shareholders’ equity $ 16,804,872 $ 15,031,623 See notes to consolidated financial statements 89 BANNER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except for per share amounts) For the Years Ended December 31, 2021, 2020 and 2019 2021 2020 2019 INTEREST INCOME: Loans receivable $ 445,731 $ 466,360 $ 471,473 Mortgage-backed securities 45,723 31,792 38,640 Securities and cash equivalents 29,046 20,994 15,574 Total interest income 520,500 519,146 525,687 INTEREST EXPENSE: Deposits 11,770 25,015 37,630 FHLB advances 2,592 5,023 12,234 Other borrowings 467 603 330 Subordinated debt 8,780 7,204 6,574 Total 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 (recapture)/provision for credit losses 530,279 413,426 458,919 NON-INTEREST INCOME Deposit fees and other service charges 39,495 34,384 46,632 Mortgage banking operations 33,948 51,083 22,215 BOLI 5,000 5,972 4,645 Miscellaneous 12,875 6,821 8,624 91,318 98,260 82,116 Net gain on sale of securities 482 1,012 33 Net change in valuation of financial instruments carried at fair value 4,616 ( 656 ) ( 208 ) Total non-interest income 96,416 98,616 81,941 NON-INTEREST EXPENSE: Salary and employee benefits 244,351 245,400 226,409 Less capitalized loan origination costs ( 34,401 ) ( 34,848 ) ( 28,934 ) Occupancy and equipment 52,850 53,362 52,390 Information/computer data services 24,356 24,386 22,458 Payment and card processing expenses 20,544 16,095 16,993 Professional and legal expenses 22,274 12,093 9,736 Advertising and marketing 6,036 6,412 7,836 Deposit insurance 5,583 6,516 2,840 State/municipal business and use taxes 4,343 4,355 3,880 REO operations ( 22 ) ( 190 ) 303 Amortization of core deposit intangibles 6,571 7,732 8,151 Loss on extinguishment of debt 2,284 — 735 Miscellaneous 24,236 22,712 27,387 379,005 364,025 350,184 COVID-19 expenses 436 3,502 — Merger and acquisition - related expenses 660 2,062 7,544 Total non-interest expense 380,101 369,589 357,728 Income before provision for income taxes 246,594 142,453 183,132 PROVISION FOR INCOME TAXES 45,546 26,525 36,854 NET INCOME $ 201,048 $ 115,928 $ 146,278 Earnings per common share Basic $ 5.81 $ 3.29 $ 4.20 Diluted $ 5.76 $ 3.26 $ 4.18 Cumulative dividends declared per common share $ 1.64 $ 1.23 $ 2.64 Weighted average number of common shares outstanding: Basic 34,610,056 35,264,252 34,868,434 Diluted 34,919,188 35,528,848 34,967,684 See notes to the consolidated financial statements 90 BANNER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) For the Years Ended December 31, 2021, 2020 and 2019 2021 2020 2019 NET INCOME $ 201,048 $ 115,928 $ 146,278 OTHER COMPREHENSIVE INCOME, NET OF INCOME TAXES: Unrealized holding (loss) gain on securities—available-for-sale arising during the period ( 80,073 ) 45,247 33,843 Income tax benefit (expense) related to securities—available-for-sale unrealized holding losses 19,217 ( 10,860 ) ( 8,122 ) Reclassification for net gain on securities—available-for-sale realized in earnings ( 498 ) ( 454 ) ( 34 ) Income tax expense related to securities—available-for-sale realized gains 120 109 8 Net unrealized loss on interest rate swaps used in cash flow hedges ( 1,261 ) — — Income tax benefit related interest rate swaps used in cash flow hedges 302 — — Changes in fair value of junior subordinated debentures related to instrument specific credit risk ( 10,419 ) 2,330 601 Income tax benefit (expense) related to junior subordinated debentures 2,501 ( 559 ) ( 144 ) Reclassification of fair value of junior subordinated debentures redeemed 1,613 — — Income tax expense related to junior subordinated debentures redeemed ( 387 ) — — Other comprehensive (loss) income ( 68,885 ) 35,813 26,152 COMPREHENSIVE INCOME $ 132,163 $ 151,741 $ 172,430 See notes to the consolidated financial statements 91 BANNER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (in thousands, except shares) For the Years Ended December 31, 2021, 2020 and 2019 Common Stock and Paid in Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Shareholders’ Equity Shares Amount Balance, January 1, 2019 35,182,772 $ 1,337,436 $ 134,055 $ 7,104 $ 1,478,595 Net income 146,278 146,278 Other comprehensive loss 26,152 26,152 Accrual of dividends on common stock ($ 2.64 /share-cumulative) ( 93,495 ) ( 93,495 ) Repurchase of common stock ( 1,000,000 ) ( 53,922 ) ( 53,922 ) Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered ( 9,547 ) 5,226 5,226 Issuance of shares for acquisition 1,578,351 85,200 85,200 Balance, December 31, 2019 35,751,576 $ 1,373,940 $ 186,838 $ 33,256 $ 1,594,034 Balance, January 1, 2020 35,751,576 $ 1,373,940 $ 186,838 $ 33,256 $ 1,594,034 New credit standard (ASC 326) - impact in year of adoption, net of tax ( 11,215 ) ( 11,215 ) Net income 115,928 115,928 Other comprehensive income 35,813 35,813 Accrual of dividends on common stock ($ 1.23 /share-cumulative) ( 44,235 ) ( 44,235 ) Repurchase of common stock ( 624,780 ) ( 31,775 ) ( 31,775 ) Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered 32,404 7,714 7,714 Balance, December 31, 2020 35,159,200 $ 1,349,879 $ 247,316 $ 69,069 $ 1,666,264 (Continued on next page) 92 BANNER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (continued) (in thousands, except shares) For the Years Ended December 31, 2021, 2020 and 2019 Common Stock and Paid in Capital Retained Earnings Accumulated Other Comprehensive Income Shareholders’ Equity Shares Amount Balance, January 1, 2021 35,159,200 $ 1,349,879 $ 247,316 $ 69,069 $ 1,666,264 Net income 201,048 201,048 Other comprehensive loss ( 68,885 ) ( 68,885 ) Accrual of dividends on common stock ($ 1.64 /share-cumulative) ( 57,602 ) ( 57,602 ) Repurchase of common stock ( 1,050,000 ) ( 56,528 ) ( 56,528 ) Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered 143,432 6,030 6,030 Balance, December 31, 2021 34,252,632 $ 1,299,381 $ 390,762 $ 184 $ 1,690,327 See notes to the consolidated financial statements 93 BANNER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Years Ended December 31, 2021, 2020 and 2019 2021 2020 2019 OPERATING ACTIVITIES: Net income $ 201,048 $ 115,928 $ 146,278 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation 17,345 18,130 17,282 Deferred income/expense, net of amortization ( 38,786 ) ( 15,040 ) ( 1,543 ) Capitalized loan servicing rights, net of amortization ( 1,805 ) ( 894 ) 662 Amortization of core deposit intangibles 6,571 7,732 8,151 Gain on sale of securities, net ( 482 ) ( 1,012 ) ( 33 ) Net change in valuation of financial instruments carried at fair value ( 4,616 ) 656 208 Reinvested dividends – equity securities — ( 353 ) — Decrease (increase) in deferred taxes 16,357 ( 13,963 ) 7,290 (Decrease) increase in current taxes payable ( 3,643 ) ( 2,193 ) 607 Stock-based compensation 9,258 9,168 7,142 Net change in cash surrender value of BOLI ( 4,685 ) ( 5,030 ) ( 4,246 ) Gain on sale of loans, excluding capitalized servicing rights ( 26,140 ) ( 43,304 ) ( 15,993 ) (Gain) loss on disposal of real estate held for sale and property and equipment, net ( 2,305 ) 859 1,075 (Recapture) provision for credit losses ( 33,388 ) 67,875 10,000 Provision for losses on real estate held for sale — 45 — Loss on extinguishment of debt 2,284 — 735 Origination of loans held for sale ( 1,102,663 ) ( 1,461,872 ) ( 1,094,237 ) Proceeds from sales of loans held for sale 1,276,111 1,471,828 1,070,814 Net change in: Other assets 2,200 ( 27,559 ) ( 10,171 ) Other liabilities ( 11,083 ) 4,385 5,588 Net cash provided from operating activities 301,578 125,386 149,609 INVESTING ACTIVITIES: Purchases of securities—available-for-sale ( 2,805,251 ) ( 1,361,132 ) ( 277,503 ) Principal repayments and maturities of securities—available-for-sale 1,314,484 474,876 321,510 Proceeds from sales of securities — available-for-sale 83,663 150,374 86,083 Purchases of securities — held-to-maturity ( 135,615 ) ( 222,094 ) ( 54,850 ) Principal repayments and maturities of securities — held-to-maturity 32,487 33,848 50,962 Purchases of equity securities ( 4,750 ) ( 1,060,000 ) — Proceeds from sales of equity securities 4,796 1,060,695 — Loan repayments (originations), net 795,892 ( 561,338 ) ( 304,191 ) Purchases of loans and participating interest in loans ( 5,086 ) ( 2,510 ) ( 9,798 ) Proceeds from sales of other loans 46,028 19,469 27,560 Net cash received related to branch divestitures — — 26,944 Purchases of property and equipment ( 10,493 ) ( 12,803 ) ( 24,700 ) Proceeds from sale of real estate held for sale and sale of other property 11,759 8,893 7,815 Proceeds from FHLB stock repurchase program 4,358 52,169 175,998 Purchase of FHLB stock — ( 40,185 ) ( 170,380 ) Purchase of securities purchased under agreements to resell ( 300,000 ) — — Investment in bank-owned life insurance ( 50,053 ) ( 83 ) ( 75 ) Other 2,355 5,197 1,511 Net cash used by investing activities ( 1,015,426 ) ( 1,454,624 ) ( 143,114 ) (Continued on next page) 94 BANNER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (in thousands) For the Years Ended December 31, 2021, 2020 and 2019 2021 2020 2019 FINANCING ACTIVITIES: Increase in deposits, net 1,759,638 2,518,654 272,625 Proceeds from FHLB advances — — 450,000 Repayment of long term FHLB borrowing ( 100,000 ) — ( 281,150 ) Repayments of overnight and short-term FHLB borrowings, net — ( 300,000 ) ( 300,000 ) Increase (decrease) in other borrowings, net 79,704 66,311 ( 520 ) Net proceeds from issuance of subordinated notes — 98,027 — Repayment of junior subordinated debentures ( 8,248 ) — — Proceeds from redemption of trust securities related to junior subordinated debentures 248 — — Cash dividends paid ( 57,621 ) ( 94,078 ) ( 56,074 ) Cash paid for repurchase of common stock ( 56,528 ) ( 31,775 ) ( 53,922 ) Taxes paid related to net share settlement for equity awards ( 3,228 ) ( 1,453 ) ( 1,915 ) Net cash provided from financing activities 1,613,965 2,255,686 29,044 NET CHANGE IN CASH AND CASH EQUIVALENTS 900,117 926,448 35,539 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,234,183 307,735 272,196 CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,134,300 $ 1,234,183 $ 307,735 2021 2020 2019 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid in cash $ 24,278 $ 40,942 $ 58,239 Taxes paid in cash 29,017 39,672 27,329 NON-CASH INVESTING AND FINANCING TRANSACTIONS: Transfer of loans to real estate owned and other repossessed assets 512 1,602 303 Dividends accrued but not paid until after period end 1,338 1,357 51,199 ACQUISITIONS (DISPOSITIONS): Assets acquired — — 426,609 Liabilities assumed — — 373,016 See notes to consolidated financial statements 95 BANNER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business: Banner Corporation (Banner or the Company) is a bank holding company incorporated in the State of Washington. The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary, Banner Bank. Banner Bank is a Washington-chartered commercial bank that conducts business from its headquarters in Walla Walla, Washington and, as of December 31, 2021, its 150 branch offices located in Washington, Oregon, California and Idaho. Banner Bank also has 18 loan production offices located in Washington, Oregon, California, Idaho and Utah. Banner Corporation is subject to regulation by the Board of Governors of the Federal Reserve System (Federal Reserve Board). Banner Bank (the Bank) is subject to regulation by the Washington State Department of Financial Institutions, Division of Banks (DFI) and the Federal Deposit Insurance Corporation (the FDIC). The Company’s operating results depend primarily on its net interest income, which is the difference between interest income on interest-earning assets, consisting 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 income also is affected by the level of the Company’s non-interest income, including deposit fees and other service charges, gains and losses on the sale of securities, results of mortgage banking operations, which includes loan origination and servicing fees and gains and losses on the sale of loans, as well as non-interest expense, provisions for loan losses and income tax provisions. In addition, net income is affected by the net change in the value of certain financial instruments carried at fair value. Basis of Presentation and Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All material intercompany transactions, profits and balances have been eliminated. The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) and under the rules and regulations of the U.S. Securities and Exchange Commission (the SEC). At December 31, 2021, the Company had nine wholly-owned subsidiary grantor trusts (the Trusts), each of which issued trust preferred securities (TPS) and common securities. The Trusts are not included in the Company’s consolidated financial statements. Subsequent Events: The Company has evaluated events and transactions subsequent to December 31, 2021 for potential recognition or disclosure. On February 18, 2022 , Banner Bank entered into a purchase and assumption agreement to sell four Banner Bank branches, subject to certain regulatory approvals and customary closing conditions. The sale includes deposit accounts with an approximate balance of $ 212 million. Banner Bank will receive a 5.0 % premium in relation to the core deposits. The sale also includes all related branch premises and equipment. Cash and Cash Equivalents: Cash and cash equivalents include cash and due from banks and temporary investments which are federal funds sold and interest bearing balances due from other banks. Cash and cash equivalents generally have maturities of three months or less at the date of purchase. Business Combinations: 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 excess purchase consideration over 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, except for those items permitted to be capitalized. Changes in deferred tax asset valuation allowances related to acquired tax uncertainties are recognized in net income after the measurement period. A transaction between common controlled entities is not considered a business combination and the receiving entity records the net assets received in the transaction at their historical carrying amounts, as reflected in the parent’s financial statements. Use of 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. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Various elements of the Company’s 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 Banner’s consolidated 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 intangible assets, such as goodwill, core deposit intangibles (CDI) and loan servicing rights, (v) the valuation of real estate held for sale, (vi) the valuation or recognition of deferred tax assets and liabilities and (vii) the valuation of assets and liabilities acquired in business combinations and subsequent recognition of related income and expense. These policies and judgments, estimates and assumptions are described in greater detail in subsequent Notes to the Consolidated Financial Statements. Management believes that the judgments, estimates and assumptions used in the preparation of the consolidated financial statements are appropriate based on the factual circumstances at the time. However, given the sensitivity of the consolidated financial statements to these critical accounting policies, the use of other judgments, estimates and 96 assumptions could result in material differences in the Company’s results of operations or financial condition. Further, subsequent changes in economic or market conditions could have a material impact on these estimates and the Company’s financial condition and operating results in future periods. Securities: Debt securities are classified as held-to-maturity when the Company has the ability and positive intent to hold them to maturity. Debt securities classified as available-for-sale are available for future liquidity requirements and may be sold prior to maturity. Debt securities classified as trading are also available for future liquidity requirements and may be sold prior to maturity. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Debt securities classified as held-to-maturity are carried at cost, net of the allowance for credit losses- securities, adjusted for amortization of premiums to the earliest callable date and accretion of discounts to maturity. Debt securities classified as available-for-sale are measured at fair value. Unrealized holding gains and losses on debt securities classified as available-for-sale are excluded from earnings and are reported net of tax as accumulated other comprehensive income (AOCI), a component of shareholders’ equity, until realized. Debt securities classified as trading are also measured at fair value. Unrealized holding gains and losses on securities classified as trading are included in earnings. (See Note 16 for a more complete discussion of accounting for the fair value of financial instruments.) Realized gains and losses on sale are computed on the specific identification method and are included in earnings on the trade date sold. Equity securities are measured at fair value with changes in the fair value recognized through net income. Allowance for Credit Losses - Securities: Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. The Company’s held-to maturity portfolio contains mortgage-backed securities issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The Company’s held-to-maturity portfolio also contains municipal bonds that are typically rated by major rating agencies as Aa or better. The Company has never incurred a loss on a municipal bond, therefore the expectation of credit losses on these securities is insignificant. The Company uses industry historical credit loss information adjusted for current conditions to establish the allowance for credit losses on the municipal bond portfolio. Less than 2% of the Company’s held-to-maturity portfolio are community development bonds; approximately half represent pools of one- to four-family loans while the other half are not collateralized. The expected credit losses on these bonds is similar to Banner’s commercial business loan portfolio. Therefore, the Company uses the commercial business loan portfolio loss rates to establish the allowance for credit losses on the collateralized bonds and its own loss history to establish a loss rate on bonds that are not collateralized. For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized costs, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. Projected cash flows are discounted by the current effective interest rate. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to AOCI. Changes in the allowance for credit losses are recorded as provision for (or recapture of) credit loss expense. Losses are charged against the allowance when management believes the non-collectability of an available-for-sale or held-to-maturity security is confirmed or when either of the criteria regarding intent of requirement to sell is met. Investment in FHLB Stock: At December 31, 2021, the Bank had $ 12.0 million in FHLB of Des Moines stock (FHLB stock), compared to $ 16.4 million at December 31, 2020. FHLB stock does not have a readily determinable fair value. The Bank’s investments in FHLB stock is carried at cost or par value ($ 100 per share) and evaluated for impairment based on the Bank’s expectations of the ultimate recoverability of the stock’s par value. Ownership of FHLB stock is restricted to the FHLB and member institutions and can only be purchased and redeemed at par, therefore there has been no observable changes in market prices. As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding FHLB advances. Management periodically evaluates FHLB stock for impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the client base of the FHLB, and (4) the liquidity position of the FHLB. The Company has determined there is no impairment on the FHLB stock investment as of December 31, 2021 and 2020. Loans Receivable : The Bank originates residential one- to four-family and multifamily mortgage loans for both portfolio investment and sale in the secondary market. The Bank also originates construction and land development, commercial real estate, commercial business, agricultural and consumer loans for portfolio investment. Loans receivable not designated as held for sale are recorded at amortized cost, net 97 of the allowance for credit losses. Amortized cost is the principal amount outstanding, net of deferred fees, discounts and premiums. Accrued interest on loans is reported in accrued interest receivable on the Consolidated Statements of Financial Condition. Premiums, discounts and deferred loan fees are amortized to maturity using the level-yield methodology. Loans Held for Sale: Residential one- to four-family and multifamily mortgage loans originated with the intent to be sold in the secondary market are considered held for sale. Residential one- to four-family loans under best effort delivery commitments are carried at the lower of aggregate cost or estimated market value. Residential one- to four-family loans expected to be delivered under mandatory commitments are carried at fair value in order to match changes in the value of the loans with the value of the related economic hedges on the loans. Fair values for residential mortgage loans held for sale are determined by comparing actual loan rates to current secondary market prices for similar loans. The multifamily held for sale loans originated prior to April 1, 2020 are carried at fair value in order to match changes in the value of the loans with the value of the related economic hedges on the loans. Fair values for multifamily loans held for sale are calculated based on discounted cash flows using a discount rate that is a combination of market spreads for similar loan types added to selected index rates. The multifamily held for sale loans originated subsequent to March 31, 2020 are carried at the lower of cost or market. Net unrealized losses on loans held for sale that are carried at lower of cost or market are recognized through the valuation allowance by charges to income. Non-refundable fees and direct loan origination costs related to loans held for sale carried at the lower of cost or market are recognized as part of the cost basis of the loan. Gains and losses on sales of loans held for sale are determined using the aggregate method and are recorded in the mortgage banking operations component of non-interest income. For the years ended December 31, 2021 and 2020, we recorded net gains on loans sold of $ 34.5 million and $ 51.9 million, respectively. Loans Acquired in Business Combinations : 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 is grossed up for the allowance for credit losses and 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 loan. 