UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K


[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017
☒    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2021
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________to__________
☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________to__________
 Commission File Number 0-26584
BANNER CORPORATION
(Exact name of registrant as specified in its charter)
Washington
91-1691604
 (State or other jurisdiction of incorporation (I.R.S. Employer
 or organization) Identification Number)
10 South First Avenue, Walla Walla, Washington 99362
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (509) 527-3636
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per shareBANRThe NASDAQ Stock Market LLC
(Title of Each Class)(Trading Symbol)(Name of Each Exchange on Which Registered)
 
Securities registered pursuant to section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes  X No _
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes __No X
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   X    No  ____
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes  X     No  ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ____
  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or emerging growth company. See definition of "large accelerated filer," "accelerated filer" andfiler," "smaller reporting company" and emerging growth company in Rule 12b-2 of the Exchange Act:
Large accelerated filer  X
Accelerated filer ___
_____		Non-accelerated filer _____Smaller reporting company     ____☐Emerging growth company     ☐
   
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ____

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U. S. C 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ____ ☐No X
 
The aggregate market value of the voting and non-voting common equity held by nonaffiliates of the registrant based on the closing sales price
of the registrant’s common stock quoted on The NASDAQ Stock Market on June 30, 2017,2021, was:
Common Stock – $1,847,597,162$1,848,276,723
 (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the Registrant
that such person is an affiliate of the Registrant.)
 The number of shares outstanding of the registrant’s classes of common stock as of January 31, 2018:2022:


Common Stock, $.01 par value – 32,626,20434,252,632 shares
Non-voting Common Stock, $.01 par value – 100,029 shares
Documents Incorporated by Reference
Portions of Proxy Statement for Annual Meeting of Shareholders to be held April 25, 2018May 18, 2022 are incorporated by reference into Part III.

2

BANNER CORPORATION AND SUBSIDIARIES


Table of Contents
PART IPage
Item 1.Business
45
General
45
Recent Developments and significant events
56
Lending Activities
57
Asset Quality
1011
Investment Activities
11
Deposit Activities and Other Sources of Funds
1213
Personnel
1314
Taxation
1316
Competition
1417
Regulation
1417
Management Personnel
2023
Corporate Information
2226
Item 1A.Risk Factors
2327
Item 1B.Unresolved Staff Comments
3339
Item 2.Properties
3339
Item 3.Legal Proceedings
3339
Item 4.Mine Safety Disclosures
3440
PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
3541
Item 6.Selected Financial Data[Reserved]
38
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
4144
Executive Overview
4144
Comparison of Financial Condition at December 31, 20172021 and 20162020
4652
Comparison of Results of Operations
Years ended December 31, 20172021 and 20162020
6064
Years ended December 31, 20162020 and 20152019
6972
Market Risk and Asset/Liability Management
7172
Liquidity and Capital Resources
7475
Capital Requirements
7576
Effect of Inflation and Changing Prices
75
Contractual Obligations
76
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
76
Item 8.Financial Statements and Supplementary Data
76
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
7677
Item 9A.Controls and Procedures
7677
Item 9B.Other Information
77
Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
77
PART III
PART III
Item 10.Directors, Executive Officers and Corporate Governance
78
Item 11.Executive Compensation
78
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
78
Item 13.Certain Relationships and Related Transactions, and Director Independence
79
Item 14.Principal Accounting Fees and Services
79
PART IV
Item 15.Exhibits and Financial Statement Schedules
80
Signatures
82

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Forward-Looking Statements


Certain matters in this Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, liquidity, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance and projections of financial items. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to:potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets, generally, resulting from the ongoing novel coronavirus of 2019 (COVID-19) and any governmental or societal responses thereto; the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in ourestimates of the adequacy of the allowance for loancredit losses and provisionprovisions for credit losses; the ability to manage loan losses that may be impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and non-performing assets, and may result in our allowance for loan losses not being adequate to cover actual losses and require us to materially increase our reserves;delinquency rates; competitive pressures among financial services companies; changes in economic conditions in generalconsumer spending or borrowing and in Washington, Idaho, Oregon and California in particular; changes in the levels of generalspending habits; interest ratesrate movements generally and the relative differences between short and long-term interest rates, loan and deposit interest rates, our net interest margin and funding sources; uncertainty regarding the future of the London Interbank Offered Rate (LIBOR), and the potential transition away from LIBOR toward new interest rate benchmarks; the impact of repricing and competitors’ pricing initiatives on loan and deposit products; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate valuesvalues; the ability to adapt successfully to technological changes to meet clients’ needs and developments in the marketplace; the ability to access cost-effective funding; the ability to control operating costs and expenses; including the costs associated with our market areas;“Banner Forward” initiative; the use of estimates in determining fair value of certain assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect employees, and potential associated charges; disruptions, security breaches or other adverse events, failures or interruptions in, or attacks on, information technology systems or on the third-party vendors who perform critical processing functions; changes in financial markets; changes in economic conditions in general and in Washington, Idaho, Oregon and California in particular, including the risk of inflation; secondary market conditions for loans and ourthe ability to sell loans in the secondary market; the costs, effects and outcomes of litigation; legislation or regulatory changes or reforms, including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, results of safety and soundness and compliance examinations of us by the Board of Governors of the Federal Reserve System (the Federal Reserve) and of our bank subsidiaries by, the Federal Deposit Insurance Corporation (the FDIC), the Washington State Department of Financial Institutions, Division of Banks, (the Washington DFI) or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require restitution or institute an informal or formal enforcement action against us or any of our bank subsidiaries which could require us toan increase our reservein reserves for loan losses, write-downwrite-downs of assets change ouror changes in regulatory capital position, or affect ourthe ability to borrow funds, or maintain or increase deposits, or impose additional requirements and restrictions, on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including changes related to Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) and the implementing regulations; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation; difficulties in reducing risk associated with the loans and securities on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; future goodwill impairment due to changes in our business, changes in market conditions, or other factors; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common stock and non-voting common stock, and interest or principal payments on our junior subordinated debentures; adverse changes in the securities markets; the inability of key third-party providers to perform their obligations to us;obligations; changes in accounting principles, policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Boardguidelines, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services; including the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act) and the Consolidated Appropriations Act, 2021 the (CAA); future acquisitions by Banner of other depository institutions or lines of business; and future goodwill impairment due to changes in Banner’s business, changes in market conditions, and other risks detailed from time to time in our filings with the U.S. Securities and Exchange Commission (SEC), including this report on Form 10-K. Any forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. We do not undertake and specifically disclaim any obligation to update any forward-looking statements included in this report or the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. These risks could cause our actual results to differ materially from those expressed in any forward-looking statements by, or on behalf of, us.Further, many of these risks and uncertainties are currently amplified by and may continue to be amplified by or may, in the future, be amplified by, the COVID-19 pandemic. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.


As used throughout this report, the terms “we,” “our,” “us,” or the “Company” refer to Banner Corporation and its consolidated subsidiaries, unless the context otherwise requires.  All references to “Banner” refer to Banner Corporation and those to “the Banks”Bank” refer to its wholly-owned subsidiaries,subsidiary, Banner Bank and Islanders Bank, collectively.Bank.

4



PART 1


Item 1 – Business General
 
Banner Corporation (the Company) is a bank holding company incorporated in the State of Washington. We are primarily engaged in the business of planning, directing and coordinating the business activities of our wholly-owned subsidiaries,Washington which wholly owns one subsidiary bank, Banner Bank and Islanders Bank. Banner Bank is a Washington-chartered commercial bank that conducts business from its main office in Walla Walla, Washington and, as of December 31, 2017,2021, its 175150 branch offices located in Washington, Oregon, California and Idaho. Banner Bank also has 1318 loan production offices located in Washington, Oregon, California, Idaho and Utah. On October 9, 2017, Banner Bank announced that it had completed the sale of its seven Utah branches and related operations, although Banner Bank continues to maintain one loan production office in Utah. Islanders Bank is also a Washington-chartered commercial bank that conducts business from three locations in San Juan County, Washington. Banner Corporation is subject to regulation by the Federal Reserve. Banner Bank and Islanders Bank (the Banks) areis subject to regulation by the Washington DFI and the FDIC.  As of December 31, 2017,2021, we had total consolidated assets of $9.76$16.80 billion, net loans of $7.51$8.95 billion, total deposits of $8.18$14.33 billion and total shareholders’ equity of $1.27$1.69 billion. Our voting common stock is traded on the NASDAQ Global Select Market under the ticker symbol “BANR.”


Banner Bank is a regional bank which offers a wide variety of commercial banking services and financial products to individuals, businesses and public sector entities in its primary market areas.  Islanders Bank is a community bank which offers similar banking services to individuals, businesses and public entities located primarily in the San Juan Islands.  The Banks'Bank’s primary business is that of traditional banking institutions, accepting deposits and originating loans in locations surrounding our offices in portions of Washington, Oregon, California and Idaho.  Banner Bank is also an active participant in the secondary market,loan markets, engaging in mortgage banking operations largely through the origination and sale of one- to four-family and multi-familymultifamily residential loans.  Lending activities include commercial business and commercial real estate loans, agriculture business loans, construction and land development loans, one- to four-family and multifamily residential loans, U.S. Small Business Administration (SBA) loans and consumer loans.


Since becoming a public companyWe continue to invest in 1995, we have invested significantly in expanding our branch and distribution systemsdelivery platform across the franchise with a primary emphasis on strengthening our market presence in the higher growth regions of our five primary marketsmarkets. In addition, we continue to improve the efficiency of our branch delivery channel with on-going branch consolidations and investments in streamlining the Northwest.  Those markets includeorigination of new loan and deposit accounts while simultaneously enhancing our digital service and account origination capabilities. During the four largest metropolitan areaspast year, client adoption of mobile and digital banking accelerated, while physical branch transaction volume declined. Banner anticipates this shift in client service delivery channel preference will continue after the Northwest: the Puget Sound region of Washington and the greater Portland, Oregon, Boise, Idaho, and Spokane, Washington markets, as well as our historical base in the vibrant agricultural communities in the Columbia Basin region of Washington and Oregon.  Our aggressive franchise expansion during this period included the acquisition and consolidation of ten commercial banks, as well asthe opening of 28 new branches, the acquisition of seven branches and relocating 14others. More recently, our acquisition activity included two whole bank transactions in 2015 and the purchase of six branches in 2014 which has expanded our geographic focus to include additional markets in southwest Oregon, as well as select markets in California and more than doubled the size of the Company. The acquisition of Starbuck Bancshares, Inc. (Starbuck), the holding company for AmericanWest Bank (AmericanWest), which closed on October 1, 2015, with 98 branches and approximately $4.46 billion in assets, $3.00 billion in loans and $3.64 billion in deposits, added scale to our operations, strengthened our Northwest presence and provided entry into attractive markets in California.COVID-19 pandemic related restrictions have ended.


In addition to complementary bank acquisitions and our branch openingsrelocations and relocations,consolidations, we also have investedfocus on expanding our product offerings and investing heavily in marketing campaigns designed to significantly increase the brand awareness for Banner BankBank.  During 2021, however, as well as expanded product offerings and enhanced risk management capabilities.a result of the COVID-19 pandemic some of our marketing campaigns were curtailed. These marketing investments which have beenare a significant elementselement in our strategiesstrategy to grow loans, depositsclient relationships and customer relationships, have increasedincrease our market presence, within desirable marketplaces and allowwhile allowing us to better serve existing and future customers.  This emphasis on growth and development resulted in an elevated level of non-interest expense during recent periods; however, weclients.  We believe the expandedour branch network, broaderbroad product line and heightened brand awarenesshave created a franchise that is well positioned for growth and is allowing us to successfully execute onsuccessful execution of our super community bank model.  ThatOur overall strategy is focused on delivering customers,clients, including middle market and small businesses, business owners, their families and employees, a compelling value proposition by providing the financial sophistication and breadth of products of a regional bank while retaining the appeal, responsiveness, and superior service level of a community bank.


During 2021, we implemented Banner Forward, a Bank-wide initiative to accelerate revenue growth and reduce operating expense. Implementation of this plan commenced during the third quarter of 2021 with full implementation expected by 2023, with the goal of producing meaningful results in the near term while staying true to our mission and value proposition of being connected, knowledgeable and responsive to our clients, communities and employees. The focus of Banner Forward is to accelerate growth in commercial banking, deepen relationships with retail clients, advance technology strategies to enhance our digital service channels, while streamlining underwriting and back office processes. As part of Banner Forward, we have identified potential additional opportunities to rationalize our physical footprint. We incurred expenses of $11.6 million related to Banner Forward during the year ended December 31, 2021.

Banner Corporation'sCorporation’s successful execution onof its super community bank model and its strategic initiatives have delivered solid profitability and growth. We have made substantial progress on our goals to achieve and maintain the Company's moderate risk profile as well as to develop and continue strong earnings momentum. Highlights of this success have included continued strong asset quality, outstanding client acquisition and account growth, significantly increased non-interest-bearing deposit balances and strong revenue generation from core operations.

Like most financial institutions, our operating results in recent years have been meaningfully impacted by the exceptionally low interest rate environment and our future operating results and financial performance will be significantly affected by the course of economic activity. However,profitability over the last several years we substantially addedyears. Banner’s longer term strategic initiatives continue to ourfocus on originating high quality assets and client relationships and account base, while maintaining a moderate risk profile, which has resulted in strong and sustainable revenues and low credit costs, andacquisition, which we believe has positionedwill continue to generate strong revenue while maintaining the Company well for continued success.Company’s moderate risk profile.


For the year ended December 31, 2017,2021, our net income decreased to $60.8was $201.0 million, or $1.84$5.76 earnings per diluted share, compared to $85.4$115.9 million, or $2.52$3.26 earnings per diluted share, for the prior year. Our financial results for the year ended December 31, 2021 reflect the low interest rate environment, the unprecedented level of market liquidity and the reduction in business activity in some of our markets due to the lingering impacts of the COVID-19 pandemic. The current year results include a recapture of our provision for credit losses, primarily due to the improvement in the level of adversely classified loans and forecasted economic indicators utilized to calculate credit losses as well as increased net interest income, partially offset by a decrease in netmortgage banking income, is due toincreased non-interest expense, a $42.6 million, or $1.29 per diluted share, revaluation of our net deferred tax assetdecrease in the yield on earnings-assets as a result of the enactmentdecline in market interest rates and excess liquidity being invested in relatively low yielding short term investments. Both the current year and prior year results were positively influenced by growth in interest-earnings assets and decreased funding costs.

At December 31, 2021, Banner Bank had 21 mortgage loans totaling $6.4 million operating under forbearance agreements due to COVID-19. Since these loans were performing loans that were current on their payments prior to the COVID-19 pandemic, these modifications are not considered to be troubled debt restructurings pursuant to applicable accounting and regulatory guidance through January 1, 2022

5

The CARES Act amended the SBA’s loan program, in which the Bank participates, to create a guaranteed, unsecured loan program, the Paycheck Protection Program (SBA PPP), to fund payroll and operational costs of eligible businesses, organizations and self-employed persons during COVID-19. During the Tax Cutslast two years the Bank participated in the SBA’s PPP in accordance with the CARES Act and Jobs Act (2017 Tax Act) inCAA. The SBA PPP ended on May 31, 2021.Prior to the program end Banner had funded over 13,000 SBA PPP loans totaling approximately $1.61 billion and, as of December 2017, which reduced the marginal federal corporate income tax rate from 35% to 21%. There were no acquisition-related expenses in 2017 compared to $11.7 million, or $0.22 per diluted share net of tax benefit, in 2016.31, 2021, received SBA forgiveness for SBA PPP loans totaling $1.48 billion.




Our operating results depend primarily on our net interest income, which is the difference between interest income on interest-earning assets, consisting primarily of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of customerclient deposits, Federal Home Loan Bank of Des Moines (FHLB) advances, other borrowings, subordinated notes, and junior subordinated debentures. Net interest income is primarily a function of our interest rate spread, which is the difference between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, as well as a function of the average balances of interest-earning assets, interest-bearing liabilities and non-interest-bearing funding sources including non-interest-bearing deposits. Our net interest income before provision for loan losses increased 5%3% to $393.0 million for the year ended December 31, 2017, compared to $375.1$496.9 million for the year ended December 31, 2016.2021, compared to $481.3 million for the year ended December 31, 2020. The increase in net interest income in 2021 is primarily a result of growth in total interest-earning assets and core deposits as well as the acceleration of deferred loan fees due to the repayment of SBA PPP loans from SBA loan forgiveness, partially offset by lower yields on interest-earning assets. The growth in total interest-earning assets and core deposits was largely the result of SBA PPP loan funds deposited into client deposit accounts, fiscal stimulus payments and an increase in general client liquidity due to reduced business investment and consumer spending during the COVID-19 pandemic.


Our net income is also is affected by the level of our non-interest income, including deposit fees and other service charges, results of mortgage banking operations, which includes loan origination and servicing fees and gains and losses on the sale of one- to four-familyloans and multifamily loans,servicing fees, and gains and losses on the sale of securities, as well as our non-interest expenses and provisions for loancredit losses and income tax provisions.taxes. In addition, our net income is affected by the net change in the value of certain financial instruments carried at fair value.


Our total revenues (net interest income before the provision for loan losses plus non-interest income) for 20172021 increased $28.0$13.4 million, or 6%2%, to $486.6$593.3 million, compared to $458.5$579.9 million for 2016.2020. Our total non-interest income, which is a component of total revenue, and includeswas $96.4 million for the netyear ended December 31, 2021, compared to $98.6 million for the year ended December 31, 2020. The decrease in non-interest income during 2021 is primarily the result of decreased mortgage banking income due to a reduction in the volume of one- to four-family loans sold as well as a decrease in the gain on sale margin on one- to four-family held-for-sale loans, partially offset by higher gains on the sale of securities,multifamily held for sale loans. The decrease in mortgage banking income was partially offset by an increase in deposit fees and other service charges, primarily due to increased transaction deposit account activity and higher fees on certain transactions and miscellaneous non-interest income as well as a net gain recognized for fair value adjustments as a result of changes in the valuevaluation of financial instruments carried at fair value and gain on sale of branches including related loans and deposits, was $93.5 million for the year ended December 31, 2017, compared to $83.5 million for the year ended December 31, 2016. The year ended December 31, 2017, included a $12.2 million net gain on the sale of the Utah branches including the related loans and deposits (Utah Branch Sale).value.

Although our credit quality metrics continue to reflect our moderate risk profile, weWe recorded a $8.0$33.4 million recapture of provision for loancredit losses in the year ended December 31, 2017,2021, primarily due to the organic growthreflecting an improvement in the loan portfolio,forecasted economic indicators and a decrease in adversely classified loans during the renewal of acquired loans out of the discounted loan portfolios and net charge-offs,year ended December 31, 2021, compared to a $6.0$67.9 million provision recorded in 2016. Non-performing2020. The allowance for credit losses - loans increasedat December 31, 2021 was $132.1 million, representing 578% of non-performing loans compared to $27.0$167.3 million, or 470% of non-performing loans at December 31, 2020. In addition to the allowance for credit losses - loans, Banner maintains an allowance for credit losses - unfunded loan commitments, which was $12.4 million at December 31, 2017,2021 compared to $22.6$13.3 million a year earlier. Our allowance for loan losses at December 31, 2017 was $89.02020. Non-performing loans were $22.8 million or 1.17%at December 31, 2021, compared to $35.6 million at December 31, 2020. Net charge-offs decreased to $2.1 million for the year ended December 31, 2021, compared to net charge-offs of total loans outstanding and 329% of non-performing loans.$5.4 million for the prior year. (See Note 5,4, Loans Receivable and the Allowance for LoanCredit Losses, of the Notes to the Consolidated Financial Statements as well as “Asset Quality” below.)


Our non-interest expense increased 1%3% to $327.3$380.1 million for the year ended December 31, 2017, compared to $322.9 million for the year ended December 31, 2016.2021, compared to $369.6 million for the year ended December 31, 2020. The year-over-year increase in non-interest expense was largely attributable to increased salaryincreases in payment and employee benefitscard processing services expense and elevated costs for professional services as compared to a year ago largelyexpense, primarily due to enhanced regulatory requirements attributablean increase in consulting expenses related to compliance and risk management infrastructure build-out partially offset by no acquisition-related costs incurred in 2017.

During the fourth quarterBanner Forward initiative, as well as a $2.3 million loss on extinguishment of 2017, we implemented a balance sheet restructuring to reduce our total assets below $10.0 billion at December 31, 2017,debt as a result of which our total assets decreased slightly in 2017 to $9.76 billion atthe redemption of $8.2 million of junior subordinated debentures during the current year ended December 31, 2017. Remaining below $10.0 billion at year end had the beneficial effect of delaying the adverse impact on our future operating results from certain enhanced regulatory requirements2021. The year-over-year increase was partially offset by decreases in COVID-19 expenses and the Durbin Amendment cap on interchange revenues. Based on current debit card transaction volumes, Banner estimates that the Durbin Amendment will have a $12 million annualized negative impact on pre-tax revenues commencing six months after the calendar year end when our assets exceed $10 billion.merger and acquisition-related expenses.


Recent Developments and Significant Events



Merger of Islanders Bank into Banner Bank

On February 5, 2021, Banner completed the merger of Islanders Bank into Banner Bank. Since both banks were wholly owned subsidiaries of Banner, there was no change in the consolidated assets or liabilities of Banner.

Sale of Utah Branchesfour branches


On October 6, 2017,February 18, 2022, Banner Bank completed the sale of its Utah branches and related assets and liabilities to People’s Intermountain Bank,entered into a banking subsidiary of People’s Utah Bancorp (NASDAQ: PUB).

Under the terms of the purchase and assumption agreement with Spokane Teachers Credit Union, Spokane, Washington (“STCU”) with respect to the sale included $253.8 million in loans, $160.3 million in deposits and allto STCU of four Banner Bank’s seven UtahBank branches located in Provo, Orem, Salem, Springville, South Jordan, Salt Lake CityHayden, Idaho, and Woods Cross.in Chewelah, Colville, and Kettle Falls, Washington, 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 included $4.0 millionincludes all related branch premises and equipment.

6

Banner anticipates that these sale transactions will help to further shape the Bank’s service footprint, which should in turn add to Banner’s capital, reduce excess liquidity, and improve its operating efficiency. The transactions are intended to support the Banner Forward initiative by improving focus on key operations and markets, and providing capital to reinvest in profitability enhancement initiatives. The Company’s goal is that the combined impact of propertythese sales and equipment and $581,000 of accrued interest. In addition, Banner allocated an associated $1.9 million of goodwill and $1.1 million of other intangible assets with the divestiture, which constituted the disposal of a business. The deposit premium paidForward initiatives will be positive to Banner was $13.8 million based on average daily deposits for a period prior to closing. The net gain recorded on the Utah Branch Sale was $12.2 million.future annual operating earnings.


Lending Activities


General: All of our lending activities are conducted through Banner Bank and its subsidiary, Community Financial Corporation, a residential construction lender located in Portland, Oregon, and Islanders Bank.Oregon. We offer a wide range of loan products to meet the demands of our customersclients and our loan portfolio is very diversified by product type, borrower and geographic location within our market area. We originate loans for our own loan portfolio and for sale in the secondary market. Management’s strategy has been to maintain a well diversifiedwell-diversified portfolio with a significant percentage of assets in the loan portfolio having more frequent interest rate repricing terms or shorter maturities than traditional long-term fixed-rate mortgage loans. As part of this effort, we offer a variety of floating or adjustable interest rate products that correlate more closely with our cost of interest bearinginterest-bearing funds, particularly loans for commercial business and real estate, agricultural business, and construction and development purposes. However, in response to customerclient demand, we continue to originate fixed-rate loans, including fixed interest rate mortgage loans


with terms of up to 30 years. The relative amount of fixed-rate loans and adjustable-rate loans that can be originated at any time is largely determined by the demand for each in a competitive environment. At December 31, 2017,2021, our net loan portfolio totaled $7.51$8.95 billion compared to $7.37$9.70 billion at December 31, 2016.2020.


Our lending activities are primarily directed toward the origination of real estate and commercial loans. Commercial real estate loans include owner-occupied, investment properties and multifamily residential real estate. Although ourOur level of activity and investment in commercial real estate loans has been relatively stable for many years, we have experienced an increase in new originations in recent periods.years. We also originate construction, land and land development loans, a significant component of which is our residential one- to four-family construction loans. Originations of one- to four-family construction loans have increased in recent years as builders have expanded production and experienced strong sales in many of the markets we serve. Our origination of construction and development loans has been significant during this periodrecent years and balances in this portion of the portfolio have increased in recent periods but not at the same pace of originations as brisk sales of new homes have produced rapid turnover through repayments. Our commercial business lending is directed toward meeting the credit and related deposit and treasury management needs of various small- to medium-sized business and agribusiness borrowers operating in our primary market areas. In recent years, our commercial business lending has also included participation in certain national syndicated loans. ReflectingPrior to 2020, reflecting the expanding economy of the western United States, demand for these types of commercial business loans hashad strengthened and our production levels havehad increased from prior periods. As a result of COVID-19, commercial business loan originations declined in recent periods.2020, however, the decline was more than offset by the origination of SBA PPP loans. The demand for commercial business loans strengthened in 2021 and our production levels increased compared to 2020, although still below production levels prior to the COVID-19 pandemic. Our residential mortgage loan originations have been relativelyvery strong in recent years, as exceptionallysustained periods of low interest rates have supported demand for loans to refinance existing debt as well as loans to finance home purchases. However, mostMost of the one- to four-family loans that we originate are sold in the secondary markets with net gains on sales and loan servicing fees reflected in our revenues from mortgage banking. Our consumer loan activity is primarily directed at meeting demand from our existing deposit customers. We have increased our emphasis on consumer lending, which resulted in meaningful growth from originations in recent years, primarily related to increased home equity lines of credit.clients.


For additional information concerning our loan portfolio, see Item 7 of this report, “Management’s Discussion and Analysis of Financial Condition—Condition and Results of Operations—Comparison of Financial Condition at December 31, 20172021 and 2016—2020—Loans and Lending” including Tables 34 and 4,5, which sets forth the composition and geographic concentration of our loan portfolio, and Tables 56 and 6,7, which contain information regarding the loans maturing in our portfolio.


One- to Four-Family Residential Real Estate Lending:  At both Banner Bank and Islanders Bank, we We originate loans secured by first mortgages on one- to four-family residences in the markets we serve.  Through our mortgage banking activities, we sell residential loans on either a servicing-retained or servicing-released basis. In recent years, we have generally sold a significant portion of our conventional residential mortgage originations and nearly all of our government insured loans in the secondary market. At December 31, 2017, $848.32021, $683.3 million, or 11%8% of our loan portfolio, consisted of permanent loans on one- to four-family residences.


We offer fixed- and adjustable-rate mortgages (ARMs) at rates and terms competitive with market conditions, primarily with the intent of selling these loans into the secondary market.  Fixed-rate loans generally are offered on a fully amortizing basis for terms ranging from 10ten to 30 years at interest rates and fees that reflect current secondary market pricing.  Most ARM products offered adjust annually after an initial period ranging from one to five years, subject to a limitation on the annual adjustment and a lifetime rate cap.  For a small portion of the portfolio, where the initial period exceeds one year, the first interest rate change may exceed the annual limitation on subsequent adjustments.  Our ARM products most frequently adjust based upon the average yield on Treasury securities adjusted to a constant maturity of one year or certain London Interbank Offered Rate (LIBOR) indices plus a margin or spread above the index.  ARM loans held in our portfolio may allow for interest-only payments for an initial period up to five years but do not provide for negative amortization of principal and carry no prepayment restrictions.  The retention of ARM loans in our loan portfolio can help reduce our exposure to changes in interest rates.  However, borrower demand for ARM loans versus fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the level of interest rates and the difference between the initial interest rates and fees charged for each type of loan.  In recent years, borrower demand for ARM loans has been limited and we have chosen not to aggressively pursue ARM loans by offering minimally profitable, deeply discounted teaser rates or option-payment ARM products.  As a result, ARM loans have represented only a small portion of our loans originated during recent periods.


Our residential loans are generally underwritten and documented in accordance with the guidelines established by the Federal Home Loan Mortgage Corporation (Freddie Mac or FHLMC) and the Federal National Mortgage Association (Fannie Mae or FNMA).  Government insured loans are underwritten and documented in accordance with the guidelines established by the Department of Housing and Urban Development (HUD) and the Department of Veterans AdministrationAffairs (VA).  In the loan approval process, we assess the borrower’s ability to repay the loan, the adequacy of the proposed security, the employment stability of the borrower and the creditworthiness of the borrower.  For ARM loans, our standard practice provides for underwriting based upon fully indexed interest rates and payments.  Generally, we will lend up to
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95% of the lesser of the appraised value or purchase price of the property on conventional loans, although higher loan-to-value ratios are available on secondary market programs.  We require private mortgage insurance on conventional residential loans with a loan-to-value ratio at origination exceeding 80%.


Construction and Land Lending:  Historically, we have invested a significant portion of our loan portfolio in residential construction and land loans to professional home builders and developers. Our land loans are typically on improved or entitled land, versus raw land. We also make construction loans to qualified owner occupants, which upon completion of the construction phase convert to long-term amortizing one- to four-family residential loans that are eligible for sale in the secondary market. We regularly monitor our construction and land loan portfolios and the economic conditions and housing inventory in each of our markets and increase or decrease this type of lending as we observe market conditions change. Our residential construction and land and land development lending has been recently increasing in select markets and has made a meaningful contribution to our net interest income and profitability.  To a lesser extent, we also originate construction loans for commercial and multifamily real estate.  Although well diversified with respect to sub-markets, price ranges and borrowers, our construction, land and land development loans are significantly concentrated in the greater Puget Sound region of Washington State and the Portland, Oregon market area. At December 31, 2017,2021, construction, land and land development loans totaled


$907.5 million, $1.31 billion, or 12%14% of total loans; 43% of the balance was primarily comprised of one- to four-family construction and residential land orand land development loans, and to a lesser extentwith the remaining balance comprised of commercial and multifamily real estate construction loans and commercial land orand land development loans.


Construction and land lending affords us the opportunity to achieve higher interest rates and fees with shorter terms to maturity than are usually available on other types of lending.  Construction and land lending, however, involves a higher degree of risk than other lending opportunities because of the inherent difficulty in estimating both a property’s value at completion of the project and the estimated cost of the project.  If the estimate of construction cost proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the project.  If the estimate of value upon completion proves to be inaccurate, we may be confronted at, or prior to, the maturity of the loan with a project the value of which is insufficient to assure full repayment.  Disagreements between borrowers and builders and the failure of builders to pay subcontractors may also jeopardize projects.  Loans to builders to construct homes for which no purchaser has been identified carry additional risk because the payoff for the loan is dependent on the builder’s ability to sell the property before the construction loan is due.opportunities. We attempt to address these risks by adhering to strict underwriting policies, disbursement procedures and monitoring practices.

Construction For additional information concerning the risks associated with construction and land lending, see Item 1A., “Risk Factors—Our loan portfolio includes loans made by us include those with a sales contract or permanent loan in place for the finished homes and those for which purchasers for the finished homes may be identified either during or following the construction period.  We actively monitor the numberhigher risk of unsold homes in our construction loan portfolio and local housing markets to attempt to maintain an appropriate balance between home sales and new loan originations.  The maximum number of speculative loans (loans that are not pre-sold) approved for each builder is based on a combination of factors, including the financial capacity of the builder, the market demand for the finished product and the ratio of sold to unsold inventory the builder maintains.  We have attempted to diversify the risk associated with speculative construction lending by doing business with a large number of small and mid-sized builders spread over a relatively large geographic region with numerous sub-markets within our service area.loss.”

Loans for the construction of one- to four-family residences are generally made for a term of twelve to eighteen months.  Our loan policies include maximum loan-to-value ratios of up to 80% for speculative loans.  Individual speculative loan requests are supported by an independent appraisal of the property, a set of plans, a cost breakdown and a completed specifications form.  Underwriting is focused on the borrowers’ financial strength, credit history and demonstrated ability to produce a quality product and effectively market and manage their operations.  All speculative construction loans must be approved by senior loan officers.


On a more limited basis, we also make land loans to developers, builders and individuals to finance the acquisition and/or development of improved lots or unimproved land.  In making land loans, we follow more conservative underwriting policies andthan those for construction loans but maintain similar disbursement and monitoring procedures similar to those for construction loans.procedures.  The initial term on land loans is typically one to three years with interest only payments, payable monthly, and provisions for principal reduction as lots are sold and released from the lien of the mortgage.


Commercial and Multifamily Real Estate Lending: We originate loans secured by multifamily and commercial real estate, including loans for construction of multifamily and commercial real estate projects.  Commercial real estate loans are made for both owner-occupied and investorinvestor-owned properties.  At December 31, 2017,2021, our loan portfolio included $1.94$1.99 billion in non-owner-occupied commercial real estate loans, $1.28$1.13 billion in owner-occupied commercial real estate loans, $598.2 million of small balance commercial real estate or CRE loans (CRE loans up to $1 million) and $314.2$564.1 million in multifamily loans which in aggregate comprised 47% of our total loans.  Multifamily and commercial real estate lending affords us an opportunity to receive interest at rates higher than those generally available from one- to four-family residential lending.  However, loans secured by multifamily and commercial properties are generally greater in amount, more difficult to evaluate and monitor and, therefore, potentially riskier than one- to four-family residential mortgage loans.  Because payments on loans secured by multifamily and commercial properties are often dependent on the successful operation and management of the properties, repayment of these loans may be affected by adverse conditions in the real estate market or the economy.  In addition, many of our commercial and multifamily real estate loans often are not fully amortizing and contain large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment. In originating multifamily and commercial real estate loans, we consider the location, marketability and overall attractiveness of the properties.  Our underwriting guidelines for multifamily and commercial real estate loans require an appraisal from a qualified independent appraiser, as well as an environmental risk assessment and an economic analysis of each property with regard to the annual revenue and expenses, debt service coverage and fair value to determine the maximum loan amount.  In the approval process we assess the borrowers’borrower’s willingness and ability to manage the property and repay the loan and the adequacy of the collateral in relation to the loan amount. While a portion of our multifamily loan originations are held for investment, the majority of multifamily loan originations are sold with the gain recognized as mortgage banking income. For information concerning the risks associated with commercial and multifamily real estate lending, see Item 1A., “Risk Factors—Our loan portfolio includes loans with a higher risk of loss.”


Multifamily and commercial real estate loans originated by us are both fixed- and adjustable-rate loans generally with intermediate terms of generally five to ten years.  A significant portion of our multifamily and commercial real estate loans are linked to various FHLB advance rates, certain prime rates, US Treasury rates, or other market rate indices.  Rates on these adjustable-rate loans generally adjust with a frequency of one to five years after an initial fixed-rate period ranging from one to ten years.  Our commercial real estate portfolio consists of loans on a variety of property types with no large concentrations by property type, location or borrower.  At December 31, 2017,2021, the average size of our commercial real estate loans was $627,000$949,000 and the largest commercial real estate loan, in terms of an outstanding balance, in our portfolio was approximately $16.8$19.9 million.


Commercial Business Lending:  We are active in small- to medium-sized business lending and are engaged in agricultural lending primarily by providing crop production loans.lending.  Our commercial bankers are focused on local markets and devote a great deal of effort to developing customerclient relationships and providing these types of borrowers with a full array of products and services delivered in a thorough and responsive manner.  Our experienced commercial bankers and senior credit staff help us meet our commitment to small business lending while also focusing on corporate lending opportunities for borrowers with credit needs generally in a $3 million to $15$25 million range. In addition to providing earning assets, commercial business lending has helped us increase our deposit base. In recent years, our commercial business lending has included modest participation in certain national syndicated loans, including shared national credits. We also originate smaller balance business loans principally through our retail branch network, using our Quick Step business loan program, which is closely aligned with our consumer lending operations


and relies on centralized underwriting procedures. Quick Step business loans andare available up to $1.0 million, business lines of credit are available from $5,000up to $500,000 and owner-occupied real estate loans are available up to $1.0 million.


As a result of the COVID-19 pandemic, the CARES Act was enacted and authorized the SBA to temporarily guarantee loans under a new loan program called the Paycheck Protection Program. The CAA, which was signed into law on December 27, 2020 renewed and extended the SBA PPP until May 31, 2021, the final expiration date for SBA PPP lending. As a qualified SBA lender, beginning in the second quarter
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of 2020, we began to offer SBA PPP loans which are fully guaranteed by the SBA, to existing and new clients. The SBA guarantees 100% of the SBA PPP loans made to eligible borrowers. The entire principal amount of the borrower’s SBA PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA if the borrower meets the SBA PPP conditions. The great majority of our SBA PPP loans have been forgiven by the SBA in accordance with the terms of the program. We earn 1% interest on SBA PPP loans as well as a fee from the SBA to cover processing costs, which is amortized over the life of the loan and recognized fully at payoff or forgiveness. The maturity date of the SBA PPP loan is either two or five years from the date of loan origination. At December 31, 2021 and 2020, our total SBA PPP loan balance was $133.9 million and $1.04 billion, respectively. The balance of unamortized net deferred fees on SBA PPP loans was $4.5 million at December 31, 2021, compared to $24.1 million at December 31, 2020.

Commercial business loans, other than SBA PPP loans, may entail greater risk than other types of loans.  Commercial business loans may be unsecured or secured by special purpose or rapidly depreciating assets, such as equipment, inventory and receivables, which may not provide an adequate source of repayment on defaulted loans.  In addition, commercial business loans are dependent on the borrower’s continuing financial strength and management ability, as well as market conditions for various products, services and commodities.  For these reasons,Conventional commercial business loans generally provide higher yields or related revenue opportunities than many other types of loans but also require more administrative and management attention.  Loan terms, including the fixed or adjustable interest rate, the loan maturity and the collateral considerations, vary significantly and are negotiated on an individual loan basis. For information concerning the risks associated with commercial business lending, see Item 1A., “Risk Factors—Our loan portfolio includes loans with a higher risk of loss.”

We underwrite our conventional commercial business loans on the basis of the borrower’s cash flow and ability to service the debt from earnings rather than on the basis of the underlying collateral value.  We seek to structure these loans so that they have more than one source of repayment.  The borrower is required to provide us with sufficient information to allow us to make a prudent lending determination.  In most instances, this information consists of at least three years of financial statements and tax returns, a statement of projected cash flows, current financial information on any guarantor and information about the collateral.  Loans to closely held businesses typically require personal guarantees by the principals.  Our commercial business loan portfolio is geographically dispersed across the market areas serviced by our branch network and there are no significant concentrations by industry or products.product.


Our commercial business loans may be structured as term loans or as lines of credit.  Commercial business term loans are generally made to finance the purchase of fixed assets and have maturities of five years or less.  Commercial business lines of credit are typically made for the purpose of providing working capital and are usually approved with a term of one year.  Adjustable- or floating-rate loans are primarily tied to various prime rate or LIBOR indices.  At December 31, 2017,2021, commercial business loans totaled $1.28$1.17 billion, or 17%13% of our total loans receivable, including $129.5$132.6 million of SBA PPP loans and $173.9 million of shared national credits.


Agricultural Lending:  Agriculture is a major industry in several of our markets.  We make agricultural loans to borrowers with a strong capital base, sufficient management depth, proven ability to operate through agricultural cycles, reliable cash flows and adequate financial reporting.  Payments on agricultural loans depend, to a large degree, on the results of operations of the related farm entity.  The repayment is also subject to other economic and weather conditions as well as market prices for agricultural products, which can be highly volatile.  At December 31, 2017,2021, agricultural business loans, including collateral secured loans to purchase farm land and equipment and $1.4 million of SBA PPP loans, totaled $338.4$285.8 million, or 4%3% of our loan portfolio.


Agricultural operating loans generally are made as a percentage of the borrower’s anticipated income to support budgeted operating expenses.  These loans are secured by a blanket lien on all crops, livestock, equipment, accounts and products and proceeds thereof.  In the case of crops, consideration is given to projected yields and prices from each commodity.  The interest rate is normally floating based on the prime rate or a LIBOR index plus a negotiated margin.  Because these loans are made to finance a farmfarm’s or ranch’s annual operations, they are usually written on a one-year review and renewable basis.  The renewal is dependent upon the prior year’s performance and the forthcoming year’s projections as well as the overall financial strength of the borrower.  We carefully monitor these loans and related variance reports on income and expenses compared to budget estimates.  To meet the seasonal operating needs of a farm, borrowers may qualify for single payment notes, revolving lines of credit and/or non-revolving lines of credit.


In underwriting agricultural operating loans, we consider the cash flow of the borrower based upon the expected operating results as well as the value of collateral used to secure the loans.  Collateral generally consists of cash crops produced by the farm, such as milk, grains, fruit, grass seed, peas, sugar beets, mint, onions, potatoes, corn and alfalfa or livestock.  In addition to considering cash flow and obtaining a blanket security interest in the farm’s cash crop, we may also collateralize an operating loan with the farm’s operating equipment, breeding stock, real estate and federal agricultural program payments to the borrower.


We also originate loans to finance the purchase of farm equipment.  Loans to purchase farm equipment are made for terms of up to seven years.  On occasion, we also originate agricultural real estate loans secured primarily by first liens on farmland and improvements thereon located in our market areas, although generally only to service the needs of our existing customers.clients.  Loans are generally written in amounts ranging from 50% to 75% of the tax assessed or appraised value of the property for terms of five to 20 years.  These loans generallywill typically have interest rates that adjust at least every five years based upon a Treasury index or FHLB advance rate plus a negotiated margin.  Fixed-rate loans are granted on terms usually not to exceed five years.  In originating agricultural real estate loans, we consider the debt service coverage of the borrower’s cash flow, the appraised value of the underlying property, the experience and knowledge of the borrower, and the borrower’s past performance with us and/or the market area.  These loans normally are not made to start-up businesses and are reserved for existing customersclients with substantial equity and a proven history.


Among the more common risks to agricultural lending can be weather conditions and disease.  These risks may be mitigated through multi-peril crop insurance.  Commodity prices also present a risk, which may be reducedmitigated through by the use of set price contracts.  Normally, required beginning and projected operating margins provide for reasonable reserves to offset unexpected yield and price deficiencies.  In addition to these risks, we also consider management succession, life insurance and business continuation plans when evaluating agricultural loans.

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loans. For additional information concerning the risks associated with agricultural lending, see Item 1A., “Risk Factors—Our loan portfolio includes loans with a higher risk of loss.”

Consumer and Other Lending:  We originate a variety of consumer loans, including home equity lines of credit, automobile, boat and recreational vehicle loans and loans secured by deposit accounts.  While consumer lending has traditionally been a small part of our business, with loans made primarily to accommodate our existing customerclient base, it has received consistent emphasis in recent years.  Part of this emphasis includes


a Banner Bank-owned credit card program.  Similar to other consumer loan programs, we focus this credit card program on our existing customerclient base to add to the depth of our customerclient relationships.  In addition to earning balances, credit card accounts produce non-interest revenues through interchange fees and other activity-based revenues. Our underwriting of consumer loans is focused on the borrower’s credit history and ability to repay the debt as evidenced by documented sources of income.  At December 31, 2017,2021, we had $688.8$555.9 million, or 9%6% of our loan portfolio, in consumer related loans, including $522.9$458.5 million, or 7%5% of our loan portfolio, in consumer loans secured by one- to four-family residences.

Similar to commercial business loans, our consumer loans often entail greater risk than first-lien residential mortgage loans. Home equity lines of credit generally entail greater risk than do one- to four-family residential mortgage loans where we are in For information concerning the first lien position. For those home equity lines secured by a second mortgage, it is less likely that we will be successful in recovering all of our loan proceeds in the event of default. Our foreclosure on these loans requires that the value of the property be sufficient to cover the repayment of the first mortgage loan, as well as the costsrisks associated with foreclosure. In the caseconsumer lending, see Item 1A., “Risk Factors—Our loan portfolio includes loans with a higher risk of consumer loans which are unsecured or secured by rapidly depreciating assets such as automobiles, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.  The remaining deficiency often does not warrant further substantial collection efforts against the borrower.  In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.  Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on these consumer loans.  Loans that we purchased, or indirectly originated, may also give rise to claims and defenses by a consumer loan borrower against an assignee of such loans such as us, and a borrower may be able to assert against the assignee claims and defenses that it has against the seller of the underlying collateral.loss.”


Loan Solicitation and Processing:  We originate real estate loans in our market areas by direct solicitation of real estate brokers, builders, developers, depositors, walk-in customersclients, real estate brokers and visitors to our Internet website.  One- to four-family residential loan applications are taken by our mortgage loan officers or through our Internet website and are processed in branch or regional locations.  In addition, we have specialized loan origination units, focused on construction and land development, commercial real estate and multifamily loans. Most underwriting and loan administration functions for our real estate loans are performed by loan personnel at central locations.


In addition to commercial real estate loans, our commercial bankers solicit commercial and agricultural business loans through call programs focused on local businesses and farmers.  While commercial bankers are delegated reasonable commitmentlending authority based upon their qualifications, credit decisions on significant commercial and agricultural loans are made by senior loancredit officers based on their lending authority or in certain instancesif required, by the Board of Directors of Banner Bank and Islanders Bank.


We originate consumer loans and small business (including Quick Step) commercial business loans through various marketing efforts directed primarily toward our existing deposit and loan customers.clients.  Consumer loans and Quick Step commercial business loan applications are primarily underwritten and documented by centralized administrative personnel.


Loan Originations, Sales and Purchases


While we originate a variety of loans, our ability to originate each type of loan is dependent upon the relative customerclient demand and competition in each market we serve.  For the years ended December 31, 20172021 and 2016,2020, we originated loans, net of repayments, including our participation in syndicated loans and loans held for sale of $985.7$306.8 million and $1.11$2.02 billion, respectively. The year ended December 31, 2021 included net repayments of SBA PPP loans of $910.5 million, compared to net originations of SBA PPP loans of $1.04 billion for the year ended December 31, 2020. For additional information concerning origination of portfolio loans by type, see Item 7 in this report, “Management’s Discussion and Analysis of Financial Condition—Comparison of Financial Condition at December 31, 2021 and 2020—Loans and Lending,” and Table 3 contained therein.


We sell many of our newly originated one- to four-family residential mortgage loans and multifamily loans to secondary market purchasers as part of our interest rate risk management strategy.  Originations of loans for sale decreased to $807.1 million$1.10 billion for the year ended December 31, 20172021 from $1.06$1.46 billion during 2016, as rising interest rates and other market conditions resulted in less demand for mortgage loans, particularly for refinancing transactions.2020. Originations of loans for sale included $292.3$225.0 million and $367.6$234.0 million of multifamily held for sale loan production for the years ended December 31, 20172021 and December 31, 2016,2020, respectively. Sales of loans generally are beneficial to us because these sales may generate income at the time of sale, provide funds for additional lending and other investments, increase liquidity or reduce interest rate risk.  During the year ended December 31, 2017,2021, we sold $1.03received proceeds of $1.28 billion from the sale of loans held for sale compared to $880.9 million$1.47 billion for the year ended December 31, 2016.2020. The held for sale loans sold in 20172021 and 20162020 included $475.7$287.7 million and $198.1$241.8 million, respectively, of multifamily loans held for sale. In addition, we sold $2.5 million and $160.3 million of portfolio multifamily loans in 2017 and 2016, respectively. We sell one- to four-family mortgage loans on both a servicing-retained and a servicing-released basis.  All loans are sold without recourse.recourse however, subject to the standard representations and warranties contained in the loan sale agreement. The decision to hold or sell loans is based on asset liability management goals, strategies and policies and on market conditions.  See In addition, we generally sell the guaranteed portion of SBA loans. For additional information, see “Loan Servicing.”


We periodically purchase whole loans and loan participation interests or participate in syndicates, originating new loans, including shared national credits, primarilycredits. These purchases are made during periods of reduced loan demand in our primary market area and at timesas well as to support our Community Reinvestment Act lending activities.  Any such purchases or loan participations are generally made generallyon terms consistent with our underwriting standards; however, the loans may be located outside of our normal lending area.  During the years ended December 31, 2017 and 2016, we purchased $306.9 million and $314.3 million, respectively, of loans and loan participation interests, principally commercial real estate loans.




Loan Servicing


We receive fees from a variety of institutional owners in return for performing the traditional services of collecting individual payments and managing portfolios of sold loans.  At December 31, 2017,2021, we were servicing $2.64$3.04 billion of loans for others.  Loan servicing includes processing payments, accounting for loan funds and collecting and paying real estate taxes, hazard insurance and other loan-related items such as private mortgage insurance.  In addition to earning fee income, we retain certain amounts in escrow for the benefit of the lender for which we incur no interest expense but are able to invest the funds into earning assets.  


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Mortgage and SBA Servicing Rights:  We record mortgage servicing rights (MSRs) with respect to loans we originate and sell in the secondary market on a servicing-retained basis.basis and SBA servicing rights with respect to the guaranteed portion of SBA loans we sell.  The value of MSRs is capitalized and amortized in proportion to, and over the period of, the estimated future net servicing income.  Management periodically evaluates the estimates and assumptions used to determine the carrying values of MSRs and the amortization of MSRs. MSRs generally are adversely affected by higher levels of current or anticipated prepayments resulting from decreasing interest rates.  These carrying valuesMSRs are adjusted whenevaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is recognized through a valuation indicatesallowance, to the carryingextent that fair value is impaired.less than the capitalized carrying amount. SBA servicing rights are initially recorded and carried at fair value. Any change in the fair value of SBA servicing rights is recorded in non-interest income. At December 31, 2017,2021, our MSRs and SBA servicing rights were carried at aan aggregate value of $14.7$17.2 million, net of amortization.  For additional information see Note 17,15, Goodwill, Other Intangible Assets and Mortgage Servicing Rights, of the Notes to the Consolidated Financial Statements.


Asset Quality


Classified Assets: State and federal regulations require that the Banks reviewBank reviews and classify theirits problem assets on a regular basis.  In addition, in connection with examinations of insured institutions, state and federal examiners have authority to identify problem assets and, if appropriate, require them to be classified.  Historically, we have not had any meaningful differences of opinion with the examiners with respect to asset classification.  Banner Bank’s Credit Policy Division reviews detailed information with respect to the composition and performance of the loan portfolios, including information on risk concentrations, delinquencies and classified assets for both Banner Bank and Islanders Bank.  The Credit Policy Division approves all recommendations for new classified loans or, in the case of smaller-balance homogeneous loans including residential real estate and consumer loans, it has approved policies governing such classifications, or changes in classifications, and develops and monitors action plans to resolve the problems associated with the assets.  The Credit Policy Division also approves recommendations for establishing the appropriate level of the allowance for loancredit losses.  Significant problem loans are transferred to Banner Bank’s Special Assets Department for resolution or collection activities.  The Banks’Both Banner Bank’s and Banner Corporation’s Boards of Directors are given a detailed report on classified assets andreview asset quality at least quarterly.  For additional information regarding asset quality and non-performing loans, see Item 7 of this report, “Management’s Discussion and Analysis of Financial Condition—Comparison of Financial Condition at December 31, 20172021 and 2016—2020—Asset Quality,” and Table 11Tables 12 and 13 contained therein.


Allowance for LoanCredit Losses:  In originating loans, we recognize that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan.  As a result, we maintain an allowance for loancredit losses consistent with U.S. generally accepted accounting principles (GAAP) guidelines.  We increase our allowance for loancredit losses by charging provisionsprovision for probable loancredit losses against our income.  The allowance for loancredit losses is maintained at a level which, in management’s judgment, is sufficient to provide for probableexpected credit losses over the life of the loan based on evaluating knownhistorical credit loss experience and inherent risksmaking adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio and upon continuing analysis of the factors underlying the quality of the loan portfolio.forecasted economic conditions.  For additional information concerning our allowance for loancredit losses, see Item 7 of this report, “Management’s Discussion and Analysis of Financial Condition—Comparison of Results of Operations for the Years Ended December 31, 20172021 and 2016—2020—Provision and Allowance for LoanCredit Losses,” and Tables 1517 and 1618 contained therein.


Real Estate Owned:  Real estate owned (REO) is property acquired by foreclosure or receiving a deed in lieu of foreclosure, and is recorded at the estimated fair value of the property, less expected selling costs.  Development and improvement costs relating to the property are capitalized to the extent they add value to the property.  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 credited or charged to operations in the period in which they are realized.  The amounts we will ultimately recover from REO may differ substantially from the carrying value of the assets because of market factors beyond our control or because of changes in our strategies for recovering the investment.   For additional information on REO, see Item 7 of this report “Management’s Discussion and Analysis of Financial Condition—Comparison of Financial Condition at December 31, 2017 and 2016—Asset Quality” and Table 11 contained therein and Note 6,5, Real Estate Owned, Held for Sale, Net, of the Notes to the Consolidated Financial Statements.




Investment Activities


Investment Securities


Under Washington state law and FDIC regulation, banks are permitted to invest in various types of marketable securities.  Authorized securities include but are not limited to Treasury obligations, securities of various federal agencies (including government-sponsored enterprises), mortgage-backed and asset-backed securities, certain certificates of deposit of insured banks and savings institutions, bankers’ acceptances, repurchase agreements, federal funds, commercial paper, corporate debt and equity securities and obligations of states and their political subdivisions.  Our investment policies are designed to provide and maintain adequate liquidity and to generate favorable rates of return without incurring undue interest rate or credit risk.  Our policies generally limit investments to U.S. Government and agency (including government-sponsored entities) securities, municipal bonds, certificates of deposit, corporate debt obligations and mortgage-backed securities.  Investment in mortgage-backed securities may include those issued or guaranteed by Freddie Mac, Fannie Mae, Government National Mortgage Association (Ginnie Mae or GNMA) and investment grade privately-issued mortgage-backed securities, as well as collateralized mortgage obligations (CMOs).  All of our investment securities, including those that have highwith a credit ratings,rating, are subject to market risk in so far as a change in market rates of interest or other conditions may cause a change in an investment’s earnings performance and/or market value.


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At December 31, 2017,2021, our consolidated investment portfolio totaled $1.20$4.19 billion and consisted principally of mortgage-backed securities and municipal bonds and to a lesser extent U.S. Government agency obligations, mortgage-backed securities, municipal bonds, corporate debt obligations, and asset-backed securities. From time to time, investmentInvestment levels may be increased or decreasedecreased in order to manage balance sheet liquidity, interest rate risk, market risk and provide appropriate risk adjusted returns. SecuritySecurities purchases exceeded sales, paydowns and maturities were significant during the year ended December 31, 20172021 as the Company implementedwe deployed excess balance sheet restructuring initiatives during the fourth quarter of 2017 primarily through reductions in our investment portfolio to remain below $10 billion in assets at December 31, 2017 to delayliquidity amid widening market spreads for certain regulatory consequences associated with exceeding that asset size. For additional information regarding these regulatory consequences, see Item 1A, Risk Factors, "We may be subject to additional regulatory scrutiny if and when Banner or Banner Bank's total assets exceed $10.0 billion."security types.


For detailed information on our investment securities, see Item 7, “Management’s Discussion and Analysis of Financial Condition—Comparison of Financial Condition at December 31, 20172021 and 2016—2020—Investments,” and Tables 1 and 2 contained therein.


Derivatives
The Company, through its Banner Bank subsidiary, is party to various derivative instruments that are used for asset and liability management and customerclient 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. We obtain dealer quotations to value our interest rate swap derivative contracts.
Our predominant derivative and hedging activities involve interest rate swaps related to certain term loans, interest rate lock commitments to borrowers, and forward sales contracts associated with mortgage banking activities. Generally, these instruments help us manage exposure to market risk and meet customerclient 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
Our 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. Under a prior program that was discontinued, we have hedged our 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.
Derivatives Not Designated in Hedge Relationships
Interest Rate Swaps: Banner Bank uses an interest rate swap program for commercial loan customers,clients, in which we provide the client with a variable rate loan and enter into an interest rate swap in which the client receives a fixed rate payment in exchange for a variable rate payment. We offset our 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. At December 31, 2021, Banner Bank also has a fewhad $551.6 million in notional amounts of these client interest rate swaps from a prior interest rate swap programoutstanding that were also not designated in hedge relationships.relationships, with an equal amount of offsetting third party swaps also in place. These swaps do not qualify as designated hedges; therefore, each swap is accounted for as a free standing derivative.
Mortgage Banking: In the normal course of business, the Company sells originated one- to four-family loans and multifamily mortgage loans into the secondary mortgage loan markets. DuringFor one- to four-family loans 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 and multifamily mortgage loans held for sale 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 and multifamily mortgage loans or mortgage-backed securities to broker/dealers at specific prices and dates.


We are exposed to credit-related losses in the event of nonperformance by the counterparty to these agreements. Credit risk of the financial contract is controlledmitigated through the credit approval, limits, and monitoring procedures and we do not expect the counterparties to fail their obligations.procedures.
In connection with the interest rate swaps between Banner Bank and the dealer counterparties, the agreements contain a provision wheresuch that 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, we could be required to settle our obligations under certain of these 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 we had breached any of these provisions at December 31, 20172021 or 2016,2020, we could have been required to settle our obligations under the agreements at the termination value. We generally post collateral against derivative liabilities in the form of cash, government agency-issued bonds, mortgage-backed securities, or commercial mortgage-backed securities.
Derivative assets and liabilities are recorded at fair value on the balance sheet and do not take into account the effects of master netting agreements.sheet. Master netting agreements allow us 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 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.


Derivatives Designated in Hedge Relationships

The Company’s floating rate loans result in exposure to losses in value or net interest income as interest rates change. Our risk management objectives are to reduce volatility in net interest income and to manage our exposure to interest rate movements. To accomplish this objective, the Company uses interest rate derivatives, primarily 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
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exchange for the Company making floating-rate payments over the life of the agreements without exchange of the underlying notional amount. As of December 31, 2021, Banner Bank was a party to $400.0 million in notional amounts of interest rate swaps designated in a hedge relationship under this program.
Deposit Activities and Other Sources of Funds


General:  Deposits, FHLB advances (or other borrowings) and loan repayments are our major sources of funds for lending and other investment purposes.  Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced by general economic, interest rate and money market conditions and may vary significantly.  Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources.  Borrowings may also be used on a longer-term basis to fund loans and investments, as well as to manage interest rate risk.


We compete with other financial institutions and financial intermediaries in attracting deposits.  There is strong competition for transaction balances and savings deposits from commercial banks, credit unions and non-bank corporations, such as securities brokerage companies, mutual funds and other diversified companies, some of which have nationwide networks of offices.  Much of the focus of our acquisitions, branch expansion, relocations and renovation and advertising and marketing campaigns has been directed toward attracting additional deposit customerclient relationships and balances.  In addition, our electronic and digital banking activities including debit card and automated teller machine (ATM) programs, on-line Internet banking services and most recently, customerclient remote deposit and mobile banking capabilities are all directed at providing products and services that enhance customerclient relationships and result in growing deposit balances as well as fee income.  Growing coreCore deposits (non-interest-bearing checking and interest-bearing transaction and savings accounts) isare a fundamental element of our business strategy. Core deposits increased to 88%were 94% of total deposits at December 31, 20172021 compared to 87%93% a year earlier and 83% two years ago.earlier.


Deposit Accounts:  We generally attract deposits from within our primary market areas by offering a broad selection of deposit instruments, including non-interest-bearing checking accounts,interest-bearing checking accounts, money market deposit accounts, regular savings accounts, certificates of deposit, treasury management services and retirement savings plans.  Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors.  In determining the terms of deposit accounts, we consider current market interest rates, profitability to us, matching deposit and loan products and customerclient preferences and concerns.  At December 31, 2017,2021, we had $8.18$14.33 billion of deposits.  For additional information concerning our deposit accounts, see Item 7 in this report, “Management’s Discussion and Analysis of Financial Condition—Comparison of Financial Condition at December 31, 20172021 and 2016—2020—Deposit Accounts,” including Table 78 contained therein, which sets forth the balances of deposits in the various types of accounts, and Table 8,9, which sets forth the amount of our certificates of deposit greater than $100,000in excess of the FDIC insurance limit by time remaining until maturity as of December 31, 2017.2021.  In addition, see Note 8,7, Deposits of the Notes to the Consolidated Financial Statements.


Borrowings:  While deposits are the primary source of funds for our lending and investment activities and for general business purposes, we also use borrowings to supplement our supply of lendable funds, to meet deposit withdrawal requirements and to more efficiently leverage our capital position.  The FHLB serves as our primary borrowing source. The FHLB provides credit for member financial institutions such as Banner Bank and Islanders Bank.  As members,a member, the Banks areBank is required to own capital stock in the FHLB and areis authorized to apply for advances on the security of that stock and certain of theirits mortgage loans and securities, provided that certain credit worthiness standards have been met.  Limitations on the amount of advances are based on the financial condition of the member institution, the adequacy of collateral pledged to secure the credit, and FHLB stock ownership requirements.  At December 31, 2017,2021, we had $202,000$50.0 million of borrowings from the FHLB.  At that date, based on pledged collateral, Banner Bank was authorized byhad $2.38 billion of available credit capacity with the FHLB to borrow up to $3.55 billion under a blanket floating lien security agreement, while Islanders Bank was approved to borrow up to $98.7 million under a similar agreement.FHLB.  The Federal Reserve Bank also serves as an importantadditional source of borrowing capacity.  The Federal Reserve Bank provides credit based upon acceptable loan collateral, which includes certain loan types not eligible for pledging to the FHLB.  At December 31, 2017,2021, based upon our available unencumbered collateral, Banner Bank was eligible to borrow $1.15 billion$782.3 million from the Federal Reserve Bank, although at that date we had no funds borrowed under this arrangement.  Although eligible to participate, Islanders Bank has not applied for approval to borrow from the Federal Reserve Bank.  For additional information concerning our borrowings, see Item 7 in this report, “Management’s Discussion and Analysis of Financial Condition—Comparison of Financial Condition at December 31, 20172021 and 2016—2020—Borrowings,” and Table 10 contained therein,, as well as NotesNote 8, Advances from Federal Home Loan Bank of Des Moines and Note 9, and 10Other Borrowings of the Notes to the Consolidated Financial Statements.


At December 31, 2017,2021, Banner Bank had uncommitted federal funds line of credit agreements with other financial institutions totaling $110.0 million, while Islanders Bank had an uncommitted federal funds line of credit agreement with another financial institution totaling $5.0$125.0 million. NoThere were no balances were outstanding under these agreements as of December 31, 2017.2021. 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.


We issue retail repurchase agreements, generally due within 90 days, as an additional source of funds, primarily in connection with treasury management services provided to our larger deposit customers.clients.  At December 31, 2017,2021, we had issued retail repurchase agreements totaling $90.9$264.5 million. We also may borrow funds through the use of secured wholesale repurchase agreements with securities brokers; at December 31, 2017,2021, we had oneno borrowings outstanding under wholesale repurchase borrowing with a carrying value of $5.0 million.agreements. The retail and wholesale repurchase borrowings were secured by pledges of certain U.S. Government and agency notes and mortgage-backed securities with a market value of $123.9 million.$292.7 million at December 31, 2021.