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 in the Consolidated Statement of Operations. Any subsequent deterioration (improvement) in credit quality is recognized by recording (recapturing) a provision for credit losses. Income Recognition on Nonaccrual Loans and Securities : 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 or principal 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. Provision and Allowance for Credit Losses - Loans : The methodology for determining the allowance for credit losses - loans is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for credit losses. Among the material estimates required to establish the allowance for credit losses - loans are: a reasonable and supportable forecast; a reasonable and supportable forecast period and the reversion period; value of collateral; strength of guarantors; the amount and timing of future cash flows for loans individually evaluated; and determination of the qualitative loss factors. All of these estimates are susceptible to significant change. The allowance for credit losses - loans 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 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. The Company has established systematic methodologies for the determination of the adequacy of the Company’s allowance for credit losses. 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 98 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 - 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 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 - 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 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, 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 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 commencing with the first quarter of 2008. For loans evaluated collectively, management uses economic indicators to adjust the historical loss rates so that they better reflect management’s expectations of future conditions over the remaining lives of the loans in the portfolio based on reasonable and supportable forecasts. 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 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 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. 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 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. 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 Bank determines 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 Bank measures 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 Bank’s 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 Bank 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 99 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 Bank. Some of the Bank’s loans are reported as troubled debt restructures (TDRs). Loans are reported as TDRs when the Bank grants 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) and the Consolidated Appropriations Act, 2021 (CAA) 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. The CAA extends relief offered under the CARES Act related to TDRs as a result of COVID-19 through January 1, 2022. Loan Origination and Commitment Fees: Loan origination fees, net of certain specifically defined direct loan origination costs, are deferred and recognized as an adjustment of the loans’ interest yield using the level-yield method over the contractual term of each loan adjusted for actual loan prepayment experience. Loan commitment fees are deferred until the expiration of the commitment period unless management believes there is a remote likelihood that the underlying commitment will be exercised, in which case the fees are amortized to fee income using the straight-line method over the commitment period. If a loan commitment is exercised, the deferred commitment fee is accounted for in the same manner as a loan origination fee. Deferred commitment fees associated with expired commitments are recognized as fee income. Allowance for Credit Losses - unfunded loan commitments: An allowance for credit losses - unfunded loan commitments is maintained at a level that, in the opinion of management, is adequate to absorb expected credit losses associated with the contractual life of the Bank’s commitments to lend funds under existing agreements such as letters or lines of credit. The Bank uses a methodology for determining the allowance for credit losses - unfunded loan commitments that applies the same segmentation and loss rate to each pool as the funded exposure adjusted for probability of funding. Draws on unfunded loan commitments that are considered uncollectible at the time funds are advanced are charged to the allowance for credit losses on off-balance sheet exposures. Changes in the allowance for credit losses - unfunded loan commitments are recognized as provision for (or recapture of) credit loss expense and added to the allowance for credit losses - unfunded loan commitments, which is included in other liabilities in the Consolidated Statements of Financial Condition. Real Estate Owned, Held for Sale: 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 and, if necessary, 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 Bank 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 Bank’s control or because of changes in the Bank’s strategies for recovering the investment. Property is classified as held for sale when the Company commits to a plan to sell the property and is actively marketing the property for sale. Held for sale property is recorded at the lower of the estimated fair value of the property, less expected selling costs, or the book value at the date the property is transferred to held for sale. Depreciation is not recorded on held for sale property. Property and Equipment: Property and equipment is carried at cost less accumulated depreciation. Depreciation is based upon the straight-line method applied to individual assets and groups of assets acquired in the same year over the lesser of their estimated useful lives or the related lease terms of the assets: Buildings and leased improvements 10 – 39 years Furniture and equipment 3 – 10 years Routine maintenance, repairs and replacement costs are expensed as incurred. Expenditures which significantly increase values or extend useful lives are capitalized. The Company reviews buildings, leasehold improvements and equipment for impairment whenever events or changes in circumstances indicate that the undiscounted cash flows for the property are less than its carrying value. If identified, an impairment loss is recognized through a charge to earnings based on the fair value of the property. Right of Use Lease Asset & Lease Liability: The Company leases retail space, office space, storage space, and equipment under operating leases. Most leases require the Company to pay real estate taxes, maintenance, insurance and other similar costs in addition to the base rent. Certain leases also contain lease incentives, such as tenant improvement allowances and rent abatement. Variable lease payments are recognized as lease expense as they are incurred. We record an operating lease right of use (ROU) asset and an operating lease liability (lease liability) for operating leases with a lease term greater than 12 months. The ROU asset and lease liability are recorded in the Consolidated Statement of Financial Condition. 100 ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Accordingly, ROU assets are reduced by tenant improvement allowances from landlords plus any prepaid rent. We do not separate lease and non-lease components of contracts. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. Many of our leases contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule, which are factored into our determination of lease payments when appropriate. Substantially all of the leases provide the Company with the option to extend the lease term one or more times following expiration of the initial term. The ROU asset and lease liability terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Goodwill: 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. The Company completes its annual review of goodwill as of December 31. An assessment of qualitative factors is completed to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The qualitative assessment involves judgment by management on determining whether there have been any triggering events that have occurred which would indicate potential impairment. If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed. 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 the fair value exceeds the carrying amount then goodwill is not considered impaired. If the carrying amount exceeds its fair value, an impairment loss would be recognized equal to the amount of excess, limited to the amount of total goodwill allocated to the reporting unit. The impairment loss would be recognized as a charge to earnings. The disposal of a portion of a reporting unit that meets the definition of a business requires goodwill to be allocated for purposes of determining the gain or loss on disposal . Other Intangible Assets: Other intangible assets consist 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. CDI is being amortized on an accelerated basis over a weighted average estimated useful life of eight years to ten years . 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 and SBA Servicing Rights: Servicing assets are recognized as separate assets when rights are acquired through purchase or sale of loans. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage and SBA loans, the fair value of the servicing right is estimated and capitalized. Fair values are estimated based on an independent dealer analysis of discounted cash flows. Capitalized mortgage servicing rights are reported in other assets and are amortized into mortgage banking operations in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Capitalized SBA servicing rights are reported in other assets and are carried at fair value. Changes in the fair value of SBA servicing rights are recognized into miscellaneous non-interest income. Mortgage servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics for the underlying loans, such as interest rate, balance outstanding, loan type, age and remaining term, and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If the Company later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income. Servicing fee income is recorded for fees earned for servicing loans. Servicing fee income is reflected in mortgage banking operations for mortgage servicing rights and in miscellaneous non-interest income for SBA servicing rights on the Consolidated Statements of Operations. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Bank-Owned Life Insurance (BOLI): The Bank has purchased, or acquired through mergers, life insurance policies in connection with the implementation of certain executive supplemental income, salary continuation and deferred compensation retirement plans. These policies provide protection against the adverse financial effects that could result from the death of a key employee and provide tax-exempt income to offset expenses associated with the plans. It is the Bank’s intent to hold these policies as a long-term investment; however, there may be an income tax impact if the Bank chooses to surrender certain policies. Although the lives of individual current or former management-level employees are insured, the Bank is the respective owner and sole or partial beneficiaries. BOLI is carried at the cash surrender value (CSV) of the underlying insurance contract. Changes in the CSV and any death benefits received in excess of the CSV are recognized as non-interest income. Derivative Instruments: Derivatives include “off-balance-sheet” financial products, the value of which is dependent on the value of underlying financial assets, such as stock, bonds, foreign currency, or a reference rate or index. Such derivatives include “forwards,” “futures,” “options” or “swaps.” Banner Bank uses an interest rate swap program which involves the receipt of fixed-rate amounts from a counterparty in exchange for variable-rate payments over the life of the agreements without exchange of the underlying notional amount. Such derivatives are used to hedge the variable cash flows associated with existing variable-rate assets. These interest rate swaps qualify as cash flow hedging instruments so gains and losses are recorded in AOCI to the extent the hedge is effective. Gains and losses on the interest 101 rate swaps are reclassified from AOCI to earnings in the period the hedged transaction affects earnings and are included in interest income. Amounts reported in AOCI related to derivatives will be reclassified to interest income as interest payments are received on the Company’s variable-rate assets. Banner Bank is a party to $ 400.0 million in notional amounts of these types of interest rate swaps at December 31, 2021. In addition, Banner Bank uses an interest rate swap program for commercial loan clients that provides the client with a variable rate loan and enters into an interest rate swap allowing them to effectively fix their loan interest rates. These client swaps are matched with third party swaps with qualified broker/dealer or banks to offset the risk. At December 31, 2021, Banner Bank had $ 551.6 million in notional amounts of these client interest rate swaps outstanding, with an equal amount of offsetting third party swaps also in place. The fair value adjustments for these swaps are reflected in other assets or other liabilities as appropriate. Further, as a part of its mortgage banking activities, the Company issues “rate lock” commitments to one- to four-family loan borrowers and obtains offsetting “best efforts” delivery commitments from purchasers of loans. The Company uses forward contracts for the sale of mortgage-backed securities and mandatory delivery commitments for the sale of loans to hedge one- to four-family loan “rate lock” commitments and one- to four-family loans held for sale. The commitments to originate mortgage loans held for sale and the related delivery contracts are considered derivatives. The Company recognizes all derivatives as either assets or liabilities in the balance sheet and requires measurement of those instruments at fair value through adjustments to current earnings. None of these residential mortgage loan related derivatives are designated as hedging instruments for accounting purposes. Rather, they are accounted for as free-standing derivatives, or economic hedges, and the Company reports changes in fair values of its derivatives in current period net income. The fair values for these instruments, which generally change as a result of changes in the level of market interest rates, are estimated based on dealer quotes and secondary market sources. Assumptions used include rate assumptions based on historical information, current mortgage interest rates, the stage of completion of the underlying application and underwriting process, the time remaining until the expiration of the derivative loan commitment, and the expected net future cash flows related to the associated servicing of the loan (see Note 21 for a more complete discussion of derivatives and hedging). Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee has the right to pledge or exchange the transferred assets beyond a trivial benefit, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Advertising Expenses: Advertising costs are expensed as incurred. Costs related to production of advertising are considered incurred when the advertising is first used. Income Taxes: The Company files a consolidated income tax return including all of its wholly-owned subsidiaries on a calendar year basis. Income taxes are accounted for using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates which are expected to be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’s income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period of change. A valuation allowance is recognized as a reduction to deferred tax assets when management determines it is more likely than not that deferred tax assets will not be available to offset future income tax liabilities. Accounting standards for income taxes prescribe a recognition threshold and measurement process for financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a tax return, and also provides guidance on the de-recognition of previously recorded benefits and their classification, as well as the proper recording of interest and penalties, accounting in interim periods, disclosures and transition. The Company periodically reviews its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This review takes into consideration the status of current taxing authorities’ examinations of the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment. Stock-Based Compensation: The Company maintains a number of stock-based incentive plans, which are discussed in more detail in Note 13, Stock-Based Compensation Plans. Under these plans, the Company compensates employees and directors with time-based restricted stock and restricted stock unit grants. Some restricted stock awards include performance-based and market-based goals that impact the number of shares that ultimately vest based on the level of goal achievement. The Company measures the cost of employee or director services received in exchange for an award of equity instruments based on the fair value of the award, which is the intrinsic value on the grant date. This cost is recognized as expense in the Consolidated Statements of Operations ratably over the vesting period of the award. Any tax benefit or deficiency is recorded as income tax benefit or expense in the period the shares vest. Excess tax benefits are classified along with other income tax cash flows as an operating activity. The Company issues restricted stock and restricted stock unit awards which vest over a one or three year period during which time the employee or director accrues or receives dividends and may have full voting rights depending on the terms of the grant. Earnings Per Share: Earnings per common share is computed under the two-class method. Pursuant to the two-class method, non-vested stock-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and are included in the computation of EPS. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Application of the two-class method resulted in the equivalent earnings per share to the treasury method. Basic earnings per common share is computed by dividing net earnings allocated to common shareholders by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per common share 102 is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method. Comprehensive Income: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. In addition, certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, unrealized gains and losses on interest rate swaps used in cash flow hedges and changes in fair value of junior subordinated debentures related to instrument specific credit risk, are reported as a separate component of the equity section of the Consolidated Statements of Financial Condition, and such items, along with net income, are components of comprehensive income which is reported in the Consolidated Statements of Comprehensive Income. Business Segments: The Company is managed by legal entity and not by lines of business. The Bank is a community oriented commercial bank chartered in the State of Washington. The Bank’s primary business is that of a traditional banking institution, gathering deposits and originating loans for portfolio in its respective primary market areas. The Bank offers a wide variety of deposit products to its consumer and commercial clients. Lending activities include the origination of real estate, commercial/agriculture business and consumer loans. The Bank is also an active participant in the secondary market, originating residential loans for sale on both a servicing released and servicing retained basis. In addition to interest income on loans and investment securities, the Bank receives other income from deposit service charges, loan servicing fees and from the sale of loans and investments. The performance of the Bank is reviewed by the Company’s executive management and Board of Directors on a monthly basis. All of the executive officers of the Company are members of Banner Bank’s management team. Generally Accepted Accounting Principles establish standards to report information about operating segments in annual financial statements and require reporting of selected information about operating segments in interim reports to shareholders. The Company has determined that its current business and operations consist of a single business segment and a single reporting unit. Reclassification: Certain reclassifications have been made to the prior years’ consolidated financial statements and/or schedules to conform to the current year’s presentation. These reclassifications may have affected certain reported amounts and ratios for the prior periods. These reclassifications had no effect on retained earnings or net income as previously presented and the effect of these reclassifications is considered immaterial. Note 2: ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED Reference Rate Reform (Topic 848) In March 2020, the Financial Accounting Standards Board (FASB) issued guidance within Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , in response to the scheduled discontinuation of LIBOR on December 31, 2021. The amendments in this ASU provide optional guidance designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements (e.g., loans, debt securities, derivatives, borrowings) necessitated by reference rate reform. Since the issuance of this guidance, the publication cessation of U.S. dollar LIBOR has been extended to June 30, 2023. The following optional expedients for applying the requirements of certain Topics or Industry Subtopics in the Codification are permitted for contracts that are modified because of reference rate reform and that meet certain scope guidance: 1) modifications of contracts within the scope of Topics 310, Receivables, and 470, Debt, should be accounted for by prospectively adjusting the effective interest rate; 2) modifications of contracts within the scope of Topic 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required under this Topic for modifications not accounted for as separate contracts; 3) modifications of contracts do not require an entity to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract under Subtopic 815-15, Derivatives and Hedging- Embedded Derivatives; and 4) for other Topics or Industry Subtopics in the Codification, the amendments in this ASU also include a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope . This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. The amendments in these ASUs are effective upon the issuance date of March 12, 2020 and applies to contract modifications made and new hedging relationships entered into through December 31, 2022. The Company has elected certain expedients related to individual hedge relationships. The Company will be able to use other expedients in this guidance to manage through the transition away from LIBOR, specifically as they relate to loans, leases and hedging relationships. The adoption of this accounting guidance did not have a material impact on the Company’s Consolidated Financial Statements. 103 Note 3: SECURITIES The amortized cost, gross unrealized gains and losses and estimated fair value of securities at December 31, 2021 and December 31, 2020 are summarized as follows (in thousands): December 31, 2021 Amortized Cost Fair Value Trading: Corporate bonds $ 27,203 $ 26,981 $ 27,203 $ 26,981 December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Fair Value Available-for-Sale: U.S. Government and agency obligations $ 201,101 $ 852 $ ( 621 ) $ — $ 201,332 Municipal bonds 293,761 15,171 ( 320 ) — 308,612 Corporate bonds 114,427 3,103 ( 183 ) — 117,347 Mortgage-backed or related securities 2,837,480 17,749 ( 49,961 ) — 2,805,268 Asset-backed securities 206,391 52 ( 9 ) — 206,434 $ 3,653,160 $ 36,927 $ ( 51,094 ) $ — $ 3,638,993 December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Allowance for Credit Losses Held-to-Maturity: U.S. Government and agency obligations $ 316 $ 3 $ — $ 319 $ — Municipal bonds 420,555 20,743 ( 1,393 ) 439,905 ( 203 ) Corporate bonds 3,092 — ( 3 ) 3,089 ( 230 ) Mortgage-backed or related securities 97,392 1,171 ( 23 ) 98,540 — $ 521,355 $ 21,917 $ ( 1,419 ) $ 541,853 $ ( 433 ) December 31, 2020 Amortized Cost Fair Value Trading: Corporate bonds 27,203 $ 24,980 $ 27,203 $ 24,980 104 December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Fair Value Available-for-Sale: U.S. Government and agency obligations $ 141,668 $ 1,002 $ ( 935 ) $ — $ 141,735 Municipal bonds 283,997 19,523 ( 2 ) — 303,518 Corporate bonds 219,086 2,762 ( 79 ) — 221,769 Mortgage-backed or related securities 1,602,033 45,179 ( 1,060 ) — 1,646,152 Asset-backed securities 9,405 77 ( 63 ) — 9,419 $ 2,256,189 $ 68,543 $ ( 2,139 ) $ — $ 2,322,593 December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Allowance for Credit Losses Held-to-Maturity: U.S. Government and agency obligations $ 340 $ 7 $ — $ 347 $ — Municipal bonds 370,998 24,130 ( 94 ) 395,034 ( 59 ) Corporate bonds 3,222 — ( 12 ) 3,210 ( 35 ) Mortgage-backed or related securities 47,247 2,843 — 50,090 — $ 421,807 $ 26,980 $ ( 106 ) $ 448,681 $ ( 94 ) Accrued interest receivable on held-to-maturity debt securities was $ 3.3 million and $ 3.0 million as of December 31, 2021 and December 31, 2020, respectively, and was $ 10.1 million and $ 6.9 million on available-for-sale debt securities as of December 31, 2021 and December 31, 2020, respectively. Accrued interest receivable on securities is reported in accrued interest receivable on the Consolidated Statements of Financial Condition and is excluded from the calculation of the allowance for credit losses. At December 31, 2021, the gross unrealized losses and the fair value for securities available-for-sale aggregated by the length of time that individual securities have been in a continuous unrealized loss position were as follows (in thousands): December 31, 2021 Less Than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Available-for-Sale: U.S. Government and agency obligations $ — $ — $ 71,306 $ ( 621 ) $ 71,306 $ ( 621 ) Municipal bonds 40,397 ( 221 ) 8,541 ( 99 ) 48,938 ( 320 ) Corporate bonds 8,009 ( 121 ) 9,938 ( 62 ) 17,947 ( 183 ) Mortgage-backed or related securities 1,307,411 ( 38,028 ) 721,454 ( 11,933 ) 2,028,865 ( 49,961 ) Asset-backed securities 3,382 ( 9 ) — — 3,382 ( 9 ) $ 1,359,199 $ ( 38,379 ) $ 811,239 $ ( 12,715 ) $ 2,170,438 $ ( 51,094 ) 105 At December 31, 2020, the gross unrealized losses and the fair value for securities available-for-sale and held-to-maturity aggregated by the length of time that individual securities have been in a continuous unrealized loss position were as follows (in thousands): December 31, 2020 Less Than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Available-for-Sale: U.S. Government and agency obligations $ 3,126 $ ( 8 ) $ 50,603 $ ( 927 ) $ 53,729 $ ( 935 ) Municipal bonds 495 ( 2 ) — — 495 ( 2 ) Corporate bonds 3,586 ( 79 ) — — 3,586 ( 79 ) Mortgage-backed or related securities 181,871 ( 1,046 ) 2,337 ( 14 ) 184,208 ( 1,060 ) Asset-backed securities — — 5,676 ( 63 ) 5,676 ( 63 ) $ 189,078 $ ( 1,135 ) $ 58,616 $ ( 1,004 ) $ 247,694 $ ( 2,139 ) At December 31, 2021, there were 97 securities—available-for-sale with unrealized losses, compared to 54 at December 31, 2020. Management does not believe that any individual unrealized loss as of December 31, 2021 or December 31, 2020 resulted from credit loss. The decline in fair market value of these securities was generally due to changes in interest rates and changes in market-desired spreads subsequent to their purchase. There were no sales of securities—trading for the years ended December 31, 2021, 2020 or 2019. There were no securities—trading in a nonaccrual status at December 31, 2021 or December 31, 2020. Net unrealized holding gains of $ 2.0 million were recognized in 2021 and net unrealized holding losses of $ 656,000 were recognized 2020. The following table presents gross gains and losses on sales and partial calls of securities available-for-sale (in thousands): For the Year Ended December 31, 2021 2020 2019 Available-for-Sale: Gross Gains $ 993 $ 899 $ 239 Gross Losses ( 495 ) ( 445 ) ( 205 ) Balance, end of the period $ 498 $ 454 $ 34 There were no securities—available-for-sale in a nonaccrual status at December 31, 2021 and 2020. During the year ended December 31, 2021, the Company sold one held-to-maturity security with a resulting net gain of $ 3,000 and had partial calls of securities that resulted in a net loss of $ 65,000 . There were no sales of securities—held-to-maturity during the years ended December 31, 2020 or 2019, although there were partial calls of securities that resulted in a net gain of $ 216,000 for the year ended December 31, 2020 and a net loss of $ 1,000 for the year ended December 31, 2019. There were no securities—held-to-maturity in a nonaccrual status at December 31, 2021 and 2020. During the year ended December 31, 2021, the Company sold a $ 4.8 million equity security with a resulting net gain of $ 46,000 . There were two sales of equity securities totaling $ 1.06 billion for the year ended December 31, 2020 with a resulting net loss of $ 177,000 and no sales of equity securities during the year ended December 31, 2019. During the year ended December 31, 2020, the Company also sold Visa Class B stock with a net gain of $ 519,000 . The stock was previously carried at a zero-cost basis due to transfer restrictions and uncertainty of litigation. 106 The amortized cost and estimated fair value of securities at December 31, 2021, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because some securities may be called or prepaid with or without call or prepayment penalties. December 31, 2021 Trading Available-for-Sale Held-to-Maturity Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Maturing within one year $ — $ — $ 14,077 $ 14,174 $ 12,026 $ 12,087 Maturing after one year through five years — — 165,039 170,104 93,652 95,299 Maturing after five years through ten years — — 849,194 846,399 22,562 23,776 Maturing after ten years 27,203 26,981 2,624,850 2,608,316 393,115 410,691 $ 27,203 $ 26,981 $ 3,653,160 $ 3,638,993 $ 521,355 $ 541,853 The following table presents, as of December 31, 2021, investment securities which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law (in thousands): Carrying Value Amortized Cost Fair Value Purpose or beneficiary: State and local governments public deposits $ 209,304 $ 208,827 $ 221,319 Interest rate swap counterparties 24,268 23,723 24,285 Repurchase transaction accounts 292,700 300,441 292,700 Other 2,529 2,529 2,559 Total pledged securities $ 528,801 $ 535,520 $ 540,863 The Company monitors the credit quality of held-to-maturity debt securities through the use of credit rating. Credit ratings are reviewed and updated quarterly. The Company’s non-rated held-to-maturity debt securities are primarily United States government sponsored enterprise debentures carrying minimal to no credit risk. The remaining non-rated held-to-maturity debt securities balance is local municipal debt from within the Company’s geographic footprint and is monitored through quarterly or annual financial review. This municipal debt is predominately essential service or unlimited general obligation backed debt. The following tables summarize the amortized cost of held-to-maturity debt securities by credit rating at December 31, 2021 and December 31, 2020 (in thousands): December 31, 2021 U.S. Government and agency obligations Municipal bonds Corporate bonds Mortgage-backed or related securities Total AAA/AA/A $ — $ 406,363 $ 500 $ — $ 406,863 Not Rated 316 14,192 2,592 97,392 114,492 $ 316 $ 420,555 $ 3,092 $ 97,392 $ 521,355 December 31, 2020 U.S. Government and agency obligations Municipal bonds Corporate bonds Mortgage-backed or related securities Total AAA/AA/A $ — $ 349,123 $ 500 $ — $ 349,623 Not Rated 340 21,875 2,722 47,247 72,184 $ 340 $ 370,998 $ 3,222 $ 47,247 $ 421,807 The following tables present the activity in the allowance for credit losses for held-to-maturity debt securities by major type for the year ended December 31, 2021 and December 31, 2020 (in thousands): 107 For the Year Ended December 31, 2021 U.S. Government and agency obligations Municipal bonds Corporate bonds Mortgage-backed or related securities Total Allowance for credit losses – securities Beginning Balance $ — $ 59 $ 35 $ — $ 94 Provision for credit losses — 144 445 — 589 Securities charged-off — — ( 250 ) — ( 250 ) Ending Balance $ — $ 203 $ 230 $ — $ 433 For the Year Ended December 31, 2020 U.S. Government and agency obligations Municipal bonds Corporate bonds Mortgage-backed or related securities Total Allowance for credit losses – securities Beginning Balance $ — $ — $ — $ — $ — Impact of adopting ASC 326 — 28 35 — 63 Provision for credit losses — 31 — — 31 Ending Balance $ — $ 59 $ 35 $ — $ 94 Note 4: LOANS RECEIVABLE AND THE ALLOWANCE FOR CREDIT LOSSES The following table presents the loans receivable at December 31, 2021 and 2020 by class (dollars in thousands). December 31, 2021 December 31, 2020 Amount Percent of Total Amount Percent of Total Commercial real estate: Owner-occupied $ 1,131,828 12.4 % $ 1,076,467 10.9 % Investment properties 1,990,461 21.9 1,955,684 19.8 Small balance CRE 598,212 6.6 573,849 5.8 Multifamily real estate 564,100 6.2 428,223 4.4 Construction, land and land development: Commercial construction 169,530 1.9 228,937 2.3 Multifamily construction 259,116 2.9 305,527 3.1 One- to four-family construction 568,753 6.3 507,810 5.1 Land and land development 313,454 3.5 248,915 2.5 Commercial business: Commercial business (1) 1,172,076 12.9 2,178,461 22.1 Small business scored 792,310 8.7 743,451 7.5 Agricultural business, including secured by farmland (2) 285,753 3.1 299,949 3.0 One- to four-family residential 683,268 7.5 717,939 7.3 Consumer: Consumer—home equity revolving lines of credit 458,533 5.0 491,812 5.0 Consumer—other 97,369 1.1 113,958 1.2 Total loans 9,084,763 100.0 % 9,870,982 100.0 % Less allowance for credit losses - loans ( 132,099 ) ( 167,279 ) Net loans $ 8,952,664 $ 9,703,703 108 (1) Includes $ 132.6 million and $ 1.04 billion of SBA PPP loans as of December 31, 2021 and December 31, 2020, respectively. (2) Includes $ 1.4 million of SBA PPP loans as of December 31, 2021 and none as of December 31, 2020. Loan amounts are net of unearned loan fees in excess of unamortized costs of $ 8.6 million as of December 31, 2021 and $ 25.6 million as of December 31, 2020. Net loans include net discounts on acquired loans of $ 9.7 million and $ 16.1 million as of December 31, 2021 and 2020, respectively. Net loans does not include accrued interest receivable. Accrued interest receivable on loans was $ 29.2 million as of December 31, 2021 and $ 36.6 million as of December 31, 2020 and was reported in accrued interest receivable on the Consolidated Statements of Financial Condition. The Company’s loans to directors, executive officers and related entities are on substantially the same terms and underwriting as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectability. Such loans had balances of $ 700,000 and $ 1.5 million at December 31, 2021 and 2020, respectively. Purchased credit-deteriorated and purchased non-credit-deteriorated loans. Loans acquired in business combinations are recorded at their fair value at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased credit-deteriorated (PCD) or purchased non-credit-deteriorated. There were no PCD loans acquired during the years ended December 31, 2021 and 2020. Troubled Debt Restructurings. Loans are reported as TDRs when the Bank grants one or more concessions to a borrower experiencing financial difficulties that it would not otherwise consider. The Company’s TDRs have generally not involved forgiveness of amounts due, but almost always include a modification of multiple factors; the most common combination includes interest rate, payment amount and maturity date. As of December 31, 2021 and 2020, the Company had TDRs of $ 5.5 million and $ 7.9 million, respectively. The Company had no commitments to advance additional funds related to TDRs as of both December 31, 2021 and 2020. There were no new TDRs that occurred during the year ended December 31, 2021. The following tables present new TDRs that occurred during the years ended December 31, 2020 and 2019 (dollars in thousands): Number of Contracts Pre-modification Outstanding Recorded Investment Post-modification Outstanding Recorded Investment Year Ended December 31, 2020 Recorded Investment (1) (2) Commercial business 3 $ 5,532 $ 5,532 Agricultural business/farmland 1 $ 169 $ 169 Total 4 $ 5,701 $ 5,701 Year Ended December 31, 2019 Recorded Investment (1) (2) Commercial real estate: Investment properties 1 $ 1,090 $ 1,090 Commercial business 1 $ 160 $ 160 Agricultural business/farmland 1 $ 596 $ 596 Total 3 $ 1,846 $ 1,846 (1) Since most loans were already considered classified and/or on non-accrual status prior to restructuring, the modifications did not have a material effect on the Company’s determination of the allowance for credit losses. (2) Generally, these modifications do not fit into one separate type, such as rate, term, amount, interest-only or payment, but instead are a combination of multiple types of modifications; therefore, they are disclosed in aggregate. There were no TDRs which incurred a payment default within the years ended December 31, 2021 and 2020 for which the payment default occurred within twelve months of the restructure date. A default on a restructured loan results in a transfer to nonaccrual status, a charge-off or a combination of both. 109 Credit Quality Indicators : To appropriately and effectively manage the ongoing credit quality of the Company’s loan portfolio, management has implemented a risk-rating or loan grading system for its loans. The system is a tool to evaluate portfolio asset quality throughout each applicable loan’s life as an asset of the Company. Generally, loans are risk rated on an aggregate borrower/relationship basis with individual loans sharing similar ratings. There are some instances when specific situations relating to individual loans will provide the basis for different risk ratings within the aggregate relationship. Loans are graded on a scale of 1 to 9. A description of the general characteristics of these categories is shown below: Overall Risk Rating Definitions : Risk-ratings contain both qualitative and quantitative measurements and take into account the financial strength of a borrower and the structure of the loan or lease. Consequently, the definitions are to be applied in the context of each lending transaction and judgment must also be used to determine the appropriate risk rating, as it is not unusual for a loan or lease to exhibit characteristics of more than one risk-rating category. Consideration for the final rating is centered in the borrower’s ability to repay, in a timely fashion, both principal and interest. The Company’s risk-rating and loan grading policies are reviewed and approved annually. There were no material changes in the risk-rating or loan grading system for the periods presented. Risk Ratings 1-5: Pass Credits with risk ratings of 1 to 5 meet the definition of a pass risk rating. The strength of credits vary within the pass risk ratings, ranging from a risk rated 1 being an exceptional credit to a risk rated 5 being an acceptable credit that requires a more than normal level of supervision. Risk Rating 6: Special Mention A credit with potential weaknesses that deserves management’s close attention is risk rated a 6. If left uncorrected, these potential weaknesses will result in deterioration in the capacity to repay debt. A key distinction between Special Mention and Substandard is that in a Special Mention credit, there are identified weaknesses that pose potential risk(s) to the repayment sources, versus well defined weaknesses that pose risk(s) to the repayment sources. Assets in this category are expected to be in this category no more than 9-12 months as the potential weaknesses in the credit are resolved. Risk Rating 7: Substandard A credit with well-defined weaknesses that jeopardize the ability to repay in full is risk rated a 7. These credits are inadequately protected by either the sound net worth and payment capacity of the borrower or the value of pledged collateral. These are credits with a distinct possibility of loss. Loans headed for foreclosure and/or legal action due to deterioration are rated 7 or worse. Risk Rating 8: Doubtful A credit with an extremely high probability of loss is risk rated 8. These credits have all the same critical weaknesses that are found in a substandard loan; however, the weaknesses are elevated to the point that based upon current information, collection or liquidation in full is improbable. While some loss on doubtful credits is expected, pending events may make the amount and timing of any loss indeterminable. In these situations taking the loss is inappropriate until the outcome of the pending event is clear. Risk Rating 9: Loss A credit that is considered to be currently uncollectible or of such little value that it is no longer a viable bank asset is risk rated 9. Losses should be taken in the accounting period in which the credit is determined to be uncollectible. Taking a loss does not mean that a credit has absolutely no recovery or salvage value but, rather, it is not practical or desirable to defer writing off the credit, even though partial recovery may occur in the future. 