We have also issued $120.0 million of junior subordinated debentures in connection with the sale of trust preferred securities (TPS).  The TPS were issued from 2002 through 2007 by special purpose business trusts formed by Banner Corporation and were sold in private offerings to pooled investment vehicles.  We invested substantially all of the proceeds from the issuance of these TPS as additional paid in capital at Banner Bank. In addition, Banner has $16.0$15.5 million of junior subordinated debentures that were acquired through acquisitions, for a total of $136.0$135.5 million in debentures at December 31, 2017.2021. The junior subordinated debentures associated with the TPS have been recorded as liabilities and are reported at fair value on our Consolidated Statements of Financial Condition. As of December 31, 20172021 the fair value of the junior
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subordinate debentures was $98.7$119.8 million. Banner redeemed $8.2 million of junior subordinated debentures during the fourth quarter of 2021 and subsequent to December 31, 2021 redeemed an additional $50.5 million of junior subordinated debentures. All of the debentures issued to the trusts, measured at their fair value, less the common stock of the trusts, qualified as Tier I capital as of December 31, 2017, under guidance issued by the Federal Reserve Board. We invested substantially all of the proceeds from the issuance of the TPS as additional paid in capital at Banner Bank.2021. See Note 11,10, Junior Subordinated Debentures and Mandatorily Redeemable Trust Preferred Securities, of the Notes to the Consolidated Financial Statements.


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 (Subordinated 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 offering expenses, of approximately $98.1 million. The subordinated notes qualify as Tier 2 capital for regulatory capital purposes.

Personnel

Human Capital

Strategic Priority: Retain, develop and attract talented people.

At Banner, we seek to provide a work environment that retains, develops and attracts top talent by offering our employees an engaging work experience that allows for career growth and opportunities for meaningful community involvement. Our employees contribute to our commitment to social responsibility through personal volunteerism and active engagement in the communities in which they live and work.

As our business grows and evolves, the demand for qualified candidates continues to increase. Meanwhile, the pool of experienced candidates continues to tighten across the financial industry, making it increasingly challenging to compete for top candidates. To address this challenge, we have developed and continue to enhance a robust and comprehensive company-wide talent management program. The program spans from talent acquisition and selection to performance coaching, career development and retention of our top talent and ultimately to succession planning, always with a focus on diversity, equity and inclusion.

Diversity, Equity and Inclusion (DEI). Our commitment to diversity starts with our Board of Directors, which oversees our culture and holds management accountable to build and maintain a diverse and inclusive environment. Our Board and its Compensation and Human Capital Committee in partnership with Banner’s Executive team including its Chief Human Resources and Diversity Officer oversee our human capital management strategies, programs and practices, including our diversity and inclusion initiatives; oversee our establishment, maintenance and administration of appropriately designed compensation programs and plans; and review our employee engagement and exit survey results.

We established a cross-functional, employee-led DEI council in 2021 to provide leadership and serve as a catalyst for inclusion and diversity initiatives across our organization. The DEI council is intended to help Banner develop effective strategies to encourage diversity, equity and inclusion in our workplace as well as to attract, develop and retain diverse talent. Approximately 24% of our workforce self-identifies as diverse talent as of December 31, 2021.

We aim to maintain a work environment where every employee is treated with dignity and respect, is free from discrimination and harassment and is allowed to devote their full attention and best efforts to performing their job to the best of their ability. Employing the best talent — including individuals who possess a broad range of experiences, backgrounds and skills — enables us to anticipate and meet the needs of our business and those of our clients.

We have a strong team of men and women who are collectively capable of professionally operating the business and fulfilling our vision. The following table illustrates our employees’ gender diversity by position level as of December 31, 2021:

Position LevelFemale %Male %
Individual Contributor72 %28 %
Manager64 %36 %
Director41 %59 %
Executive33 %67 %
Total69 %31 %

Talent Acquisition. To cultivate and recruit hard-to-fill positions, we partner closely with several colleges and universities with well-known programs relevant to our business. We also utilize talent assessment tools to identify candidates who we believe would thrive in our culture and be well-suited to a particular opportunity. Our employment application and hiring processes do not solicit compensation information from candidates during our hiring process. This helps ensure our new hire compensation is based on individual qualifications and roles, rather than how a candidate may have been previously compensated. During 2021, we hired 416 employees.

Employee Engagement. We utilize anonymous employee surveys to seek valuable feedback on key initiatives and leverage the results to improve current programs as well as develop new programs. To drive employee engagement, we share the results with our employees. Additionally, senior leadership analyzes areas of progress or opportunities for improvement and prioritizes responsive actions and activities.
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We have in the past conducted a traditional employee engagement survey, but during the COVID-19 pandemic – particularly in the first year of the pandemic – we shifted our approach to use “pulse surveys,” which enable more frequent engagement with employees and allowed us to focus on discrete areas of employee well-being or other topics of particular interest. Our management and cross-functional teams also work in close coordination to evaluate human capital management issues such as retention, training, workplace safety, harassment and bullying, as well as to implement measures to mitigate these risks.

Total Rewards (Compensation and Benefits). We provide robust compensation and benefits programs, in addition to base pay, to help meet the needs of our employees. These programs include, subject to eligibility policies, annual incentives, stock awards, a 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family care resources, flexible work schedules, employee assistance programs and tuition assistance, among many others. We grant long-term incentive awards in the form of restricted stock and performance-based stock to a select group of senior leaders who we believe will play critical roles in the Company’s future.

We offer comprehensive health insurance coverage, including telehealth services, to employees working an average of 20 hours or more each week. Coverage is also available to eligible employees’ family members including domestic partners. We provide up to 12 days of accrued paid sick time based on hours worked annually; employees are permitted to use sick time for themselves or family members in need of care. Newly hired employees are automatically enrolled in our 401(k) plan, which includes an employer match up to 4% of eligible earnings. As of December 31, 2017,2021, over 92% of employees were participating in our 401(k) plan.

In addition to our traditional health insurance coverage, we had 2,128offer employees a suite of mental health-related programs and benefits, including text-based and telehealth services. We offer virtual physical therapy benefits as well as virtual support for hypertension and diabetes. We also offer Care@Work, which provides employees with subsidized child, adult or 2,078 fullsenior care planning services. This benefit includes up to ten days of subsidized backup care services each year.

Health, Safety and Well-being. The success of our business is fundamentally connected to the well-being of our employees. We provide employees and their families with access to a variety of innovative, flexible and convenient health and well-being programs. Also offered are benefits that support their physical and mental health by providing tools and resources to help employees improve or maintain their health status and encourage healthy behaviors. Finally, we offer choices and options, when possible, to enable employees to customize benefits to meet their own needs and the needs of their families.

COVID-19 Pandemic Response. We have taken many broad-ranging steps to support workplace safety and employee well-being during the COVID-19 pandemic. We transitioned approximately 48% of our employees to a remote work environment, which accounts for nearly all employees whose duties could be performed remotely. This remote work environment continued throughout 2021. To improve safety conditions for our on-site essential employees, we also provided personal protective equipment and supplies such as face coverings and hand sanitizer, conducted enhanced cleanings in our facilities, and installed numerous protective shields and signage related to social distancing and face mask guidelines. We have expanded our employee benefits to include virtual general medicine, behavioral and mental health benefits, and child and eldercare resources. To support our on-site essential employees, we provided additional compensation during the original transition period to aid with unexpected and unusual conditions faced by these individual as we responded to the in-person service needs of our clients and communities. In addition, we provided additional paid time off to support quarantine, recovery and vaccination time.

Encouraging Volunteerism. We strive to be a good corporate citizen by encouraging employees to be engaged in the communities where they live and work. To help remove roadblocks to volunteering, we offer Community Connections, a program that offers employees paid time off to volunteer at non-profit organizations of their choice (16 hours for full-time and 8 hours for part time). We also encourage employees to serve in leadership roles in these organizations as part of their professional development. We are proud to support many local community organizations through financial contributions and employee-driven volunteerism, including Junior Achievement, United Way and hundreds of other organizations.

Incentive Compensation Risk Management. We strive to align incentives with the risk and performance frameworks of the Company. The Company’s “pay for performance” philosophy connects individual, operating unit and Company results to compensation, providing employees with opportunities to share in the Company’s overall growth and success. We develop, execute and govern all incentive compensation plans that discourage imprudent or excessive risk-taking and balance financial reward in a manner that supports our clients, employees and Company.

Talent Development. We invest significant resources developing the talent needed to be an employer of choice. We deliver a variety of training opportunities, use leading-edge methodologies to manage performance and provide frequent performance and development feedback rather than relying on annual reviews. Our talent development programs provide employees with the resources they need to help achieve their career goals, build management skills and lead their teams. We believe in a multi-dimensional approach to learning and development, specifically the 70-20-10 development framework that encompasses on-the-job development or experiential learning; social learning through relationships, networks and mentoring; and formal education. We leverage best-in-class industry associations such as the American Bankers Association, Washington Bankers Association and the Pacific Coast Banking School to provide continuing education courses relevant to the banking industry and job functions. To encourage advancement and growth within our organization, we provide information and guides so individuals can design their own career paths. With this strong focus on internal talent development, we filled 29% of all open positions with internal candidates in 2021. Internal mobility is a particular focus for our DEI council as part of our strategy to increase diverse representation at more senior levels of the organization.

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Succession Planning. Because our Board of Directors recognizes the importance of succession planning for our CEO and other key executives, the Board is actively involved in monitoring our efforts surrounding this initiative. The Board annually reviews our succession plans for senior leadership roles, with the goal of ensuring we will continue to have the right leadership talent in place to execute the organization’s long-term strategic plans.

During these reviews, the Board discusses:

1.Our succession process and pipeline, including diversity, inclusion and goals for building future senior leaders;
2.Potential successors to the CEO in the event of an emergency or retirement; and
3.The CEO’s recommendations for potential successors for top executive roles, along with a review of any development plans for these individuals.

Human Capital Metrics. We capture critical metrics regarding human capital management and report them to the Compensation and Human Capital Committee of the Board of Directors on a quarterly basis. The Human Capital Management Dashboard includes a mixture of trending and point-in-time metrics designed to provide information and analysis of workforce demographics; talent acquisition; workforce stability (retention, turnover, etc.); employee engagement; learning and development; and total rewards. As of December 31, 2021, we employed 1,935 full- and part-time employees across our four-state footprint, which equates to 1,891 full-time equivalent employees.employees (based on scheduled hours). All Banner Corporation has no employees except for those who are also employees of Banner Bank, itsthe Company’s subsidiaries, and Islandersincluding the Bank. TheOur employees are not represented by a collective bargaining unit.  We believe our relationship withagreement. As of December 31, 2021, 61% of our employees is good.work in Washington State. We also have employees working in Oregon (18%), California (14%) and other states (7%). As of December 31, 2021, five generations of employees were represented in our workplace with Millennials being our largest generation (36%), followed by Gen X (31%), Boomers (26%) and Gen Z (7%). Our overall turnover rate increased in 2021, principally due to the talent crisis brought on by the pandemic. Our voluntary turnover rate in 2021 was 22.6%.


Taxation


Tax-Sharing Agreement


Banner Corporation files its federal and state income tax returns on a consolidated basis under a tax-sharing agreement between the Company and each bank subsidiary.  The Company prepares each subsidiary’s minimum income tax which would be required if the individual subsidiary were to file federal and state income tax returns as a separate entity.  Each subsidiary pays to the Company an amount equal to the estimated income tax due if it were to file as a separate entity.  The payment is made on or about the time the subsidiary would be required to make such tax payments to the United States Treasury or the applicable State Departments of Revenue.  In the event the computation of the subsidiary’s federal or state income tax liability, after taking into account any estimated tax payments made, would result in a refund if the subsidiary were filing income tax returns as a separate entity, then the Company pays to the subsidiary an amount equal to the hypothetical refund.  The Company is an agent for each subsidiary with respect to all matters related to the consolidated tax returns and refunds claims.  If Banner'sBanner’s consolidated federal or state income tax liability is adjusted for any period, the liability of each party under the tax-sharing agreement is recomputed to give effect to such adjustments and any additional payments required as a result of the adjustments are made within a reasonable time after the corresponding additional tax payments are made or refunds are received.


Federal Taxation


General:  For tax reporting purposes, we report our income on a calendar year basis using the accrual method of accounting on a consolidated basis.  We are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the reserve for bad debts.  Reference is made toSee Note 12,11, Income Taxes, of the Notes to the Consolidated Financial Statements for additional information concerning the income taxes payable by us.


State Taxation


Washington Taxation: We are subject to a Business and Occupation (B&O) tax which is imposed underby the State of Washington on gross receipts. Interest received on loans secured by mortgages or deeds of trust on residential properties, residential mortgage-backed securities, and certain U.S. Government and agency securities is not subject to this tax.  


California, Oregon, Idaho, Montana and Utah Taxation: Corporations with nexus in the states of California, Oregon, Idaho, Montana and Utah are subject to a corporate level income tax.  AsIn 2020, the state of Oregon implemented a tax on Oregon corporate revenue. If a large percentage of our operations inincome were to come from these states, increase, with the exception of Utah operations which were sold in October 2017, theour state income tax provision willwould have an increasingincreased effect on our effective tax rate and results of operations.




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Competition


We encounter significant competition both in attracting deposits and in originating loans.  Our most direct competition for deposits comes from other commercial and savings banks, savings associations and credit unions with offices in our market areas.  We also experience competition from securities firms, insurance companies, money market and mutual funds, and other investment vehicles.  We expect continued strong competition from such financial institutions and investment vehicles in the foreseeable future, including competition from on-line Internet banking competitors.competitors and “FinTech” companies that rely on technology to provide financial services.  Our ability to attract and retain deposits depends on our ability to provide transaction services and investment opportunities that satisfy the requirements of depositors.  We compete for deposits by offering a variety of accounts and financial services, including robust electronic banking capabilities, with competitive rates and terms, at convenient locations and business hours, and delivered with a high level of personal service and expertise.


Competition for loans comes principally from other commercial banks, loan brokers, mortgage banking companies, savings banks and credit unions and for agricultural loans from the Farm Credit Administration.  The competition for loans is intense as a result of the large number of institutions competing in our market areas.  We compete for loans primarily by offering competitive rates and fees and providing timely decisions and excellent service to borrowers.


Regulation

Banner Bank and Islanders Bank


General:  As a state-chartered, federally insured commercial banks,bank, Banner Bank and Islanders Bank (the Banks) areis subject to extensive regulation and must comply with various statutory and regulatory requirements, including prescribed minimum capital standards.  The Banks areBank is regularly examined by the FDIC and the Washington DFI and filefiles periodic reports concerning theirits activities and financial condition with these banking regulators.  The Banks'Bank’s relationship with depositors and borrowers also is regulated to a great extent by both federal and state law, especially in such matters as the ownership of deposit accounts and the form and content of mortgage and other loan documents.


Federal and state banking laws and regulations govern all areas of the operation of the Banks,Bank, including reserves, loans, investments, deposits, capital, issuance of securities, payment of dividends and establishment of branches.  Federal and state bank regulatory agencies also have the general authority to limit the dividends paid by insured banks and bank holding companies if such payments should be deemed to constitute an unsafe and unsound practice and in other circumstances.  The Federal Reserve and FDIC, as the respective primary federal regulators of Banner Corporation and each of Banner Bank and Islanders Bank, have authority to impose penalties, initiate civil and administrative actions and take other steps intended to prevent banks from engaging in unsafe or unsound practices.

The laws and regulations affecting banks and bank holding companies have changed significantly, particularly in connection with the enactment of The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). Among other changes, the Dodd-Frank Act established the Consumer Financial Protection Bureau (CFPB) asis an independent bureau of the Federal Reserve. The CFPB assumed responsibilityis responsible for the implementation of the federal financial consumer protection and fair lending laws and regulations and has authority to impose new requirements.

Any change in applicable laws, regulations, or regulatory policies may have a material effect on our business, operations, and prospects. We cannot predict the nature or the extent of the effects on our business and earnings that any fiscal or monetary policies or new federal or state legislation may have in the future. For additional information, concerning the Dodd-Frank Act and the CFPB, see Item 1A., “Risk Factors—We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations that are expected to increase our costs of operation,” and “We may be subject to additional regulatory scrutiny if and when Banner or Banner Bank maintains total assets exceeding $10.0 billion.operation.”


The following is a summary discussion of certain laws and regulations applicable to Banner and the BanksBank which is qualified in its entirety by reference to the actual laws and regulations.


State Regulation and Supervision:  As a Washington state-chartered commercial bank with branches in the States of Washington, Oregon, Idaho and California, Banner Bank is subject not only to the applicable provisions of Washington law and regulations, but is also subject to Oregon, Idaho and California law and regulations.  These state laws and regulations govern Banner Bank'sBank’s ability to take deposits and pay interest thereon, to make loans on or invest in residential and other real estate, to make consumer loans, to invest in securities, to offer various banking services to its customersclients and to establish branch offices.  In a similar fashion, Washington state laws and regulations for state-chartered commercial banks also apply to Islanders Bank.


Deposit Insurance:The Deposit Insurance Fund of the FDIC insures deposit accounts of each of the BanksBank up to $250,000 per separately insured depositor.deposit relationship category.  As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions.


The Dodd-Frank Act requiresUnder the FDIC's deposit insurance assessments to be based on assets instead of deposits.  The FDIC has issuedFDIC’s rules which specify that the assessment base for a bank is equal to its total average consolidated assets less average tangible capital.  As of December 31, 2017,2021, assessment rates ranged from 3three basis points to 30 basis points for all institutions, subject to adjustments for unsecured debt issued by the institution, unsecured debt issued by other FDIC-insured institutions, and brokered deposits held by the institution. The FDIC also imposed a 4.5 basis point surcharge on assessment rates for all large banks, defined as insured depository institutions that report total consolidated assets of $10 billion or more for four consecutive quarters. The 4.5 basis point surcharge is applied to the assessment base in excess of $10 billion. The surcharge will be in place until the FDIC reserve ratio reaches 1.35%. When the reserve ratio reaches 1.38%, small banks will receive certain


credits applicable to their assessments. If the FDIC reserve ratio does not reach 1.35% by December 31, 2018, the FDIC will impose a shortfall assessment on all large banks in the first quarter of 2019.
Under the current rules, when the reserve ratio for the prior assessment period reaches, or is equal to, or greater than 2.0% and less than 2.5%, assessment rates will range from two basis points to 28 basis points and when the reserve ratio for the prior assessment period is greater than 2.5%, assessment rates will range from one basis point to 25 basis points (in each case subject to adjustments as described above for current rates).  No institution may pay a dividend if it is in default on its federal deposit insurance assessment.
The FDIC conducts examinations of and requires reporting by state non-member banks, such as the Banks.Bank. The FDIC also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious risk to the deposit insurance fund.

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The FDIC may terminate the deposit insurance of any insured depository institution if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC.  It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance if the institution has no tangible capital.  If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC.  Management is not aware of any existing circumstances which would result in termination of the deposit insurance of either Banner Bank or Islanders Bank.


Standards for Safety and Soundness:  The federal banking regulatory agencies have prescribed, by regulation, guidelines for all insured depository institutions relating to internal controls, information systems and internal audit systems; loan documentation; credit underwriting; interest rate risk exposure; asset growth; asset quality; earnings; and compensation, fees and benefits.  The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions.  Each insured depository institution must implement a comprehensive written information security program that includes administrative, technical, and physical safeguards appropriate to the institution'sinstitution’s size and complexity and the nature and scope of its activities.  The information security program must be designed to ensure the security and confidentiality of customerclient information, protect against any unanticipated threats or hazards to the security or integrity of such information, protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer,client, and ensure the proper disposal of customerclient and consumer information.  Each insured depository institution must also develop and implement a risk-based response program to address incidents of unauthorized access to customerclient information in customerclient information systems.  If the FDIC determines that an institution fails to meet any of these guidelines, it may require an institution to submit to the FDIC an acceptable plan to achieve compliance.


Capital Requirements: Bank holding companies, such as Banner Corporation, and federally insured financial institutions, such as Banner Bank, and Islanders Bank, are required to maintain a minimum level of regulatory capital.  


Effective January 1, 2015 (with some changes transitioned into full effectiveness over several years), Banner Corporation and the Banks becameBank are subject to new capital regulations adopted by the Federal Reserve and the FDIC, which established minimum required ratios for common equityCommon Equity Tier 1 (“CET1”) capital, Tier 1 capital, total capital and the leverage ratio; risk-weightings of certain assetsratio and other items for purposes of the risk-based capital ratios, a required capital conservation buffer over the required capital ratios, and defined what qualifies as capital for purposes of meeting the capital requirements. These regulations implement the regulatory capital reforms required by the Dodd—Frank Act and the “Basel III” requirements.ratios.


Under the 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 loan and leasecredit losses up to 1.25% of assets. Total capital is the sum of Tier 1 and Tier 2 capital.


There were a number of changes in what constitutes regulatory capital compared to the rules in effect prior to January 1, 2015, some of which are subject to transition periods.  These changes include the phasing-out of certain instruments as qualifying capital and eliminate or significantly reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory capital. Trust preferred securities issued by a bank holding company, such as the Company, with total consolidated assets of less than $15 billion before May 19, 2010 and treated as regulatory capital are grandfathered, but any such securities issued later are not eligible to be treated as regulatory capital under the new regulations.capital.  If an institution grows above $15 billion as a result of an acquisition, the trust preferred securities are excluded from Tier 1 capital and instead included in Tier 2 capital. Mortgage servicing assets and deferred tax assets over designated percentages of CET1 are deducted from capital.  In addition, Tier 1 capital includes AOCI, which includes all unrealized gains and losses on available for sale debt and equity securities.  However, because of our asset size, we were eligible for the one-time option ofto elect, and did elect, to permanently optingopt out of the inclusion of unrealized gains and losses on available for sale debt and equity securities in our capital calculations, which we elected to do.calculations.


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. The regulations changed certain risk-weightings compared to the earlier capital rules, includinginclude a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in nonaccrual status; a 20% (up from 0%) credit conversion factor for the


unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (up from 0%); and a 250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital.


In addition to the minimum CET1, Tier 1, leverage ratio and total capital ratios, Banner and each of the BanksBank 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.  The new capital conservation buffer requirement was phased in beginning on January 1, 2016 when a buffer greater than 0.625% of risk-weighted assets was required, which amount will increase each year by 0.625% until the buffer requirement is fully implemented on January 1, 2019.
 
To be considered "well“well capitalized,"” a bank holding company must have, on a consolidated basis, a total risk-based capital ratio of 10.0% or greater and a Tier 1 risk-based capital ratio of 6.0% or greater and must not be subject to an individual order, directive or agreement under which the FRB requires it to maintain a specific capital level.  To be considered “well capitalized,” a depository institution must have a Tier 1 risk-based capital ratio of at least 8.0%, a total risk-based capital ratio of at least 10.0%, a CET1 capital ratio of at least 6.5% and a leverage ratio of at least 5.0% and not be subject to an individualized order, directive or agreement under which its primary federal banking regulator requires it to maintain a specific capital level. 


The FASB issued a new accounting standard the Bank adopted on January 1, 2020. This standard, referred to as CECL, requires FDIC-insured institutions and their holding companies (banking organizations) to recognize credit losses expected over the life of certain financial assets. Upon adoption of CECL, a banking organization must record a one-time adjustment to its credit loss allowances as of the beginning of
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the fiscal year of adoption equal to the difference, if any, between the amount of credit loss allowances under the prior methodology and the amount required under CECL. Concurrent with enactment of the CARES Act, federal banking agencies issued an interim final rule that delays the estimated impact on regulatory capital resulting from the adoption of CECL. The interim final rule provides banking organizations that implement CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay. The changes in the final rule apply only to those banking organizations that elect the CECL transition relief provided under the rule. Banner and the Bank elected this option.

Prompt Corrective Action:  Federal statutes establish a supervisory framework for FDIC-insured institutions based on five capital categories:  well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.  An institution'sinstitution’s category depends upon where its capital levels are in relation to relevant capital measures. The well-capitalized category is described above. An institution that is not well capitalized is subject to certain restrictions on brokered deposits, including restrictions on the rates it can offer on its deposits generally.  To be considered adequately capitalized, an institution must have the minimum capital ratios described above. Any institution which is neither well capitalized nor adequately capitalized is considered undercapitalized.


Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions which become more extensive as an institution becomes more severely undercapitalized.  Failure by either Banner Bank and Islanders Bank to comply with applicable capital requirements would, if unremedied, result in progressively more severe restrictions on its activities and lead to enforcement actions, including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels and, ultimately, the appointment of the FDIC as receiver or conservator.  Banking regulators will take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements.  Additionally, approval of any regulatory application filed for their review may be dependent on compliance with capital requirements.


As of December 31, 2017,2021, Banner Corporation and each of the BanksBank met the requirements to be "well capitalized"“well capitalized” and the fully phased-in capital conservation buffer requirement.  For additional information, see Note 16,14, Regulatory Capital Requirements, of the Notes to the Consolidated Financial Statements.


Commercial Real Estate Lending Concentrations:The federal banking agencies have issued guidance on sound risk management practices for concentrations in commercial real estate lending.  The particular focus is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be sensitive to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution).  The purpose of the guidance is not to limit a bank'sbank’s commercial real estate lending but to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations.  The guidance directs the FDIC and other bank regulatory agencies to focus their supervisory resources on institutions that may have significant commercial real estate loan concentration risk.  A bank that has experienced rapid growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding the following supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk:


•Total reported loans for construction, land development and other landrepresent 100% or more of the bank'sbank’s total regulatory capital; or


•Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank'sbank’s total regulatory capital orand the outstanding balance of the bank'sbank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months.


The guidance provides that the strength of an institution'sinstitution’s lending and risk management practices with respect to such concentrations will be taken into account in supervisory guidance on evaluation of capital adequacy.  As of December 31, 2017,2021, Banner Bank's and Islanders Bank'sBank’s aggregate recorded loan balances for construction, land development and land loans were 86% and 35% of total regulatory capital, respectively.capital.  In addition, at December 31, 2017,2021, Banner Bank's and Islanders Bank'sBank’s loans onsecured by commercial real estate were 293% and 227%represent 280% of total regulatory capital, respectively.capital.


Activities and Investments of Insured State-Chartered Financial Institutions:  Federal law generally limits the activities and equity investments of FDIC insured, state-chartered banks to those that are permissible for national banks.  An insured state bank is not prohibited from, among other things, (1) acquiring or retaining a majority interest in a subsidiary, (2) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank'sbank’s total assets, (3) acquiring up to 10% of the voting stock of a company that solely provides or re-insures directors'directors’, trustees'trustees’ and officers'officers’ liability insurance coverage or bankers'bankers’ blanket bond group insurance coverage for insured depository institutions, and (4) acquiring or retaining the voting shares of a depository institution if certain requirements are met.




Washington State has enacted a lawlaws regarding financial institution parity.  Primarily, the law affordsThese laws afford Washington-chartered commercial banks the same powers as Washington-chartered savings banks.  In addition, the law providesbanks and provide that Washington-chartered commercial banks may exercise any of the powers that the Federal Reserve has determined to be closely related to the business of banking and the powers of national banks, subject to the approval of the Director in certain situations.  Finally, the law provides additional flexibility for Washington-chartered banks with respect to interest rates on loans and other extensions of credit.  Specifically, they may charge the maximum interest rate allowable for loans and other extensions of credit by federally-chartered financial institutions.


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Environmental Issues Associated With Real Estate Lending: The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) is a federal statute that generally imposes strict liability on all prior and present “owners and operators” of sites containing hazardous waste.  However, Congress acted to protect secured creditors by providing that the term “owner and operator” excludes a person whose ownership is limited to protecting its security interest in the site.  Since the enactment of the CERCLA, this “secured creditor exemption” has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as collateral for a loan.  To the extent that legal uncertainty exists in this area, all creditors, including Banner Bank, and Islanders Bank, that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property.


Federal Reserve System:  The Federal Reserve Board requires that all depository institutions maintain reserveshas the authority to establish reserve requirements on transaction accounts or non-personal time deposits.  These reserves may be in the form of cash or non-interest-bearing deposits with the regional Federal Reserve Bank.  Interest-bearing checking accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to Regulation D reserve requirements, as are any non-personal time deposits at a bank.  At December 31, 2017,bank.  In response to the Banks' deposits withCOVID-19 pandemic, the Federal Reserve Bankreduced requirements to zero percent effective on March 26, 2020, to support lending to households and vault cash exceeded their reserve requirements.businesses.


Affiliate Transactions:  Banner Corporation Banner Bank and IslandersBanner Bank are separate and distinct legal entities. Each Bank is an affiliate of the other and Banner Corporation (and any non-bank subsidiary of Banner Corporation) is an affiliate of both Banks.the Bank. Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates.  Transactions deemed to be a “covered transaction” under Section 23A of the Federal Reserve Act between a bank and an affiliate are limited to 10% of the bank'sbank’s capital and surplus and, with respect to all affiliates, to an aggregate of 20% of the bank'sbank’s capital and surplus.  Further, covered transactions that are loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts.  Federal law also requires that covered transactions and certain other transactions listed in Section 23B of the Federal Reserve Act between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates.


Community Reinvestment Act:  Banner Bank and Islanders Bank areis subject to the provisions of the Community Reinvestment Act of 1977 (CRA), which requires the appropriate federal bank regulatory agency to assess a bank'sbank’s performance under the CRA in meeting the credit needs of the community serviced by the bank, including low and moderate income neighborhoods.  The regulatory agency'sagency’s assessment of the bank'sbank’s record is made available to the public.  Further, a bank'sbank’s CRA performance rating must be considered in connection with a bank'sbank’s application to, among other things, establish a new branch office that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution.  Both Banner Bank and Islanders Bank received a “satisfactory”an “outstanding” rating during theirits most recently completed CRA examinations.


Dividends:  The amount of dividends payable by the BanksBank to the Company dependdepends upon theirits earnings and capital position, and is limited by federal and state laws, regulations and policies, including the capital conservation buffer requirement.  Federal law further provides that no insured depository institution may make any capital distribution (which includes a cash dividend) if, after making the distribution, the institution would be “undercapitalized,” as defined in the prompt corrective action regulations.  Moreover, the federal bank regulatory agencies also have the general authority to limit the dividends paid by insured banks if such payments should be deemed to constitute an unsafe and unsound practice. Dividends from Banner Bank to the Company require regulatory approval because Banner Bank remainsIn addition, under Washington law, no bank may declare or pay any dividend in a cumulative negativean amount greater than its retained earnings position primarily as a resultwithout the prior approval of goodwill impairment recorded in 2010the Washington DFI. The Washington DFI also has the power to require any bank to suspend the payment of any and in 2015 the special dividend paid to the Company to fund the acquisition of Starbuck.all dividends.