110 The following tables present the Company’s portfolio of risk-rated loans by class and by grade as of December 31, 2021 and December 31, 2020 (in thousands). Revolving loans that are converted to term loans are treated as new originations in the table below and are presented by year of origination. Term loans that are renewed or extended for periods longer than 90 days are presented as a new origination in the year of the most recent renewal or extension. December 31, 2021 Term Loans by Year of Origination Revolving Loans Total Loans By class: 2021 2020 2019 2018 2017 Prior Commercial real estate - owner occupied Risk Rating Pass $ 280,746 $ 224,451 $ 140,679 $ 125,282 $ 80,955 $ 205,594 $ 11,782 $ 1,069,489 Special Mention 1,050 — 2,185 — — 74 — 3,309 Substandard 13,597 — 13,770 — 1,056 30,607 — 59,030 Doubtful — — — — — — — — Loss — — — — — — — — Total Commercial real estate - owner occupied $ 295,393 $ 224,451 $ 156,634 $ 125,282 $ 82,011 $ 236,275 $ 11,782 $ 1,131,828 Commercial real estate - investment properties Risk Rating Pass $ 397,100 $ 224,303 $ 265,385 $ 235,542 $ 225,718 $ 549,266 $ 18,471 $ 1,915,785 Special Mention — — 240 5,544 — — — 5,784 Substandard 29,933 — 4,369 — 5,490 29,100 — 68,892 Doubtful — — — — — — — — Loss — — — — — — — — Total Commercial real estate - investment properties $ 427,033 $ 224,303 $ 269,994 $ 241,086 $ 231,208 $ 578,366 $ 18,471 $ 1,990,461 Multifamily real estate Risk Rating Pass $ 190,709 $ 79,047 $ 58,243 $ 36,026 $ 89,942 $ 100,653 $ 3,030 $ 557,650 Special Mention — — — — — — — — Substandard 4,908 — — — — 1,542 — 6,450 Doubtful — — — — — — — — Loss — — — — — — — — Total Multifamily real estate $ 195,617 $ 79,047 $ 58,243 $ 36,026 $ 89,942 $ 102,195 $ 3,030 $ 564,100 111 December 31, 2021 Term Loans by Year of Origination Revolving Loans Total Loans By class: 2021 2020 2019 2018 2017 Prior Commercial construction Risk Rating Pass $ 103,352 $ 31,841 $ 8,791 $ 8,087 $ — $ — $ — $ 152,071 Special Mention — — — — — — — — Substandard 11,782 85 688 4,806 — 98 — 17,459 Doubtful — — — — — — — — Loss — — — — — — — — Total Commercial construction $ 115,134 $ 31,926 $ 9,479 $ 12,893 $ — $ 98 $ — $ 169,530 Multifamily construction Risk Rating Pass $ 86,643 $ 118,114 $ 54,359 $ — $ — $ — $ — $ 259,116 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Loss — — — — — — — — Total Multifamily construction $ 86,643 $ 118,114 $ 54,359 $ — $ — $ — $ — $ 259,116 One- to four- family construction Risk Rating Pass $ 526,153 $ 40,133 $ 331 $ — $ — $ 216 $ 1,920 $ 568,753 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Loss — — — — — — — — Total One- to four- family construction $ 526,153 $ 40,133 $ 331 $ — $ — $ 216 $ 1,920 $ 568,753 112 December 31, 2021 Term Loans by Year of Origination Revolving Loans Total Loans By class: 2021 2020 2019 2018 2017 Prior Land and land development Risk Rating Pass $ 181,381 $ 89,895 $ 17,154 $ 8,141 $ 4,050 $ 7,870 $ 1,682 $ 310,173 Special Mention — — — — — — — — Substandard 2,876 14 263 — — 128 — 3,281 Doubtful — — — — — — — — Loss — — — — — — — — Total Land and land development $ 184,257 $ 89,909 $ 17,417 $ 8,141 $ 4,050 $ 7,998 $ 1,682 $ 313,454 Commercial business Risk Rating Pass $ 273,096 $ 215,462 $ 176,136 $ 121,211 $ 45,434 $ 78,049 $ 246,351 $ 1,155,739 Special Mention 65 77 — 241 19 8 2,430 2,840 Substandard 1,941 1,560 2,292 3,853 875 679 2,297 13,497 Doubtful — — — — — — — — Loss — — — — — — — — Total Commercial business $ 275,102 $ 217,099 $ 178,428 $ 125,305 $ 46,328 $ 78,736 $ 251,078 $ 1,172,076 Agricultural business including secured by farmland Risk Rating Pass $ 34,573 $ 25,338 $ 49,951 $ 27,401 $ 13,073 $ 32,608 $ 99,410 $ 282,354 Special Mention — — — — — — — — Substandard — 474 2,231 493 129 72 — 3,399 Doubtful — — — — — — — — Loss — — — — — — — — Total Agricultural business including secured by farmland $ 34,573 $ 25,812 $ 52,182 $ 27,894 $ 13,202 $ 32,680 $ 99,410 $ 285,753 113 December 31, 2020 Term Loans by Year of Origination Revolving Loans Total Loans By class: 2020 2019 2018 2017 2016 Prior Commercial real estate - owner occupied Risk Rating Pass $ 243,100 $ 156,838 $ 156,817 $ 122,484 $ 92,312 $ 212,792 $ 3,379 $ 987,722 Special Mention — 4,560 — 2,251 — 1,869 149 8,829 Substandard 7,923 26,914 3,040 2,516 11,731 27,792 — 79,916 Doubtful — — — — — — — — Loss — — — — — — — — Total Commercial real estate - owner occupied $ 251,023 $ 188,312 $ 159,857 $ 127,251 $ 104,043 $ 242,453 $ 3,528 $ 1,076,467 Commercial real estate - investment properties Risk Rating Pass $ 237,553 $ 262,543 $ 299,452 $ 218,018 $ 278,348 $ 502,914 $ 20,062 $ 1,818,890 Special Mention — 2,712 — — 2,730 1,856 — 7,298 Substandard 19,812 11,418 20,352 36,310 23,027 18,577 — 129,496 Doubtful — — — — — — — — Loss — — — — — — — — Total Commercial real estate - investment properties $ 257,365 $ 276,673 $ 319,804 $ 254,328 $ 304,105 $ 523,347 $ 20,062 $ 1,955,684 Multifamily real estate Risk Rating Pass $ 78,632 $ 69,825 $ 39,343 $ 93,442 $ 44,395 $ 96,863 $ 1,983 $ 424,483 Special Mention — — — — — — — — Substandard 2,312 1,428 — — — — — 3,740 Doubtful — — — — — — — — Loss — — — — — — — — Total Multifamily real estate $ 80,944 $ 71,253 $ 39,343 $ 93,442 $ 44,395 $ 96,863 $ 1,983 $ 428,223 114 December 31, 2020 Term Loans by Year of Origination Revolving Loans Total Loans By class: 2020 2019 2018 2017 2016 Prior Commercial construction Risk Rating Pass $ 83,506 $ 67,152 $ 41,299 $ 6,038 $ 2,158 $ 1,129 $ — $ 201,282 Special Mention — 5,963 — — — — — 5,963 Substandard 12,913 3,808 4,873 — 98 — — 21,692 Doubtful — — — — — — — — Loss — — — — — — — — Total Commercial construction $ 96,419 $ 76,923 $ 46,172 $ 6,038 $ 2,256 $ 1,129 $ — $ 228,937 Multifamily construction Risk Rating Pass $ 79,710 $ 151,141 $ 59,744 $ 14,932 $ — $ — $ — $ 305,527 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Loss — — — — — — — — Total Multifamily construction $ 79,710 $ 151,141 $ 59,744 $ 14,932 $ — $ — $ — $ 305,527 One- to four- family construction Risk Rating Pass $ 461,294 $ 35,910 $ — $ — $ — $ — $ 7,581 $ 504,785 Special Mention 1,563 — — — — — 630 2,193 Substandard 501 331 — — — — — 832 Doubtful — — — — — — — — Loss — — — — — — — — Total One- to four- family construction $ 463,358 $ 36,241 $ — $ — $ — $ — $ 8,211 $ 507,810 115 December 31, 2020 Term Loans by Year of Origination Revolving Loans Total Loans By class: 2020 2019 2018 2017 2016 Prior Land and land development Risk Rating Pass $ 156,450 $ 37,397 $ 16,560 $ 6,801 $ 6,264 $ 4,840 $ 17,020 $ 245,332 Special Mention — — — — — — — — Substandard 14 30 3,047 190 — 302 — 3,583 Doubtful — — — — — — — — Loss — — — — — — — — Total Land and land development $ 156,464 $ 37,427 $ 19,607 $ 6,991 $ 6,264 $ 5,142 $ 17,020 $ 248,915 Commercial business Risk Rating Pass $ 1,243,276 $ 230,845 $ 203,051 $ 65,524 $ 38,757 $ 66,206 $ 264,741 $ 2,112,400 Special Mention 103 412 — 829 — 115 9,507 10,966 Substandard 6,624 14,413 18,569 5,224 1,320 453 8,492 55,095 Doubtful — — — — — — — — Loss — — — — — — — — Total Commercial business $ 1,250,003 $ 245,670 $ 221,620 $ 71,577 $ 40,077 $ 66,774 $ 282,740 $ 2,178,461 Agricultural business including secured by farmland Risk Rating Pass $ 32,032 $ 62,058 $ 31,381 $ 22,635 $ 22,394 $ 24,950 $ 91,660 $ 287,110 Special Mention — — — 810 — 537 — 1,347 Substandard 1,542 2,652 1,076 163 675 3,049 2,335 11,492 Doubtful — — — — — — — — Loss — — — — — — — — Total Agricultural business including secured by farmland $ 33,574 $ 64,710 $ 32,457 $ 23,608 $ 23,069 $ 28,536 $ 93,995 $ 299,949 116 The following tables present the Company’s portfolio of non-risk-rated loans by class and delinquency status as of December 31, 2021 and December 31, 2020 (in thousands). Revolving loans that are converted to term loans are treated as new originations in the table below and are presented by year of origination. Term loans that are renewed or extended for periods longer than 90 days are presented as a new origination in the year of the most recent renewal or extension. December 31, 2021 Term Loans by Year of Origination Revolving Loans Total Loans By class: 2021 2020 2019 2018 2017 Prior Small balance CRE Past Due Category Current $ 73,302 $ 80,992 $ 74,079 $ 82,151 $ 67,837 $ 219,117 $ 533 $ 598,011 30-59 Days Past Due 40 — — — 49 — — 89 60-89 Days Past Due — — — — — — — — 90 Days + Past Due — — — — — 112 — 112 Total Small balance CRE $ 73,342 $ 80,992 $ 74,079 $ 82,151 $ 67,886 $ 219,229 $ 533 $ 598,212 Small business scored Past Due Category Current $ 235,435 $ 126,959 $ 109,483 $ 84,460 $ 55,940 $ 69,504 $ 108,632 $ 790,413 30-59 Days Past Due 260 268 — 133 74 4 185 924 60-89 Days Past Due — — 133 11 9 248 64 465 90 Days + Past Due — 69 — 62 306 7 64 508 Total Small business scored $ 235,695 $ 127,296 $ 109,616 $ 84,666 $ 56,329 $ 69,763 $ 108,945 $ 792,310 One- to four- family residential Past Due Category Current $ 229,473 $ 89,634 $ 56,843 $ 51,445 $ 54,007 $ 196,571 $ 1,425 $ 679,398 30-59 Days Past Due — 596 — 404 635 683 — 2,318 60-89 Days Past Due — — 2 295 — 30 — 327 90 Days + Past Due — — — 167 — 1,058 — 1,225 Total One- to four- family residential $ 229,473 $ 90,230 $ 56,845 $ 52,311 $ 54,642 $ 198,342 $ 1,425 $ 683,268 117 December 31, 2021 Term Loans by Year of Origination Revolving Loans Total Loans By class: 2021 2020 2019 2018 2017 Prior Consumer—home equity revolving lines of credit Past Due Category Current $ 7,135 $ 1,210 $ 1,324 $ 1,772 $ 1,764 $ 2,920 $ 440,352 $ 456,477 30-59 Days Past Due 147 — — 23 37 568 210 985 60-89 Days Past Due 49 — — — 45 83 91 268 90 Days + Past Due — — 109 191 156 188 159 803 Total Consumer—home equity revolving lines of credit $ 7,331 $ 1,210 $ 1,433 $ 1,986 $ 2,002 $ 3,759 $ 440,812 $ 458,533 Consumer-other Past Due Category Current $ 18,640 $ 12,803 $ 8,676 $ 8,242 $ 6,138 $ 17,055 $ 25,336 $ 96,890 30-59 Days Past Due — 114 13 150 22 29 60 388 60-89 Days Past Due 6 — 2 — — 8 59 75 90 Days + Past Due — — 10 6 — — — 16 Total Consumer-other $ 18,646 $ 12,917 $ 8,701 $ 8,398 $ 6,160 $ 17,092 $ 25,455 $ 97,369 118 December 31, 2020 Term Loans by Year of Origination Revolving Loans Total Loans By class: 2020 2019 2018 2017 2016 Prior Small balance CRE Past Due Category Current $ 56,544 $ 80,090 $ 84,749 $ 77,637 $ 68,791 $ 202,653 $ 2,550 $ 573,014 30-59 Days Past Due — — — — — — — — 60-89 Days Past Due — — — 45 — — — 45 90 Days + Past Due — — — 567 — 223 — 790 Total small balance CRE $ 56,544 $ 80,090 $ 84,749 $ 78,249 $ 68,791 $ 202,876 $ 2,550 $ 573,849 Small business scored Past Due Category Current $ 157,161 $ 145,037 $ 126,578 $ 89,734 $ 47,909 $ 63,347 $ 109,287 $ 739,053 30-59 Days Past Due 129 62 310 723 4 1 230 1,459 60-89 Days Past Due 98 147 3 140 — 352 151 891 90 Days + Past Due 73 228 800 484 169 248 46 2,048 Total small business scored $ 157,461 $ 145,474 $ 127,691 $ 91,081 $ 48,082 $ 63,948 $ 109,714 $ 743,451 One- to four- family residential Past Due Category Current $ 105,411 $ 90,425 $ 92,232 $ 101,491 $ 60,738 $ 254,850 $ 3,164 $ 708,311 30-59 Days Past Due 1,051 — 1,302 829 — 1,438 — 4,620 60-89 Days Past Due — — 19 — — 936 — 955 90 Days + Past Due — 114 1,185 456 169 2,129 — 4,053 Total One- to four- family residential $ 106,462 $ 90,539 $ 94,738 $ 102,776 $ 60,907 $ 259,353 $ 3,164 $ 717,939 119 December 31, 2020 Term Loans by Year of Origination Revolving Loans Total Loans By class: 2020 2019 2018 2017 2016 Prior Consumer—home equity revolving lines of credit Past Due Category Current $ 10,522 $ 2,617 $ 2,553 $ 3,359 $ 1,372 $ 2,154 $ 466,490 $ 489,067 30-59 Days Past Due — — — — — 50 409 459 60-89 Days Past Due — 202 — — — 237 — 439 90 Days + Past Due — 312 198 564 286 255 232 1,847 Total Consumer—home equity revolving lines of credit $ 10,522 $ 3,131 $ 2,751 $ 3,923 $ 1,658 $ 2,696 $ 467,131 $ 491,812 Consumer-other Past Due Category Current $ 21,811 $ 13,377 $ 13,936 $ 11,433 $ 8,575 $ 18,802 $ 25,460 $ 113,394 30-59 Days Past Due 48 35 15 22 46 26 44 236 60-89 Days Past Due 242 — — 33 21 14 18 328 90 Days + Past Due — — — — — — — — Total Consumer-other $ 22,101 $ 13,412 $ 13,951 $ 11,488 $ 8,642 $ 18,842 $ 25,522 $ 113,958 120 The following tables provide the amortized cost basis of collateral-dependent loans as of December 31, 2021 and December 31, 2020 (in thousands). Our collateral dependent loans presented in the tables below have no significant concentrations by property type or location. December 31, 2021 Real Estate Accounts Receivable Equipment Total Commercial real estate: Owner-occupied $ 3,806 $ — $ — $ 3,806 Investment properties 7,322 — — 7,322 Small balance CRE 1,831 — — 1,831 Commercial business 17 — 47 64 Agricultural business, including secured by farmland 427 — 594 1,021 Total $ 13,403 $ — $ 641 $ 14,044 December 31, 2020 Real Estate Accounts Receivable Equipment Total Commercial real estate: Owner-occupied $ 7,506 $ — $ — $ 7,506 Investment properties 8,979 — — 8,979 Small balance CRE 567 — — 567 Land and land development 302 — — 302 Commercial business Commercial business 557 — — 557 Small business scored 44 — 47 91 Agricultural business, including secured by farmland 427 — 984 1,411 One- to four-family residential 196 — — 196 Total $ 18,578 $ — $ 1,031 $ 19,609 121 The following tables provide additional detail on the age analysis of Banner’s past due loans as of December 31, 2021 and 2020 (in thousands): December 31, 2021 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Loans Non-accrual with no Allowance Total Non-accrual (1) Loans 90 Days or More Past Due and Accruing Commercial real estate: Owner-occupied $ 233 $ — $ 448 $ 681 $ 1,131,147 $ 1,131,828 $ 3,809 $ 4,340 $ — Investment properties 81 — 1,186 1,267 1,989,194 1,990,461 4,892 7,468 — Small balance CRE 89 — 112 201 598,011 598,212 1,815 2,351 — Multifamily real estate — — — — 564,100 564,100 — — — Construction, land and land development: Commercial construction — — 98 98 169,432 169,530 — 98 — Multifamily construction — — — — 259,116 259,116 — — — One- to four-family construction 162 — — 162 568,591 568,753 — — — Land and land development 51 — 14 65 313,389 313,454 — 381 — Commercial business Commercial business 5,157 1,007 588 6,752 1,165,324 1,172,076 228 1,144 2 Small business scored 924 465 508 1,897 790,413 792,310 — 1,012 — Agricultural business, including secured by farmland 139 — 1,021 1,160 284,593 285,753 1,021 1,022 — One- to four-family residential 2,318 327 1,225 3,870 679,398 683,268 — 2,711 436 Consumer: Consumer—home equity revolving lines of credit 985 268 803 2,056 456,477 458,533 — 1,736 114 Consumer—other 388 75 16 479 96,890 97,369 — 18 3 Total $ 10,527 $ 2,142 $ 6,019 $ 18,688 $ 9,066,075 $ 9,084,763 $ 11,765 $ 22,281 $ 555 122 December 31, 2020 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Loans Non-accrual with no Allowance Total Non-accrual (1) Loans 90 Days or More Past Due and Accruing Commercial real estate: Owner-occupied $ — $ 182 $ 1,447 $ 1,629 $ 1,074,838 $ 1,076,467 $ 7,509 $ 8,429 $ — Investment properties — — 7,981 7,981 1,947,703 1,955,684 8,979 8,979 — Small balance CRE — 45 790 835 573,014 573,849 567 791 — Multifamily real estate — — — — 428,223 428,223 — — — Construction, land and land development: Commercial construction — — 98 98 228,839 228,937 — 98 — Multifamily construction — — — — 305,527 305,527 — — — One- to four-family construction 356 — 331 687 507,123 507,810 — 331 — Land and land development — — 317 317 248,598 248,915 302 507 — Commercial business Commercial business 3,247 31 2,088 5,366 2,173,095 2,178,461 555 1,988 889 Small business scored 1,459 891 2,048 4,398 739,053 743,451 91 3,419 136 Agricultural business, including secured by farmland 298 37 1,548 1,883 298,066 299,949 1,412 1,743 — One-to four-family residential 4,620 955 4,053 9,628 708,311 717,939 171 3,556 1,899 Consumer: Consumer—home equity revolving lines of credit 459 439 1,847 2,745 489,067 491,812 — 2,697 130 Consumer—other 236 328 — 564 113,394 113,958 — 22 — Total $ 10,675 $ 2,908 $ 22,548 $ 36,131 $ 9,834,851 $ 9,870,982 $ 19,586 $ 32,560 $ 3,054 (1) The Company did not recognize any interest income on non-accrual loans during both the years ended December 31, 2021 and 2020. 123 The following tables provide the activity in the allowance for credit losses by portfolio segment for the years ended December 31, 2021 and 2020 (in thousands): For the Year Ended December 31, 2021 Commercial Real Estate Multifamily Real Estate Construction and Land Commercial Business Agricultural Business One- to Four-Family Residential Consumer Unallocated Total Allowance for credit losses: Beginning balance $ 57,791 $ 3,893 $ 41,295 $ 35,007 $ 4,914 $ 9,913 $ 14,466 $ — $ 167,279 Provision/(recapture) for credit losses ( 2,758 ) 3,209 ( 14,101 ) ( 8,621 ) ( 1,573 ) ( 1,907 ) ( 7,361 ) — ( 33,112 ) Recoveries 1,729 — 100 1,797 30 199 760 — 4,615 Charge-offs ( 3,767 ) ( 59 ) — ( 1,762 ) ( 181 ) — ( 914 ) — ( 6,683 ) Ending balance $ 52,995 $ 7,043 $ 27,294 $ 26,421 $ 3,190 $ 8,205 $ 6,951 $ — $ 132,099 Net loan charge-offs as a percent of average outstanding loans during the period ( 0.02 ) % — % — % — % — % — % — % n/a ( 0.02 ) % For the Year Ended December 31, 2020 Commercial Real Estate Multifamily Real Estate Construction and Land Commercial Business Agricultural Business One- to Four-Family Residential Consumer Unallocated Total Allowance for loan losses: Beginning balance $ 30,591 $ 4,754 $ 22,994 $ 23,370 $ 4,120 $ 4,136 $ 8,202 $ 2,392 $ 100,559 Impact of Adopting ASC 326 ( 2,864 ) ( 2,204 ) 2,515 3,010 ( 351 ) 7,125 2,973 ( 2,392 ) 7,812 Provision/(recapture) for credit losses 31,643 1,409 15,781 12,615 ( 87 ) ( 1,679 ) 4,603 — 64,285 Recoveries 275 — 105 3,265 1,823 467 328 — 6,263 Charge-offs ( 1,854 ) ( 66 ) ( 100 ) ( 7,253 ) ( 591 ) ( 136 ) ( 1,640 ) — ( 11,640 ) Ending balance $ 57,791 $ 3,893 $ 41,295 $ 35,007 $ 4,914 $ 9,913 $ 14,466 $ — $ 167,279 Net loan (charge-offs) recoveries as a percent of average outstanding loans during the period ( 0.02 ) % — % — % ( 0.04 ) % 0.01 % — % ( 0.01 ) % n/a ( 0.05 ) % 124 The following table provides additional information on the allowance for loan losses for the year ended December 31, 2019 (in thousands): For the Year Ended December 31, 2019 Commercial Real Estate Multifamily Real Estate Construction and Land Commercial Business Agricultural Business One- to Four-Family Residential Consumer Unallocated Total Allowance for loan losses: Beginning balance $ 27,132 $ 3,818 $ 24,442 $ 19,438 $ 3,778 $ 4,714 $ 7,972 $ 5,191 $ 96,485 Provision/(recapture) for loan losses 4,121 936 ( 1,611 ) 7,478 1,206 ( 1,053 ) 1,722 ( 2,799 ) 10,000 Recoveries 476 — 208 625 47 561 548 — 2,465 Charge-offs ( 1,138 ) — ( 45 ) ( 4,171 ) ( 911 ) ( 86 ) ( 2,040 ) — ( 8,391 ) Ending balance $ 30,591 $ 4,754 $ 22,994 $ 23,370 $ 4,120 $ 4,136 $ 8,202 $ 2,392 $ 100,559 Net loan (charge-offs) recoveries as a percent of average outstanding loans during the period ( 0.01 ) % — % — % ( 0.04 ) % ( 0.01 ) % 0.01 % ( 0.02 ) % n/a ( 0.07 ) % 125 Note 5: REAL ESTATE OWNED, HELD FOR SALE, NET The following table presents the changes in REO, net of valuation allowance, for the years ended December 31, 2021, 2020 and 2019 (in thousands): Years Ended December 31 2021 2020 2019 Balance, beginning of period $ 816 $ 814 $ 2,611 Additions from loan foreclosures 512 1,588 109 Additions from acquisitions — — 650 Proceeds from dispositions of REO ( 783 ) ( 2,360 ) ( 2,588 ) Gain on sale of REO 307 819 32 Valuation adjustments in the period — ( 45 ) — Balance, end of period $ 852 $ 816 $ 814 The Company had no foreclosed residential real estate properties held as REO at both December 31, 2021 and December 31, 2020. The recorded investment in one- to four-family residential loans in the process of foreclosure was $ 609,000 at both December 31, 2021 and December 31, 2020. Note 6: PROPERTY AND EQUIPMENT, NET Land, buildings and equipment owned by the Company and its subsidiaries at December 31, 2021 and 2020 are summarized as follows (in thousands): December 31 2021 2020 Land (1) $ 29,387 $ 32,196 Buildings and leasehold improvements (1) 150,238 153,934 Furniture and equipment 121,637 126,115 301,262 312,245 Less accumulated depreciation ( 152,503 ) ( 147,689 ) Property and equipment, net $ 148,759 $ 164,556 (1) The Company had $ 3.3 million and $ 8.4 million of properties held for sale that were included in land and buildings at December 31, 2021 and 2020, respectively. The Company’s depreciation expense related to property and equipment was $ 17.3 million, $ 18.1 million, and $ 17.3 million for the years ended December 31, 2021, 2020 and 2019, respectively. 126 Note 7: DEPOSITS Deposits consist of the following at December 31, 2021 and 2020 (in thousands): December 31 2021 2020 Non-interest-bearing checking $ 6,385,177 $ 5,492,924 Interest-bearing checking 1,947,414 1,569,435 Regular savings accounts 2,784,716 2,398,482 Money market accounts 2,370,995 2,191,135 Total interest-bearing transaction and savings accounts 7,103,125 6,159,052 Certificates of deposit: Certificates of deposit less than or equal to $250,000 657,615 718,256 Certificates of deposit greater than $250,000 181,016 197,064 Total certificates of deposit (1) 838,631 915,320 Total deposits $ 14,326,933 $ 12,567,296 Included in total deposits: Public fund transaction accounts $ 353,874 $ 302,875 Public fund interest-bearing certificates 39,961 59,127 Total public deposits $ 393,835 $ 362,002 (1 ) Certificates of deposit included no acquisition discounts at December 31, 2021 and $ 58,000 of acquisition discounts at December 31, 2020. Deposits at December 31, 2021 and 2020 included deposits from the Company’s directors, executive officers and related entities totaling $ 13.1 million and $ 11.2 million, respectively. At December 31, 2021 and 2020, the Company had certificates of deposit of $ 184.5 million and $ 203.6 million, respectively, that were equal to or greater than $250,000. Scheduled maturities and weighted average interest rates of certificates of deposits at December 31, 2021 are as follows (dollars in thousands): December 31, 2021 Amount Weighted Average Rate Maturing in one year or less $ 652,694 0.45 % Maturing after one year through two years 117,013 0.63 Maturing after two years through three years 47,057 0.79 Maturing after three years through four years 9,858 0.99 Maturing after four years through five years 10,552 0.38 Maturing after five years 1,457 0.85 Total certificates of deposit $ 838,631 0.50 % 127 Note 8: ADVANCES FROM FEDERAL HOME LOAN BANK OF DES MOINES Utilizing a blanket pledge, qualifying loans receivable at December 31, 2021 and 2020, were pledged as security for FHLB borrowings and there were no securities pledged as collateral as of December 31, 2021 or 2020. At December 31, 2021 and 2020, FHLB advances were scheduled to mature as follows (in thousands): At or for the Years Ended December 31 2021 2020 Amount Weighted Average Rate Amount Weighted Average Rate Maturing in one year or less $ 50,000 2.72 % $ 100,000 2.51 % Maturing after one year through three years — — 50,000 2.72 Maturing after three years through five years — — — — Maturing after five years — — — — Total FHLB advances $ 50,000 2.72 % $ 150,000 2.58 % The maximum amount outstanding from the FHLB advances at any month end for the years ended December 31, 2021 and 2020 was $ 150.0 million and $ 380.0 million, respectively. The average FHLB advances balance outstanding for the years ended December 31, 2021 and 2020 was $ 97.9 million and $ 215.1 million, respectively. The average contractual interest rate on the FHLB advances for the years ended December 31, 2021 and 2020 was 2.65 % and 2.34 %, respectively. As of December 31, 2021, Banner Bank has established a borrowing line with the FHLB to borrow up to 45 % of its total assets, contingent on having sufficient qualifying collateral and 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. Note 9: OTHER BORROWINGS Other borrowings consist of retail and wholesale repurchase agreements, other term borrowings and Federal Reserve Bank borrowings. Repurchase Agreements: At December 31, 2021, retail repurchase agreements carry interest rates ranging from 0.05 % to 0.25 %. These repurchase agreements are secured by the pledge of certain mortgage-backed and agency securities with a carrying value of $ 292.7 million. Banner Bank has the right to pledge or sell these securities, but it must replace them with substantially the same securities. Banner Bank had no borrowings under wholesale repurchase agreements at December 31, 2021 or December 31, 2020. Federal Reserve Bank of San Francisco and Other Borrowings: Banner Bank periodically borrows funds on an overnight basis from the Federal Reserve Bank through the Borrower-In-Custody program. Such borrowings are secured by a pledge of eligible loans. At December 31, 2021, based upon available unencumbered collateral, Banner Bank was eligible to borrow $ 782.3 million from the Federal Reserve Bank, although, at that date, as well as at December 31, 2020, Banner Bank had no funds borrowed under this or other borrowing arrangements. At December 31, 2021, Banner Bank had uncommitted federal funds lines of credit agreements with other financial institutions totaling $ 125.0 million. No balances were outstanding under these agreements as of December 31, 2021 and 2020. Availability of lines is subject to federal funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs and the agreements may restrict consecutive day usage. A summary of all other borrowings at December 31, 2021 and 2020 by the period remaining to maturity is as follows (dollars in thousands): At or for the Years Ended December 31 2021 2020 Amount Weighted Average Rate Amount Weighted Average Rate Repurchase agreements: Maturing in one year or less $ 264,490 0.13 % $ 184,785 0.22 % Maturing after one year through two years — — — — Maturing after two years — — — — Total year-end outstanding $ 264,490 0.13 % $ 184,785 0.22 % Average outstanding $ 240,817 0.19 % $ 158,478 0.30 % Maximum outstanding at any month-end $ 258,779 n/a $ 189,937 n/a 128 NOTE 10: SUBORDINATED DEBT AND MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES At December 31, 2021, the Company had nine wholly-owned subsidiary grantor trusts (the Trusts), which had issued $ 135.5 million of TPS to third parties, as well as $ 4.2 million of common capital securities, carried among other assets, which were issued to the Company. TPS and common capital securities accrue and pay distributions periodically at specified annual rates as provided in the indentures. The Trusts used the proceeds from the offerings to purchase a like amount of junior subordinated debentures (the Debentures) of the Company. The Debentures are the sole assets of the Trusts. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the Trusts. The TPS are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures. The Company has the right to redeem the Debentures in whole on or after specific dates, at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date. For the year ended December 31, 2021, the Company redeemed $ 8.0 million in trust preferred securities and $ 248,000 in related common capital securities resulting in a loss of $ 2.3 million. There were no redemptions for the year ended December 31, 2020. Subsequent to December 31, 2021, the Company fully redeemed the debentures issued by four of the Trusts, totaling $50.5 million. All of the TPS issued by the Trusts qualified as Tier 1 capital as of December 31, 2021. At December 31, 2021, the Trusts comprised $ 135.5 million, or 8.1 % of the Company’s total risk-based capital. The following table is a summary of trust preferred securities at December 31, 2021 (dollars in thousands): Name of Trust Aggregate Liquidation Amount of Trust Preferred Securities Aggregate Liquidation Amount of Common Capital Securities Aggregate Principal Amount of Junior Subordinated Debentures Stated Maturity (1) Current Interest Rate Reset Period Interest Rate Spread Banner Capital Trust II (3) $ 15,000 $ 464 $ 15,464 2033 3.47 % Quarterly Three-month LIBOR + 3.35 % Banner Capital Trust III (3) 15,000 465 15,465 2033 3.02 Quarterly Three-month LIBOR + 2.90 % Banner Capital Trust IV (3) 15,000 465 15,465 2034 2.97 Quarterly Three-month LIBOR + 2.85 % Banner Capital Trust V 25,000 774 25,774 2035 1.73 Quarterly Three-month LIBOR + 1.57 % Banner Capital Trust VI 25,000 774 25,774 2037 1.79 Quarterly Three-month LIBOR + 1.62 % Banner Capital Trust VII 25,000 774 25,774 2037 1.51 Quarterly Three-month LIBOR + 1.38 % Greater Sacramento Bancorp Statutory Trust I (3) 4,000 124 4,124 2033 3.47 Quarterly Three-month LIBOR + 3.35 % Greater Sacramento Bancorp Statutory Trust II 4,000 124 4,124 2035 1.88 Quarterly Three-month LIBOR + 1.68 % Mission Oaks Statutory Trust I 7,500 232 7,732 2036 1.85 Quarterly Three-month LIBOR + 1.65 % Total TPS liability at par $ 135,500 $ 4,196 139,696 2.24 % Fair value adjustment (2) ( 19,881 ) Total TPS liability at fair value (2) $ 119,815 (1) All of the Company’s trust preferred securities are eligible for redemption. (2) The Company has elected to use fair value accounting on its TPS. (3) Fully redeemed subsequent to December 31, 2021. 129 On June 30, 2020, Banner issued and sold in an underwritten offering $ 100.0 million aggregate principal amount of 5.000 % Fixed-to-Floating Rate Subordinated Notes due 2030 (Notes) at a public offering price equal to 100% of the aggregate principal amount of the Notes, resulting in net proceeds, after underwriting discounts and estimated offering expenses, of approximately $98.1 million. The interest rate on the Notes remains fixed equal to 5.000% for the first 5 years, after 5 years the interest rate changes to a floating interest rate tied to a benchmark rate, which is expected to be Three-Month Term SOFR, plus a spread of 489 basis points. The Notes will mature on June 30, 2030. On or after June 30, 2025, the Company may redeem the Notes, in whole or in part. The Notes are unsecured obligations and are subordinated in right of payment to all existing and future indebtedness, deposits and other liabilities of the Company’s current and future subsidiaries, including the Bank’s deposits as well as the Company’s subsidiaries’ liabilities to general creditors and liabilities arising during the ordinary course of business. The Notes may be included in Tier 2 capital for the Company under current regulatory guidelines and interpretations. 130 Note 11: INCOME TAXES The following table presents the components of the provision for income taxes included in the Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019 (in thousands): Years Ended December 31 2021 2020 2019 Current Federal $ 20,461 $ 30,325 $ 25,278 State 4,359 6,964 2,494 Total Current 24,820 37,289 27,772 Deferred Federal 18,278 ( 8,134 ) 7,738 State 2,448 ( 2,630 ) 1,344 Total Deferred 20,726 ( 10,764 ) 9,082 Provision for income taxes $ 45,546 $ 26,525 $ 36,854 The following table presents the reconciliation of the federal statutory rate to the actual effective rate for the years ended December 31, 2021, 2020 and 2019: Years Ended December 31 2021 2020 2019 Federal income tax statutory rate 21.0 % 21.0 % 21.0 % Increase (decrease) in tax rate due to: Tax-exempt interest ( 3.0 ) ( 4.4 ) ( 2.2 ) Investment in life insurance ( 0.4 ) ( 0.9 ) ( 0.5 ) State income taxes, net of federal tax offset 2.2 2.5 2.0 Tax credits ( 1.5 ) ( 2.6 ) ( 1.2 ) Merger and acquisition costs — — 0.1 State audits and amended returns — — ( 0.5 ) Low income housing partnerships, net of amortization 1.1 1.6 0.7 Other ( 0.9 ) 1.4 0.7 Effective income tax rate 18.5 % 18.6 % 20.1 % 131 The following table reflects the effect of temporary differences that gave rise to the components of the net deferred tax asset as of December 31, 2021 and 2020 (in thousands): December 31 2021 2020 Deferred tax assets: Loan loss and REO $ 34,753 $ 43,158 Deferred compensation 21,193 18,309 Net operating loss carryforward 20,159 26,126 Federal and state tax credits 7,631 7,517 State net operating losses 5,179 5,400 Loan discount 1,830 3,365 Lease liability 14,136 14,088 Other 5,091 9,177 Total deferred tax assets 109,972 127,140 Deferred tax liabilities: Depreciation ( 7,119 ) ( 7,537 ) Deferred loan fees, servicing rights and loan origination costs ( 12,696 ) ( 11,646 ) Intangibles ( 4,977 ) ( 6,278 ) Right of use asset ( 13,071 ) ( 13,144 ) Unrealized loss (gain) on securities - available-for-sale 91 ( 21,662 ) Financial instruments accounted for under fair value accounting ( 878 ) ( 947 ) Total deferred tax liabilities ( 38,650 ) ( 61,214 ) Deferred income tax asset 71,322 65,926 Valuation allowance ( 184 ) ( 184 ) Deferred tax asset, net $ 71,138 $ 65,742 Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recognized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period of enactment. At December 31, 2021, the Company has federal net operating loss carryforwards of approximately $ 96.0 million. The Company also has $ 72.5 million of state net operating loss carryforwards, against which the Company has established a $ 184,000 valuation reserve. The federal and state net operating losses will expire, if unused, by the end of 2034. The Company has federal general business credit carryforwards at December 31, 2021 of $ 3.3 million, which will expire, if unused, by the end of 2031. The Company also has federal alternative minimum tax credit carryforwards of $ 4.2 million, which are available to reduce future federal regular income taxes, if any, over an indefinite period. At December 31, 2020, the Company had federal and state net operating loss carryforwards of approximately $ 124.4 million and $ 76.3 million, respectively, and federal general business credits carryforwards of $ 3.3 million. At that same date, the Company also had federal alternative minimum tax credit carryforwards of approximately $ 4.2 million. As a consequence of the Company’s 2015 acquisition of Starbuck Bancshares, Inc., the Company experienced a change in control within the meaning of Section 382 of the Code. In addition, the underlying Section 382 limitations at Starbuck Bancshares, Inc.’s level continue to apply to the Company. Section 382 limits the ability of a corporate taxpayer to use net operating loss carryforwards, general business credits, and recognized built-in-losses, on an annual basis, incurred prior to the change in control against income earned after the change in control. As a result of the Section 382 limitations, the Company is limited to utilizing $ 21.5 million on an annual basis (after the application of the Section 382 limitations carried over from Starbuck Bancshares, Inc.) of federal net operating loss carryforwards, general business credits, and recognized built-in losses. The applicable state Section 382 limitations range from $ 525,000 to $ 21.5 million. In 2017, the Company established a $ 184,000 valuation reserve against the portion of its various state net operating loss carryforwards and tax credits that it believed it is more likely than not that it would not realize the benefit because the application of the Section 382 limitations at the state level is based on future apportionment rates. For non-Section 382 limited alternative minimum tax credits, the credits expired in 2019 due to the passage of the CARES Act in 2020. As a consequence of Banner’s capital raise in June 2010, the Company experienced a change in control within the meaning of Section 382 of the Code. As a result of the Section 382 limitations, the Company is limited to utilizing $ 6.9 million of net operating loss carryforwards which existed prior to the acquisition of Starbuck Bancshares, Inc., on an annual basis. Based on its analysis, the Company believes it is more likely than not that the June 2010 change in control will not impact its ability to utilize all of the related available net operating loss carryforwards, general business credits, and recognized built-in-losses. 132 As a consequence of the Company’s 2019 acquisition of AltaPacific and AltaPacific Bank, the Company did not experience a change in control within the meaning of Section 382 of the Code. However, the underlying Section 382 limitations at AltaPacific and AltaPacific Bank’s continue to apply to the Company. As a result of the Section 382 limitations, the Company is limited to utilizing $ 110,000 of the federal net operating loss carryovers and general business credits acquired from AltaPacific and AltaPacific Bank based on underlying limits carried over. Based on its analysis, the Company believes it is more likely than not that the Section 382 limitations will not impact its ability to utilize all of the related available net operating loss carryforwards and general business credits. Retained earnings at December 31, 2021 and 2020 included approximately $ 5.4 million in tax basis bad debt reserves for which no income tax liability has been recorded. In the future, if this tax bad debt reserve is used for purposes other than to absorb bad debts or the Company no longer qualifies as a bank or is completely liquidated, the Company will incur a federal tax liability at the then-prevailing corporate tax rate, established as $ 1.1 million at December 31, 2021. A reconciliation of the beginning and ending amount of total unrecognized state tax benefits for the years ended December 31, 2021 and 2020 is as follows (in thousands): Years Ended December 31 2021 2020 Balance, beginning of year $ 450 $ 275 Changes related to prior year tax positions 365 — Changes related to current year tax positions 185 175 Balance, end of year $ 1,000 $ 450 None of the unrecognized tax benefits, if recognized, would materially affect the effective tax rate. The Company does not anticipate that the amount of unrecognized tax benefits will significantly increase or decrease in the next twelve months. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense. The amount of interest and penalties accrued for the years ended December 31, 2021, 2020 and 2019 is immaterial. The Company files consolidated income tax returns in Oregon, California, Utah, Montana and Idaho and for federal purposes. The Company is no longer subject to tax examination for tax years before 2018. Tax credit investments: The Company invests in low income housing tax credit funds that are designed to generate a return primarily through the realization of federal tax credits. The Company accounts for these investments by amortizing the cost of tax credit investments over the life of the investment using a proportional amortization method and tax credit investment amortization expense is a component of the provision for income taxes. The following table presents the balances of the Company’s tax credit investments and related unfunded commitments at December 31, 2021 and 2020 (in thousands): December 31, 2021 December 31, 2020 Tax credit investments $ 56,589 $ 33,528 Unfunded commitments—tax credit investments 31,174 18,306 The following table presents other information related to the Company’s tax credit investments for the years ended December 31, 2021, 2020 and 2019 (in thousands): For the years ended December 31, 2021 2020 2019 Tax credits and other tax benefits recognized $ 4,390 $ 3,842 $ 1,916 Tax credit amortization expense included in provision for income taxes 3,816 2,992 1,633 Note 12: EMPLOYEE BENEFIT PLANS Employee Retirement Plans: Substantially all of the Company’s and the Bank’s employees are eligible to participate in its 401(k)/Profit Sharing Plan, a defined contribution and profit sharing plan sponsored by the Company. Employees may elect to have a portion of their salary contributed to the plan in conformity with Section 401(k) of the Internal Revenue Code. At the discretion of the Company’s Board of Directors, the Company may elect to make matching and/or profit sharing contributions for the employees’ benefit. For the years ended December 31, 2021, 2020 and 2019 , $ 6.5 million, $ 6.7 million and $ 6.2 million, respectively, was expensed for 401(k) contributions. During 2021, the Board of Directors elected to make a 4 % of eligible compensation matching contribution. 133 Supplemental Retirement and Salary Continuation Plans: Through the Bank, the Company is obligated under various non-qualified deferred compensation plans to help supplement the retirement income of certain executives, including certain retired executives, selected by resolution of the Bank’s Boards of Directors or in certain cases by the former directors of acquired banks. These plans are unfunded, include both defined benefit and defined contribution plans, and provide for payments after the executive’s retirement. In the event of a participant employee’s death prior to or during retirement, the Company is obligated to pay to the designated beneficiary the benefits set forth under the plan. For the years ended December 31, 2021, 2020 and 2019, expense recorded for supplemental retirement and salary continuation plan benefits totaled $ 3.3 million, $ 2.1 million, and $ 3.4 million, respectively. At December 31, 2021 and 2020, liabilities recorded for the various supplemental retirement and salary continuation plan benefits totaled $ 39.4 million and $ 40.1 million, respectively, and are recorded in a deferred compensation liability account. Deferred Compensation Plans and Rabbi Trusts: The Company and the Bank also offer non-qualified deferred compensation plans to members of their Boards of Directors and certain employees. The plans permit each participant to defer a portion of director fees, non-qualified retirement contributions, salary or bonuses for future receipt. Compensation is charged to expense in the period earned. In connection with its acquisitions, the Company also assumed liability for certain deferred compensation plans for key employees, retired employees and directors. In order to fund the plans’ future obligations, the Company has purchased life insurance policies or other investments, including Banner Corporation common stock, which in certain instances are held in irrevocable trusts commonly referred to as “Rabbi Trusts.” As the Company is the owner of the investments and the beneficiary of the insurance policies, and in order to reflect the Company’s policy to pay benefits equal to the accumulations, the assets and liabilities are reflected in the Consolidated Statements of Financial Condition. Banner Corporation common stock held for such plans is reported as a contra-equity account and was recorded at an original cost of $ 7.4 million at December 31, 2021 and $ 7.6 million at December 31, 2020. At December 31, 2021 and 2020, liabilities recorded in connection with deferred compensation plan benefits totaled $ 15.0 million ($ 7.4 million in contra-equity) and $ 11.4 million ($ 7.6 million in contra-equity), respectively, and are recorded in deferred compensation or equity as appropriate. The Bank has purchased, or acquired through mergers, life insurance policies in connection with the implementation of certain executive supplemental retirement, salary continuation and deferred compensation retirement plans, as well as additional policies not related to any specific plan. These policies provide protection against the adverse financial effects that could result from the death of a key employee and provide tax-exempt income to offset expenses associated with the plans. It is the Bank’s intent to hold these policies as a long-term investment. However, there will be an income tax impact if the Bank chooses to surrender certain policies. Although the lives of individual current or former management-level employees are insured, the Bank is the owner and sole or partial beneficiary. At December 31, 2021 and 2020, the cash surrender value of these policies was $ 244.2 million and $ 191.8 million, respectively. The Bank is exposed to credit risk to the extent an insurance company is unable to fulfill its financial obligations under a policy. In order to mitigate this risk, the Bank uses a variety of insurance companies and regularly monitor their financial condition. Note 13: STOCK-BASED COMPENSATION PLANS The Company operates the following stock-based compensation plans as approved by its shareholders: • 2014 Omnibus Incentive Plan (the 2014 Plan). • 2018 Omnibus Incentive Plan (the 2018 Plan). The purpose of these plans is to promote the success and enhance the value of the Company by providing a means for attracting and retaining highly skilled employees, officers and directors of Banner Corporation and its affiliates and linking their personal interests with those of the Company’s shareholders. Under these plans the Company currently has outstanding restricted stock share grants and restricted stock unit grants. 