Privacy Standards:Standards and Cybersecurity: The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (GLBA) modernized the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. Banner BankFederal banking agencies, including the FDIC, have adopted guidelines for establishing information security standards and Islanders Bank are subject to FDIC regulationscybersecurity programs for implementing safeguards under the privacy protection provisionssupervision of the GLBA.board of directors.These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services. These regulations require the BanksBank to disclose theirits privacy policy, including informing consumers of theirits information sharing practices and informing consumers of their rights to opt out of certain practices.In addition, other state cybersecurity and data privacy laws and regulations may expose Banner Bank to risk and result in certain risk management costs. Notably, the California Consumer Privacy Act of 2018 (the CCPA), which became effective on January 1, 2020, gives California residents the right to request disclosure of information collected about them, and whether that information has been sold or shared with others, the right to request deletion of personal information (subject to certain exceptions), the right to opt out of the sale of personal information, and the right not to be discriminated against for exercising these rights. The CCPA also created a private right of action with statutory damages for data security breaches, thereby increasing potential liability associated with a data breach, which has triggered a number of class actions against other companies since January 1, 2020. Although Banner Bank may enjoy several fairly broad exemptions from the CCPA’s privacy requirements, those exemptions do not extend to the private right of action for a data security breach. In November 2020, voters in the State of California approved the California Privacy Rights Act (CPRA), a ballot measure that amends and supplements the substantive requirements of the CCPA, as well as providing certain mechanisms for administration and enforcement of the statute by creating the California Privacy Protection Agency, a watchdog privacy agency. The CCPA, the CPRA as well as other similar state data privacy laws and regulations, may require the establishment by Banner Bank of certain regulatory compliance and risk management controls. Non-compliance with the CCPA, the CPRA or similar state privacy laws and regulations could lead to substantial regulatory imposed fines and penalties, damages from private causes of action and/or reputational harm. In addition, Congress and federal regulatory agencies are considering similar laws or regulations that could create new individual privacy rights and impose increased obligations on companies handling personal data.On November 18, 2021, the federal banking agencies announced the issuance of a new rule, effective April 1, 2022,

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providing for new notification requirements for banking organizations and their service providers for significant cybersecurity incidents.Specifically, the new rule requires banking organizations to notify their primary federal regulator as soon as possible, and not later than 36 hours after, the discovery of a computer-security incident that rises to the level of a notification incident within the meaning attributed to those terms by the rule.Notification is required for incidents that have materially affected or are reasonably likely to materially affect the viability of a banking organization’s operations, its ability to deliver banking products and services, or the stability of the financial sector. Service providers are required under the rule to notify any affected bank client it provides services as soon as possible when it determines it has experienced a computer-security incident that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, covered services provided by that entity to the Bank for four or more hours.

Anti-Money Laundering and CustomerClient Identification:  The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) was signed into law on October 26, 2001.  The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customersclients seeking to open new financial accounts, and effective in 2018, the beneficial owners of accounts. Bank regulators are directed to consider an institution'sinstitution’s effectiveness in combating money laundering when ruling on Bank Holding Company Act and Bank Merger Act applications.  Banner Bank's and Islanders Bank'sBank’s policies and procedures are designed to comply with the requirements of the USA Patriot Act.




Other Consumer Protection Laws and Regulations:  The Dodd-Frank Act established the CFPB andis empowered it to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. The Banks are subject to consumer protection regulations issued byEffective the CFPB, but as financial institutions with assetssecond quarter of less than $10 billion, the Banks are generally subject to supervision and enforcement by the FDIC and the Washington DFI with respect to our compliance with consumer financial protection laws and CFPB regulations.2019 Banner Bank and its affiliates and subsidiaries will becomebecame subject to CFPB supervisory and enforcement authority when the assets of Banner or Banner Bank have exceeded $10 billion for four consecutive quarters. See Item 1A "Risk Factors—We may be subject to additional regulatory scrutiny if and when Banner or Banner Bank maintains total assets exceeding $10.0 billion."authority.


The Banks areBank is subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of theirits business relationships with consumers.  While the list set forth below is not exhaustive, these include the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfers Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and state laws prohibiting unfair and deceptive business practices, and various regulations that implement some or all of the foregoing.  These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customersclients when taking deposits, making loans, collecting loans, and providing other services.  Failure to comply with these laws and regulations can subject the BanksBank to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages, and the loss of certain contractual rights.


COVID-19 Legislation: In response to the COVID-19 pandemic, Congress, through the enactment of the CARES Act and CAA, and the federal banking agencies, though rulemaking, interpretive guidance and modifications to agency policies and procedures, have taken a series of actions to provide national emergency economic relief measures including, among others, the CARES Act and CAA.

As the on-going COVID-19 pandemic evolves, federal and state regulatory authorities continue to issue additional guidance with respect to COVID-19. In addition, it is possible that Congress will enact additional COVID-19 response legislation. We will continue to assess the impact of the CARES Act, CAA and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic.

Banner Corporation


General:  Banner Corporation, as sole shareholder of Banner Bank and Islanders Bank, is a bank holding company registered with the Federal Reserve.  Bank holding companies are subject to comprehensive regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended, or the BHCA, and the regulations of the Federal Reserve.  We are required to file quarterly reports with the Federal Reserve and provide additional information as the Federal Reserve may require.  The Federal Reserve may examine us, and any of our subsidiaries, and charge us for the cost of the examination.  The Federal Reserve also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries).  In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices.  Banner Corporation is also required to file certain reports with, and otherwise comply with the rules and regulations of the SEC.


The Bank Holding Company Act:  Under the BHCA, we areBanner Corporation is supervised by the Federal Reserve.  The Federal Reserve has a policy that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner.  In addition, the Dodd-Frank Act and earlier Federal Reserve policy provideprovides that a bank holding company shouldmust serve as a source of financial strength to its subsidiary banks by having the ability to provide financial assistance to its subsidiary banks during periods of financial distress to the banks.  A bank holding company'scompany’s failure to meet its obligation to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve'sReserve’s regulations or both.  No regulations have yet been proposed by the Federal Reserve to implement the source of strength provisions of the Dodd-Frank Act.  Banner Corporation and any subsidiaries that it may control are considered “affiliates” of the BanksBank within the meaning of the Federal Reserve Act, and transactions between Banner Bank and affiliates are subject to numerous restrictions.  With some exceptions, Banner Corporation and its subsidiaries are prohibited from tying the provision of various services, such as extensions of credit, to other services offered by Banner Corporation or by its affiliates.

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Acquisitions:  The BHCA prohibits a bank holding company, with certain exceptions, from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries.  Under the BHCA, the Federal Reserve may approve the ownership of shares by a bank holding company in any company, the activities of which the Federal Reserve has determined to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto.  These activities include:  operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers'travelers’ checks and U.S. Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers.clients.


Federal Securities Laws:BannerCorporation'sCorporation’s common stock is registered with the SEC under Section 12(b) of the Securities Exchange Act of 1934, as amended.  We are subject to information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934 (the Exchange Act).


The Dodd-Frank Act: On July 21, 2010, the The Dodd-Frank Act was signed into law. The Dodd-Frank-Act imposes newvarious restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions, and implements newcertain capital regulations forapplicable to Banner Corporation and the Banks are subject to andBank that are discussed above under the section entitled "Capital“Capital Requirements."”




In addition, among other changes, the Dodd-Frank Act requires public companies, like Banner Corporation, to (i) provide their shareholders with a non-binding vote (a) at least once every three years on the compensation paid to executive officers and (b) at least once every six years on whether they should have a “say on pay” vote every one, two or three years; (ii) have a separate, non-binding shareholder vote regarding golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that would trigger the parachute payments; (iii) provide disclosure in annual proxy materials concerning the relationship between the executive compensation paid and the financial performance of the issuer; and (iv) amend Item 402 of Regulation S-K to require companies to disclose the ratio of the Chief Executive Officer'sOfficer’s annual total compensation to the median annual total compensation of all other employees.


The regulations to implement the provisions of Section 619 of the Dodd-Frank Act, commonly referred to as the Volcker Rule, contain prohibitions and restrictions on the ability of financial institutions holding companies and their affiliates to engage in proprietary trading and to hold certain interests in, or to have certain relationships with, various types of investment funds, including hedge funds and private equity funds. Banner Corporation is continuously reviewing its investment portfolio to determine if changes in its investment strategies are in compliance with the various provisions of the Volcker Rule regulations.


For certain of these changes, the implementing regulations have not been promulgated, so the full impact of the Dodd-Frank Act on public companies cannot be determined at this time.

Sarbanes-Oxley Act of 2002:  As a public company that files periodic reports with the SEC, under the Securities Exchange Act of 1934, Banner Corporation is subject to the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), which addresses, among other issues, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosure of corporate information. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.  Our policies and procedures are designed to comply with the requirements of the Sarbanes-Oxley Act.

Interstate Banking and Branching:  The Federal Reserve must approve an application of a bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than the holding company'scompany’s home state, without regard to whether the transaction is prohibited by the laws of any state.  The Federal Reserve may not approve the acquisition of a bank that has not been in existence for the minimum time period (not exceeding five years) specified by the statutory law of the host state.  Nor may the Federal Reserve approve an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank'sbank’s home state or in any state in which the target bank maintains a branch.  Federal law does not affect the authority of states to limit the percentage of total insured deposits in the state which may be held or controlled by a bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies.  Individual states may also waive the 30% state-wide concentration limit contained in the federal law.


The federal banking agencies are generally authorized to approve interstate merger transactions without regard to whether the transaction is prohibited by the law of any state.  Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located permits such acquisitions.  Interstate mergers and branch acquisitions are subject to the nationwide and statewide insured deposit concentration amounts described above.  Under the Dodd-Frank Act, the federal banking agencies may generally approve interstate de novo branching.


Dividends:  The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses its view that although there are no specific regulations restricting dividend payments by bank holding companies other than state corporate laws, a bank holding company must maintain an adequate capital position and generally should not pay cash dividends unless the company'scompany’s net income for the past year is sufficient to fully fund the cash dividends and that the prospective rate of earnings appears consistent with the company'scompany’s capital needs, asset quality, and overall financial condition.  The Federal Reserve policy statement also indicates that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. As described above under “Capital Requirements,” beginning January 1, 2016 the capital conversion buffer requirement can also restrict Banner Corporation’s and the Banks’Bank’s ability to pay dividends. Further, under Washington law, Banner Corporation is prohibited from paying a dividend if, after making such dividend payment, it would be unable to pay its debts as they become due in the usual course of business, or if its total liabilities, plus the amount that would be needed in the event Banner Corporation were to be dissolved at the time of the dividend payment, to satisfy preferential rights on dissolution of holders of preferred stock ranking senior in right of payment to the capital stock on which the applicable distribution is to be made, exceed our total assets.


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Stock Repurchases:  A bank holding company, except for certain “well-capitalized” and highly rated bank holding companies, is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding twelve months, is equal to 10% or more of its consolidated net worth.  The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order or any condition imposed by, or written agreement with, the Federal Reserve.During the year ended December 31, 2017,2021, Banner Corporation repurchased 545,1661,050,000 shares of its common stock at aan average price of $56.91$53.84 per share. For additional information regarding share repurchases and authorizations, see Item 5 of this report, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”




Management Personnel
Executive Officers


The following table sets forth information with respect to the executive officers of Banner Corporation and Banner Bank as of December 31, 2017:
2021:
NameAgePosition with Banner CorporationPosition with Banner Bank
Mark J. Grescovich5357
President, Chief Executive Officer,

Director
President, Chief Executive Officer, Director
Lloyd W. BakerJanet M. Brown6954
Executive Vice President,

Chief Information Officer
Peter J. Conner56Executive Vice President
Chief Financial Officer
Treasurer
Executive Vice President,


Chief Financial Officer
Richard B. BartonJames M. Costa7453
Executive Vice President,

Chief CreditRisk Officer
Peter J. ConnerJames P. Garcia5262
Executive Vice President,


Chief Audit Executive
Kenneth W. Johnson
59
Executive Vice President
Chief Financial Officer

Operations
James P. GarciaKayleen R. Kohler5849
Executive Vice President

Human Resources
Chief Audit Executive
Diversity Officer*
Kayleen R. KohlerKenneth A. Larsen4552
Executive Vice President,
Human Resources

Mortgage Banking
Kenneth A. LarsenSherrey Luetjen4850
Executive Vice President
Mortgage Banking

General Counsel, Ethics Officer
Secretary		Executive Vice President
General Counsel, Secretary
James P. G. McLean5857
Executive Vice President,

Commercial Real Estate Lending Division
Craig MillerCynthia D. Purcell6664
Executive Vice President,
General Counsel

Chief Strategy and Administration Officer*
Executive Vice President,
General Counsel
Cynthia D. PurcellM. Kirk Quillin6059
Executive Vice President,
Retail Banking and Administration

Chief Commercial Executive
M. Kirk Quillin55
Executive Vice President,
East Region, Commercial Banking
James T. Reed, Jr.5559
Executive Vice President,
West Region,
Commercial Banking
North
Steven W. RustJill M. Rice7056
Executive Vice President,

Chief InformationCredit Officer
Judith A. SteinerGary W. Wagers5561
Executive Vice President,
Chief Risk Officer
Gary W. Wagers57
Executive Vice President,

Retail Products and Services
Keith A. Western62
Executive Vice President,
California & S. Oregon Commercial Banking
Services**

*    Ms. Purcell’s Banner Bank title was changed from Executive Vice President, Retail Banking and Administration in January 2022.
**    Mr. Wagers began his retirement transition in October 2021 and is no longer a member of the Banner Bank Executive Management Committee.


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Biographical Information


Set forth below is certain information regarding the executive officers of Banner Corporation and Banner Bank.  There are no family relationships among or between the directors or executive officers.




Mark J.Grescovich is President and Chief Executive Officer, and a director, of Banner Corporation and Banner Bank.  Mr. Grescovich joined Banner Bank in April 2010 and became Chief Executive Officer in August 2010 following an extensive banking career specializing in finance, credit administration and risk management.  Under his leadership, Banner has grown from $4.7 billion in assets in 2010 to more than $16 billion today through organic growth as well as selective acquisition.  During that time, Mr. Grescovich has guided the expansion of the Company’s footprint to over 150 locations in four states.  Prior to joining Bannerthe Bank, Mr. Grescovich was the Executive Vice President and Chief Corporate Banking Officer for Akron, Ohio-based FirstMerit Corporation and FirstMerit Bank N.A., a commercial bank with $14.5 billion in assets and over 200 branch offices in three states.  He assumed the role and responsibility for FirstMerit’s commercial and regional line of business in 2007, having served since 1994 in various commercial and corporate banking positions, including that of Chief Credit Officer.  Prior to joining FirstMerit, Mr. Grescovich was a Managing Partner in corporate finance with Sequoia Financial Group, Inc. of Akron, Ohio and a commercial and corporate lending officer and credit analyst with Society National Bank of Cleveland, Ohio.  He has a Bachelor of Business Administration degree in finance from Miami University and a Master of Business Administration degree, also in finance, from The University of Akron.

Lloyd W. Baker joined First Savings Bank of Washington (now Banner Bank) in 1995 as Asset/Liability Manager, has been a member of the executive management committee since 1998 and has served as the Chief Financial Officer of Banner Corporation since 2000 and of Banner Bank from 2000 to October 2015. His banking career began in 1973 and has included a variety of roles in financial management and reporting, strategic planning, asset, liability and portfolio management, mortgage lending and secondary marketing.

Richard B. BartonJanet M. Brown joined Banner Bank in 2002December 2020 as Chief CreditInformation Officer. Mr. Barton’s banking career began in 1972 with Seafirst BankShe provides direction and Bank of America, where he served in a variety of commercial lendingoversight for information technology and credit risk management positions. In his last positions at Bank of America before joiningsecurity across Banner Bank, heincluding existing and emerging initiatives. Prior to joining the Company, Ms. Brown’s career included more than 25 years of information technology experience. She has specific expertise leading large, complex projects and technology environments. Ms. Brown served as Vice President of Governance & Infrastructure Shared Services at Epiq Global, a worldwide provider of legal services, in the senior real estate risk management executiveSeattle, WA office from November 2018 through October 2020. In June 2018, Epiq Global purchased Garden City Group, where Ms. Brown had served as Senior Vice President and Chief Information Officer since September 2016 (also in Seattle, WA). From March 2014 to September 2016, Ms. Brown was Vice President, Information Technology Applications for Premera (Mountlake Terrace, WA), where she had previously served as Information Technology Director, Strategic Services. Ms. Brown attended Washington State University and served eight years in the Pacific NorthwestU.S. Marine Corps. She is a Desert Storm Veteran. Ms. Brown is an active volunteer in several children’s welfare and asdevelopment causes in the credit risk management executive for the west coast home builder division.Puget Sound area and abroad.


Peter J. Conner joined Banner Bank in 2015 upon the acquisition of AmericanWest.AmericanWest Bank (AmericanWest). He is Executive Vice President and Chief Financial Officer of Banner Corporation and Banner Bank. Prior to joining Banner,the Company, Mr. Conner was the Chief Financial Officer for SKBHC LLC in Seattle, WA the holding company for Starbuck Bancshares, Inc. (Starbuck), the holding company for AmericanWest, and AmericanWest from 2010 until he joined Banner Bank in 2015. Mr. Conner has 26over 30 years of experience in financial services, including 20 years in executive financefinancial positions at Wells Fargo Bank as well as regional community banks. Additionally, he spent time as a managing director for FSI Group, where he evaluated and placed equity fund investments in community banks. He earned a B.S. in Quantitative Economics from the University of California at San Diego and a MastersMaster’s of Business degree from the Haas School of Business at U.C. Berkeley. Mr. Conner’s community involvement includes having served as chairman of the board of directors for Spokane Habitat for Humanity.


JamesJames M. Costa joined Banner Bank in October 2021 as Executive Vice President and Chief Risk Officer. He brings nearly 30 years of banking experience to his position. Prior to joining Banner, Mr. Costa served at Mann Lake Group in Minneapolis as the Chief Executive Officer and Founder from October 2020 where he provided advice to banks, trade associations and fintech firms on credit strategy, capital allocation, risk program design, regulatory relations, and compliance risk management. From 2013 through October 2020, he served as an executive officer of TCF Financial Corporation (“TCF”) in Wayzata, MN, including as Executive Vice President and Chief Risk Officer and Chief Credit Officer from August 2019, as Chief Risk Officer and Chief Credit Officer from January 2017, and as Chief Risk Officer since August 2013. TCF was a $49 billion regional bank holding company with operations in USA, Canada and Asia. Prior to that, Mr. Costa was Executive Vice President and Head of Credit Strategy for Wachovia in Charlotte, NC, and PNC Financial Corp. in Pittsburgh, PA. A U.S. Air Force veteran, Mr. Costa earned his bachelor’s degree from Ohio State University and conducted his doctorate studies in Economics with the University of Minnesota. He is an active community volunteer with a local Habitat for Humanity and Humane Society, as well as with the University of Minnesota Center for Children’s Cancer Research. Mr. Costa is also an advisory board member for the Midsize Bank Coalition of America.

James P. Garcia is the Chief Audit Executive responsible for proactively identifying and mitigating risks as well as providing internal audit services in the areas of financial compliance, IT Governance, and operations.  He has more than 4042 years of experience in the financial services industry.industry.  Prior to joining Bannerthe Company in 2017, Mr. Garcia served for 16 years at the Bank of Hawaii in Honolulu, HI, most recently as Executive Vice President and Chief Audit Executive, with prior positions as Vice President and Senior Audit Manager.  Mr. Garcia also has 24 years of experience at Bank of America where he held several positions in consumer and commercial operations management and audit, including that of Audit Director.  Mr. Garcia earned his bachelor'sbachelor’s degree in management from St. Mary'sMary’s College of California and is a graduate of the School of Mortgage Banking.  He is a Certified Bank Auditor (CBA), holds a Certification in Risk Management Assurance (CRMA) and is a Certified Information Systems Auditor (CISA).


Kenneth W. Johnson has over 36 years of banking experience. He joined Banner Bank as Executive Vice President, Operations, in connection with Banner’s merger with Skagit Bank in November 2018.  Prior to joining Skagit Bank in Burlington, WA in 2015, Mr. Johnson held various executive positions with Chemical Financial Corporation, including production oversight of commercial, consumer and deposit generation. In addition, while at Chemical, he served nine years as Executive Vice President, Director of Bank Operations, responsible for
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nine business units including the branch system, information technology, corporate marketing, loan operations, deposit operations, electronic banking, facilities/purchasing, card services, and client care centers. Prior to Chemical, he held leadership roles in retail banking and operations at Shoreline Bank and as Vice President, Zone Manager for Michigan National Bank. Mr. Johnson holds a Bachelor of Arts Degree in Business Administration from Michigan State University. He is also a graduate of Stonier Graduate School of Banking. Mr. Johnson’s community involvement includes serving on the board of United Way of Skagit County and is a past president of the Burlington Rotary Club.

Kayleen R. Kohler joined Banner Bank in 2016 as Executive Vice President of Human Resources.Resources and, in January 2021, was also appointed as the Bank’s Chief Diversity Officer. Ms. Kohler’s focus is on driving organizational design priorities at Banner Bank including: leadership development, talent acquisition, workforce planning, employee relations, compensation, benefits, diversity initiatives, payroll, and safety. Prior to joining Banner, Ms. Kohler served 20 years in progressive human resource leadership roles for Plum Creek Timber Company, now Weyerhaeuser.Weyerhaeuser, in Seattle, WA. She holds bachelors’ degrees in Marketing as well as Business Management from Northwest Missouri State University and a master’s degree in Organizational Management from the University of Phoenix. Through continuing education, she maintains her SPHRcertifications as a Senior Professional in Human Resources (SPHR) and SHRM-SCP certifications.a Society of Human Resources Management Senior Certified Professional or (SHRM-SCP).


Kenneth A. Larsen joined Banner Bank in 2005 as the Real Estate Administration Manager and was promoted to Mortgage Banking Director in 2010. Mr. Larsen is responsible for Banner Bank’s mortgage banking activities from origination, administration, secondary marketing, through loan servicing. Mr. Larsen has had a 26-year31-year career in mortgage banking, including holding positions in all facets of operations and management. A graduate of Eastern Washington University, he earned a Bachelor of Arts in Education with a degree in Social Science and earned certificates from the Pacific Coast Banking School and the School of Mortgage Banking. He is also a Certified Mortgage Banker, the highest designation recognized by the Mortgage Bankers Association. Mr. Larsen began his career at Action Mortgage/Sterling Savings, later moving to Peoples Bank of Lynden where he managed the mortgage banking operation. Mr. Larsen also served as the 90th President of the Seattle Mortgage Bankers Association. Formerly he was the Chairman of the Washington Mortgage Bankers Association and currently serves as a commissioner on the Washington State Housing Finance Commission. He was promoted to Executive Vice President in 2015.


Sherrey Luetjen is Executive Vice President, General Counsel and Secretary for Banner Corporation and Banner Bank, as well as Ethics Officer for Banner Corporation. She joined Banner as Senior Vice President and Assistant General Counsel in May 2019 and was promoted to her current position in August 2021. Ms. Luetjen is responsible for directing and overseeing the company’s legal functions. Ms. Luetjen has more than 20 years of legal experience including more than 15 years as in-house counsel in the financial services industry. From 2010 through 2018, Ms. Luetjen was a Managing Director of Legal and Compliance at BlackRock, Inc. in Seattle, where she had served as a Director of Legal and Compliance from 2007 through 2010. Prior to BlackRock, Ms. Luetjen served as Associate General Counsel at a privately held investment advisory firm. Ms. Luetjen earned concurrent JD and MBA degrees from the University of Washington and earned her bachelor’s degree from Seattle University. Ms. Luetjen’s community involvement includes nine years of service on the board of directors of The Arboretum Foundation, including two years as board chair.

James P.G. McLean joined Banner Bank in November 2010 and is Executive Vice President, of the Commercial Real Estate Lending, Division, leading teams withinincluding the Multifamily Lending Group, Commercial Real Estate Specialty Unit, Affordable Housing and LIHTC Investments, Community Financial Corporation, Residential Construction and Income Property Divisions, as well as the loan administration functions related to this division.  Mr. McLean has 2730 years of real estate finance experience at large national commercial banks, as well asregional and community banks.  This experience includes tenfifteen years in executive leadership roles and as a principal of a mid-sized regional commercial real estate development firm.  Mr. McLean earned his bachelor’s degree from the University of Washington.  His community volunteering is focused on organizations that serve local youth, including the Boy Scouts of America, Lake Washington School District and numerous coaching positions.


Craig MillerCynthia D. Purcell is theBanner Bank’s Executive Vice President and General Counsel for Banner CorporationChief Strategy and Banner Bank. He joined Banner in 2016 and is responsible for overseeing the company’s legal functions. Mr. Miller hadAdministration Officer, having previously served as senior litigation partner at Davis Wright Tremaine LLP in Seattle. Mr. Miller earned his B.A. degree from Grinnell College and his J.D. degree from the University of Southern California Law School. His community involvement includes board service with the YMCA of Greater Seattle, Childhaven (past board president), King County Sexual Assault Resource Center, and the Meany Center for the Performing Arts.



Cynthia D. Purcell is theBanner Bank’s Executive Vice President forof Retail Banking and Administration. Ms. Purcell is responsible for leading the Retail Banking business line including Branch Banking, Mortgage Banking, Business Banking and Digitalexecution of the Bank’s long-term corporate strategic objectives in addition to leading the community banking residential lending, digital strategy & delivery channels as well as oversighta number of administrativeoperational and supportadministrative functions for Banner Bank. She was formerly the Chief Financial Officer of Inland Empire Bank (now Banner Bank), which she joined in 1981. Over her banking career, Ms. Purcell has been deeply involved in advocating for the industry through leadership roles on various Boards and committees including State Banking Associations and the American Bankers Association (ABA). She has also taught banking courses throughout her career, including the ABA Graduate School of Bank Investments and Financial Management, the Northwest Intermediate Banking School, and the Oregon Bankers Association Directors College.
M. Kirk Quillin joined Banner Bank’s commercial banking group in 2002 and now serves as a Senior Vice President and commercial loan manager and was named to his current position as the East RegionChief Commercial Banking Executive in July 2012. He is responsible for commercial and specialty banking for all locations in Eastern Washington, Eastern Oregon and Idaho.Executive.   Mr. Quillin began his career in the banking industry in 1984 with Idaho First National Bank, which is now U.S. Bank.  His career also included management positions in commercial lending with Washington Mutual.  He earned a B.S. in Finance and Economics from Boise State University and was certified by the Pacific Coast Banking School and Northwest Intermediate Commercial Lending School. As a dedicated, civic-minded community member, Mr. Quillin was active in Rotary for over 20 years, and for eight years served as a Fire Commissioner.


James T. Reed, Jr. joined Towne Bank (now Banner Bank) as a Vice President and Commercial Branch Manager in July 1995 and was named to his current position as the West Region Commercial Banking Executive in July 2012. He is responsible for Commercial Banking in Western Washington and Western Oregon, as well as Treasury Management and Specialty Banking Services. Mr. Reed began his banking career in 1985 and joined Banner Bank in 1998. Since then he has held several leadership positions with Rainier Bank, which later became Security Pacific Bankprogressive responsibilities within the Commercial Banking division. Today, as Executive Vice President, Commercial Banking, Mr. Reed leads the teams that focus on commercial banking relationship management, portfolio management, and later still West One Bank. Hebusiness development. Mr. Reed earned a Bachelor of Arts in Interdisciplinary Arts and Scienceshis bachelor’s degree from the University of Washington and earned certificates fromis a graduate of Pacific Coast Banking School, Northwest Intermediate Banking School and Northwest Intermediate Commercial Lending School. Currently, Mr. Reed isReed’s
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community involvement includes serving on the Association of Washington Businesses Executive Board as well as a member of the University of Washington Bothell Advisory Board and the Association of Washington Business Board of Directors.Board.


Steven W. RustJill M. Rice joined Banner Bank in October 20052002 as a Regional Credit Risk Manager, later promoted to Senior Vice PresidentCredit Officer overseeing the commercial banking credit function in 2008, and promoted to Chief Information Officer and was named to his current position as Executive Vice President and Chief InformationCredit Officer in September 2007. Mr. Rust2020. In all, Ms. Rice has over 38more than 30 years of relevant industrycredit-related experience, prior to joining Banner Bank and was founder and President of InfoSoft Technology, through which he worked for nine yearsincluding time as a technology consultant and interim Chief Information Officer for banks and insurance companies. He also worked 19 yearsSenior Bank Examiner with US Bank/West One Bancorp as Senior Vice President & Manager of Information Systems.
Judith A. Steiner joined Banner Bank in 2016 as Executive Vice President and Chief Risk Officer.  In this role,the FDIC. Ms. Steiner is responsible for overseeing the company’s risk and compliance functions as well as Banner Bank’s interactions with industry regulators. Prior to joining Banner, Ms. Steiner spent 25 years with FirstMerit Corporation in executive leadership positions including Executive Vice President & Chief Risk Officer, Secretary, and General Counsel.  Ms. SteinerRice earned her bachelor’s degree from Western Washington University, is a graduate of the UniversityPacific Coast Banking School, and has held the RMA Credit Risk Certification since 2009. For more than 12 years Ms. Rice has been actively engaging with LifeWire, a domestic violence prevention organization, including serving seven years on the board of Akron and her Juris Doctor degree (JD) fromdirectors, two of which she was the Case Western Reserve University Schoolboard president. Ms. Rice currently serves on the board of Law.directors for the Alzheimer’s Association Washington State Chapter Board.

Gary W. Wagers joined Banner Bank as Senior Vice President, Consumer Lending Administration in 2002 and was named to his current position inas Executive Vice President, Retail Products and Services in January 2008. Mr. Wagers began a transition to retirement in the fourth quarter of 2021. Mr. Wagers began his banking career in 1982 at Idaho First National Bank. Prior to joining Banner Bank, his career included senior management positions in retail lending and branch banking operations with West One Bank and US Bank. Mr. Wagers earned his bachelor’s degree from Whitman College and his Master’s of Business degree from the University of Oregon. He is also a graduate of the ABA’s Stonier School of Banking.


Keith A. Western is Executive Vice President, Commercial Banking for Banner Bank, joining Banner upon the merger of AmericanWest and Banner Bank. Prior to the merger, Mr. Western was President of Northwest Banking for AmericanWest since 2011. Mr. Western has 40 years of banking experience across multiple markets including the western, eastern and mid-western United States and Canada. The bulk of Mr. Western’s career was with Bank of America (approximately 15 years) and Citibank (approximately 12 years) in a variety of assignments including asset based lending, commercial and business banking, and credit risk management.

Corporate Information


Our principal executive offices are located at 10 South First Avenue, Walla Walla, Washington 99362. Our telephone number is (509) 527-3636.  We maintain a website with the address www.bannerbank.com.  The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K.  Other than an investor’s own Internet access charges, we make available free of charge through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material to, the SEC.




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Item 1A – Risk Factors


An investment in our common stock is subject to risks inherent in our business.  Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this report.  The risks described below are not the only ones we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition, capital levels, cash flows, liquidity, results of operations and prospects.  The market price of our common stock could decline significantly due to any of these identified or other risks, and you could lose some or all of your investment.  The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.  This report is qualified in its entirety by these risk factors.


Risks Related to Macroeconomic Conditions

The COVID-19 pandemic has adversely affected our ability to conduct business and our financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic continues to negatively impact economic and commercial activity and financial markets, both globally and within the United States. In our market areas, stay-at-home orders, travel restrictions and closure of non-essential businesses and similar orders imposed across the United States to restrict the spread of COVID-19 in 2020 resulted in significant business and operational disruptions, including business closures, supply chain disruptions, and significant layoffs and furloughs. Although local jurisdictions have subsequently lifted stay-at-home orders and moved to the opening of businesses, worker shortages, vaccine and testing requirements, new variants of COVID-19 and other health and safety recommendations have impacted the ability of businesses to return to pre-pandemic levels of activity and employment. While the overall economy has improved, disruptions to supply chains continue and significant inflation has been seen in the market. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in our Form 10-K could be exacerbated, including the following risks of COVID-19, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations of the Company:

•effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating our financial reporting and internal controls;
•declines in demand for loans and other banking services and products, as well as a decline in the credit quality of our loan portfolio, owing to the effects of COVID-19 in the markets served by us;
•if the economy is unable to remain open in an efficient manner, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
•collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
•our allowance for credit losses may increase if borrowers experience financial difficulties, which will adversely affect net income;
•the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments;
•as long as the Federal Reserve Board’s target federal funds rate remains near 0%, the yield on assets may decline to a greater extent than the decline in cost of interest-bearing liabilities, reducing net interest margin and spread and reducing net income
•higher operating costs, increased cybersecurity risks and potential loss of productivity as the result of an increase in the number of employees working remotely;
•increasing or protracted volatility in the price of the Company’s common stock, which may also impair our goodwill; and
•risks to the capital markets that may impact the performance of our investment securities portfolio, as well as limit our access to capital markets and other funding sources.

Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of COVID-19’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, possible future virus variants, the effectiveness of our work-from-home arrangements, third party providers’ ability to support our operations, and any actions taken by governmental authorities and other third parties in response to the pandemic. The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.

Our business may be adversely affected by downturns in the national economy and the regional economies on which we depend.


Our operations are significantly affected by national and regional economic conditions.  Weakness in the national economy or the economies of the markets in which we operate could have a material adverse effect on our financial condition, results of operations and prospects. We provide banking and financial services primarily to businesses and individuals in the states of Washington, Oregon, California and Idaho.  All of our branches and most of our deposit customersclients are also located in these four states.  Further, as a result of a high concentration of our customerclient base in the Puget Sound area and eastern Washington state regions, the deterioration of businesses in these areas, or one or more businesses with a large employee base in these areas, could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.  Weakness in the global economy has adversely affected many businesses operating in our markets that are
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dependent upon international trade and it is not known how the withdrawal by the United States from the Trans-Pacific Partnershipchanges in tariffs being imposed on international trade agreement may also affect these businesses. In addition, adverse weather conditions as well as decreases in market prices for agricultural products grown in our primary markets can adversely affect agricultural businesses in our markets. As we expand our presence in areas such as San Diego and Sacramento, and throughout California, we will be exposed to concentration risks in those areas as well.


A deterioration in economic conditions in the market areasmarkets we serve as a result of COVID-19 or other factors, in particular the Puget Sound area of Washington State, the Portland, Oregon metropolitan area, Spokane, Washington, Boise, Idaho, Eugene and southwest Oregon, San Diego and Sacramento, California and the agricultural regions of the Columbia Basin, could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:


•demand for our products and services may decline;
•loan delinquencies, problem assets and foreclosures may increase;
•we may increase our allowance for credit losses;
•collateral for loans, especially real estate, may decline in value, in turn reducing customers’clients’ borrowing power, reducing the value of assets and collateral associated with existing loans;
•the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and
•the amount of our low-cost or non-interest-bearing deposits may decrease.


A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loans are more geographically diverse. Many of the loans in our portfolio are secured by real estate. Deterioration in the real estate markets where collateral for a mortgage loan is locatedreal property could negatively affect the borrower'sborrower’s ability to repay the loan and the value of the collateral securing the loan. Real estate values are affected by various other factors, including changes in general or regional economic conditions, governmental rules or policies and natural disasters such as earthquakes, flooding and tornadoes. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.


Adverse changes in the regional and general economy could reduce our growth rate, impair our ability to collect loans and generally have a negative effect on our financial condition and results of operations.


WeExternal economic factors, such as changes in monetary policy and inflation and deflation, may be adverselyhave an adverse effect on our business, financial condition and results of operations.

Our financial condition and results of operations are affected by changes in U.S. tax lawscredit policies of monetary authorities, particularly the Board of Governors of the Federal Reserve System, or the Federal Reserve. Actions by monetary and regulations.

The Tax Cuts and Jobs Act was signed into law in December 2017 reformingfiscal authorities, including the U.S. tax code. The legislation includes lowering the 35% corporate tax rateFederal Reserve, could lead to 21%, modifying the U.S. taxation of income earned outside the U.S. and limiting or eliminating various deductions, tax credits and/inflation, deflation, or other tax preferences. While we expect to benefit on a prospective net income basis from the decrease in corporate tax rates, the legislation has resulted in a $42.6 million decrease in the value of our deferred tax asset, which resulted in a material reduction to net income during the year ended December 31, 2017. The decrease to the deferred tax asset, also reduced regulatory capital, although to a lesser extent since the deferred tax asset associated with net operating losses was previously being excluded from regulatory capital. In addition, the legislation could negatively impact our customers because it lowers the existing caps on mortgage interest deductions and limits the state and local tax deductions. These changes could make it more difficult for borrowers to make their loan payments, could also negatively impact the housing market, whicheconomic phenomena that could adversely affect our businessfinancial performance. The primary impact of inflation on our operations most likely will be reflected in increased operating costs. Conversely, deflation generally will tend to erode collateral values and diminish loan growth.quality. Virtually all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than general levels of inflation or deflation. Interest rates do not necessarily move in the same direction or by the same magnitude as the prices of goods and services.


Risks Related to Credit and Lending

Our loan portfolio includes loans with a higher risk of loss.


In addition to first-lien one- to four -family residential real estate lending, we originate construction and land loans, commercial and multifamily mortgage loans, commercial business loans, agricultural mortgage loans and agricultural loans, and consumer loans, primarily within our market areas.  We had $6.75$8.27 billion outstanding in these types of higher risk loans, excluding SBA PPP loans, at December 31, 20172021, compared to $6.64$8.11 billion at December 31, 2016.2020.  These loans typically present different risks to us for a number of reasons, including those discussed below:




•Construction and Land Loans. At December 31, 2017,2021, construction and land loans were $907.5 million$1.31 billion, or 12%14% of our total loan portfolio.  This type of lending containsis subject to the inherent difficultydifficulties in estimating both a property’s value at completion of thea project and the estimated cost (including interest) of the project.  ChangesBecause of the uncertainties inherent in demand for new housingestimating construction costs, as well as the market value of a completed project and higher than anticipated building costs may cause actual resultsthe effects of governmental regulation on real property, it is relatively difficult to vary significantly from those estimated.evaluate accurately the total funds required to complete a project and the completed project’s loan-to-value ratio. If the estimate of construction cost proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permitensure completion of the project. If our appraisal of the estimatevalue of value upon completiona completed project proves to be inaccurate,overstated, we may be confronted at, or prior to,have inadequate security for the maturityrepayment of the loan upon completion of construction of the project and may incur a loss. Disagreements between borrowers and builders and the failure of builders to pay subcontractors may also jeopardize projects.  This type of lending also typically involves higher loan principal amounts and may be concentrated with a projectsmall number of builders. A downturn in housing, or the real estate market, could increase delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. Many of the builders we deal with have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss. In addition, during the term of some of our construction loans, no payment from the borrower is required since the
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accumulated interest is added to the principal of the loan through an interest reserve. Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly depleting the interest reserves prior to completion and/or increasing the end-purchaser’s borrowing costs, thereby possibly reducing the homeowner’s ability to finance the home upon completion or the overall demand for the project. Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold which is insufficientalso complicates the process of managing our problem construction loans. This may require us to assure full repayment.advance additional funds and/or contract with another builder to complete construction and assume the market risk of selling the project at a future market price, which may or may not enable us to fully recover unpaid loan funds and associated construction and liquidation costs. In addition, speculative construction loans to a builder are often associated with homes that are not pre-sold, and thus pose a greater potential risk to us than construction loans to individuals on their personal residences.  Loans on land under development or held for future construction also pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the collateral.  These risks can be significantly impacted by supply and demand.  As a result, this type of lending often involves the disbursement of substantial funds with repayment dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to independently repay principal and interest.  

Construction loans made by us include those with a sales contract or permanent loan in place for the finished homes and those for which purchasers for the finished homes may not be identified either during or following the construction period, known as speculative construction loans. Speculative construction loans to a builder pose a greater potential risk to us than construction loans to individuals on their personal residences.  We attempt to mitigate this risk by actively monitoring the number of unsold homes in our construction loan portfolio and local housing markets in an attempt to maintain an appropriate balance between home sales and new loan originations.  In addition, the maximum number of speculative construction loans (loans that are not pre-sold) approved for each builder is based on a combination of factors, including the financial capacity of the builder, the market demand for the finished product and the ratio of sold to unsold inventory the builder maintains.  We have also attempted to diversify the risk associated with speculative construction lending by doing business with a large number of small and mid-sized builders spread over a relatively large geographic region representing numerous sub-markets within our service area.

As a result of the recent improvement inincreasing real estate values in certain of our market areas, this category of lending has increased significantly in recent years and ourincreased. Our investment in construction and land loans increased by $84.4$19.7 million or 10%2% in 2017.2021. At December 31, 2017,2021, construction and land loans that were non-performing were $1.1 million,$479,000, or 4%2% of our total non-performing loans. 


•Commercial and Multifamily Real Estate Loans. At December 31, 2017,2021, commercial and multifamily real estate loans were $3.54$4.28 billion, or 47% of our total loan portfolio. These loans typically involve higher principal amounts than other types of loans and some of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan. Repayment of these loans is dependent upon income being generated from the property securing the loan in amounts sufficient to cover operating expenses and debt service, which may be adversely affected by changes in the economy or local market conditions.  In addition, many of our commercial and multifamily real estate loans are not fully amortizing and contain large balloon payments upon maturity.  Such balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment. If we foreclose on a commercial or multifamily real estate loan, our holding period for the collateral typically is longer than for one-to-four family residential loans because there are fewer potential purchasers of the collateral. At December 31, 2017,2021, commercial and multifamily real estate loans that were non-performing were $10.6$14.2 million, or 39%62% of our total non-performing loans.


•Commercial Business Loans.  At December 31, 2017,2021, commercial business loans, excluding SBA PPP loans, were $1.28$1.83 billion, or 17%20% of our total loan portfolio. Our commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower.  The borrowers’A borrower’s cash flow may prove to be unpredictable, and collateral securing these loans may fluctuate in value.  Most often, this collateral isincludes accounts receivable, inventory, equipment or real estate.  In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.clients.  Other collateral securing loans may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business.  At December 31, 2017,2021, commercial business loans that were non-performing were $3.4$2.2 million, or 13%9% of our total non-performing loans.


•Agricultural Loans.  At December 31, 2017,2021, agricultural loans were $338.4$285.8 million, or 4%3% of our total loan portfolio.  Agricultural lending involves a greater degree of risk and typically involves higher principal amounts than other types of loans.risk. Repayment is dependent upon the successful operation of the business, which is greatly dependent on many things outside the control of either us or the borrowers.  These factors include adverse weather conditions that prevent the planting of a crops or limit crop yields (such as hail, drought and floods), loss of livestock due to disease or other factors, declines in market prices for agricultural products (both domestically and internationally) and the impact of government regulations (including changes in price supports, subsidies, tariffs and environmental regulations). In addition, many farms are dependent on a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm. If the cash flow from a farming operation is diminished, the borrower'sborrower’s ability to repay the loan may be impaired. Consequently, agricultural loans may involve a greater degree of risk than other types of loans, particularly in the case of loans that are unsecured or secured by
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rapidly depreciating assets such as farm equipment (some of which is highly specialized with a limited or no market for resale), or assets such as livestock or crops. In such cases, any repossessed collateral for a defaulted agricultural operating loan mymay not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation or because the assessed value of the collateral exceeds the eventual realization value. At December 31, 2017,2021, there were $6.1$1.0 million of agricultural loans that were non-performing, or 23%4% of total non-performing loans.


•Consumer Loans.  At December 31, 2017,2021, consumer loans were $688.8$555.9 million, or 9%6% of our total loan portfolio.  ConsumerOur consumer loans (such as personaloften entail greater risk than first-lien residential mortgage loans. Home equity lines of credit)credit generally entail greater risk than do one- to four-family residential mortgage loans where we are collateralized, if atin the first lien position. For those home equity lines secured by a second mortgage, it is less likely that we will be successful in recovering all of our loan proceeds in the event of default. Our foreclosure on these loans requires that the value of the property be sufficient to cover the repayment of the first mortgage loan, as well as the costs associated with foreclosure. In the case of consumer loans that are unsecured or secured by rapidly depreciating assets thatsuch as automobiles, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of paymentrepayment of the outstanding loan due to depreciation,balance as a result of the greater likelihood of damage, loss or loss.depreciation.  The remaining deficiency often does not warrant further substantial collection efforts against the borrower.  In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.  Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount thatwhich can be recovered on these consumer loans.  Loans that we purchased, or indirectly originated, may also give rise to claims and defenses by a consumer loan borrower against an assignee of such loans such as us, and a borrower may be able to assert against the assignee claims and defenses that it has against the seller of the underlying collateral. At December 31, 2017,2021, consumer loans that were non-performing were $1.4$1.9 million, or 5%8% of our total non-performing loans.



Our business may be adversely affected by credit risk associated with residential property and declining property values.


At December 31, 2021, first-lien one- to four-family residential loans were $683.3 million or 8% of our total loan portfolio. Our first-lien one- to four-family residential loans are primarily made based on the repayment ability of the borrower and the collateral securing these loans. Foreclosure on the loans requires that the value of the property be sufficient to cover the repayment of the loan, as well as the costs associated with foreclosure.

This type of lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. A downturn in the economy or the housing market in our market areas or a rapid increase in interest rates may reduce the value of the real estate collateral securing these types of loans and increase the risk that we would incur losses if borrowers default on their loans. Residential loans with high combined loan-to-value generally will be more sensitive to declining properly values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, the borrowers may be unable to repay their loans in full from the sale proceeds. As a result, these loans may experience higher rates of delinquencies, defaults and losses, which will in turn adversely affect our financial condition and results of operations.

Our allowance for loancredit losses may prove to be insufficient to absorb losses in our loan portfolio,which would cause our results of operations, liquidity and financial condition to be adversely affected.


Lending money is a substantial part of our business and each loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment.  This risk is affected by, among other things:


•cash flow of the borrower and/or the project being financed; 
•in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral; 
•the duration of the loan; 
•the character and creditworthiness of a particular borrower; and 
•changes in economic and industry conditions. conditions; and

•the duration of the loan.

We maintain an allowance for loancredit losses, which is a reserve established through a provision for loanexpected losses charged to expense, which we believe is appropriate to provide for probablelifetime expected credit losses in our loan portfolio.  The amount of this allowance is determined by our management through periodic reviews and consideration of several factors, including, but not limited to:


•our generalcollective loss reserve, for loans evaluated on a pool basis which have similar risk characteristics based on our life of loan historical default and loss experience, certain macroeconomic factors, reasonable and supportable forecasts, regulatory requirements, management’s expectations of future events;events and qualitative factors; and
•our specificindividual loss reserve, based on our evaluation of non-performingindividual loans that do not share similar risk characteristics and theirthe present value of the expected future cash flows or the fair value of the underlying collateral; and collateral.
an unallocated reserve to provide for other credit losses inherent in our portfolio that may not have been contemplated in the other loss factors.

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The determination of the appropriate level of the allowance for loancredit losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. If our estimates are incorrect, the allowance for credit losses may not be sufficient to cover the expected losses in our loan portfolio, resulting in the need for increases in our allowance for credit losses through the provision for credit losses which is recorded as a charge against income. Management also recognizes that significant new growth in loan portfolios, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner and will increase the risk that our allowance may be insufficient to absorb losses without significant additional provisions.

Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loancredit losses. If current conditions in the housing and real estate markets weaken, we expect we will experience increased delinquencies and credit losses.


The Financial Accounting Standards Board has adopted a new accounting standard that will be effective for our first fiscal year after December 15, 2019. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as an allowance for credit losses. This will change the current method of providing allowances for credit losses only when they have been incurred and are probable, which may require us to increase our allowance for loan losses, and may greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for credit losses. In addition, bank regulatory agencies periodically review our allowance for loancredit losses and may require an increase in the provision for possible loancredit losses or the recognition of further loan charge-offs, based on judgments different than those of management. If charge-offs in future periods exceed the allowance for loancredit losses, we may need additional provisions to replenishincrease the allowance for loancredit losses. Any increases in the allowance for loancredit losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.


Loans originated under the SBA Paycheck Protection Program subject us to forgiveness and guarantee risk.

As of December 31, 2021, we hold and service a portfolio of 1,106 loans originated under the SBA PPP with a balance of $133.9 million. The SBA PPP loans are subject to the provisions of the CARES Act and CAA 2021 and to complex and evolving rules and guidance issued by the SBA and other government agencies. Most of our SBA PPP borrowers have already qualified for or will seek full or partial forgiveness of their loan obligations, however, if an SBA PPP borrower fails to qualify for loan forgiveness, we face a heightened risk of holding these loans at unfavorable interest rates for an extended period of time. We could face additional risks in our administrative capabilities to service our SBA PPP loans, and risk with respect to the determination of loan forgiveness. In the event of a loss resulting from a default on an SBA PPP loan and a determination by the SBA that there was a deficiency in the manner in which we originated, funded or serviced an SBA PPP loan, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if the SBA has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.

If our investments in real estate are not properly valued or sufficiently reserved to cover actual losses, or if we are required to increase our valuation reserves, our earnings could be reduced.

We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed and the property taken in as REO and at certain other times during the assets holding period.  Our net book value (NBV) in the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs (fair value).  A charge-off is recorded for any excess in the asset’s NBV over its fair value.  If our valuation process is incorrect, or if property values decline, the fair value of the investments in real estate may not be sufficient to recover our carrying value in such assets, resulting in the need for additional write-downs.  Significant write-downs to our investments in real estate could have a material adverse effect on our financial condition, liquidity and results of operations.

In addition, bank regulators periodically review our REO and may require us to recognize further write-downs.  Any increase in our write-downs, as required by the bank regulators, may have a material adverse effect on our financial condition, liquidity and results of operations.

Risks Related to Merger and Acquisition Strategy

We pursue a strategy of supplementing internal growth by acquiring other financial companies or their assets and liabilities that we believe will help us fulfill our strategic objectives and enhance our earnings. We may be adversely affected by risks associated with potential acquisitions.


As part of our general growth strategy, we have recently expanded our business through acquisitions. During 2015, we completed the acquisitions of AmericanWest and Siuslaw. Although our business strategy emphasizes organic expansion, we continue, from time to time in the ordinary course of business, to engage in preliminary discussions with potential acquisition targets. There can be no assurance that, in the future, we will successfully identify suitable acquisition candidates, complete acquisitions and successfully integrate acquired operations into our existing operations or expand into new markets. The consummation of any future acquisitions may dilute shareholder value or may have an adverse effect upon our operating results while the operations of the acquired business are being integrated into our operations. In addition, once integrated, acquired operations may not achieve levels of profitability comparable to those achieved by Banner’s existing operations, or otherwise perform as expected. Further, transaction-related expenses may adversely affect our earnings. These adverse effects on our earnings and results of operations may have a negative impact on the value of Banner’s stock. Acquiring banks, bank branches or businesses involves risks commonly associated with acquisitions, including:


•We may be exposed to potential asset quality issues or unknown or contingent liabilities of the banks, businesses, assets, and liabilities we acquire. If these issues or liabilities exceed our estimates, our results of operations and financial condition may be materially negatively affected;
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•Higher than expected deposit attrition;
•Potential diversion of our management'smanagement’s time and attention;
•Prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could not be made in specific markets at prices we considered acceptable and expect that we will experience this conditionsituation in the future;
•The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity into our company to make the transaction economically successful. This integration process is complicated and time consuming and can also be disruptive to the customersclients of the acquired business. If the integration process is not conducted successfully and with minimal


adverse effect on the acquired business and its customers,clients, we may not realize the anticipated economic benefits of particular acquisitions within the expected time frame, and we may lose customersclients or employees of the acquired business. We may also experience greater than anticipated customerclient losses even if the integration process is successful;
To the extent our costs of an acquisition exceed the fair value of the net assets acquired, the acquisition will generate goodwill.  As discussed below, we are required to assess our goodwill for impairment at least annually, and any goodwill impairment charge could have a material adverse effect on our results of operations and financial condition;
•To finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional capital, which could dilute the interests of our existing shareholders; and
•We have completed various acquisitions in the past few years that enhanced our rate of growth.  We may not be able to continue to sustain our past rate of growth or to grow at all in the future.future; and

•To the extent our costs of an acquisition exceed the fair value of the net assets acquired, the acquisition will generate goodwill. As discussed below under “-If the goodwill we have recorded in connection with acquisitions become impaired, our earnings and capital could be reduced,” we are required to assess our goodwill for impairment at least annually, and any goodwill impairment charge could have a material adverse effect on our results of operations and financial condition.

The required accounting treatment of loans we acquire through acquisitions including purchase credit impaired loans could result in higher net interest margins and interest income in current periods and lower net interest margins and interest income in future periods.


Under GAAP, we are required to record loans acquired through acquisitions including purchase credit impaired loans, at fair value. Estimating the fair value of such loans requires management to make estimates based on available information and facts and circumstances onas of the acquisition date. Actual performance could differ from management’s initial estimates. If these loans outperform our original fair value estimates, the difference between our original estimate and the actual performance of the loan (the “discount”) is accreted into net interest income. Thus, our net interest margins may initially increase due to the discount accretion. We expect the yields on our loans to decline as our acquired loan portfolio pays down or matures and the discount decreases, and we expectcould experience downward pressure on our interest income to the extent that the runoff on our acquired loan portfolio is not replaced with comparable high-yielding loans. This could result in higher net interest margins and interest income in current periods and lower net interest rate margins and lower interest income in future periods.


Severe weather, natural disasters,If the goodwill we have recorded in connection with acquisitions become impaired, our earnings and capital could be reduced.
In accordance with GAAP, we record assets acquired and liabilities assumed at their fair value with the excess of the purchase consideration over the net assets acquired resulting in the recognition of goodwill. As a result, acquisitions typically result in recording goodwill. We perform a goodwill evaluation at least annually to test for goodwill impairment. Our test of goodwill for potential impairment is based on a qualitative assessment by management that takes into consideration macroeconomic conditions, industry and market conditions, cost or other catastrophesmargin factors, financial performance and share price. Our evaluation of the fair value of goodwill involves a substantial amount of judgment. If our judgment was incorrect, or if events or circumstances change, and an impairment of goodwill was deemed to exist, we would be required to write down our goodwill resulting in a charge against operations, which could significantly impactadversely affect our business.
Severe weather, natural disasters, widespread disease or pandemics, actsresults of war or terrorism or other adverse external events couldoperations and financial condition, perhaps materially; however, it would have a significantno impact on our liquidity, operations, or regulatory capital.

Risks Related to Market and Interest Rate Changes

Our results of operations, liquidity and cash flows are subject to interest rate risk.

Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. In March 2020, in response to the COVID-19 pandemic, the Federal Open Market Committee (“FOMC”) of the Federal Reserve System lowered the target range for the federal funds rate 150 basis points to a range of 0.00% to 0.25%. The reduction in the targeted federal funds rate has resulted in a decline in overall interest rates which has negatively impacted our net interest income. However, the FOMC has recently indicated it expects to increase rates starting in 2022. If the FOMC increases the targeted federal funds rate, overall interest rates are expected to rise, which will positively impact our net interest income but may negatively impact both the housing market by reducing refinancing activity and new home purchases and the U.S. economy.

We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but these changes could also affect (i) our ability to conduct business. In addition, such events could affectoriginate and/or sell loans and obtain deposits, (ii) the stabilityfair value of our deposit base, impairfinancial assets and liabilities, which could negatively impact shareholders’ equity, and our ability to realize gains from the sale of such assets, (iii) our ability to obtain and retain deposits in competition with other available investment alternatives, (iv) the ability of our borrowers to repay adjustable or variable rate loans, and (v) the average duration of our investment securities portfolio and other interest-earning assets. In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially affected.
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Changes in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay outstandingtheir current loan obligations or by reducing our margins and profitability. Our net interest margin is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates—up or down—could adversely affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates decline, the yield we earn on our assets may decline faster than our funding costs, causing our net interest margin to contract until the funding costs catch up. Changes in the slope of the “yield curve”—or the spread between short-term and long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets. Also, interest rate decreases can lead to increased prepayments of loans and leases, impairmortgage-backed securities as borrowers refinance their loans to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such repayment proceeds into lower yielding investments, which would likely hurt our income.

A sustained increase in market interest rates could adversely affect our earnings. As is the valuecase with many banks our emphasis on increasing core deposits has resulted in an increasing percentage of collateral securingour deposits being comprised of deposits bearing no or a relatively low rate of interest and having a shorter duration than our assets. We would incur a higher cost of funds to retain these deposits in a rising interest rate environment. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans causeand other investments, our net interest income, and therefore earnings, could be adversely affected.

In addition, a substantial amount of our loans have adjustable interest rates.  As a result, these loans may experience a higher rate of default in a rising interest rate environment.  Further, a significant property damage, result in lossportion of revenueour adjustable-rate loans have interest rate floors below which the loan’s contractual interest rate may not adjust.  Approximately 63% of our loan portfolio was comprised of adjustable or cause us to incur additional expenses. The occurrencefloating-rate loans at December 31, 2021, and approximately $3.56 billion, or 62%, of anythose loans contained interest rate floors, below which the loans’ contractual interest rate may not adjust.  At December 31, 2021, the weighted average floor interest rate of these eventsloans was 4.17%.  At that date, approximately $2.28 billion, or 64%, of these loans were at their floor interest rate.  The inability of our loans to adjust downward can contribute to increased income in periods of declining interest rates, although this result is subject to the futurerisks that borrowers may refinance these loans during periods of declining interest rates.  Also, when loans are at their floors, there is a further risk that our interest income may not increase as rapidly as our cost of funds during periods of increasing interest rates which could have a material adverse effect on our business, financial condition or results of operations.
Our growth or future losses may require us to raise additional capital
Changes in interest rates also affect the future, but that capital may not be available when it is needed or the cost of that capital may be very high.

We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations.  We may at some point, however, need to raise additional capital to support continued growth or be required by our regulators to increase our capital resources. Any capital we obtain may result in the dilution of the interests of existing holdersvalue of our common stock. Our ability to raise additional capital, if needed, will depend on conditionsinterest-earning assets and in the capital markets at that time, which are outsideparticular our control, and on our financial condition and performance.  Accordingly, we cannot make assurances that we will be able to raise additional capital if needed on terms that are acceptable to us, or at all.  If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected.  In addition, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action.

If our investments in real estate are not properly valued or sufficiently reserved to cover actual losses, or if we are required to increase our valuation reserves, our earnings could be reduced.

We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed and the property taken in as REO and at certain other times during the assets holding period.  Our net book value (NBV) in the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs (fair value).  A charge-off is recorded for any excess in the asset’s NBV over its fair value.  If our valuation process is incorrect, or if property values decline,securities portfolio. Generally, the fair value of the investmentsfixed-rate securities fluctuates inversely with changes in real estate may not be sufficient to recover our carrying value in such assets, resultinginterest rates. Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of tax. Decreases in the needfair value of securities available for additional write-downs.  Significant write-downssale resulting from increases in interest rates could have an adverse effect on stockholders’ equity.

Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our investmentsresults of operations, any substantial, unexpected, prolonged change in real estatemarket interest rates could have a material adverse effect on our financial condition, liquidity and results of operations.

In addition, bank regulators periodically review  Also, our REOinterest rate risk modeling techniques and assumptions may require us to recognize further write-downs.  Any increase in our write-downs, as required bynot fully predict or capture the bank regulators, may have a material adverse effectimpact of actual interest rate changes on our financial condition, liquiditybalance sheet or projected operating results. For further discussion of how changes in interest rates could impact us, see “Part II, Item 7A. Quantitative and results of operations.Qualitative Disclosures About Market Risk” for additional information about our interest rate risk management.


Our securities portfolio may be negatively impacted by fluctuations in market value and interest rates.


Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, rating agency actions in respect of the securities, defaults by the issuer or with respect to the underlying securities, lower market prices for securities and limited investor demand. Our available-for-sale debt securities portfolioin an unrealized loss position are evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. If a credit loss exists, an allowance for credit losses is evaluatedrecorded for other-than-temporary impairment. If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities,credit loss, resulting in a potential loss to earnings may occur.charge against earnings. Changes in interest rates can also have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest


rates. We increase or decrease our shareholders'shareholders’ equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes. There can be no assurance that the declines in market value will not result in other-than-temporary impairments of these assets,expected credit losses, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.


An increase in interest rates, change in the programs offered by secondary market purchasers or our ability to qualify for their programs may reduce our mortgage banking revenues, which would negatively impact our non-interest income.


Our mortgage banking operations provide a significant portion of our non-interest income.  We generate mortgage banking revenues primarily from gains on the sale of one- to four-family and multifamily mortgage loans. The one- to four-family mortgage loans are sold pursuant to programs currently offered by Fannie Mae, Freddie Mac, Ginnie Mae and non-Government Sponsored Enterprise (GSE) investors.  These
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entities account for a substantial portion of the secondary market in residential one- to four-family mortgage loans. Multifamily mortgage loans are sold primarily to non-GSE investors.  


Any future changes in the one- to four-family programs, our eligibility to participate in these programs, the criteria for loans to be accepted or laws that significantly affect the activity of such entities, or a reduction in the size of the secondary market for multifamily loans could, in turn, materially adversely affect our results of operations.  Mortgage banking is generally considered a volatile source of income because it depends largely on the level of loan volume which, in turn, depends largely on prevailing market interest rates. In a rising or higher interest rate environment, our originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold to investors.  This would result in a decrease in mortgage banking revenues and a corresponding decrease in non-interest income.  In addition, our results of operations are affected by the amount of non-interest expense associated with mortgage banking activities, such as salaries and employee benefits, occupancy, equipment and data processing expense and other operating costs.  During periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in loan originations. In addition, although we sell loans into the secondary market without recourse, we are required to give customary representations and warranties about the loans to the buyers. If we breach those representations and warranties, the buyers may require us to repurchase the loans and we may incur a loss on the repurchase.


Certain hedging strategies that we use to manage investment in mortgage servicing rights, mortgage loans held for sale and interest rate lock commitments may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rates and market liquidity.


We use derivative instruments to economically hedge mortgage servicing rights, mortgage loans held for sale and interest rate lock commitments to offset changes in fair value resulting from changing interest rate environments. Our hedging strategies are susceptible to prepayment risk, basis risk, market volatility and changes in the shape of the yield curve, among other factors. In addition, hedging strategies rely on assumptions and projections regarding assets and general market factors. If these assumptions and projections prove to be incorrect or our hedging strategies do not adequately mitigate the impact of changes in interest rates, we may incur losses that would adversely impact earnings.


Our results of operations, liquidityRisks Related to Regulatory, Legal and cash flows are subject to interest rate risk.Compliance

Our earnings and cash flows are largely dependent upon our net interest income.  Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board.  In an attempt to help the overall economy, the Federal Reserve Board has kept interest rates low through its targeted Fed Funds rate for an extended period of time. However, more recently the Federal Reserve Board increased the Fed Funds rate by 25 basis points in 2016 and 75 basis points in 2017. In addition, The Federal Reserve Board has indicated that it intends further increases during 2018 subject to economic conditions. As the Federal Reserve Board increases the Fed Funds rate, overall interest rates will likely rise, which may negatively impact both the housing markets by reducing refinancing activity and new home purchases and the U.S. economic recovery.
Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but these changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities and (iii) the average duration of our mortgage-backed securities portfolio and other interest-earning assets. 

Changes in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations or by reducing our margins and profitability. Our net interest margin is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates—up or down—could adversely affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yield catches up. Changes in the slope of the “yield curve”—or the spread between short-term and long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets. Also, interest rate decreases can lead to increased prepayments of loans and mortgage-backed securities as borrowers refinance their loans to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such repayment proceeds into lower yielding investments, which would likely hurt our income.



A sustained increase in market interest rates could adversely affect our earnings. As a result of the exceptionally low interest rate environment, an increasing percentage of our deposits have been comprised of deposits bearing no or a relatively low rate of interest and having a shorter duration than our assets. We would incur a higher cost of funds to retain these deposits in a rising interest rate environment. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected.