2014 Omnibus Incentive Plan The 2014 Plan was approved by shareholders on April 22, 2014. The 2014 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, other stock-based awards and other cash awards, and provides for vesting requirements which may include time-based or performance-based conditions. The Company has reserved 900,000 shares of its common stock for issuance under the 2014 Plan in connection with the exercise of awards. As of December 31, 2021, 302,254 restricted stock shares and 414,716 restricted stock units have been granted under the 2014 Plan of which 2,239 restricted stock shares and 96,589 restricted stock units are unvested. 2018 Omnibus Incentive Plan The 2018 Plan was approved by shareholders on April 24, 2018. The 2018 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, other stock-based awards and other cash awards, and provides for vesting requirements which may include time-based or performance-based conditions. The Company reserved 900,000 shares of common stock for issuance under the 2018 Plan in connection with the exercise of awards. As of December 31, 2021, 467,604 restricted stock units have been granted under the 2018 Plan of which 377,394 restricted stock units are unvested. 134 The expense associated with all restricted stock and unit grants was $ 9.3 million, $ 9.2 million and $ 7.1 million respectively, for the years ended December 31, 2021, 2020 and 2019. Unrecognized compensation expense for these awards as of December 31, 2021 was $ 10.9 million and will be amortized over the next 35 months. A summary of the Company’s Restricted Stock/Unit award activity during the years ended December 31, 2021, 2020 and 2019 follows: Shares/Units Weighted Average Grant-Date Fair Value Unvested at January 1, 2019 318,097 $ 52.43 Granted (224,210 non-voting) 227,262 53.50 Vested ( 120,675 ) 50.23 Forfeited ( 41,812 ) 46.25 Unvested at December 31, 2019 382,872 54.39 Granted (380,004 non-voting) 384,807 33.49 Vested ( 146,919 ) 55.18 Forfeited ( 42,624 ) 47.90 Unvested at December 31, 2020 578,136 40.76 Granted (181,309 non-voting) 183,548 55.52 Vested ( 232,267 ) 45.37 Forfeited ( 53,195 ) 45.95 Unvested at December 31, 2021 476,222 43.62 135 Note 14: REGULATORY CAPITAL REQUIREMENTS Banner Corporation is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended (BHCA), and the regulations of the Federal Reserve. Banner Bank, as a state-chartered federally insured commercial bank, is subject to the capital requirements established by the FDIC. The Federal Reserve requires Banner to maintain capital adequacy that generally parallels the FDIC requirements. On February 5, 2021, Islanders Bank, a subsidiary of Banner Corporation and a Washington-chartered commercial bank, was merged into Banner Bank. Banner Bank and Islanders Bank (the Banks), as a state-chartered federally insured commercial banks, were both subject to the capital requirements established by the FDIC at December 31, 2020. The following table shows the regulatory capital ratios of the Company and the Bank and the minimum regulatory requirements (dollars in thousands): Actual Minimum for Capital Adequacy Purposes Minimum to be Categorized as “Well-Capitalized” Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio December 31, 2021: The Company—consolidated: Total capital to risk-weighted assets $ 1,663,943 14.71 % $ 904,633 8.00 % $ 1,130,791 10.00 % Tier 1 capital to risk-weighted assets 1,440,694 12.74 678,474 6.00 678,474 6.00 Tier 1 capital to average leverage assets 1,440,694 8.76 658,091 4.00 n/a n/a Tier 1 common equity to risk-weighted assets 1,305,194 11.54 508,856 4.50 n/a n/a Banner Bank: Total capital to risk- weighted assets 1,552,204 13.73 904,159 8.00 1,130,199 10.00 Tier 1 capital to risk- weighted assets 1,428,955 12.64 678,119 6.00 904,159 8.00 Tier 1 capital to average leverage assets 1,428,955 8.69 657,882 4.00 822,353 5.00 Tier 1 common equity to risk-weighted assets 1,428,955 12.64 508,589 4.50 734,629 6.50 December 31, 2020: The Company—consolidated: Total capital to risk-weighted assets $ 1,608,387 14.73 % $ 873,472 8.00 % $ 1,091,840 10.00 % Tier 1 capital to risk-weighted assets 1,371,736 12.56 655,104 6.00 655,104 6.00 Tier 1 capital to average leverage assets 1,371,736 9.50 577,331 4.00 n/a n/a Tier 1 common equity to risk-weighted assets 1,228,236 11.25 491,328 4.50 n/a n/a Banner Bank: Total capital to risk- weighted assets 1,438,012 13.39 859,260 8.00 1,074,075 10.00 Tier 1 capital to risk- weighted assets 1,303,590 12.14 644,445 6.00 859,260 8.00 Tier 1 capital to average leverage assets 1,303,590 9.22 565,620 4.00 707,025 5.00 Tier 1 common equity to risk-weighted assets 1,303,590 12.14 483,334 4.50 698,149 6.50 Islanders Bank: Total capital to risk- weighted assets 29,333 15.65 14,997 8.00 18,747 10.00 Tier 1 capital to risk- weighted assets 26,983 14.39 11,248 6.00 14,997 8.00 Tier 1 capital to average leverage assets 26,983 7.87 13,720 4.00 17,150 5.00 Tier 1 common equity to risk-weighted assets 26,983 14.39 8,436 4.50 12,185 6.50 At December 31, 2021, Banner Corporation and the Bank each exceeded the requirements to be “well capitalized” and the fully phased-in capital conservation buffer requirement. There have been no conditions or events since December 31, 2021 that have materially adversely changed the Tier 1 or Tier 2 capital of the Company or the Bank. However, events beyond the control of the Bank, such as weak or depressed economic conditions in areas where the Bank has most of its loans, could adversely affect future earnings and, consequently, the ability of the Bank to meet its respective capital requirements. The Company may not declare or pay cash dividends on, or repurchase, any of its shares of common stock if the effect thereof would cause equity to be reduced below applicable regulatory capital maintenance requirements or if such declaration and payment would otherwise violate regulatory requirements. Banner Corporation and the Bank are subject to minimum required ratios for common equity Tier 1 (“CET1”) capital, Tier 1 capital, total capital and the leverage ratio and a required capital conservation buffer over the required capital ratios. 136 Under capital regulations, the minimum capital ratios are: (1) a CET1 capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (3) a total risk-based capital ratio of 8.0% of risk-weighted assets; and (4) a leverage ratio (the ratio of Tier 1 capital to average total consolidated assets) of 4.0%. CET1 generally consists of common stock; retained earnings; accumulated other comprehensive income (“AOCI”) unless an institution elects to exclude AOCI from regulatory capital; and certain minority interests; all subject to applicable regulatory adjustments and deductions. Tier 1 capital generally consists of CET1 and noncumulative perpetual preferred stock. Tier 2 capital generally consists of other preferred stock and subordinated debt meeting certain conditions plus an amount of the allowance for credit losses up to 1.25% of assets. Total capital is the sum of Tier 1 and Tier 2 capital. For purposes of determining risk-based capital, assets and certain off-balance sheet items are risk-weighted from 0% to 1,250%, depending on the risk characteristics of the asset or item. In addition to the minimum CET1, Tier 1, leverage ratio and total capital ratios, Banner and each of the Bank must maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based capital levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. Note 15: GOODWILL, OTHER INTANGIBLE ASSETS AND MORTGAGE SERVICING RIGHTS Goodwill and Other Intangible Assets: At December 31, 2021, intangible assets are comprised of goodwill and CDI acquired in business combinations. 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 at least annually for impairment. Banner has identified one reporting unit for purposes of evaluating goodwill for impairment. At December 31, 2021, the Company completed an assessment of qualitative factors and concluded that no further analysis was required as it is more likely than not that the fair value of Banner Bank, the reporting unit, exceeds the carrying value. CDI represents the value of transaction-related deposits and the value of the client relationships associated with the deposits. At December 31, 2018 intangible assets also included favorable leasehold intangibles (LHI). LHI represented the value ascribed to leases assumed in an acquisition in which the lease terms are favorable compared to a market lease at the date of acquisition. LHI was reclassified to the right of use lease asset in connection with the adoption of Lease Topic 842 on January 1, 2019. The Company amortizes CDI assets over their estimated useful lives and reviews them at least annually for events or circumstances that could impair their value. The CDI assets shown in the table below represent the value ascribed to the long-term deposit relationships acquired in various bank acquisitions. These intangible assets are being amortized using an accelerated method over estimated useful lives of eight years to ten years . The CDI assets are not estimated to have a significant residual value. The following table summarizes the changes in the Company’s goodwill, CDI and LHI for the years ended December 31, 2021, 2020 and 2019 (in thousands): Goodwill CDI LHI Total Balance, January 1, 2019 $ 339,154 $ 32,699 $ 225 $ 372,078 Additions through acquisition (1) 33,967 4,610 — 38,577 Amortization — ( 8,151 ) — ( 8,151 ) Adjustments (2) — — ( 225 ) ( 225 ) Balance, December 31, 2019 373,121 29,158 — 402,279 Amortization — ( 7,732 ) — ( 7,732 ) Balance, December 31, 2020 373,121 21,426 — 394,547 Amortization — ( 6,571 ) — ( 6,571 ) Balance, December 31, 2021 $ 373,121 $ 14,855 $ — $ 387,976 (1) The additions to Goodwill and CDI in 2019 relate to the acquisition of AltaPacific. (2) The adjustment to LHI represents a reclassification to the right-of-use lease asset in connection with the implementation of Lease Topic 842. 137 Estimated amortization expense in future years with respect to CDI as of December 31, 2021 (in thousands): Year ended: Estimated Amortization 2022 $ 5,317 2023 3,814 2024 2,659 2025 1,575 2026 904 Thereafter 586 Net carrying amount $ 14,855 Mortgage and SBA servicing rights are reported in other assets. SBA servicing rights are initially recorded and carried at fair value. Mortgage servicing rights are initially recognized at fair value and are amortized in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Mortgage servicing rights are subsequently evaluated for impairment based upon the fair value of the rights compared to the amortized cost (remaining unamortized initial fair value). If the fair value is less than the amortized cost, a valuation allowance is created through an impairment charge to servicing fee income. However, if the fair value is greater than the amortized cost, the amount above the amortized cost is not recognized in the carrying value. In 2021 , 2020 and 2019, the Company did not record any impairment charges or recoveries against mortgage servicing rights. Unpaid principal balance of loans for which mortgage and SBA servicing rights have been recognized totaled $ 2.77 billion and $ 2.64 billion at December 31, 2021 and 2020, respectively. Custodial accounts maintained in connection with this servicing totaled $ 3.2 million and $ 3.8 million at December 31, 2021 and 2020, respectively. An analysis of the mortgage and SBA servicing rights for the years ended December 31, 2021, 2020 and 2019 is presented below (in thousands): Years Ended December 31 2021 2020 2019 Balance, beginning of the year $ 15,223 $ 14,148 $ 14,638 Amounts capitalized 7,260 8,572 4,392 Additions through purchase 159 175 168 Amortization (1) ( 6,580 ) ( 7,672 ) ( 5,050 ) Fair Value adjustments 1,144 — — Balance, end of the year (2) $ 17,206 $ 15,223 $ 14,148 (1) Amortization of mortgage servicing rights is recorded as a reduction of loan servicing income. Any unamortized balance is fully written off if the loan repays in full. (2) There was no valuation allowance on mortgage servicing rights as of both December 31, 2021 and 2020. 138 Note 16: FAIR VALUE The following table presents estimated fair values of the Company’s financial instruments as of December 31, 2021 and 2020, whether or not recognized or recorded in the Consolidated Statements of Financial Condition (in thousands): December 31, 2021 December 31, 2020 Level Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value Assets: Cash and cash equivalents 1 $ 2,134,300 $ 2,134,300 $ 1,234,183 $ 1,234,183 Securities—trading 3 26,981 26,981 24,980 24,980 Securities—available-for-sale 2 3,638,993 3,638,993 2,322,593 2,322,593 Securities—held-to-maturity 2 464,008 484,483 410,038 436,882 Securities—held-to-maturity 3 57,347 57,370 11,769 11,799 Securities purchased under agreements to resell 2 300,000 300,000 — — Loans held for sale 2 96,487 96,914 243,795 245,667 Loans receivable 3 9,084,763 9,100,516 9,870,982 9,810,293 FHLB stock 3 12,000 12,000 16,358 16,358 Bank-owned life insurance 1 244,156 244,156 191,830 191,830 Mortgage servicing rights 3 16,045 24,393 15,223 18,084 SBA servicing rights 3 1,161 1,161 — — Investments in limited partnerships 3 10,257 10,257 2,819 2,819 Derivatives: Interest rate swaps 2 20,826 20,826 39,066 39,066 Interest rate lock and forward sales commitments 2,3 1,555 1,555 5,641 5,641 Liabilities: Demand, interest checking and money market accounts 2 10,703,586 10,703,586 9,253,494 9,253,494 Regular savings 2 2,784,716 2,784,716 2,398,482 2,398,482 Certificates of deposit 2 838,631 836,877 915,320 919,920 FHLB advances 2 50,000 50,287 150,000 152,779 Other borrowings 2 264,490 264,490 184,785 184,785 Subordinated notes, net 2 98,564 105,241 98,201 98,201 Junior subordinated debentures 3 119,815 119,815 116,974 116,974 Derivatives: Interest rate swaps 2 11,336 11,336 22,336 22,336 Interest rate swaps used in cash flow hedges 2 279 279 — — Interest rate lock and forward sales commitments 2 140 140 1,755 1,755 The Company measures and discloses certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (that is, not a forced liquidation or distressed sale). GAAP establishes a consistent framework for measuring fair value and disclosure requirements about fair value measurements. Among other things, the standard requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s estimates for market assumptions. These two types of inputs create the following fair value hierarchy: • Level 1 – Quoted prices in active markets for identical instruments. An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. • Level 2 – Observable inputs other than Level 1 including quoted prices in active markets for similar instruments, quoted prices in less active markets for identical or similar instruments, or other observable inputs that can be corroborated by observable market data. 139 • Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs from non-binding single dealer quotes not corroborated by observable market data. In developing Level 3 measurements, management incorporates whatever market data might be available and uses discounted cash flow models where appropriate. These calculations include projections of future cash flows, including appropriate default and loss assumptions, and market based discount rates. The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize at a future date. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. Transfers between levels of the fair value hierarchy are deemed to occur at the end of the reporting period. Items Measured at Fair Value on a Recurring Basis: The following tables present financial assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy of the fair value measurements for those assets and liabilities as of December 31, 2021 and 2020 (in thousands): December 31, 2021 Level 1 Level 2 Level 3 Total Assets: Securities—trading Corporate bonds (TPS securities) $ — $ — $ 26,981 $ 26,981 Securities—available-for-sale U.S. Government and agency — 201,332 — 201,332 Municipal bonds — 308,612 — 308,612 Corporate bonds — 117,347 — 117,347 Mortgage-backed or related securities — 2,805,268 — 2,805,268 Asset-backed securities — 206,434 — 206,434 — 3,638,993 — 3,638,993 Loans held for sale (1) — 39,775 — 39,775 SBA servicing rights — — 1,161 1,161 Investment in limited partnerships — — 10,257 10,257 Derivatives Interest rate swaps — 20,826 — 20,826 Interest rate lock and forward sales commitments — 88 1,467 1,555 $ — $ 3,699,682 $ 39,866 $ 3,739,548 Liabilities Junior subordinated debentures $ — $ — $ 119,815 $ 119,815 Derivatives Interest rate swaps — 11,336 — 11,336 Interest rate swaps used in cash flow hedges — 279 — 279 Interest rate lock and forward sales commitments — 140 — 140 $ — $ 11,755 $ 119,815 $ 131,570 140 December 31, 2020 Level 1 Level 2 Level 3 Total Assets: Securities—trading Corporate bonds (TPS securities) $ — $ — $ 24,980 $ 24,980 Securities—available-for-sale U.S. Government and agency — 141,735 — 141,735 Municipal bonds — 303,518 — 303,518 Corporate bonds — 221,769 — 221,769 Mortgage-backed or related securities — 1,646,152 — 1,646,152 Asset-backed securities — 9,419 — 9,419 — 2,322,593 — 2,322,593 Loans held for sale (1) — 133,554 — 133,554 Investment in limited partnerships — — 2,819 2,819 Derivatives Interest rate swaps — 39,066 — 39,066 Interest rate lock and forward sales commitments — 420 5,221 5,641 $ — $ 2,495,633 $ 33,020 $ 2,528,653 Liabilities Junior subordinated debentures $ — $ — $ 116,974 $ 116,974 Derivatives Interest rate swaps — 22,336 — 22,336 Interest rate lock and forward sales commitments — 1,755 — 1,755 $ — $ 24,091 $ 116,974 $ 141,065 (1) The unpaid principal balance of loans held for sale carried at fair value was $38.6 million and $128.1 million at December 31, 2021 and 2020. The following methods were used to estimate the fair value of each class of financial instruments above: Securities: The estimated fair values of investment securities and mortgaged-backed securities are priced using current active market quotes, if available, which are considered Level 1 measurements. For most of the portfolio, matrix pricing based on the securities’ relationship to other benchmark quoted prices is used to establish the fair value. These measurements are considered Level 2. Due to the continued limited activity in the trust preferred markets that have limited the observability of market spreads for some of the Company’s TPS securities, management has classified these securities as a Level 3 fair value measure. Management periodically reviews the pricing information received from third-party pricing services and tests those prices against other sources to validate the reported fair values. Loans Held for Sale: Fair values for residential mortgage loans held for sale are determined by comparing actual loan rates to current secondary market prices for similar loans. Fair values for multifamily loans held for sale are calculated based on discounted cash flows using as a discount rate a combination of market spreads for similar loan types added to selected index rates. Mortgage Servicing Rights: Fair values are estimated based on an independent dealer analysis of discounted cash flows. The evaluation utilizes assumptions market participants would use in determining fair value including prepayment speeds, delinquency and foreclosure rates, the discount rate, servicing costs, and the timing of cash flows. The mortgage servicing portfolio is stratified by loan type and fair value estimates are adjusted up or down based on the serviced loan interest rates versus current rates on new loan originations since the most recent independent analysis. SBA Servicing Rights: Fair values are estimated based on an independent dealer analysis by discounting estimated net future cash flows from servicing. The evaluation utilizes assumptions market participants would use in determining fair value including prepayment speeds, delinquency and foreclosure rates, the discount rate, servicing costs, and the timing of cash flows. The SBA servicing portfolio is stratified by loan type and fair value estimates are adjusted up or down based on the serviced loan interest rates versus current rates on new loan originations since the most recent independent analysis. 