In addition, a substantial amount of our loans have adjustable interest rates.  As a result, these loans may experience a higher rate of default in a rising interest rate environment.  Further, a significant portion of our adjustable rate loans have interest rate floors below which the loan’s contractual interest rate may not adjust.  Approximately 69% of our loan portfolio was comprised of adjustable or floating-rate loans at December 31, 2017, and approximately $2.5 billion, or 46%, of those loans contained interest rate floors, below which the loans’ contractual interest rate may not adjust.  At December 31, 2017, the weighted average floor interest rate of these loans was 4.65%.  At that date, approximately $948.8 million, or 39%, of these loans were at their floor interest rate.  The inability of our loans to adjust downward can contribute to increased income in periods of declining interest rates, although this result is subject to the risks that borrowers may refinance these loans during periods of declining interest rates.  Also, when loans are at their floors, there is a further risk that our interest income may not increase as rapidly as our cost of funds during periods of increasing interest rates which could have a material adverse effect on our results of operations.  

Changes in interest rates also affect the value of our interest-earning assets and in particular our securities portfolio. Generally, the fair value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of tax. Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on stockholders’ equity.

Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations.  Also, our interest rate risk modeling techniques and assumptions may not fully predict or capture the impact of actual interest rate changes on our balance sheet or projected operating results. For further discussion of how changes in interest rates could impact us, see "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for additional information about our interest rate risk management.

Changes in the method of determining the LIBOR or other reference rates may adversely impact the value of loans receivable and other financial instruments we hold that are linked to LIBOR or other reference rates in ways that are difficult to predict and could adversely impact our financial condition or results of operations.

In recent years, concerns have been raised about the accuracy of the calculation of LIBOR. Aspects of the method for determining how LIBOR is formulated and its use in the market have changed and may continue to change. Recent changes to LIBOR administration have included the introduction of statutory regulation of LIBOR by United Kingdom regulatory authorities; reducing the currencies for which LIBOR is calculated to five; reducing the tenors for which LIBOR is calculated to seven; delaying the publication of individual banks’ LIBOR submissions for three months from submission; requiring banks to provide LIBOR submissions based on an effective methodology on the basis of relevant criteria and information, including observable market transactions where possible; and during July 2017, the Financial Conduct Authority, the financial regulatory body in the United Kingdom which oversees the LIBOR benchmark rate, announced that the LIBOR will be replaced at the end of 2021 and that they will work towards developing an alternative benchmark. Each such change and any future changes could impact the availability and volatility of LIBOR. Similar changes have occurred or may occur with respect to other reference rates. It is not currently possible to determine whether, or to what extent, any such changes would impact the value of any loans, derivatives and other financial obligations or extensions of credit we hold or that are due to us, that are linked to LIBOR or other reference rates, or whether, or to what extent, such changes would impact our financial condition or results of operations.

We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations that are expected to increase our costs of operations.

As state-chartered, federally insured commercial banks, Banner Bank and Islanders Bank (the Banks) are currently subject to extensive examination, supervision and comprehensive regulation by the FDIC and the Washington DFI and as a bank holding company Banner is subject to examination, supervision and regulation by the Federal Reserve. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on an institution's operations, reclassify assets, determine the adequacy of an institution's allowance for loan losses and determine the level of deposit insurance premiums assessed.

Additionally, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) has significantly changed the bank regulatory structure and affected the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of implementing rules and regulations and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently many of the details and much of the effect of the Dodd-Frank Act is still uncertain and may have indeterminable impact on us in future periods.

The Dodd-Frank Act created a new Consumer Financial Protection Bureau (the CFPB) with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Financial institutions with $10 billion or less in assets (who have no affiliates with assets of $10 billion or more) are examined for compliance with the consumer laws by their primary bank regulators


but are subject to the rules of the CFPB. See “ We may be subject to additional regulatory scrutiny if and when Banner or Banner Bank maintains total assets exceeding $10.0 billion.”

The CFPB has issued a number of final regulations and changes to certain consumer protections under existing laws. These final rules generally prohibit creditors from extending mortgage loans without regard for the consumer’s ability-to-repay and add restrictions and requirements to mortgage origination and servicing practices. In addition, these rules limit prepayment penalties and require the creditor to retain evidence of compliance with the ability-to-repay requirement for three years. Compliance with these rules has increased our overall regulatory compliance costs and may require changes to our underwriting practices with respect to mortgage loans. This includes compliance with The Truth in Lending Act and the Real Estate Settlement Procedures Act Integrated Disclosure (TRID) rule, which combines certain disclosures that consumers receive in connection with applying for and closing a mortgage loan. Moreover, these rules may adversely affect the volume of mortgage loans that we underwrite and may subject us to increased potential liabilities related to such residential loan origination activities.

It is difficult to predict at this time what specific impact the Dodd-Frank Act and the rules and regulations implementing it will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs, which could adversely affect key operating efficiency ratios, and could increase our interest expense. See “Business - Regulation” contained in Part I, Item I of this report.

We may be subject to additional regulatory scrutiny if and when Banner or Banner Bank maintains total assets exceeding $10.0 billion.

Banner's total assets were $9.76 billion and Banner Bank's total assets were $9.48 billion at December 31, 2017. Following the fourth consecutive quarter where the total assets of Banner or Banner Bank exceed $10 billion, Banner or Banner Bank, as applicable, will become subject to a number of additional requirements (such as annual stress testing requirements implemented pursuant to the Dodd-Frank Act and general oversight by the CFPB) that will impose additional compliance costs on our business. As a result, there may also be additional higher expectations from regulators. The CFPB has supervision authority, including examination authority, over institutions of that size and their affiliates to assess compliance with federal consumer financial laws, to obtain information about the institutions’ activities and compliance systems and procedures, and to detect and assess risks to consumers and markets.

Under the Dodd-Frank Act, the minimum ratio of net worth to insured deposits of the Deposit Insurance Fund was increased from 1.15% to 1.35% and the FDIC is required, in setting deposit insurance assessments, to offset the effect of the increase on institutions with assets of less than $10 billion, which results in institutions with assets greater than $10 billion paying higher assessments. In addition, if Banner Bank exceeds $10 billion in assets for four consecutive quarters, the method for determining its federal deposit insurance assessments will change from the method for smaller institutions (based on CAMELS ratings and certain financial ratios) to a scorecard method. The scorecard method uses a performance score and a loss severity score, which are combined and converted into an initial base assessment rate. The performance score is based on measures of the bank’s ability to withstand asset-related stress and funding-related stress and weighted CAMELS ratings, which are ratings ascribed under the CAMELS supervisory rating system and assigned based on a supervisory authority’s analysis of a bank’s financial statements and on-site examinations. The loss severity score is a measure of potential losses to the FDIC in the event of the bank’s failure. Under a formula, the performance score and loss severity score are combined and converted to a total score that determines the bank’s initial base assessment rate. The FDIC has the discretion to alter the total score based on factors not captured by the scorecard. The resulting initial base assessment rate is also subject to adjustments downward based on long-term unsecured debt issued by the bank, to adjustment upward based on long-term unsecured debt held by the bank that is issued by other FDIC-insured institutions, and to further adjustment upward if the bank’s brokered deposits exceed 10% of its domestic deposits.

The Dodd-Frank Act also requires publicly-traded bank holding companies with average assets of $10 billion or more for four consecutive quarters to perform capital stress testing and establish a risk committee responsible for enterprise-wide risk management practices, comprised of independent directors, including one risk management expert.

As a result of the above, if and when Banner's or Banner Bank’s total assets exceed $10 billionor more for four consecutive quarters deposit insurance assessments, expenses related to regulatory compliance are likely to increase, and interchange fee income will decrease, the cumulative effect of which may be significant.

Reductions in interchange income could negatively impact our earnings.

Further, Banner Bank and Islanders Bank may be affected by the Durbin Amendment to the Dodd-Frank Act regarding limits on debit card interchange fees. The Durbin Amendment gave the Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion or more at year end and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. The Federal Reserve Board has adopted rules under this provision that limit the swipe fees that a debit card issuer can charge a merchant for a transaction to the sum of 21 cents and five basis points times the value of the transaction, plus up to one cent for fraud prevention costs. Based on expected debit card volume, we believe we could experience a reduction of approximately $12 million a year in debit card related fee income and pre-tax earnings following the implementation of the Durbin Amendment.

Interchange income is derived from fees paid by merchants to the interchange network in exchange for the use of the network's infrastructure and payment facilitation. These fees are paid to card issuers to compensate them for the costs associated with issuance and operation. We earn interchange fees on card transactions from our debit cards, including $21.0 million during the year ended December 31, 2017. Merchants have attempted to negotiate lower interchange rates, and the Durbin Amendment to the Dodd-Frank Act, which we would become subject to once our


total assets exceed $10.0 billion, limits the amount of interchange fees that may be charged for certain debit card transactions. See “We may be subject to additional regulatory scrutiny if and when Banner or Banner Bank maintains total assets exceeding $10.0 billion.” As the financial services industry evolves, consumers may find debit financial services to be less attractive than traditional or other financial services. Consumers might not use debit card financial services for any number of reasons, including the general perception of our industry. If consumers do not continue or increase their usage of debit cards, including making changes in the way debit cards are loaded, our operating revenues and debit card deposits may remain at current levels or decline. Any projected growth for the industry may not occur or may occur more slowly than estimated. If consumer acceptance of debit financial services does not continue to develop or develops more slowly than expected or if there is a shift in the mix of payment forms, such as cash, credit cards, traditional debit cards and debit cards, away from our products and services, it could have a material adverse effect on our financial position and results of operations. Merchants may also continue to pursue alternative payment platforms, such as Apple Pay, to lower their processing costs. Any such new payment system may reduce our interchange income. Our failure to comply with the operating regulations set forth by payment card networks, which may change, could subject us to penalties, fees or the termination of our license to use the networks. Any of these scenarios could have a material impact on our business, financial condition and results of operations.


New or changing tax, accounting, and regulatory rules and interpretations could significantly impact strategic initiatives, results of operations, cash flows, and financial condition.


The bankingfinancial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit a company’sour shareholders. These regulations may sometimes impose significant limitations on operations. TheRegulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for credit losses. These bank regulators also have the ability to impose conditions in the approval of merger and acquisition transactions.

Additionally, actions by regulatory agencies or significant federallitigation against us and state banking regulationsmay lead to penalties that materially affect us are described in this report under the heading “Item 1. Business-Regulation.”us. These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time. The current presidential administration has indicated that it would like to see changes made to certain financial reform regulations, including the Dodd-Frank Act, which has resulted in increased regulatory uncertainty, and we are assessing the potential impact on financial and economic markets and on our business. Changes in federal policy and at regulatory agencies are expected to occur over time through policy and personnel changes, which could lead to changes involving the level of oversight and focus on the financial services industry. The nature, timing and economic and political effects of potential changes to the current legal and regulatory framework affecting financial institutions remain highly uncertain. Any new regulations or legislation, change in existing regulations or oversight, whether a change in regulatory policy or a change in a regulator'sregulator’s interpretation of a law or regulation, could have a material impact on our operations, increase our costs of regulatory compliance and of doing business and and/or otherwise adversely affect us and our profitability. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent registered public accounting firm. These changes could materially impact, potentially even retroactively, how we report our financial condition and results of our operations as could our interpretation of those changes. We cannot predict what restrictions may be imposed upon us with future legislation.


Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions and limit our ability to getobtain regulatory approval of acquisitions.


The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customersclients seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions and limit our ability to getobtain regulatory approval of acquisitions. Recently, several banking institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations.

The financial services market is undergoing rapid technological changes, Failure to maintain and if we are unableimplement adequate programs to stay current with those
changes, we will not be able to effectively compete.

The financial services market, including banking services, is undergoing rapid changes with frequent introductions of new technology-driven productscombat money laundering and services. Our future success will depend, in part, on our ability to keep pace with the technological changes and to use technology to satisfy and grow customer demand for our products and services and to create additional efficiencies in our operations. We expect that we will need to make substantial investments in our technology and information systems to compete effectively and to stay current with technological changes. Some of our competitors have substantially greater resources to invest in technological improvements and will be able to invest more heavily in developing and adopting new technologies, which may put us at a competitive disadvantage. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. As a result, our ability to effectively compete to retain or acquire new business may be impaired, and our business, financial condition or results of operations may be adversely affected.

We may experience future goodwill impairment.

In accordance with GAAP, we record assets acquired and liabilities assumed at their fair value with the excess of the purchase consideration over the net assets acquired resulting in the recognition of goodwill. As a result, acquisitions typically result in recording goodwill. We perform


a goodwill evaluation at least annually to test for goodwill impairment. As part of our testing, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine the fair value of a reporting unit is less than its carrying amount using these qualitative factors, we then compare the fair value of goodwill with its carrying amount, and then measures impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. Adverse conditions in our business climate, including a significant decline in future operating cash flows, a significant change in our stock price or market capitalization, or a deviation from our expected growth rate and performance may significantly affect the fair value of our goodwill and may trigger additional impairment losses, which could be materially adverse to our operating results and financial position.

We cannot provide assurance that we will not be required to take an impairment charge in the future. Any impairment charge has an adverse effect on our results of shareholders’ equity and financial results and could cause a decline in our stock price. The acquisitions of Starbuck, Siuslaw Financial Group (Siuslaw) and their subsidiaries, AmericanWest and Siuslaw Bank, respectively, have substantially increased our goodwill.

Conditions in the financial markets may limit our access to additional funding to meet our liquidity needs.

Liquidity is essential to our business. We rely on a number of different sources in order to meet our potential liquidity demands. We require sufficient liquidity to meet customer loan requests, customer deposit maturities and withdrawals, payments on our debt obligations as they come due and other cash commitments under both normal operating conditions and other unpredictable circumstances, including events causing industry or general financial market stress. Our primary sources of liquidity are increases in deposit accounts, cash flows from loan payments and our securities portfolio. Borrowings also provide us with a source of funds to meet liquidity demands. An inability to raise funds through deposits, borrowings, the sale of loans or investment securities and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable to us could be impaired by factors that affect us specifically, or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated, negative operating results, or adverse regulatory action against us.  Our ability to borrowterrorist financing could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospectshave serious reputational consequences for the financial services industry or deterioration in credit markets.us. Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could, in turn, have a material adverse effect on our business, financial condition and results of operations.

Additionally, collateralized public funds are bank deposits of state and local municipalities. These deposits are required to be secured by certain investment grade securities to ensure repayment, which on the one hand tends to reduce our contingent liquidity risk by making these funds somewhat less credit sensitive, but on the other hand reduces standby liquidity by restricting the potential liquidity of the pledged collateral. Although these funds historically have been a relatively stable source of funds for us, availability depends on the individual municipality's fiscal policies and cash flow needs.

We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.

Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, the community banking industry where the Banks conduct their business.  The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy.   Our success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel and upon the continued contributions of our management and personnel.  In particular, our success has been and continues to be highly dependent upon the abilities of key executives, including our President, and certain other employees.  We could undergo a difficult transition period if we were to lose the services of any of these individuals. Our success also depends on the experience of our banking facilities’ managers and bankers and on their relationships with the customers and communities they serve. In addition, our success has been and continues to be highly dependent upon the services of our directors, many of whom are at or nearing retirement age, and we may not be able to identify and attract suitable candidates to replace such directors. The loss of these key persons could negatively impact the affected banking operations.

Our operations rely on numerous external vendors.

We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor's organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which in turn could have a material negative impact on our financial condition and results of operations. We also could be adversely affected to the extent such an agreement is not renewed by the third party vendor or is renewed on terms less favorable to us.

Any inaccurate assumptions in our analytical and forecasting models could cause us to miscalculate our projected revenue or losses, which could adversely affect us.

We use analytical and forecasting models to estimate the effects of economic conditions on our financial assets and liabilities as well as our mortgage servicing rights. Those models include assumptions about interest rates and consumer behavior that may be incorrect. If our model


assumptions are incorrect, improperly applied or inadequate, we may record higher than expected losses or lower than expected revenues which could have a material adverse effect on our business, financial condition, and results of operations.operations and growth prospects.


Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.
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Our loans to businesses and individuals and our deposit relationships and related transactions are subject to exposure to the risk of loss due to fraud and other financial crimes.  Nationally, reported incidents of fraud and other financial crimes have increased.  We have also experienced losses due to apparent fraud and other financial crimes.  While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses will not occur.

Managing reputational risk is important to attracting and maintaining customers, investors and employees.

Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality or operational failures due to integration or conversion challenges as a result of acquisitions we undertake, compliance deficiencies, and questionable or fraudulent activities of our customers.  We have policies and procedures in place to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective.  Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental regulation.

If our enterprise risk management framework is not effective at mitigating risk and loss to us, we could suffer unexpected losses and our results of operations could be materially adversely affected.


Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which is critical to optimizing stockholder value. We have established processes and procedures intended to identify, measure, monitor, report, analyze and control the types of risk to which we are subject. These risks include liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and compliance risk, and reputational risk, among others. We also maintain a compliance program designed to identify, measure, assess, and report on our adherence to applicable laws, regulations, policies and procedures. While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk management or compliance programs, along with other related controls, will effectively mitigate all risk and limit losses in our business. However, as with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could suffer unexpected losses and our business financial condition and results of operations could be materially adversely affected.


Our business and financial results could be impacted materially by adverse results in legal proceedings.

Legal proceedings could result in judgments, significant time and attention from our management, or other adverse effects on our business and financial results. We establish estimated liabilities for legal claims when payments associated with claims become probable and the amount of loss can be reasonably estimated. We may still incur losses for a matter even if we have not established an estimated liability. In addition, the actual cost of resolving a legal claim may be substantially higher than any amounts accrued for that matter. The ultimate resolution of any legal proceeding, depending on the remedy sought and granted, could materially adversely affect our results of operations and financial condition.

Risks Related to Cybersecurity, Data and Fraud

We are subject to certain risks in connection with our use of technology.


Our security measures may not be sufficient to mitigate the risk of a cyber attack.cyber-attack. Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customerclient relationships, our general ledger and virtually all other aspects of our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to breaches, fraudulent or unauthorized access, denial or degradation of service attacks, misuse, computer viruses, malware or other malicious code and cyber attackscyber-attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our customers'clients’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customersclients or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant reputational damage.


Security breaches in our Internetinternet banking activities could further expose us to possible liability and damage our reputation.reputation. Increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions. Any compromise of our security also could deter customersclients from using our Internetinternet banking services that involve the transmission of confidential information. We rely on standard Internetinternet security systems to provide the security and authentication necessary to effect secure transmission of data. TheseAlthough we have developed and continue to invest in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, these precautions may not protect our systems from compromises or breaches of our security measures, whichand could result in significant legal liability and significantlosses to us or our clients, our loss of business and/or clients, damage to our reputation, the incurrence of additional expenses, disruption to our business, our inability to grow our online services or other businesses, additional regulatory scrutiny or penalties, or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business.business, financial condition and results of operations.


Our security measures may not protect us from systemssystem failures or interruptions. While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers. While we select third-party vendors carefully, we do not control their actions. If our third-party providers encounter difficulties including those resulting from breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher transaction volumes, cyber-attacks and security breaches or if we otherwise have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our ability to deliver products and services to our clients and otherwise conduct business operations could be adversely impacted. Replacing these third-party vendors could also entail significant delay and expense. Threats to information security also exist in the processing of customerclient information through various other vendors and their personnel.


The occurrence of anyWe cannot assure you that such breaches, failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely. We may require usnot be insured against all types of losses as a result of third party failures and insurance
35

coverage may be inadequate to cover all losses resulting from breaches, system failures or other disruptions. If any of our third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to identify alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all. Further, the occurrence of any systems failure or interruption could damage our reputation and result in a loss of customersclients and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.



Our Board of Directors oversees the risk management process, including the risk of cybersecurity breaches, and engages with management on cybersecurity issues.


We are subject to certain risks in connection with our data management or aggregation.


We are reliant on our ability to manage data and our ability to aggregate data in an accurate and timely manner to ensure effective risk reporting and management. Our ability to manage data and aggregate data may be limited by the effectiveness of our policies, programs, processes and practices that govern how data is acquired, validated, stored, protected and processed. While we continuously update our policies, programs, processes and practices, many of our data management and aggregation processes are manual and subject to human error or system failure. Failure to manage data effectively and to aggregate data in an accurate and timely manner may limit our ability to manage current and emerging risks, as well as to manage changing business needs.


Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.

The Bank is susceptible to fraudulent activity that may be committed against us or our clients which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client’s information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Nationally, reported incidents of fraud and other financial crimes have increased.  We have also experienced losses due to apparent fraud and other financial crimes.  While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses will not occur.

Risks related to our Business and Industry Generally

We will be required to transition from the use of the London Interbank Offered Rate (“LIBOR”) in the future.

We have certain FHLB advances, loans, investment securities, subordinated debentures and trust preferred securities indexed to LIBOR to calculate the interest rate. The continued availability of the LIBOR index is not guaranteed after 2021 and by June 2023, LIBOR is scheduled to be eliminated entirely. We cannot predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR (with the exception of overnight repurchase agreements, which are expected to be based on the Secured Overnight Financing Rate, or SOFR). Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans, and to a lesser extent securities in our portfolio, and may impact the availability and cost of hedging instruments and borrowings, including the rates we pay on our subordinated debentures and trust preferred securities. The language in our LIBOR-based contracts and financial instruments has developed over time and may have various events that trigger when a successor rate to the designated rate would be selected. If a trigger is satisfied, contracts and financial instruments may give the calculation agent discretion over the substitute index or indices for the calculation of interest rates to be selected. The implementation of a substitute index or indices for the calculation of interest rates under our loan agreements with our borrowers or our existing borrowings may result in our incurring significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the substitute index or indices, and may result in disputes or litigation with clients and creditors over the appropriateness or comparability to LIBOR of the substitute index or indices, which could have an adverse effect on our results of operations.

Ineffective liquidity management could adversely affect our financial results and condition.

Effective liquidity management is essential to our business. We require sufficient liquidity to meet client loan requests, client deposit maturities and withdrawals, payments on our debt obligations as they come due and other cash commitments under both normal operating conditions and other unpredictable circumstances, including events causing industry or general financial market stress. An inability to raise funds through deposits, borrowings, the sale of loans or investment securities and other sources could have a substantial negative effect on our liquidity. We rely on client deposits and at times, borrowings from the FHLB of Des Moines and certain other wholesale funding sources to fund our operations. Deposit flows and the prepayment of loans and mortgage-related securities are strongly influenced by such external factors as the direction of interest rates, whether actual or perceived, and the competition for deposits and loans in the markets we serve. Further, changes to the FHLB of Des Moines’s underwriting guidelines for wholesale borrowings or lending policies may limit or restrict our ability to borrow, and could therefore have a significant adverse impact on our liquidity. Although we have historically been able to replace maturing deposits and borrowings if desired, we may not be able to replace such funds in the future if, among other things, our financial condition, the financial condition of the FHLB of Des Moines, or market conditions change. Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable could be impaired by factors that affect us specifically or the financial services industry or economy in general, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry or deterioration in credit markets. Additional factors that could detrimentally impact our access to liquidity
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sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our deposits and loans are concentrated, negative operating results, or adverse regulatory action against us. Any decline in available funding in amounts adequate to finance our activities or on terms which are acceptable could adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could, in turn, have a material adverse effect on our business, financial condition and results of operations.

Additionally, collateralized public funds are bank deposits of state and local municipalities. These deposits are required to be secured by certain investment grade securities to ensure repayment, which on the one hand tends to reduce our contingent liquidity risk by making these funds somewhat less credit sensitive, but on the other hand reduces standby liquidity by restricting the potential liquidity of the pledged collateral. Although these funds historically have been a relatively stable source of funds for us, availability depends on the individual municipality’s fiscal policies and cash flow needs.

Severe weather, natural disasters, or other catastrophes could significantly impact our business.

Severe weather, natural disasters, widespread disease or pandemics, acts of war or terrorism or other adverse external events could have a significant impact on our ability to conduct business. In addition, such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans and leases, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue or cause us to incur additional expenses. The occurrence of any of these events in the future could have a material adverse effect on our business, financial condition or results of operations.

Climate change may materially adversely affect the Company’s business and results of operations.

Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may change their behavior on their own as a result of these concerns. We and our clients will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. We and our clients may face cost increases, asset value reductions and operating process changes. The impact on our clients will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. Among the impacts to us could be a drop in demand for our products and services, particularly in certain industry sectors. In addition, we could face reductions in creditworthiness on the part of some clients or in the value of assets securing loans. Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.

Benefits of Banner Forward and other strategic initiatives may not be realized.
Banner’s ability to compete depends on a number of factors, including, among others, its ability to develop and successfully execute strategic plans and initiatives. Banner Forward is focused on accelerating growth in commercial banking, deepening relationships with retail clients, and advancing technology strategies to enhance our digital service channels, while streamlining underwriting and back office processes. We may not be successful in achieving some or all of these objectives. The expected cost savings and revenue growth from Banner Forward may not be realized. The costs to implement Banner Forward may be greater than anticipated. Changes in economic conditions beyond our control, including changes in interest rates, may affect our ability to achieve our objectives. Our inability to execute on or achieve the anticipated outcomes of Banner Forward may affect how the market perceives us and could impede our growth and profitability.

Development of new products and services may impose additional costs on us and may expose us to increased operational risk.
Our financial performance depends, in part, on our ability to develop and market new and innovative services and to adopt or develop new technologies that differentiate our products or provide cost efficiencies, while avoiding increased related expenses. This dependency is exacerbated in the current “FinTech” environment, where financial institutions are investing significantly in evaluating new technologies, such as “Blockchain,” and developing potentially industry-changing new products, services and industry standards. The introduction of new products and services can entail significant time and resources, including regulatory approvals. Substantial risks and uncertainties are associated with the introduction of new products and services, including technical and control requirements that may need to be developed and implemented, rapid technological change in the industry, our ability to access technical and other information from our clients, the significant and ongoing investments required to bring new products and services to market in a timely manner at competitive prices and the preparation of marketing, sales and other materials that fully and accurately describe the product or service and its underlying risks. Our failure to manage these risks and uncertainties also exposes us to enhanced risk of operational lapses which may result in the recognition of financial statement liabilities. Regulatory and internal control requirements, capital requirements, competitive alternatives, vendor relationships and shifting market preferences may also determine if such initiatives can be brought to market in a manner that is timely and attractive to our clients. Failure to successfully manage these risks in the development and implementation of new products or services could have a material adverseeffect on our business and reputation, as well as on our consolidated results of operations and financial condition.

We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.

Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, the community banking industry where the Bank conducts its business.  The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy.  Our success depends to a significant degree
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upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel and upon the continued contributions of our management and personnel.  In particular, our success has been and continues to be highly dependent upon the abilities of key executives, including our President, and certain other employees.  We could undergo a difficult transition period if we were to lose the services of any of these individuals. Our success also depends on the experience of our banking facilities’ managers and bankers and on their relationships with the clients and communities they serve. In addition, our success has been and continues to be highly dependent upon the services of our directors, some of whom are at or nearing retirement age, and we may not be able to identify and attract suitable candidates to replace such directors. The loss of these key persons could negatively impact the affected banking operations.

We rely on other companies to provide key components of our business infrastructure.

We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor’s organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which in turn could have a material negative impact on our financial condition and results of operations. We also could be adversely affected to the extent such an agreement is not renewed by the third party vendor or is renewed on terms less favorable to us. Additionally, the bank regulatory agencies expect financial institutions to be responsible for all aspects of our vendors’ performance, including aspects which they delegate to third parties. Disruptions or failures in the physical infrastructure or operating systems that support our business and clients, or cyber-attacks or security breaches of the network system or devices that our clients use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition.

Any inaccurate assumptions in our analytical and forecasting models could cause us to miscalculate our projected revenue or losses, which could adversely affect us.

We use analytical and forecasting models to estimate the effects of economic conditions on our financial assets and liabilities as well as our mortgage servicing rights. Those models include assumptions about interest rates and consumer behavior that may be incorrect. If our model assumptions are incorrect, improperly applied or inadequate, we may record higher than expected losses or lower than expected revenues which could have a material adverse effect on our business, financial condition and results of operations.

Managing reputational risk is important to attracting and maintaining clients, investors and employees.

Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality or operational failures due to integration or conversion challenges as a result of acquisitions we undertake, compliance deficiencies, and questionable or fraudulent activities of our clients.  We have policies and procedures in place to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective.  Negative publicity regarding our business, employees, or clients, with or without merit, may result in the loss of clients, investors and employees, costly litigation, a decline in revenues and increased governmental regulation.

Risks Related to Holding Our Common Stock

Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.

We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations.  We may at some point, however, need to raise additional capital to support continued growth or be required by our regulators to increase our capital resources. Any capital we obtain may result in the dilution of the interests of existing holders of our common stock. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance.  Accordingly, we cannot make assurances that we will be able to raise additional capital if needed on terms that are acceptable to us, or at all.  If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected.  In addition, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action.

We rely on dividends from Banner Bank for substantially all of our revenue at the holding company level.


We are an entity separate and distinct from our principal subsidiary, Banner Bank, and derive substantially all of our revenue at the holding company level in the form of dividends from that subsidiary. Accordingly, we are, and will be, dependent upon dividends from Banner Bank to pay the principal of and interest on our indebtedness, to satisfy our other cash needs and to pay dividends on our common stock. Banner Bank'sBank’s ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements. InIf the eventCOVID-19 pandemic were to materially adversely affect Banner Bank’s regulatory capital levels or liquidity, it may result in Banner Bank isbeing unable to pay dividends to us, wewhich may result in us not bebeing able to pay dividends on our common stock.stock at the same rate or at all. Also, our right to participate in a distribution of assets upon a subsidiary'ssubsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary'ssubsidiary’s creditors.

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Our articles of incorporation containscontain a provision which could limit the voting rights of a holder of our common stock.


Our charter provides that any person or group who acquires beneficial ownership of our common stock in excess of 10.0% of the outstanding shares may not vote the excess shares. Accordingly, if you acquire beneficial ownership of more than 10.0% of the outstanding shares of our common stock, your voting rights with respect to our common stock will not be commensurate with your economic interest in our company.


Anti-takeover provisions could negatively affect our shareholders.


Provisions in our articles of incorporation and bylaws, the corporate laws of the state of Washington and federal laws and regulations could delay or prevent a third party from acquiring us, despite the possible benefit to our shareholders, or otherwise negatively affect the market value of our stock. These provisions, among others, include: a prohibitionrestrictions on voting shares of our common stock beneficially owned in excess of 10.0% of total shares outstanding; advance notice requirements for nominations for election to our boardBoard of directorsDirectors and for proposing matters that shareholders may act on at shareholder meetings; and staggered three-year terms for directors. Our articles of incorporation also authorize our boardBoard of directorsDirectors to issue preferred or other stock, and preferred or other stock could be issued as a defensive measure in response to a takeover proposal. In addition, because we are a bank holding company, the ability of a third party to acquire us is limited by applicable banking laws and regulations. The Bank Holding Company Act requires any bank holding company to obtain the approval of the Federal Reserve before acquiring 5% or more of any class of our voting securities. Any entity that is a holder of 25% or more of any class of our voting securities, or in some circumstances a holder of a lesser percentage, is subject to regulation as a bank holding company under the Bank Holding Company Act. Under the Change in Bank Control Act of 1978, as amended, any person (or persons acting in concert), other than a bank holding company, is required to notify the Federal Reserve before acquiring 10% or more of any class of our voting securities.



Item 1B – Unresolved Staff Comments


None.


Item 2 – Properties


Banner Corporation maintains its administrative offices and main branch office, which is owned by us, in Walla Walla, Washington.  In total, as of December 31, 2017,2021, we have 178150 branch offices located in Washington, Oregon, California, and Idaho.  The 178 branches includes 175 Banner Bank branches and three Islanders Bank branches.  Geographically we have 8573 branches are located in Washington, 4435 in Oregon, 3531 in California and 1411 in Idaho.  Of these branch locations, approximately halftwo thirds are owned and the other halfone third are leased facilities.  In addition to the branch locations, we also have 1318 loan production offices, nineten of which are located in Washington, three in California, two in both Oregon and Idaho, and one each in Oregon, California, Idaho and Utah.  All loan production offices are leased facilities. The lease terms for our branch and loan production offices are not individually material.  Lease expirations range from one3 months to 2518 years.  Administrative support offices are primarily in Washington, where we have tennine facilities, of which we own fourthree and lease six.  Additionally, we have onetwo leased administrative support officeoffices in Idaho and twofour administrative support offices located in Oregon, onetwo owned and onetwo leased.  In the opinion of management, all properties are adequately covered by insurance, are in a good state of repair and are appropriately designed for their present and future use.


Item 3 – Legal Proceedings


In the normal course of our business, we have various legal proceedings and other contingent matters outstanding.pending. These proceedings and the associated legal claims are often contested and the outcome of individual matters is not always predictable. Furthermore, in some matters, it is difficult to assess potential exposure because the legal proceeding is still in the pretrial stage. These claims and counter-claimscounter claims typically arise during the course of collection efforts on problem loans or with respect to actionactions to enforce liens on properties in which we hold a security interest.interest, although we also are subject to claims related to employment matters. Claims related to employment matters may include, but are not limited to: claims by our employees of discrimination, harassment, violations of wage and hour requirements, or violations of other federal, state, or local laws and claims of misconduct or negligence on the part of our employees. Some or all of these claims may lead to litigation, including class action litigation, and these matters may cause us to incur negative publicity with respect to alleged claims. Our insurance may not cover all claims that may be asserted against us, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. Should the ultimate judgments or settlements in any litigation exceed our insurance coverage, they could have a material adverse effect on our financial condition and results of operation for any period. At December 31, 2021, we had accrued $12.1 million related to these legal proceedings. The ultimate outcome of these legal proceedings could be more or less than what we have accrued. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, operations or operations.cash flows, except as set forth below.



A class and collective action lawsuit, Bolding et al. v. Banner Bank, US Dist. Ct., WD WA., was filed against Banner Bank on April 17, 2017. The plaintiffs are former and/or current mortgage loan officers of AmericanWest Bank and/or Banner Bank, who allege that the employer bank failed to pay all required regular and overtime wages that were due pursuant to the Fair Labor Standards Act (“FLSA”) and related laws of the state respective to each individual plaintiff. The plaintiffs seek regular and overtime wages, plus certain penalty amounts and legal fees. On December 15, 2017, the court granted the plaintiffs’ motion for conditional certification of a class with regard to the FLSA claims; following notice given to approximately 160 potential class members, 33 persons elected to “opt-in” as plaintiffs in the class. On October 10, 2018, the Court granted plaintiffs’ motion for certification of a different class of approximately 200 members, with regard to state law claims. Significant pre-trial motions were filed by both parties, including various motions by Banner Bank seeking to dismiss and/or limit the class claims. The court granted in part and denied in part Banner Bank’s motions and has ultimately allowed the case to proceed. The Court ruled

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on the last of the pre-trial motions on September 13, 2021, increasing the likelihood of trial or settlement. If the case goes to trial and the Company is unsuccessful in defending the claims, damages could be higher than the amount the Company has accrued as a litigation contingency reserve for this case. We believe that there are substantial defenses to this lawsuit, and we have, and will continue to, defend this case vigorously. The ultimate outcome is unknown at this time. The trial for this case will be bifurcated between a liability phase and a damages phase. The liability phase of the trial is set to begin in September 2022.

Item 4 – Mine Safety Disclosures
 
Not applicable.




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PART II


Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


Price Range of Common Stock and Dividend Information

Our voting common stock is principally traded on the NASDAQ Global Select Market under the symbol “BANR.”  Shareholders of record as of December 31, 20172021 totaled 1,6681,957 based upon securities position listings furnished to us by our transfer agent.  This total does not reflect the number of persons or entities who hold stock in nominee or “street” name through various brokerage firms.  The following tables show the reported high and low sale prices of our listed voting common stock for the periods presented as well as the cash dividends declared per share of common stock for each of those periods.
Year Ended December 31, 2017 High Low Cash Dividend Declared
First quarter $60.97
 $51.61
 $0.25
Second quarter 59.66
 52.07
 1.25
Third quarter 61.50
 52.42
 0.25
Fourth quarter 62.75
 53.92
 0.25
Year Ended December 31, 2016 High Low Cash Dividend Declared
First quarter $45.92
 $35.39
 $0.21
Second quarter 45.01
 38.77
 0.21
Third quarter 44.69
 39.58
 0.23
Fourth quarter 56.50
 43.20
 0.23

The timing and amount of cash dividends paid on our common stock depends on our earnings, capital requirements, financial condition and other relevant factors and is subject to the discretion of our board of directors.  As a result of continued strong earnings, levels of capital, asset quality and financial condition during 2017, we increased our regular quarterly dividend to $0.25 per share and declared a special dividend of $1.00 in the second quarter 2017. There can be no assurance that we will pay dividends on our common stock in the future.
Our ability to pay dividends on our common stock depends primarily on dividends we receive from Banner Bank and Islanders Bank.  Under federal regulations, the dollar amount of dividends the Banks may pay depends upon their capital position and recent net income.  Generally, if a bank satisfies its regulatory capital requirements, it may make dividend payments up to the limits prescribed under state law and FDIC regulations.  In addition, an institution that has converted to a stock form of ownership may not declare or pay a dividend on, or repurchase any of, its common stock if the effect thereof would cause the regulatory capital of the institution to be reduced below the amount required for the liquidation account which was established in connection with the conversion.  Banner Bank, our primary subsidiary, converted to a stock form of ownershipand is therefore subject to the limitation described in the preceding sentence. In addition, under Washington law, no bank may declare or pay any dividend in an amount greater than its retained earnings without the prior approval of the Washington DFI.  The Washington DFI also has the power to require any bank to suspend the payment of any and all dividends.

Further, under Washington law, Banner Corporation is prohibited from paying a dividend if, after making such dividend payment, it would be unable to pay its debts as they become due in the usual course of business, or if its total liabilities, plus the amount that would be needed, in the event Banner Corporation were to be dissolved at the time of the dividend payment, to satisfy preferential rights on dissolution of holders of preferred stock ranking senior in right of payment to the capital stock on which the applicable distribution is to be made, exceed our total assets.

In addition to the foregoing regulatory considerations, there are numerous governmental requirements and regulations that affect our business activities.  A change in applicable statutes, regulations or regulatory policy may have a material effect on our business and on our ability to pay dividends on our common stock.

Payments of the distributions on our TPS from the special purpose subsidiary trusts we sponsored are fully and unconditionally guaranteed by us. The junior subordinated debentures that we have issued to our subsidiary trusts are ranked senior to our shares of common stock. We must make required payments on the junior subordinated debentures before any dividends can be paid on our TPSand our common stock and, in the event of our bankruptcy, dissolution or liquidation, the interest and principal obligations under the junior subordinated debentures must be satisfied before any distributions can be made on our common stock. We may defer the payment of interest on each of the junior subordinated debentures for a period not to exceed 20 consecutive quarters, provided that the deferral period does not extend beyond the stated maturity. During such deferral period, distributions on the corresponding TPSs will also be deferred and we may not pay cash dividends to the holders of shares of our common stock. At December 31, 2017, we were current on all interest payments.





Issuer Purchases of Equity Securities


The following table provides information about repurchases of common stock by the Company during the quarter ended December 31, 2017:2021:
PeriodTotal Number of Common Shares PurchasedAverage Price Paid per Common ShareTotal Number of Shares Purchased as Part of Publicly Announced PlanMaximum Number of Remaining Shares that May be Purchased at Period End under the Board Authorization
October 1, 2021 - October 31, 2021122 $57.58 — 707,781 
November 1, 2021 - November 30, 2021— — — 707,781 
December 1, 2021 - December 31, 202158 56.06 — 1,712,510 
Total for quarter180 $57.09 — 1,712,510 
PeriodTotal Number of Common Shares PurchasedAverage Price Paid per Common ShareTotal Number of Shares Purchased as Part of Publicly Announced PlanMaximum Number of Remaining Shares that May be Purchased at Period End under the Board Authorization
     
October 1, 2017 - October 31, 20176,982
$61.20
—
1,633,245
November 1, 2017 - November 30, 2017520,166
56.99
520,166
1,113,079
December 1, 2017 - December 31, 201744
56.71
—
1,113,079
Total for quarter527,192
57.05
520,166
1,113,079




On March 31, 2017,December 22, 2021, the Company announced that its Board of Directors had authorized the repurchase up to 1,712,510 shares of upthe Company’s common stock (which was equivalent to 5% of the Company'sCompany’s common stock, or 1,658,245 of the Company's outstanding shares.stock). Under the authorization, shares may be repurchased by the Company in open market purchases. No shares were repurchased under this authorization during December 2021. 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 quarter and year ended December 31, 2017, the Company repurchased 520,166 and 545,166 common shares, respectively, under the stock repurchase authorization leaving 1,113,079 shares available for future repurchase.


In addition, 7,026180 shares were surrendered by employees to satisfy tax withholding obligations upon the vesting of restricted stock grants in the fourth quarter of 2017.2021.



There were no shares tendered in connection with option exercises during the years ended December 31, 2021 and 2020, respectively. Restricted shares canceled to pay withholding taxes totaled 59,730 and 41,507 during the years ended December 31, 2021 and 2020, respectively.





41


Performance Graph


Equity Compensation Plan Information

The equity compensation plan information presented under Part III, Item 12 of this report is incorporated herein by reference.

Performance Graph.The following graph compares the cumulative total shareholder return on Banner Corporation common stock with the cumulative total return on the NASDAQ (U.S. Stock) Index, a peer group of the SNL $5 Billion to $10 Billion AssetKBW Regional Bank Index and a peer group of the SNL NASDAQ Bank Index.S&P 500.  Total return assumes the reinvestment of all dividends.


banr-20211231_g1.jpg
 Year Ended
Index12/31/1612/31/1712/31/1812/31/1912/31/2012/31/21
Banner Corporation100.00 102.26 102.31 111.54 97.55 130.98 
NASDAQ Composite100.00 129.64 125.96 172.18 249.51 304.85 
KBW Regional Bank Index100.00 101.81 84.00 104.05 95.02 129.84 
S&P 500100.00 121.83 116.49 153.17 181.35 233.41 
  Year Ended
Index 12/31/12
 12/31/13
 12/31/14
 12/31/15
 12/31/16
 12/31/17
Banner Corporation 100.00
 148.07
 144.66
 156.60
 193.55
 197.92
NASDAQ Composite 100.00
 140.12
 160.78
 171.97
 187.22
 242.71
SNL Bank $5B-$10B 100.00
 154.28
 158.92
 181.04
 259.37
 258.40
SNL Bank NASDAQ 100.00
 143.73
 148.86
 160.70
 222.81
 234.58


*Assumes $100 invested in Banner Corporation common stock and each index at the close of business on December 31, 20122016 and that all dividends were reinvested.  Information for the graph was provided by SNL Financial L.C. © 2018.Bloomberg LP, New York City, NY.




Our ability to pay dividends on our common stock depends primarily on dividends we receive from Banner Bank. The timing and amount of cash dividends paid on our common stock depends on our earnings, capital requirements, financial condition and other relevant factors,including required payments on our TPS, and is subject to the discretion of our Board of Directors. During 2021, we kept our regular quarterly dividend at $0.41 per share. Subsequent to December 31, 2021, we declared a $0.44 per share quarterly dividend, a 7% increase compared to the 2021 quarterly dividend, payable on February 14, 2022. There can be no assurance that we will pay dividends on our common stock in the future. For additional information on our ability to pay dividends, see Item 1 of this report, “Business–Regulation–Banner Bank–Dividends” and “Banner Corporation–Dividends.”

42

Item 6 – Selected Financial Data

The following condensed consolidated statements of financial condition and operations and selected performance ratios as of December 31, 2017, 2016, 2015, 2014, and 2013 and for the years then ended have been derived from our audited consolidated financial statements.

The information below is qualified in its entirety by the detailed information included elsewhere herein and should be read along with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8, Financial Statement and Supplementary Data.”- Reserved
43
FINANCIAL CONDITION DATA:
 December 31
(In thousands)2017 2016 2015 2014 2013
Total assets$9,763,209
 $9,793,688
 $9,796,298
 $4,723,163
 $4,388,257
Cash and securities (1)
1,473,608
 1,353,583
 1,655,290
 708,609
 772,614
Loans receivable, net7,509,856
 7,365,151
 7,236,496
 3,755,127
 3,341,453
Deposits8,183,431
 8,121,414
 8,055,068
 3,898,950
 3,617,926
Borrowings194,769
 255,101
 324,186
 187,436
 184,234
Common shareholders’ equity1,272,626
 1,305,710
 1,300,059
 582,888
 538,331
Total shareholders’ equity1,272,626
 1,305,710
 1,300,059
 582,888
 538,331
Shares outstanding32,726
 33,193
 34,242
 19,572
 19,544
Shares outstanding excluding unearned, restricted
    shares held in ESOP
32,726
 33,193
 34,242
 19,572
 19,509
 
OPERATING DATA:
 
  
  
  
  
 For the Year Ended December 31
(In thousands)2017 2016 2015 2014 2013
Interest income$412,284
 $391,477
 $254,433
 $190,661
 $179,712
Interest expense19,250
 16,408
 12,154
 10,789
 12,996
Net interest income before provision for loan losses393,034
 375,069
 242,279
 179,872
 166,716
Provision for loan losses8,000
 6,030
 —
 —
 —
Net interest income385,034
 369,039
 242,279
 179,872
 166,716
Deposit fees and other service charges51,787
 49,156
 40,607
 30,553
 26,581
Mortgage banking operations revenue20,880
 25,552
 17,720
 10,249
 11,170
Other-than-temporary impairment recoveries—
 —
 —
 —
 409
Net change in valuation of financial instruments carried at fair value(2,844) (2,620) (813) 1,374
 (2,278)
All other non-interest income23,712
 11,382
 4,778
 12,815
 8,780
Total non-interest income93,535
 83,470
 62,292
 54,991
 44,662
REO operations expense (recoveries), net(2,030) 175
 397
 (446) (689)
All other non-interest expenses329,335
 322,694
 236,203
 154,187
 141,664
Total non-interest expense327,305
 322,869
 236,600
 153,741
 140,975
Income before provision for income tax expense151,264
 129,640
 67,971
 81,122
 70,403
Provision for income tax expense90,488
 44,255
 22,749
 27,052
 24,189
Net income$60,776
 $85,385
 $45,222
 $54,070
 $46,214

(footnotes follow)



PER COMMON SHARE DATA:         
 At or For the Years Ended December 31
 2017 2016 2015 2014 2013
Net income:         
Basic$1.85
 $2.52
 $1.90
 $2.79
 $2.39
Diluted1.84
 2.52
 1.89
 2.79
 2.38
Common shareholders’ equity per share (2)
38.89
 39.34
 37.97
 29.78
 27.59
Common shareholders’ tangible equity per share (2)(9)
30.78
 31.06
 29.64
 29.64
 27.42
Cash dividends2.00
 0.88
 0.72
 0.72
 0.54
Dividend payout ratio (basic)108.11% 34.92% 37.89% 25.78% 22.62%
Dividend payout ratio (diluted)108.70% 34.92% 38.10% 25.84% 22.67%

OTHER DATA:         
 As of December 31
 2017 2016 2015 2014 2013
Full time equivalent employees2,078
 2,078
 2,063
 1,150
 1,084
Number of branches178
 190
 202
 93
 88

(footnotes follow)



KEY FINANCIAL RATIOS:         
 At or For the Years Ended December 31
 2017 2016 2015 2014 2013
Performance Ratios:         
Return on average assets (3)
0.60% 0.87% 0.72% 1.17% 1.09%
Return on average common equity (4)
4.57
 6.41
 5.56
 9.59
 8.79
Average common equity to average assets13.09
 13.54
 12.87
 12.20
 12.35
Interest rate spread (5)
4.23
 4.19
 4.09
 4.04
 4.08
Net interest margin (6)
4.24
 4.20
 4.10
 4.07
 4.11
Non-interest income to average assets0.92
 0.85
 0.99
 1.19
 1.05
Non-interest expense to average assets3.22
 3.28
 3.75
 3.32
 3.31
Efficiency ratio (7)
67.27
 70.41
 77.68
 65.46
 67.11
Average interest-earning assets to funding liabilities105.69
 105.84
 107.59
 108.78
 108.28
Selected Financial Ratios:         
Allowance for loan losses as a percent of total loans at end of period1.17
 1.15
 1.07
 1.98
 2.17
Net recoveries (charge-offs) as a percent of average outstanding loans during the period0.07
 0.03
 0.04
 0.05
 (0.08)
Non-performing assets as a percent of total assets0.28
 0.35
 0.28
 0.43
 0.66
Allowance for loan losses as a percent of non-performing loans (8)
329.38
 380.87
 512.47
 453.56
 299.81
Common shareholders’ tangible equity to tangible assets (9)
10.61
 10.83
 10.68
 12.29
 12.23
Consolidated Capital Ratios:         
Total capital to risk-weighted assets13.81
 13.40
 13.63
 16.80
 16.99
Tier 1 capital to risk-weighted assets12.77
 12.41
 12.65
 15.54
 15.73
Tier 1 capital to average leverage assets11.34
 11.83
 11.06
 13.41
 13.64
Common equity tier I capital to risk-weighted assets11.30
 11.19
 12.13
 na
 na
(1)
Includes securities available-for-sale and held-to-maturity. 
(2)
Calculated using shares outstanding excluding unearned restricted shares held in ESOP. 
(3)
Net income divided by average assets. 
(4)
Net income divided by average common equity. 
(5)
Difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. 
(6)
Net interest income before provision for loan losses as a percent of average interest-earning assets. 
(7)
Non-interest expenses divided by the total of net interest income before loan losses and non-interest income. 
(8)
Non-performing loans consist of nonaccrual and 90 days past due loans still accruing interest. 
(9)
Common shareholders’ tangible equity per share and the ratio of tangible common shareholders’ equity to tangible assets are non-GAAP financial measures.  We calculate tangible common equity by excluding the balance of goodwill and other intangible assets from shareholders’ equity.  We calculate tangible assets by excluding the balance of goodwill and other intangible assets from total assets.  We believe that this is consistent with the treatment by our bank regulatory agencies, which exclude goodwill and other intangible assets from the calculation of risk-based capital ratios.  Management believes that these non-GAAP financial measures provide information to investors that is useful in understanding the basis of our capital position.  However, these non-GAAP financial measures are supplemental and are not a substitute for any analysis based on GAAP.  Because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures as calculated by other companies. For a reconciliation of these non–GAAP measures, see Item 7, "Management's Discussion and Analysis of Financial Condition—Executive Overview."



Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations


Management’s discussion and analysis of results of operations is intended to assist in understanding our financial condition and results of operations.  The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Notes to the Consolidated Financial Statements of this Form 10-K.


Executive Overview


Banner Corporation'sCorporation’s successful execution of its Super Community bank model and strategic plan and operating initiatives continued in 2017, as evidenced by ourhave delivered solid core operating results and profitability. We have made substantial progressprofitability over the last several years. Banner’s longer term strategic initiatives continue to focus on our goals to achieve and maintain the Company's moderate risk profile as well as to develop and continue consistent and sustainable earnings momentum. Highlights for the year included continued strong assetoriginating high quality outstandingassets, new client acquisition and account growth,deepening existing client relationships which we believe will continue to generate strong revenue generation from core operations and a significant gain onwhile maintaining the Utah Branch Sale resulting in record pretax earnings.Company’s moderate risk profile.


For the year ended December 31, 2017,2021, our net income was $60.8$201.0 million, or $1.84$5.76 per diluted share, compared to net income of $85.4$115.9 million, or $2.52$3.26 per diluted share for the year ended December 31, 20162020 and $45.2$146.3 million, or $1.89$4.18 per diluted share for the year ended December 31, 2015.2019. Current year results were impacted by the low interest rate environment and the unprecedented level of market liquidity. The current year results include a recapture of provision for credit losses, primarily due to the improvement in the level of adversely classified loans and forecasted economic indicators utilized to estimate credit losses as well as an acceleration of SBA PPP deferred loan fee income, a decrease in netmortgage banking income, increased non-interest expense, a decrease in 2017 was due to a $42.6 million, or $1.29 per diluted share, revaluation of our net deferred tax assetthe yield on earnings-assets as a result of the enactment ofdecline in market interest rates and excess liquidity being invested in short term investments. Both the 2017 Tax Act, which reduced the marginal federal corporate income tax rate from 35% to 21%. This revaluation resultedcurrent year and prior year results were positively impacted by growth in an increase in our provision for income taxes in our Consolidated Statement of Operationsinterest-earnings assets and decreased funding costs.

Our financial results for the year ended December 31, 2017.2021 also reflect the reduction in business activity in some of our markets due the lingering impacts of the COVID-19 pandemic. At December 31, 2021, we had 21 mortgage loans totaling $6.4 million operating under forbearance agreements due to COVID-19. Since these loans were performing loans that were current on their payments prior to the COVID-19 pandemic, these modifications are not considered to be troubled debt restructurings pursuant to applicable accounting and regulatory guidance at December 31, 2021. In addition, the SBA provided assistance to improved earnings from coresmall businesses impacted by COVID-19 through the SBA PPP, which was designed to provide near-term relief to help small businesses sustain operations. As of December 31, 2021, Banner had provided SBA PPP loans totaling nearly $1.61 billion and received SBA forgiveness for SBA PPP loans totaling $1.48 billion. Our essential onsite employees, such as those working in our branches, continue to serve clients in person. In July 2021, we began to normalize our operations by returning additional groups of employees back to bank worksites. However, a late summer spike in COVID-19 cases resulted in a suspension of our net incomereturn to work process. We are currently reviewing our initiatives for allowing remaining staff to return to bank worksites. Expenses incurred in response to the COVID-19 pandemic resulted in $436,000 of related costs during the year ended December 31, 2021, compared to $3.5 million for the year ended December 31, 2017 included2020.

During 2021, we began implementing Banner Forward, a net gainBank-wide initiative to drive revenue growth and reduce operating expense. Full implementation is expected by 2023, with the goal of $12.2delivering sequential improvements in operating performance during the next six quarters while staying true to our mission and value proposition of being connected, knowledgeable and responsive to our clients, communities and employees. Banner Forward is focused on accelerating growth in commercial banking, deepening relationships with retail clients, and advancing technology strategies to enhance our digital service channels, while streamlining underwriting and back office processes. We incurred expenses of $11.6 million as a result ofrelated to Banner Forward during the Utah Branch Sale. Our results for the yearsyear ended December 31, 2016 and 2015 were significantly impacted by merger and acquisition activity and the related expenses. Acquisition-related expenses were $11.7 million in 2016 compared to $26.1 million in 2015. There were no acquisition expenses in 2017.2021.


Our operating results depend primarily on our net interest income, which is the difference between interest income on interest-earning assets, consisting primarily of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of customerclient deposits, FHLB advances, other borrowings, subordinated notes, and junior subordinated debentures. Net interest income is primarily a function of our interest rate spread, which is the difference between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, as well as a function of the average balances of interest-earning assets, interest-bearing liabilities and interest-bearing liabilities.non-interest-bearing funding sources including non-interest-bearing deposits. Our net interest income before provision for loan losses increased 5%3% to $393.0$496.9 million for the year ended December 31, 2017,2021, compared to $375.1$481.3 million for the year earlier. Thisprior year. The increase in net interest income reflectsin 2021 is a result of growth in average earningboth total interest-earning assets mostly loans,and core deposits as well as increased yields.acceleration of deferred loan fees on SBA PPP loans due to SBA loan forgiveness, partially offset by lower yields on interest-earning assets, due to declines in market rates. The growth in total interest-earning assets and core deposits was largely the result of SBA PPP loan funds deposited into client accounts, fiscal stimulus payments and an increase in general client liquidity due to reduced business investment and consumer spending during the COVID-19 pandemic. During the year ended December 31, 2017, our interest spread increased to 4.23% from 4.19% for the prior year while2021, our net interest margin increasedon a tax equivalent basis decreased to 4.24%3.39% compared to 4.20%3.85% for the prior year. OurThe decrease in net interest margin on a tax equivalent basis during 2021 primarily reflects lower yields on average interest-earning assets, partially offset by decreases in the cost of funding liabilities. The lower yields on average interest-earning assets compared to a year earlier was enhanced 10 basis pointslargely due to the impact of the continuing low targeted Fed Funds Rate resulting in 2017lower yields on new loan originations and 16 basis points in 2016 by acquisition accounting adjustments including the amortization of acquisition accounting discountsfurther declines on purchased loans obtained from the acquisitions, which are accreted intofloating rate loan interest income,yields as well as net premiums on non-market-rate certificateexcess liquidity being invested in low yielding short term investments and interest-bearing deposits.

We recorded a $33.4 million recapture of deposit liabilities assumed in the acquisitions which, are amortized as a reduction to deposit interest expense.

Although our credit quality metrics continue to reflect our moderate risk profile, we recorded an $8.0 million provision for loancredit losses in the year ended December 31, 2017,2021, primarily reflecting a decrease in the expected lifetime credit losses due to the organic growthan improvement in the loan portfolio,forecasted economic indicators used to calculate credit losses and a decrease in adversely classified loans during the renewal of acquired loans out of the discounted loan portfolios and net charge-offs,year ended December 31, 2021, compared to $6.0a $67.9 million provision for loancredit losses recorded in 20162020 and nonea $10.0 million provision in 2015.2019. Non-performing loans increaseddecreased to $27.0$22.8 million at December 31, 2017,2021, compared to $22.6$35.6 million a year earlier. Net charge-offs decreased to $2.1 million for the year ended December 31, 2021, compared to net charge-offs of $5.4 million for the prior year. Our allowance for loancredit losses - loans at December 31, 20172021 was $89.0$132.1 million, representing 329%578% of non-performing loans.loans
44

compared to $167.3 million, or 470% of non-performing loans for the prior year. In addition to the allowance for credit losses - loans, we maintain an allowance for credit losses - unfunded loan commitments which was $12.4 million at December 31, 2021 compared to $13.3 million at December 31, 2020. (See Note 5,4, Loans Receivable and the Allowance for LoanCredit Losses, of the Notes to the Consolidated Financial Statements as well as “Asset Quality” below in this Form 10-K.)


Our net income is also is affected by the level of our non-interest income, including deposit fees and other service charges, results of mortgage banking operations, which includes loan origination and servicing fees and gains and losses on the sale of loans and servicing fees, gains and losses on the sale of securities, as well as our non-interest expenseexpenses and provisions for credit losses and income tax provisions.taxes. In addition, our net income is affected by the net change in the value of certain financial instruments carried at fair value. Our total non-interest income was $93.5$96.4 million for the year ended December 31, 2017,2021, compared to $83.5$98.6 million for the year ended December 31, 2016.2020. The decrease from the prior year primarily reflects decreased mortgage banking income, partially offset by an increase in deposit fees and other services charges and a net gain recognized for fair value adjustments as a result of changes in the valuation of financial instruments carried at fair value. For the year ended December 31, 2017,2021, we recorded a net lossgain of $2.8$4.6 million for fair value adjustments and $2.1 million$482,000 in net lossesgains on the sale of securities offset by a $12.2 million gain on the Utah Branch Sale.securities. In comparison, for the year ended December 31, 2016,2020, we recorded a net loss of $2.6 million$656,000 for fair value adjustments and $843,000$1.0 million in net gains on the sale of securities. Non-interest income excluding the net gain and loss on sale of securities, changes in the value of financial instruments carried at fair value, and gain on the sale of branches including related loans and deposits, which we believe is more indicative of our core operations, increased 1% to $86.3 million for the year ended December 31, 2017 compared to $85.2 million a year earlier.


Our total revenues (net interest income before the provision for loan losses plus total non-interest income) for the year ended December 31, 20172021 increased $28.0$13.4 million, or 6%2%, to $486.6$593.3 million, compared to $458.5$579.9 million for the same period a year earlier, largely as a result of increasedincreases in net interest income and the previously mentioned gain on the sale of the Utah branches.income.  Our total adjusted revenues from core operations,(a non-GAAP financial measure), which excludes net gains and losslosses on sale of securities and fair value adjustments and gain on the sale of branches including the related loans and deposits, increased by $19.0$8.6 million, or 4%1%, to $479.3$588.2 million for the year ended December 31, 2017,2021, compared to $460.3$579.6 million a year earlier.


For the year ended December 31, 2017,2021, non-interest expense increased 1%3% to $327.3$380.1 million, compared to $322.9$369.6 million for the year ended December 31, 2016.2020. The increase was largely attributable to higher salarythe result of increases in payment and employee benefitscard processing services expense and costs for professional services mostlyexpense, primarily due to enhanced regulatory requirements attributablean increase in consulting expenses related to compliance and risk management infrastructure build-out, significantlythe Banner Forward initiative, as well as a $2.3 million loss on extinguishment of debt as a result of the redemption of $8.2 million of junior subordinated debentures during the current year. These increases were partially offset by an $11.7 million decreasedecreases in COVID-19 expenses and merger and acquisition relatedacquisition-related expenses.



45

We temporarily deleveraged our balance sheet during the fourth quarterSelected Financial Data:The following condensed consolidated statements of 2017 to reduce assets below $10.0 billion atfinancial condition and operations and selected performance ratios as of December 31, 2017 resulting2021, 2020, and 2019 and for the years then ended have been derived from our audited consolidated financial statements.

The information below is qualified in ourits entirety by the detailed information included elsewhere herein and should be read along with this “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8, Financial Statement and Supplementary Data.”