141 Investments in Limited Partnerships: Fair values are estimated using the practical expedient method based on our ownership interest in partners’ capital to which a proportionate share of net assets is attributed, for each limited partnership. Junior Subordinated Debentures: The fair value of junior subordinated debentures is estimated using an income approach technique. The significant inputs included in the estimation of fair value are the credit risk adjusted spread and three month LIBOR. The credit risk adjusted spread represents the nonperformance risk of the liability. The Company utilizes an external valuation firm to validate the reasonableness of the credit risk adjusted spread used to determine the fair value. The junior subordinated debentures are carried at fair value which represents the estimated amount that would be paid to transfer these liabilities in an orderly transaction amongst market participants. Due to inactivity in the trust preferred markets that have limited the observability of market spreads, management has classified this as a Level 3 fair value measure. Derivatives: Derivatives include interest rate swap agreements, interest rate lock commitments to originate loans held for sale and forward sales contracts to sell loans and securities related to mortgage banking activities. Fair values for these instruments, which generally change as a result of changes in the level of market interest rates, are estimated based on dealer quotes and secondary market sources. Off-Balance Sheet Items: Off-balance sheet financial instruments include unfunded commitments to extend credit, including standby letters of credit, and commitments to purchase investment securities. The fair value of these instruments is not considered to be material. Limitations: The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2021 and 2020. The factors used in the fair value estimates are subject to change subsequent to the dates the fair value estimates are completed, therefore, current estimates of fair value may differ significantly from the amounts presented herein. Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3): The following table provides a description of the valuation technique, unobservable inputs, quantitative and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring and nonrecurring basis at December 31, 2021 and 2020: December 31 2021 2020 Financial Instruments Valuation Technique Unobservable Inputs Weighted Average Rate Weighted Average Rate Corporate bonds (TPS securities) Discounted cash flows Discount rate 3.71 % 4.24 % Junior subordinated debentures Discounted cash flows Discount rate 3.71 % 4.24 % Loans individually evaluated Collateral valuations Discount to appraised value 8.5 % to 20 % 0.0 % to 20.0 % REO Appraisals Discount to appraised value 60.9 % 51.86 % Interest rate lock commitments Pricing model Pull-through rate 86.64 % 86.35 % Investments in limited partnerships Net Asset Value Infrequent transactions n/a n/a SBA servicing rights Discounted cash flows Constant prepayment rate 12 % n/a TPS Securities : Management believes that the credit risk-adjusted spread used to develop the discount rate utilized in the fair value measurement of TPS securities is indicative of the risk premium a willing market participant would require under current market conditions for instruments with similar contractual rates and terms and conditions and issuers with similar credit risk profiles and with similar expected probability of default. Management attributes the change in fair value of these instruments, compared to their par value, primarily to perceived general market adjustments to the risk premiums for these types of assets subsequent to their issuance. Junior subordinated debentures : Similar to the TPS securities discussed above, management believes that the credit risk-adjusted spread utilized in the fair value measurement of the junior subordinated debentures is indicative of the risk premium a willing market participant would require under current market conditions for an issuer with Banner’s credit risk profile. Management attributes the change in fair value of the junior subordinated debentures, compared to their par value, primarily to perceived general market adjustments to the risk premiums for these types of liabilities subsequent to their issuance. Future contractions in the risk adjusted spread relative to the spread currently utilized to measure the Company’s junior subordinated debentures at fair value as of December 31, 2021, or the passage of time, will result in negative fair value adjustments. At December 31, 2021, the discount rate utilized was based on a credit spread of 350 basis points and three month LIBOR of 21 basis points. Interest rate lock commitments: The fair value of the interest rate lock commitments is based on secondary market sources adjusted for an estimated pull-through rate. The pull-through rate is based on historical loan closing rates for similar interest rate lock commitments. An increase or decrease in the pull-through rate would have a corresponding, positive or negative fair value adjustment. 142 SBA servicing asset: The constant prepayment rate (CPR) is set based on industry data. An increase in the CPR would result in a negative fair value adjustment, where a decrease in CPR would result in a positive fair value adjustment. The following table provides a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years ended December 31, 2021 and 2020 (in thousands): Level 3 Fair Value Inputs TPS Securities Borrowings— Junior Subordinated Debentures Interest Rate Lock and Forward sales Commitments Investments in Limited Partnerships SBA Servicing Asset Balance, January 1, 2020 $ 25,636 $ 119,304 $ 791 $ 467 $ — Total gains or losses recognized Assets (losses) gains ( 656 ) — 4,430 — — Liabilities losses — ( 2,330 ) — — — Purchases, issuances and settlements — — — 2,352 — Balance, December 31, 2020 24,980 116,974 5,221 2,819 — Total gains or losses recognized Assets gains (losses) 2,001 — ( 3,754 ) 2,615 1,161 Liabilities losses — 11,089 — — — Redemptions — ( 8,248 ) — — — Purchases, issuances and settlements — — — 4,823 — Balance, December 31, 2021 $ 26,981 $ 119,815 $ 1,467 $ 10,257 $ 1,161 Interest income and dividends from the TPS securities are recorded as a component of interest income. Interest expense related to the junior subordinated debentures is measured based on contractual interest rates and reported in interest expense. The change in fair value of the junior subordinated debentures, which represents changes in instrument specific credit risk, is recorded in other comprehensive income. The change in fair value of the investment in limited partnerships and the SBA servicing asset are recorded as a component of non-interest income. Items Measured at Fair Value on a Non-recurring Basis The following tables present financial assets and liabilities measured at fair value on a non-recurring basis and the level within the fair value hierarchy of the fair value measurements for those assets at December 31, 2021 and 2020 (in thousands): December 31, 2021 Level 1 Level 2 Level 3 Total Loans individually evaluated $ — $ — $ 2,989 $ 2,989 REO $ — $ — $ 852 $ 852 December 31, 2020 Level 1 Level 2 Level 3 Total Loans individually evaluated $ — $ — $ 3,482 $ 3,482 REO — — 816 816 The following table presents the losses resulting from non-recurring fair value adjustments for the years ended December 31, 2021 , 2020 and 2019 (in thousands): For the years ended December 31, 2021 2020 2019 Loans individually evaluated $ ( 303 ) $ ( 3,482 ) $ ( 425 ) REO — ( 45 ) — Total loss from nonrecurring measurements $ ( 303 ) $ ( 3,527 ) $ ( 425 ) 143 Loans individually evaluated : 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 Bank determines 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 Bank measures 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 Bank’s 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 Bank 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 by the 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. REO : The Company records REO (acquired through a lending relationship) at fair value on a non-recurring basis. Fair value adjustments on REO are based on updated real estate appraisals which are based on current market conditions. All REO properties are recorded at the lower of the estimated fair value of the real estate, less expected selling costs, or the carrying amount of the defaulted loans. From time to time, 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. Banner considers any valuation inputs related to REO to be Level 3 inputs. The individual carrying values of these assets are reviewed for impairment at least annually and any additional impairment charges are expensed to operations. Note 17: BANNER CORPORATION (PARENT COMPANY ONLY) Summary financial information is as follows (in thousands): Statements of Financial Condition December 31 2021 2020 ASSETS Cash $ 106,329 $ 131,594 Investment in trust equities 4,196 4,444 Investment in subsidiaries 1,801,764 1,751,141 Other assets 5,877 2,852 Total assets $ 1,918,166 $ 1,890,031 LIABILITIES AND SHAREHOLDERS’ EQUITY Miscellaneous liabilities $ 5,723 $ 2,170 Deferred tax liability, net 3,737 6,422 Subordinated notes, net 98,564 98,201 Junior subordinated debentures at fair value 119,815 116,974 Shareholders’ equity 1,690,327 1,666,264 Total liabilities and shareholders’ equity $ 1,918,166 $ 1,890,031 Statements of Operations Years Ended December 31 2021 2020 2019 INTEREST INCOME: Interest-bearing deposits $ 97 $ 112 $ 98 OTHER INCOME (EXPENSE): Dividend income from subsidiaries 99,788 87,748 119,333 Equity in undistributed income of subsidiaries 112,814 36,401 35,134 Other income 146 62 33 Interest on other borrowings ( 8,780 ) ( 7,204 ) ( 6,574 ) Other expenses ( 7,391 ) ( 3,530 ) ( 4,045 ) Net income before taxes 196,674 113,589 143,979 BENEFIT FROM INCOME TAXES ( 4,374 ) ( 2,339 ) ( 2,299 ) NET INCOME $ 201,048 $ 115,928 $ 146,278 144 Statements of Cash Flows Years Ended December 31 2021 2020 2019 OPERATING ACTIVITIES: Net income $ 201,048 $ 115,928 $ 146,278 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries ( 112,814 ) ( 36,401 ) ( 35,134 ) Decrease in deferred taxes ( 571 ) 1,438 6,969 Net change in valuation of financial instruments carried at fair value 55 — — Share-based compensation 9,258 9,168 7,142 Loss on extinguishment of debt 2,284 — — Net change in other assets ( 2,970 ) 16,756 2,594 Net change in other liabilities 4,050 ( 235 ) ( 120 ) Net cash provided from operating activities 100,340 106,654 127,729 INVESTING ACTIVITIES: Other investing activities ( 228 ) ( 38 ) ( 32 ) Acquisitions — — 442 Net cash (used by) provided from investing activities ( 228 ) ( 38 ) 410 FINANCING ACTIVITIES: Net proceeds from issuance of subordinated notes — 98,027 — Repayment of junior subordinated debentures ( 8,248 ) — — Proceeds from redemption of trust securities related to junior subordinated debentures 248 — — Taxes paid related to net share settlement for equity awards ( 3,228 ) ( 1,453 ) ( 1,915 ) Repurchase of common stock ( 56,528 ) ( 31,775 ) ( 53,922 ) Cash dividends paid ( 57,621 ) ( 94,078 ) ( 56,074 ) Net cash used by financing activities ( 125,377 ) ( 29,279 ) ( 111,911 ) NET CHANGE IN CASH ( 25,265 ) 77,337 16,228 CASH, BEGINNING OF PERIOD 131,594 54,257 38,029 CASH, END OF PERIOD $ 106,329 $ 131,594 $ 54,257 145 Note 18: STOCK REPURCHASES On March 27, 2019 the Company announced that its Board of Directors had authorized the repurchase up to 5 % of the Company’s common stock, or 1,757,637 of the Company’s outstanding shares. Under the authorization, shares could be repurchased by the Company in open market purchases. During the year ended December 31, 2019, the Company repurchased 1,000,000 common shares at an average price of $ 53.90 per share. All repurchases of shares in 2019 occurred subsequent to March 27, 2019 and are accounted for under the 2019 authorization leaving 757,637 shares available for future repurchase. In addition to the shares repurchased under the authorization, there were 33,777 shares surrendered during 2019 by employees to satisfy tax withholding obligations upon vesting of restricted stock grants. There were 624,780 shares repurchased in the first quarter of 2020 under the 2019 authorization at an average price of $ 50.84 per share. This authorization expired in March 2020. On December 21, 2020, the Company announced that its Board of Directors had authorized the repurchase up to 1,757,781 of the Company’s common stock (which was equivalent to 5 % of the Company’s common stock). Under the authorization, shares may be repurchased by the Company in open market purchases. The extent to which the Company repurchases its shares and the timing of such repurchases will depend upon market conditions and other corporate considerations. During the year ending December 31, 2020 no shares were repurchased under the 2020 authorization. In addition to the shares repurchased under the 2019 authorization, there were 41,507 shares surrendered during 2020 by employees to satisfy tax withholding obligations upon vesting of restricted stock. There were 1,050,000 shares repurchased during the year ending December 31, 2021 under the 2020 authorization at an average price of $ 53.84 per share. This authorization expired in December 2021. On December 22, 2021, the Company announced that its Board of Directors had authorized the repurchase of up to 1,712,510 of the Company’s common stock (which was equivalent to 5 % of the Company’s common stock). Under the authorization, shares may be repurchased by the Company in open market purchases. The extent to which the Company repurchases its shares and the timing of such repurchases will depend upon market conditions and other corporate considerations. During the year ended December 31, 2021 no shares were repurchased under the 2021 authorization. Additionally, there were 59,730 shares surrendered during 2021 by employees to satisfy tax withholding obligations upon vesting of restricted stock and settlement of restricted stock units. Note 19: CALCULATION OF EARNINGS PER COMMON SHARE The following tables show the calculation of earnings per common share (in thousands, except per share data): Years Ended December 31 2021 2020 2019 Net income $ 201,048 $ 115,928 $ 146,278 Weighted average number of common shares outstanding Basic 34,610,056 35,264,252 34,868,434 Diluted 34,919,188 35,528,848 34,967,684 Earnings per common share Basic $ 5.81 $ 3.29 $ 4.20 Diluted $ 5.76 $ 3.26 $ 4.18 At December 31, 2021, 2020 and 2019 there were 476,222 , 578,136 , and 367,230 , respectively, of issued but unvested restricted stock shares and units that were included in the computation of diluted earnings per share. Note 20: COMMITMENTS AND CONTINGENCIES Financial Instruments with Off-Balance Sheet Risk —The Company has financial instruments with off-balance-sheet risk generated in the normal course of business to meet the financing needs of its clients. These financial instruments include commitments to extend credit, commitments related to standby letters of credit, commitments to originate loans, commitments to sell loans, and commitments to buy or sell securities. These instruments involve, to varying degrees, elements of credit and interest rate risk similar to the risk involved in on-balance sheet items recognized in our Consolidated Statements of Financial Condition. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument from commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as for on-balance sheet instruments. 146 Outstanding commitments for which no asset or liability for the notional amount has been recorded consisted of the following at the dates indicated (in thousands): Contract or Notional Amount December 31, 2021 December 31, 2020 Commitments to extend credit $ 3,527,143 $ 3,207,072 Standby letters of credit and financial guarantees 21,830 18,415 Commitments to originate loans 106,609 101,426 Risk participation agreement 40,064 40,949 Derivatives also included in Note 21: Commitments to originate loans held for sale 106,590 169,653 Commitments to sell loans secured by one- to four-family residential properties 27,006 79,414 Commitments to sell securities related to mortgage banking activities 127,580 204,000 In addition to the commitments disclosed in the table above, the Company is committed to funding its unfunded tax credit investments (see Note 11, Income Taxes). The Company has also entered into agreements to invest in several limited partnerships. As of December 31, 2021 and December 31, 2020, the funded balances and remaining outstanding commitments of these investments were as follows (in thousands): December 31, 2021 December 31, 2020 Funded Balance Unfunded Balance Funded Balance Unfunded Balance Limited partnerships investments $ 7,642 $ 9,858 $ 2,819 $ 7,181 Commitments to extend credit are agreements to lend to a client, as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Many of the commitments may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements. Each client’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the client. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties. The Company’s allowance for credit losses - unfunded loan commitments was $ 12.4 million and $ 13.3 million, at December 31, 2021 and 2020, respectively. Standby letters of credit are conditional commitments issued to guarantee a client’s performance or payment to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. Under a risk participation agreement, Banner Bank guarantees the financial performance of a borrower on the participated portion of an interest rate swap on a loan. Interest rates on residential one- to four-family mortgage loan applications are typically rate locked (committed) to clients during the application stage for periods ranging from 30 to 60 days, the most typical period being 45 days. Traditionally, these loan applications with rate lock commitments had the pricing for the sale of these loans locked with various qualified investors under a best-efforts delivery program at or near the time the interest rate is locked with the client. Banner Bank then attempts to deliver these loans before their rate locks expired. This arrangement generally required delivery of the loans prior to the expiration of the rate lock. Delays in funding the loans would require a lock extension. The cost of a lock extension at times was borne by the client and at times by the Banner Bank. These lock extension costs have not had a material impact to our operations. For mandatory delivery commitments the Company enters into forward commitments at specific prices and settlement dates to deliver either: (1) residential mortgage loans for purchase by secondary market investors (i.e., Freddie Mac or Fannie Mae), or (2) mortgage-backed securities to broker/dealers. The purpose of these forward commitments is to offset the movement in interest rates between the execution of its residential mortgage rate lock commitments with borrowers and the sale of those loans to the secondary market investor. There were no counterparty default losses on forward contracts during 2021 or 2020. Market risk with respect to forward contracts arises principally from changes in the value of contractual positions due to changes in interest rates. The Company limits its exposure to market risk by monitoring differences between commitments to clients and forward contracts with market investors and securities broker/dealers. In the event the Company has forward delivery contract commitments in excess of available mortgage loans, the transaction is completed by either paying or receiving a fee to or from the investor or broker/dealer equal to the increase or decrease in the market value of the forward contract. Changes in the value of rate lock commitments are recorded as assets and liabilities as explained in Note 1: “Derivative Instruments.” 147 In the normal course of business, the Company and/or its subsidiaries have various legal proceedings and other contingent matters outstanding. These proceedings and the associated legal claims are often contested and the outcome of individual matters is not always predictable. These claims and counter-claims typically arise during the course of collection efforts on problem loans or with respect to action to enforce liens on properties in which the Bank holds a security interest. Based upon the information known to management at this time, the Company and the Bank are not a party to any legal proceedings that management believes would have a material adverse effect on the results of operations or consolidated financial position at December 31, 2021. In connection with certain asset sales, the Bank typically makes representations and warranties about the underlying assets conforming to specified guidelines. If the underlying assets do not conform to the specifications, the Bank may have an obligation to repurchase the assets or indemnify the purchaser against any loss. The Bank believes that the potential for material loss under these arrangements is remote. Accordingly, the fair value of such obligations is not material. NOTE 21: DERIVATIVES AND HEDGING The Company, through its Banner Bank subsidiary, is party to various derivative instruments that are used for asset and liability management and client financing needs. Derivative instruments are contracts between two or more parties that have a notional amount and an underlying variable, require no net investment and allow for the net settlement of positions. The notional amount serves as the basis for the payment provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents a specified interest rate, index, or other component. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the market value of the derivative contract. The Company obtains dealer quotations to value its derivative contracts. The Company’s predominant derivative and hedging activities involve interest rate swaps related to certain term loans and forward sales contracts associated with mortgage banking activities. Generally, these instruments help the Company manage exposure to market risk and meet client financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors such as market-driven interest rates and prices or other economic factors. Derivatives Designated in Hedge Relationships Interest Rate Swaps with Dealer Counterparties: The Company’s fixed-rate loans result in exposure to losses in value or net interest income as interest rates change. The risk management objective for hedging fixed-rate loans is to effectively convert the fixed-rate received to a floating rate. The Company has hedged exposure to changes in the fair value of certain fixed-rate loans through the use of interest rate swaps. For a qualifying fair value hedge, changes in the value of the derivatives are recognized in current period earnings along with the corresponding changes in the fair value of the designated hedged item attributable to the risk being hedged. Under a prior program, clients received fixed interest rate commercial loans and Banner Bank subsequently hedged that fixed-rate loan by entering into an interest rate swap with a dealer counterparty. Banner Bank receives fixed-rate payments from the clients on the loans and makes similar fixed-rate payments to the dealer counterparty on the swaps in exchange for variable-rate payments based on the one-month LIBOR index. Some of these interest rate swaps are designated as fair value hedges. Through application of the “short cut method of accounting,” there is an assumption that the hedges are effective. Banner Bank discontinued originating interest rate swaps under this program in 2008. Interest Rate Swaps used in Cash Flow Hedges: The Company’s floating rate loans result in exposure to losses in value or net interest income as interest rates change. The risk management 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 Company primarily uses interest rate swaps as part of its interest rate risk management strategy. During the fourth quarter of 2021, the Company 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 Company making floating-rate payments over the life of the agreements without exchange of the underlying notional amount. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the unrealized gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest income in the same period during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest income as interest payments are made on the Corporation’s variable-rate assets. During the next twelve months, the Corporation estimates that an additional $ 1.8 million will be reclassified as an increase to interest income. 148 As of December 31, 2021 and December 31, 2020, the notional values or contractual amounts and fair values of the Company’s derivatives designated in hedge relationships were as follows (in thousands): Asset Derivatives Liability Derivatives December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020 Notional/ Contract Amount Fair Value (1) Notional/ Contract Amount Fair Value (1) Notional/ Contract Amount Fair Value (2) Notional/ Contract Amount Fair Value (2) Interest Rate Swaps with Dealer Counterparties $ — $ — $ 338 $ 9 $ — $ — $ 338 $ 9 Interest Rate Swaps used in Cash Flow Hedges $ — $ — $ — $ — $ 400,000 $ 279 $ — $ — Total $ — $ — $ 338 $ 9 $ 400,000 $ 279 $ 338 $ 9 (1) Included in Loans Receivable on the Consolidated Statements of Financial Condition. (2) Included in Other Liabilities on the Consolidated Statements of Financial Condition. The following table presents the effect of cash flow hedge accounting on AOCI for the year ended December 31, 2021 (in thousands): For The Year Ended December 31, 2021 Amount of Gain or (Loss) Recognized in AOCI on Derivative Amount of Gain or (Loss) Recognized in AOCI Included Component Amount of Gain or (Loss) Recognized in AOCI Excluded Component Location of Gain or (Loss) Recognized from AOCI into Income Amount of Gain or (Loss) Reclassified from AOCI into Income Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component Interest rate swaps $ ( 920 ) $ ( 920 ) $ — Interest Income $ 340 $ 340 $ — Derivatives Not Designated in Hedge Relationships Interest Rate Swaps: Banner Bank uses an interest rate swap program for commercial loan clients, that provides the client with a variable-rate loan and enters into an interest rate swap in which the client receives a variable-rate payment in exchange for a fixed-rate payment. The Bank offsets its risk exposure by entering into an offsetting interest rate swap with a dealer counterparty for the same notional amount and length of term as the client interest rate swap providing the dealer counterparty with a fixed-rate payment in exchange for a variable-rate payment. These swaps do not qualify as designated hedges; therefore, each swap is accounted for as a freestanding derivative. Mortgage Banking: The Company sells originated one- to four-family loans into the secondary mortgage loan markets. During the period of loan origination and prior to the sale of the loans in the secondary market, the Company has exposure to movements in interest rates associated with written interest rate lock commitments with potential borrowers to originate one- to four-family loans that are intended to be sold and for closed one- to four-family loans held for sale for which fair value accounting has been elected, that are awaiting sale and delivery into the secondary market. The Company economically hedges the risk of changing interest rates associated with these mortgage loan commitments by entering into forward sales contracts to sell one- to four-family loans or mortgage-backed securities to broker/dealers at specific prices and dates. 149 As of December 31, 2021 and December 31, 2020, the notional values or contractual amounts and fair values of the Company’s derivatives not designated in hedge relationships were as follows (in thousands): Asset Derivatives Liability Derivatives December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020 Notional/ Contract Amount Fair Value (1) Notional/ Contract Amount Fair Value (1) Notional/ Contract Amount Fair Value (2) Notional/ Contract Amount Fair Value (2) Interest rate swaps $ 551,606 $ 20,826 $ 451,760 $ 39,057 $ 551,606 $ 11,336 $ 451,760 $ 22,327 Mortgage loan commitments 87,986 1,467 140,390 5,221 26,329 66 72,511 199 Forward sales contracts 56,086 88 79,414 420 98,500 74 204,000 1,556 $ 695,678 $ 22,381 $ 671,564 $ 44,698 $ 676,435 $ 11,476 $ 728,271 $ 24,082 (1) Included in Other assets on the Consolidated Statements of Financial Condition, with the exception of certain interest swaps and mortgage loan commitments (with a fair value of $ 20,000 at December 31, 2021 and $ 231,000 at December 31, 2020), which are included in Loans Receivable. (2) Included in Other Liabilities on the Consolidated Statements of Financial Condition. Gains (losses) recognized in income on non-designated hedging instruments for the years ended December 31, 2021, 2020 and 2019 were as follows (in thousands): For the Years Ended December 31 Location on Income Statement 2021 2020 2019 Mortgage loan commitments Mortgage banking operations $ ( 3,754 ) $ 4,430 $ 518 Forward sales contracts Mortgage banking operations 1,243 ( 1,334 ) ( 693 ) $ ( 2,511 ) $ 3,096 $ ( 175 ) The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to these agreements. Credit risk of the financial contract is controlled through the credit approval, limits, and monitoring procedures and management does not expect the counterparties to fail their obligations. In connection with the interest rate swaps between Banner Bank and the dealer counterparties, the agreements contain a provision where if Banner Bank fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions and Banner Bank would be required to settle its obligations. Similarly, Banner Bank could be required to settle its obligations under certain of its agreements if specific regulatory events occur, such as a publicly issued prompt corrective action directive, cease and desist order, or a capital maintenance agreement that required Banner Bank to maintain a specific capital level. If Banner Bank had breached any of these provisions at December 31, 2021 or December 31, 2020, it could have been required to settle its obligations under the agreements at the termination value. As of December 31, 2021 and 2020, the termination value of derivatives in a net liability position related to these agreements was $ 24.9 million and $ 48.6 million, respectively. The Company generally posts collateral against derivative liabilities in the form of cash, government agency-issued bonds, mortgage-backed securities, or commercial mortgage-backed securities. Collateral posted against derivative liabilities was $ 45.8 million and $ 47.1 million as of December 31, 2021 and 2020, respectively. Derivative assets and liabilities are recorded at fair value on the balance sheet. Master netting agreements allow the Company to settle all derivative contracts held with a single counterparty on a net basis and to offset net derivative positions with related collateral where applicable. In addition, some of interest rate swap derivatives between Banner Bank and the dealer counterparties are cleared through central clearing houses. These clearing houses characterize the variation margin payments as settlements of the derivative’s market exposure and not as collateral. The variation margin is treated as an adjustment to our cash collateral, as well as a corresponding adjustment to our derivative liability. As of December 31, 2021 and December 31, 2020, the variation margin adjustment was a negative adjustment of $ 10.7 million and $ 16.9 million, respectively. 150 The following presents additional information related to the Company’s derivative contracts, by type of financial instrument, as of December 31, 2021 and December 31, 2020 (in thousands): December 31, 2021 Gross Amounts of Financial Instruments Not Offset in the Statement of Financial Condition Gross Amounts Recognized Amounts offset in the Statement of Financial Condition Net Amounts in the Statement of Financial Condition Derivative Amount Fair Value of Financial Collateral in the Statement of Financial Condition Net Amount Derivative assets Interest rate swaps $ 20,826 $ — $ 20,826 $ — $ — $ 20,826 $ 20,826 $ — $ 20,826 $ — $ — $ 20,826 Derivative liabilities Interest rate swaps $ 11,615 $ — $ 11,615 $ — $ ( 9,669 ) $ 1,946 $ 11,615 $ — $ 11,615 $ — $ ( 9,669 ) $ 1,946 December 31, 2020 Gross Amounts of Financial Instruments Not Offset in the Statement of Financial Condition Gross Amounts Recognized Amounts offset in the Statement of Financial Condition Net Amounts in the Statement of Financial Condition Derivative Amount Fair Value of Financial Collateral in the Statement of Financial Condition Net Amount Derivative assets Interest rate swaps $ 39,066 $ — $ 39,066 $ — $ — $ 39,066 $ 39,066 $ — $ 39,066 $ — $ — $ 39,066 Derivative liabilities Interest rate swaps $ 22,336 $ — $ 22,336 $ — $ ( 22,220 ) $ 116 $ 22,336 $ — $ 22,336 $ — $ ( 22,220 ) $ 116 151 NOTE 22: REVENUE FROM CONTRACTS WITH CLIENTS Disaggregation of Revenue: Deposit fees and other service charges for the years ended December 31, 2021, 2020 and 2019 are summarized as follows (in thousands): Years Ended December 31 2021 2020 2019 Deposit service charges 19,162 16,428 19,236 Debit and credit interchange fees 23,271 20,052 27,752 Debit and credit card expense ( 10,636 ) ( 9,098 ) ( 8,527 ) Merchant services income 14,973 12,554 13,111 Merchant services expenses ( 12,084 ) ( 10,042 ) ( 10,512 ) Other service charges 4,809 4,490 5,572 Total deposit fees and other service charges 39,495 34,384 46,632 Deposit fees and other service charges Deposit fees and other service charges include transaction and non-transaction based deposit fees. Transaction based fees on deposit accounts are charged to deposit clients for specific services provided to the client. These fees include such items as wire fees, official check fees, and overdraft fees. These are contract specific to each individual transaction and do not extend beyond the individual transaction. The performance obligation is completed and the fees are recognized at the time the specific transactional service is provided to the client. Non-transactional deposit fees are typically monthly account maintenance fees charged on deposit accounts. These are day-to-day contracts that can be canceled by either party without notice. The performance obligation is satisfied and the fees are recognized on a monthly basis after the service period is completed. Debit and credit card interchange income and expenses Debit and credit card interchange income represent fees earned when a credit or debit card issued by the Bank is used to purchase goods or services at a merchant. The merchant’s bank pays the Bank a default interchange rate set by MasterCard on a transaction by transaction basis. The merchant acquiring bank can stop accepting the Bank’s cards at any time and the Bank can stop further use of cards issued by them at any time. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the Bank cardholders’ card. Direct expenses associated with the credit and debit card are recorded as a net reduction against the interchange income. Merchant services income Merchant services income represents fees earned by the Bank for card payment services provided to its merchant clients. The Bank has a contract with a third party to provide card payment services to the Bank’s merchants that contract for those services. The third party provider has contracts with the Bank’s merchants to provide the card payment services. The Bank does not have a direct contractual relationship with its merchants for these services. The Bank sets the rates for the services provided by the third party. The third party provider passes the payments made by the Bank’s merchants through to the Bank. The Bank, in turn, pays the third party provider for the services it provides to the Bank’s merchants. These payments to the third party provider are recorded as expenses as a net reduction against fee income. In addition, a portion of the payment received by the Bank represents interchange fees which are passed through to the card issuing bank. Income is primarily earned based on the dollar volume and number of transactions processed. The performance obligation is satisfied and the related fee is earned when each payment is accepted by the processing network. NOTE 23: LEASES The Company leases 98 buildings and offices under non-cancelable operating leases. The leases contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule. Substantially all of the leases provide the Company with the option to extend the lease term one or more times following expiration of the initial term. 152 Lease Position The table below presents the lease right-of-use assets and lease liabilities recorded on the balance sheet at December 31, 2021 and December 31, 2020 (dollars in thousands): Classification on the Balance Sheet December 31, 2021 December 31, 2020 Assets Operating right-of-use lease assets Other assets $ 55,257 $ 55,367 Liabilities Operating lease liabilities Accrued expenses and other liabilities $ 59,756 $ 59,343 Weighted-average remaining lease term Operating leases 5.5 years 5.8 years Weighted-average discount rate Operating leases 2.8 % 3.3 % Lease Costs The table below presents certain information related to the lease costs for operating leases for the year ended December 31, 2021 and December 31, 2020 (in thousands): Year Ended December 31, 2021 2020 2019 Operating lease cost (1) $ 17,541 $ 17,337 $ 15,388 Short-term lease cost (1) 100 97 327 Variable lease cost (1) 2,584 2,778 2,396 Less sublease income (1) ( 904 ) ( 946 ) ( 925 ) Total lease cost $ 19,321 $ 19,266 $ 17,186 (1) Lease expenses and sublease income are classified within occupancy and equipment expense on the Consolidated Statements of Operations. Supplemental Cash Flow Information Operating cash flows paid for operating lease amounts included in the measurement of lease liabilities were $ 18.0 million for the year ended December 31, 2021 and $ 17.1 million for the year ended December 31, 2020. The Company recorded $ 16.7 million of right-of-use lease assets in exchange for operating lease liabilities for the year ended December 31, 2021 and $ 9.2 million for the year ended December 31, 2020 153 Undiscounted Cash Flows The table below reconciles the undiscounted cash flows for each of the first five years beginning with 2022 and the total of the remaining years to the operating lease liabilities recorded on the Consolidated Statements of Financial Position (in thousands): Operating Leases 2022 $ 14,393 2023 12,952 2024 11,361 2025 9,086 2026 7,260 Thereafter 9,569 Total minimum lease payments 64,621 Less: amount of lease payments representing interest ( 4,865 ) Lease obligations $ 59,756 As of December 31, 2021, the Company had $ 353,000 undiscounted lease payments under an operating lease that had not yet commenced. The Company had no undiscounted lease payments under an operating lease that had not yet commenced at December 31, 2020. BANNER CORPORATION Exhibit Index of Exhibits 3{a} Amended and Restated Articles of Incorporation of Registrant [incorporated by reference to the Registrant ’ s Current Report on Form 8-K filed on April 29, 2010 (File No. 000-26584)]. 3{b} Articles of Amendment of Registrant (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on June 1,2011 (File No. 000-26584)) 3{c} Articles of Amendment to Amended and Restated Articles of Incorporation of Registrant for nonvoting common stock (incorporated by reference to the Registrant’s Current Report on Form 8-K filed on March 18, 2015 (File No. 00026584)). 3{d} Amended and Restated Bylaws of Registrant [incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on October 29, 2020 (File No. 000-26584)]. 4.2 Description of Capital Stock 4.3 Issuance of base indenture, first supplemental indenture and subordinated note [incorporated by reference to the exhibits filed with Form 8-K on June 30, 2020 (File No. 000-26584)] 10{a} Amended and Restated Employment Agreement, with Mark J. Grescovich [incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on June 4, 2013 (File No. 000-26584]. 10{b} Form of Supplemental Executive Retirement Program Agreement with Gary Sirmon, Michael K. Larsen, Lloyd W. Baker, Cynthia D. Purcell and Richard B. Barton [incorporated by reference to exhibits filed with the Annual Report on Form 10-K for the year ended December 31, 2001 and the exhibits filed with the Form 8-K on May 6, 2008 (File No. 000-26584)]. 10{c} Form of Employment Contract entered into with Lloyd W. Baker, Cynthia D. Purcell and Richard B. Barton [incorporated by reference to exhibits filed with the Form 8-K on June 25, 2014 (File No. 000-26584)]. 10{d} 2005 Executive Officer and Director Stock Account Deferred Compensation Plan [incorporated by reference to exhibits filed with the Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 000-26584)]. 10{e} Entry into an Indemnification Agreement with each of the Registrant’s Directors [incorporated by reference to exhibits filed with the Form 8-K on January 29, 2010 (File No. 000-26584)]. 10{f} 2012 Restricted Stock and Incentive Bonus Plan [incorporated by reference to Appendix B to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on March 19, 2013 (File No. 000-26584)]. 10{g} Amended and Restated Executive Severance and Change in Control Plan and Summary Plan Description (Amended and Restated effective as of October 1, 2021) [incorporated by reference to exhibit 10{j} included in the Form 10-Q dated September 30, 2021 (File No. 000-26584)] 10{h} 2014 Omnibus Incentive Plan [incorporated by reference as Appendix C to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on March 24, 2014 (File No. 000-26584)] and amendments [incorporated by reference to the Form 8-K filed on March 25, 2015 (File No. 000-26534)]. 10{i} Forms of Equity-Based Award Agreements: Incentive Stock Option Award Agreement, Non-Qualified Stock Option Award Agreement, Restricted Stock Award Agreement, Restricted Stock Unit Award Agreement, Stock Appreciation Right Award Agreement, and Performance Unit Award Agreement [incorporated by reference to Exhibits 10.2 - 10.7 included in the Registration Statement on Form S-8 dated May 9, 2014 (File No. 333-195835)]. 154 10{j} 2018 Omnibus Incentive Plan [incorporated by reference as Appendix D to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on March 23, 2018 (File No. 000-26584)] 10{k} Forms of Equity-Based Award Agreements: Incentive Stock Option Award Agreement, Non-Qualified Stock Option Award Agreement under the Banner Corporation 2018 Omnibus Incentive Plan; Director Restricted Stock Award Agreement; Director Restricted Stock Unit Award Agreement; Employee Time-based Restricted Stock Unit Award Agreement; Employee performance-based Restricted Stock Unit Award Agreement; Stock Appreciation Right Award Agreement; and Performance Unit Award Agreement [incorporated by reference to Exhibits 10.2 - 10.9 included in the Registration Statement on Form S-8 dated May 4, 2018 (File No. 333-224693)] 14 Code of Ethics [Registrant elects to satisfy Regulation S-K §229.406(c) by posting its Code of Ethics on its website at www.bannerbank.com in the section titled Corporate Overview: Governance Document 21 Subsidiaries of the Registrant. 23.1 Consent of Registered Independent Public Accounting Firm – Moss Adams LLP. 31.1 Certification of Chief Executive Officer pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS Inline XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the XBRL document. 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, formatted in Inline XBRL (included in Exhibit 101) 155