FINANCIAL CONDITION DATA:
 December 31
(In thousands)202120202019
Total assets$16,804,872 $15,031,623 $12,604,031 
Cash and securities (1)
6,321,196 4,003,469 2,121,022 
Loans receivable, net8,952,664 9,703,703 9,204,798 
Deposits14,326,933 12,567,296 10,048,641 
Borrowings434,305 451,759 687,778 
Common shareholders’ equity1,690,327 1,666,264 1,594,034 
Total shareholders’ equity1,690,327 1,666,264 1,594,034 
Shares outstanding34,253 35,159 35,752 
 
OPERATING DATA:
   
 For the Year Ended December 31
(In thousands)202120202019
Interest income$520,500 $519,146 $525,687 
Interest expense23,609 37,845 56,768 
Net interest income496,891 481,301 468,919 
(Recapture) provision for credit losses(33,388)67,875 10,000 
Net interest income after provision for credit losses530,279 413,426 458,919 
Deposit fees and other service charges39,495 34,384 46,632 
Mortgage banking operations revenue33,948 51,083 22,215 
Net change in valuation of financial instruments carried at fair value4,616 (656)(208)
All other non-interest income18,357 13,805 13,302 
Total non-interest income96,416 98,616 81,941 
Salary and employee benefits244,351 245,400 226,409 
All other non-interest expenses135,750 124,189 131,319 
Total non-interest expense380,101 369,589 357,728 
Income before provision for income tax expense246,594 142,453 183,132 
Provision for income tax expense45,546 26,525 36,854 
Net income$201,048 $115,928 $146,278 

PER COMMON SHARE DATA:   
 At or For the Years Ended December 31
 202120202019
Net income:   
Basic$5.81 $3.29 $4.20 
Diluted5.76 3.26 4.18 
Common shareholders’ equity per share (2)
49.35 47.39 44.59 
Common shareholders’ tangible equity per share (2)(9)
38.02 36.17 33.33 
Cash dividends1.64 1.23 2.64 
Dividend payout ratio (basic)28.23 %37.39 %62.86 %
Dividend payout ratio (diluted)28.47 %37.73 %63.16 %

46

OTHER DATA:   
 As of December 31
 202120202019
Full time equivalent employees1,891 2,061 2,198 
Number of branches150 155 178 

KEY FINANCIAL RATIOS:
 At or For the Years Ended December 31
 202120202019
Performance Ratios:   
Return on average assets (3)
1.24 %0.83 %1.22 %
Return on average common equity (4)
12.12 7.14 9.50 
Average common equity to average assets10.26 11.63 12.85 
Net interest margin (tax equivalent) (5)
3.39 3.85 4.35 
Non-interest income to average assets0.60 0.71 0.68 
Non-interest expense to average assets2.35 2.65 2.98 
Efficiency ratio (6)
64.06 63.73 64.94 
Average interest-earning assets to funding liabilities104.18 104.61 106.09 
Loans to deposits ratio64.08 80.48 94.70 
Selected Financial Ratios:
Allowance for credit/loan losses as a percent of total loans at end of period (7)
1.45 1.69 1.08 
Net charge-offs as a percent of average outstanding loans during the period(0.02)(0.05)(0.07)
Non-performing assets as a percent of total assets0.14 0.24 0.32 
Allowance for credit/loan losses as a percent of non-performing loans (7)(8)
578.47 469.70 253.95 
Common shareholders’ tangible equity to tangible assets (9)
7.93 8.69 9.77 
Consolidated Capital Ratios:
Total capital to risk-weighted assets14.71 14.73 12.93 
Tier 1 capital to risk-weighted assets12.74 12.56 11.97 
Tier 1 capital to average leverage assets8.76 9.50 10.71 
Common equity tier I capital to risk-weighted assets11.54 11.25 10.63 

(1)Includes securities available-for-sale and held-to-maturity. 
(2)Calculated using shares outstanding, excluding unearned restricted shares held in ESOP. 
(3)Net income divided by average assets. 
(4)Net income divided by average common equity. 
(5)Net interest income before provision for credit losses as a percent of average interest-earning assets. 
(6)Non-interest expenses divided by the total of net interest income before loan losses and non-interest income. 
(7)The allowance for credit losses - loans as a percentage of loans and as a percentage of non-performing assets decreasing slightly to $9.76 billion at December 31, 2017. Remaining below $10.0 billion at December 31, 2017 hadfor 2020 and 2021 reflects the beneficial effectadoption of delaying the adverse impactFinancial Instruments - Credit Losses (ASC 326) on our future operating results from certain enhanced regulatory requirementsJanuary 1, 2020.
(8)Non-performing loans consist of nonaccrual and 90 days past due loans still accruing interest. 
(9)Common shareholders’ tangible equity per share and the Durbin Amendment capratio of tangible common shareholders’ equity to tangible assets are non-GAAP financial measures.  We calculate tangible common equity by excluding the balance of goodwill and other intangible assets from shareholders’ equity.  We calculate tangible assets by excluding the balance of goodwill and other intangible assets from total assets.  We believe that this is consistent with the treatment by our bank regulatory agencies, which exclude goodwill and other intangible assets from the calculation of risk-based capital ratios.  Management believes that these non-GAAP financial measures provide information to investors that is useful in understanding the basis of our capital position.  However, these non-GAAP financial measures are supplemental and are not a substitute for any analysis based on interchange fees.GAAP.  Because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures as calculated by other companies. For a reconciliation of these non–GAAP measures, see Item 7 of this report, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Overview.”

*Non-GAAP financial measures: Non-interestmeasures: Net income, revenues and other earnings and expense information excluding fair value adjustments, net gains or losses on the sale of securities, and, in certain periods gain on the sale of branches including related loans and depositsmerger and acquisition-related costs,expenses, losses on extinguishment of debt, COVID-19 expenses, Banner Forward expenses, amortization of CDI, REO operations, state/municipal tax expense and the related tax benefit, are non-GAAP financial
47

measures.  Management has presented these and other non-GAAP financial measures in this discussion and analysis because it believes that they provide useful and comparative information to assess trends in our core operations and in understandingto facilitate the comparison of our capital position.performance with the performance of our peers.  However, these non-GAAP financial measures are supplemental and are not a substitute for any analysis based on GAAP. Where applicable, we have also presented comparable earnings information using GAAP financial measures.  For a reconciliation of these non-GAAP financial measures, see the tables below.  Because not all companies use the same calculations, our presentation may not be comparable to other similarly titled measures as calculated by other companies. See “Comparison of Results of Operations for the Years Ended December 31, 20172021 and 2016”2020” for more detailed information about our financial performance.


The following tables set forth reconciliations of non-GAAP financial measures discussed in this report (dollars in thousands, except share and per share data):
 For the Years Ended December 31
202120202019
ADJUSTED REVENUE:
Net interest income (GAAP)$496,891 $481,301 $468,919 
Total non-interest income96,416 98,616 81,941 
Total GAAP revenue593,307 579,917 550,860 
Exclude net gain on sale of securities(482)(1,012)(33)
Exclude net change in valuation of financial instruments carried at fair value(4,616)656 208 
Adjusted Revenue (non-GAAP)$588,209 $579,561 $551,035 
ADJUSTED EARNINGS:
Net income (GAAP)$201,048 $115,928 $146,278 
Exclude net gain on sale of securities(482)(1,012)(33)
Exclude net change in valuation of financial instruments carried at fair value(4,616)656 208 
Exclude merger and acquisition-related costs660 2,062 7,544 
Exclude COVID-19 expenses436 3,502 — 
Exclude Banner Forward expenses11,604 — — 
Exclude loss on extinguishment of debt2,284 — 735 
Exclude related tax benefit(2,373)(1,239)(1,741)
Total adjusted earnings (non-GAAP)$208,561 $119,897 $152,991 
Diluted earnings per share (GAAP)$5.76 $3.26 $4.18 
Diluted adjusted earnings per share (non-GAAP)$5.97 $3.37 $4.38 



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 For the Years Ended December 31
NON-INTEREST INCOME FROM CORE OPERATIONS:2017 2016 2015
Total non-interest income (GAAP)$93,535
 $83,470
 $62,292
Exclude net loss (gain) on sale of securities2,080
 (843) 540
Exclude change in valuation of financial instruments carried at fair value2,844
 2,620
 813
Exclude gain on sale of branches, including related loans and deposits(12,189) —
 —
Total non-interest income from core operations (non-GAAP)$86,270
 $85,247
 $63,645
REVENUE FROM CORE OPERATIONS:     
Net interest income before provision for loan losses (GAAP)$393,034
 $375,069
 $242,279
Total non-interest income93,535
 83,470
 62,292
Total GAAP revenue486,569
 458,539
 304,571
Exclude net loss (gain) on sale of securities2,080
 (843) 540
Exclude change in valuation of financial instruments carried at fair value2,844
 2,620
 813
Exclude gain on sale of branches, including related loans and deposits(12,189) —
 —
Revenue from core operations (non-GAAP)$479,304
 $460,316
 $305,924
EARNINGS FROM CORE OPERATIONS:     
Net income (GAAP)$60,776
 $85,385
 $45,222
Exclude net loss (gain) on sale of securities2,080
 (843) 540
Exclude change in valuation of financial instruments carried at fair value2,844
 2,620
 813
Exclude gain on sale of branches, including related loans and deposits(12,189) —
 —
Exclude acquisition related costs—
 11,733
 26,110
Exclude related tax expense (benefit)2,615
 (4,857) (8,552)
        Exclude deferred tax asset revaluation due to the 2017 Tax Act42,630
 —
 —
Total earnings from core operations (non-GAAP)$98,756
 $94,038
 $64,133
Diluted earnings per share (GAAP)$1.84
 $2.52
 $1.89
Diluted core earnings per share (non-GAAP)$2.99
 $2.78
 $2.69
December 31
ADJUSTED EFFICIENCY RATIO:202120202019
Non-interest expense (GAAP)$380,101 $369,589 $357,728 
Exclude merger and acquisition-related costs(660)(2,062)(7,544)
Exclude COVID-19 expenses(436)(3,502)— 
Exclude Banner Forward expenses(11,604)— — 
Exclude CDI amortization(6,571)(7,732)(8,151)
Exclude state/municipal tax expense(4,343)(4,355)(3,880)
Exclude REO operations22 190 (303)
Exclude loss on extinguishment of debt(2,284)— (735)
Adjusted non-interest expense (non-GAAP)$354,225 $352,128 $337,115 
Net interest income (GAAP)$496,891 $481,301 $468,919 
Non-interest income (GAAP)96,416 98,616 81,941 
Total revenue593,307 579,917 550,860 
Exclude net gain on sale of securities(482)(1,012)(33)
Exclude net change in valuation of financial instruments carried at fair value(4,616)656 208 
Adjusted revenue (non-GAAP)$588,209 $579,561 $551,035 
Efficiency ratio (GAAP)64.06 %63.73 %64.94 %
Adjusted efficiency ratio (non-GAAP)60.22 %60.76 %61.18 %







 December 31
ADJUSTED EFFICIENCY RATIO:2017 2016 2015
Non-interest expense (GAAP)$327,305
 $322,869
 $236,600
Exclude acquisition-related costs—
 (11,733) (26,110)
Exclude CDI amortization(6,246) (7,061) (3,164)
Exclude state/municipal tax expense(2,594) (3,516) (1,889)
Exclude REO gain (loss)2,030
 (175) (397)
Adjusted non-interest expense (non-GAAP)$320,495
 $300,384
 $205,040
      
Net interest income before provision for loan losses (GAAP)$393,034
 $375,069
 $242,279
Non-interest income (GAAP)93,535
 83,470
 62,292
Total revenue486,569
 458,539
 304,571
Exclude net (gain) loss on sale of securities2,080
 (843) 540
Exclude net change in valuation of financial instruments carried at fair value2,844
 2,620
 813
    Exclude gain on sale of branches(12,189) —
 —
Adjusted revenue (non-GAAP)$479,304
 $460,316
 $305,924
      
Efficiency ratio (GAAP)67.27% 70.41% 77.68%
Adjusted efficiency ratio (non-GAAP)66.87% 65.26% 67.02%



Common shareholders'shareholders’ tangible equity per share and the ratio of common shareholders'shareholders’ tangible equity to tangible assets referred to in footnote (9) to Item 6, Selected Financial Data above are also non-GAAP financial measures. We calculate tangible common shareholders' tangible equity by excluding goodwill and other intangible assets from common shareholders'shareholders’ equity. We calculate tangible assets by excluding the balance of goodwill and other intangible assets from total assets. We believe that this is consistent with the treatment by our bank regulatory agencies, which exclude goodwill and other intangible assets from the calculation of risk-based capital ratios. Management believes that this non-GAAP financial measure provides information to investors that is useful in understanding the basis of our capital position (dollars in thousands).

 December 31
 202120202019
Shareholders’ equity (GAAP)$1,690,327 $1,666,264 $1,594,034 
Exclude goodwill and other intangible assets, net387,976 394,547 402,279 
Common shareholders’ tangible equity (non-GAAP)$1,302,351 $1,271,717 $1,191,755 
Total assets (GAAP)$16,804,872 $15,031,623 $12,604,031 
Exclude goodwill and other intangible assets, net387,976 394,547 402,279 
Total tangible assets (non-GAAP)$16,416,896 $14,637,076 $12,201,752 
Common shareholders’ equity to total assets (GAAP)10.06 %11.09 %12.65 %
Common shareholders’ tangible equity to tangible assets (non-GAAP)7.93 %8.69 %9.77 %
Common shares outstanding34,252,632 35,159,200 35,751,576 
Common shareholders’ equity (book value) per share (GAAP)$49.35 $47.39 $44.59 
Common shareholders’ tangible equity (tangible book value) per share (non-GAAP)$38.02 $36.17 $33.33 

 December 31
 2017 2016 2015
Shareholders’ equity (GAAP)$1,272,626
 $1,305,710
 $1,300,059
Exclude goodwill and other intangible assets, net265,314
 274,745
 285,210
Common shareholders’ tangible equity (non-GAAP)$1,007,312
 $1,030,965
 $1,014,849
Total assets (GAAP)$9,763,209
 $9,793,668
 $9,796,298
Exclude goodwill and other intangible assets, net265,314
 274,745
 285,210
Total tangible assets (non-GAAP)$9,497,895
 $9,518,923
 $9,511,088
Common shareholders' equity to total assets (GAAP)13.03% 13.33% 13.27%
Common shareholders’ tangible equity to tangible assets (non-GAAP)10.61% 10.83% 10.67%
Common shares outstanding32,726,485
 33,193,387
 34,242,255
Common shareholders' equity per share (GAAP)$38.89
 $39.34
 $37.97
Common shareholders' tangible equity per share (non-GAAP)$30.78
 $31.06
 $29.64

Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Notes to the Consolidated Financial Statements contained in Item IV of this Form 10-K.



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Summary of Critical Accounting Policies and Estimates


In the opinion of management, the accompanying Consolidated Statements of Financial Condition and related Consolidated Statements of Operations, Comprehensive Income, Changes in Shareholders’ Equity and Cash Flows reflect all adjustments (which include reclassification and normal recurring adjustments) that are necessary for a fair presentation in conformity with GAAP.  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 our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments.  In particular, management has identified severalcertain accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our financial statements.  These policies relate to (i) the methodology for the recognition of interest income, (ii) determination of the provision and allowance for loan losses, (iii) the valuation of financial assets and liabilities recorded at fair value, including OTTI losses, (iv) the valuation of intangibles, such as goodwill, core deposit intangibles, favorable leasehold intangibles and mortgage servicing rights, (v) the valuation of real estate held for sale, (vi) the valuation of assets and liabilities acquired in business combinations and subsequent recognition of related income and expense, and (vii) the valuation of or recognition of deferred tax assets and liabilities.  These policies and judgments, estimates and assumptions are described in greater detail below.  Management believes the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate based on the factual circumstances at the time.  However, given the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition.  Further, subsequent changes in economic or market conditions could have a material impact on these estimates and our financial condition and operating results in future periods.  There have been no significant changes in our application of accounting policies since December 31, 2016.2020.  For additional information concerning critical accounting policies, see Notes 1, 3, 5, 12, 17 and 18 of the Selected Notes to the Consolidated Financial Statements and the following:


Interest Income:   (Notes 1 and 5)  Interest on loans and securities is accrued as earned unless management doubts the collectability of the asset or the unpaid interest.  Interest accruals on loans are generally discontinued when loans become 90 days past due for payment of interest and the loans are then placed on nonaccrual status.  All previously accrued but uncollected interest is deducted from interest income upon transfer to nonaccrual status.  For any future payments collected, interest income is recognized only upon management’s assessment that there is a strong likelihood that the full amount of a loan will be repaid or recovered.  Management's assessment of the likelihood of full repayment involves judgment including determining the fair value of the underlying collateral which can be impacted by the economic environment. A loan may be put on nonaccrual status sooner than this policy would dictate if, in management’s judgment, the amounts owed, principal or interest, may be uncollectable.  While less common, similar interest reversal and nonaccrual treatment is applied to investment securities if their ultimate collectability becomes questionable.

Provision and Allowance for Loan Losses:  Credit Losses - Loans: (Notes 1 and 5)Note 4) The methodology for determining the allowance for loancredit 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 loancredit 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 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 loancredit losses reflects the amount required to maintain the allowance loan for credit losses at an appropriate level based upon management’s evaluation of the adequacy of generalcollective and specificindividual loss reserves.  Determining the amount of the allowance for loan losses involves a high degree of judgment. Among the material estimates required to establish the allowance for loan losses are: overall economic conditions; value of collateral; strength of guarantors; loss exposure at default; the amount and timing of future cash flows on impaired loans; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. We haveThe Company has established systematic methodologies for the determination of the adequacy of ourthe Company’s allowance for loancredit losses.  The methodologies are set forth in a formal policy and take into consideration the need for an overall generala valuation allowance for loans evaluated on a collective (pool) basis which have similar risk characteristics as well as specific allowances that are tied to individual problem loans.  We increase ourloans that do not share risk characteristics.

Management estimates the allowance for loancredit losses by charging provisions for probable loan losses against our income.

- loans using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for loancredit losses - loans is maintained at a level sufficient to provide for probableexpected credit losses over the life of the loan based on evaluating knownhistorical credit loss experience and inherent risksmaking adjustments to historical loss information for differences in the loan portfolio and upon our continuing analysis ofspecific risk characteristics in the factors underlying the quality of thecurrent loan portfolio.  These factors include, among others, changes in the size and composition of the loan portfolio, differences in underwriting standards, delinquency rates, actual loan loss experience and current and economic conditions, detailed analysisconditions.

The allowance for credit losses - loans is measured on a collective (pool) basis when similar risk characteristics exist. In estimating the component of individual loans for which full collectability may not be assured, and determination of the existence and realizable value of the collateral and guarantees securing the loans.  Realized losses related to specific assets are applied as a reduction of the carrying value of the assets and charged immediately against the allowance for loan loss reserve.  Recoveries on previously charged offcredit losses for loans that share common risk characteristics, loans are credited topooled based on loan type and areas of risk concentration. For loans evaluated collectively, the allowance for credit losses - loans is calculated using life of loan historical losses adjusted for economic forecasts and current conditions.

For commercial real estate, multifamily real estate, construction and land, commercial business and agricultural loans with risk rating segmentation, historical credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and risk rating. For one- to four- family residential loans, 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 back to 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 uses a third party baseline economic forecast as its standard reasonable and supportable forecast. Management does consider other more optimistic and pessimistic economic forecasts, however, when evaluating the economic indicators and under certain circumstances will probability weight the various forecasts to arrive at the forecast that most reflects management’s expectations of future conditions. The selection of a more optimistic or pessimistic economic forecast would result in a lower or higher allowance for credit losses. The reserve is based upon factors and trends identified by us at the time financial statements are prepared.  Although we use the best information available, future adjustments toof a protracted slump economic forecast would have increased the allowance for loancredit losses may- loans by approximately 4% as of December 31, 2021, where the use of a stronger near-term growth economic forecast would result in a
50

negligible decrease in the allowance for credit losses - loans as of December 31, 2021. The allowance for credit losses - loans is then adjusted for the period in which those forecasts are considered to be necessary due to economic, operating, regulatoryreasonable and other conditions beyond our control.  The adequacy of general and specific reserves is based on our continuing evaluationsupportable. To the extent the lives of the pertinentloans 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 (QE) factors underlyingfor each loan category to adjust for differences between the qualityhistorical periods used to calculate historical loss rates and expected conditions over the remaining lives of the loan portfolio as well as individual review of certain large balance loans. Loans are considered impaired when, based on current information and events, we determine that it is probable that we will be unable to collect all amounts due according toloans in the contractual terms ofportfolio. In determining the loan agreement.  Factors involved in determining impairment include, but are not limited to,aggregate adjustment needed management considers the financial condition of the borrower,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 less selling costson 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 process, the quality of the Company’s management and lending staff, and the current status ofregulatory and economic environments in the economy.  Impaired loansareas in which the Company’s lending activities are measuredconcentrated. Management uses a scale to assign QE factor adjustments based on the present valuelevel of expected future cash flows discounted at the loan’s effective interest rateestimated impact which requires a significant amount of judgment. Generally, adjustments to QE factors are made in five basis-point increments. Some QE factors impact all loan segments equally while others may impact some loan segments more or asless than others. If management’s judgment were different for a practical expedient, at the loan’s observable market priceQE factor that impacts all loan segments equally, a five basis-point change in this QE factor would increase or the fair value of collateral if the loan is collateral dependent.  We continue to assess the collateral of these loans and update our appraisals on these loans on an annual basis. To the extent the property values continue to decline, there could be additional losses on these impaired loans, which may be material. Subsequent changes in the value of impaired loans are included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported.  Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment.  Loans that are collectively evaluated for impairment include residential real estate and consumer loans and, as appropriate, smaller balance non-homogeneous loans.  Larger balance non-homogeneous


residential construction and land, commercial real estate, commercial business loans and unsecured loans are individually evaluated for impairment.  

Our methodology for assessing the appropriateness ofdecrease the allowance for loancredit losses consists of several key elements, which include specific allowances, an allocated formula allowance and an unallocated allowance.  Losses on specific loans are provided for when the losses are probable and estimable.  General loan loss reserves are established to provide for inherent loan portfolio risks not specifically provided for.  The level of general reserves is based on analysis of potential exposures existing in our loan portfolio including evaluation of historical trends, current market conditions and other relevant factors identified by us at the time the financial statements are prepared.  The formula allowance is calculated by applying loss factors to outstanding loans, excluding those loans that are subject to individual analysis for specific allowances.  Loss factors are based on our historical loss experience adjusted for significant environmental considerations, including the experience of other banking organizations, which in our judgment affect the collectability of the loan portfolio3.4% as of the evaluation date.  The unallocated allowance is based upon our evaluation of various factors that are not directly measured in the determination of the formula and specific allowances.  This methodology may result in actual losses or recoveries differing significantly from the allowance for loan losses in the Consolidated Financial Statements.December 31, 2021.


While we believe the estimates and assumptions used in our determination of the adequacy of the allowance for loan losses are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations.  In addition, the determination of the amount of the Banks’ allowance for loan losses is subject to review by bank regulators as part of the routine examination process, which may result in the adjustment of reserves based upon their judgment of information available to them at the time of their examination.

Fair Value Accounting and Measurement: (Notes 1 and 18)Note 16) We use fair value measurements to record fair value adjustments to certain financial assets and liabilities and to determine fair value disclosures.  We includeliabilities.  A hierarchical disclosure framework associated with the level of pricing observability is utilized in the Notes to the Consolidated Financial Statements information about the extent to which fair value is used to measure financial assets and liabilities, the valuation methodologies used and the impact on our results of operations and financial condition.  Additionally, formeasuring financial instruments not recorded at fair value we disclose, where required, our estimatevalue. The degree of their fair value.  For more information regarding fair value accounting, please refer to Note 18judgment utilized in the Notes to the Consolidated Financial Statements.

Business Combinations: (Notes 1) Business combinations are accounted for using the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed, both tangible and intangible, and consideration exchanged are recorded at acquisition date fair values. The determination ofmeasuring the fair value of assets acquiredfinancial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and liabilities assumed involvesa lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no pricing observability and a higher degree of judgment utilized in measuring fair value. Determining the fair value of financial instruments with unobservable inputs requires a significant amount of judgment. The excess purchase consideration overThis includes the discount rate used to fair value of net assets acquired is recorded as goodwill. In the event that the fair value of net assets acquired exceeds the purchase price, including fair value of liabilities assumed, a bargain purchase gain is recorded on that acquisition. Expenses incurred in connection with a business combination are expensed as incurred. Changes in deferred tax asset valuation allowances related to acquired tax uncertainties are recognized in net income after the measurement period.

Acquired Loans:(Notes 5)Purchased loans, including loans acquired in business combinations, are recorded at their fair value at the acquisition date. Credit discounts are includedour trust preferred securities and junior subordinated debentures. A 25 basis-point increase or decrease in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date. Establishing the fair value of acquired loan involves a significant amount of judgment, including determining the credit discount. The credit discount is 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 discountrate used to calculate the fair value of our trust preferred securities would result in a $884,000 decrease or increase in the acquired loans. Acquired loans are evaluated upon acquisition and classifiedreporting fair value as either purchased credit-impairedof December 31, 2021, with an offsetting adjustment to our non-interest income. A 25 basis-point increase or purchased non-credit-impaired. Purchased credit-impaired (PCI) loans reflect credit deterioration since origination such that it is probable at acquisition thatdecrease in the Company will be unablediscount rate used to collect all contractually required payments. The accounting for PCI loans is periodically updated for changes in cash flow expectations, and reflected in interest income over the life of the loans as accretable yield. Any subsequent decreases in expected cash flows attributable to credit deterioration are recognized by recording a provision for loan losses.

For purchased non-credit-impaired loans, the difference betweencalculate the fair value and unpaid principal balance of our junior subordinated debentures would result in a $2.2 million decrease or increase in the loan at the acquisition date is amortized or accretedreported fair value as of December 31, 2021, with an offsetting adjustment to interest income over the life of the loans. Any subsequent deterioration in credit quality is recognized by recording a provision for loan losses.our accumulated other comprehensive income.


Goodwill: (Notes 1 and 17)15) Goodwill represents the excess of the purchase consideration paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination and is not amortized but is reviewed annually, or more frequently as current circumstances and conditions warrant, for impairment. 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. Such trigger events considered by management could include: a) macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, or other developments in equity and credit markets; b) industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (consider in both absolute terms and relative to peers), a change in the market for an entity’s products or services, or a regulatory or political development; c) cost factors such as increases in labor, or other costs that have a negative effect on earnings and cash flows; d) overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods; e) other relevant entity-specific events such as changes in management, key personnel, strategy, or clients; or litigation; f) events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing of all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit; g) if applicable, a sustained decrease in share price (consider in both absolute terms and relative to peers). If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed. The quantitative goodwill impairment test is used to identify the existence of impairment and the amount of impairment loss and compares the reporting unit'sunit’s estimated fair values, including goodwill, to its carrying amount. If a quantitative goodwill impairment test is required, management would engage a third-party valuation firm to estimate the fair value of the reporting unit. Various valuation methodologies are considered when estimating the reporting unit’s fair value. These methodologies could include a comparable transaction approach, a control premium approach and a discounted cash flow approach, as well as others. The specific factors used in these various valuation methodologies that require judgment include the selection of comparable market transactions, discount rates, earnings capitalization rates and the future projected earnings of the reporting unit. Changes in these assumptions could result in changes to the estimated fair value of the reporting unit. If the fair value exceeds the carry amount, then goodwill is not considered impaired. 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.

Other Intangible Assets:(Notes 1 and 17) Other intangible assets consists primarily The Company completed an assessment of core deposit intangibles (CDI), which are amounts recorded in business combinations or deposit purchase transactions related to the value of transaction-related depositsqualitative factors and the valuepotential triggering events noted above as of the


customer relationships associated with the deposits.  Core deposit intangibles are being amortized on an accelerated basis over a weighted average estimated useful life of eight years.  The determination of the estimated useful life of the core deposit intangible involves judgment by management. The actual life of the core deposit intangible could vary significantly from the estimated life. These assets are reviewed at least annually for events or circumstancesDecember 31, 2021 and concluded 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.

Other intangibles also include favorable leasehold intangibles (LHI). LHI represents the value assigned to leases assumed in an acquisition in which the lease terms are favorable compared to a market lease at the date of acquisition. LHIno further analysis was required as it is amortized over the underlying lease term and is reviewed at least annually for events or circumstancesmore likely than not that could impair the value.

Mortgage Servicing Rights: (Note 17) Mortgage servicing rights (MSRs) are recognized as separate assets when rights are acquired through purchase or through sale of loans.  Generally, purchased MSRs are capitalized at the cost to acquire the rights.  For sales of mortgage loans, the value of the MSR is estimated and capitalized.  Fair value is based on market prices for comparable mortgage servicing contracts.  The fair value of the MSRs includes an estimate of the life of the underlying loans which is affected by estimated prepayment speeds. The estimate of prepayment speeds are based on current market conditions. Actual market conditions could vary significantly from current conditions which could result in the estimated life of the underlying loans being different which would change the fair value of Banner, the MSR. Capitalized MSRs are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.

Real Estate Owned Held for Sale:  (Notes 1 and 6)  Property acquired by foreclosure or deed in lieu of foreclosure is recorded at the estimated fair value of the property, less expected selling costs.  Development and improvement costs relating to the property may be capitalized, while other holding costs are expensed.  The carrying value of the property is periodically evaluated by management, property values are influenced by current economic and market conditions, changes in economic conditions could result in a decline in property value. To the extent that property values decline, allowances are established to reducereporting unit, exceeds the carrying value to net realizable value.  Gains or losses at the time the property is sold are charged or credited to operations in the period in which they are realized.  The amounts the Banks will ultimately recover from real estate held for sale may differ substantially from the carrying value of the assets because of market factors beyond the Banks’ control or because of changes in the Banks’ strategies for recovering the investment.


Income Taxes and Deferred Taxes: (Note 12)11) The Company and its wholly-owned subsidiaries file consolidated U.S. federal income tax returns, as well as state income tax returns in Oregon, California, Utah, Idaho and Idaho.Montana.  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 that includes the enactment date.  A 1% change in tax rates would result in a $2.5 million increase or decrease in our net deferred tax asset as
51

of December 31, 2021. We assess the appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other pertinent information and maintain tax accruals consistent with our evaluation. Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations by the tax authorities and newly enacted statutory, judicial and regulatory guidance that could impact the relative merits of tax positions. These changes, when they occur, impact accrued taxes and can materially affect our operating results. A valuation allowance is required to be recognized if it is “moremore likely than not”not that all or a portion of our deferred tax assets will not be realized. The evaluation pertaining to the tax expense and related deferred tax asset and liability balances involves a high degree of judgment and subjectivity around the measurement and resolution of these matters. This includes an evaluation of our ability to use our net operating loss carryforwards. The ultimate realization of the deferred tax assets is dependent upon the existence, or generation, of taxable income in the periods when those temporary differences and net operating loss and credit carryforwards are deductible.


Legal Contingencies: In December 2017, the federal government enactednormal course of our business, we have various legal proceedings and other contingent matters pending. We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We assess our potential liability by analyzing our litigation and regulatory matters using available information. We develop our views on estimated losses in consultation with outside counsel handling our defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. The estimated losses often involve a level of subjectivity and usually are a range of reasonable losses and not an exact number, in those situations we accrue the 2017 Tax Act, which among other provisions, reducedbest estimate within the federal marginal corporate income tax rate from 35% to 21%. As a resultrange or the low end of the passage ofrange if no estimate within the 2017 Tax Act, the Company recorded a $42.6 million charge for the revaluation of its net deferred tax to account for the future impact of the decrease in the corporate income tax rate and other provisions of the legislation. The charge was recorded as an increase to tax expense and reduction of the net deferred asset. The Company’s financial results reflect the income tax effects of the 2017 Tax Act for which the accountingrange is complete and provisional amounts for those specific income tax effects of the 2017 Tax Act for which the accounting is incomplete but a reasonable estimate could be determined. As a result, these amounts could be adjusted during the measurement period, which will end in December 2018.  The Company did not identify any items for which the income tax effects of the 2017 Tax Act have not been completed and a reasonable estimate could not be determined as of December 31, 2017. The $42.6 million charge recorded by the Company includes $4.2 million of provisional income tax expense related to Alternative Minimum Tax (AMT) credits that are limited under Internal Revenue Code of 1986 ("Code") Section 383, which resulted in a reduction in the AMT deferred tax asset.  The utilization of the limited AMT credits under the refundable AMT credit law is uncertain and will require further analysis as guidance is released during 2018.better than another.


Accounting Standards Recently Adopted or Issued - See Note 2 of the Notes to the Consolidated Financial Statements for a description of recently adopted and new accounting pronouncements, including the respective dates of adoption and expected effects on the Company'sCompany’s financial position and results of operations.


Comparison of Financial Condition at December 31, 20172021 and 20162020


General. Total assets decreasedincreased to $9.76$16.80 billion at December 31, 2017,2021, compared to $9.79$15.03 billion at December 31, 2016.2020.  The modest decreaseincrease in assets in 2017 reflects our strategy to reduce total assets below $10.0 billion at December 31, 2017. The decrease in 20172021 was largely the


result of excess liquidity from increases in retail deposits being invested in short term investments, including interest-bearing deposits and securities, partially offset by a decrease in total loans held for sale and the net deferred tax asset which was partially offset by increases in net loans and investment securities.receivable due to SBA PPP loan forgiveness.


NetTotal loans receivable (gross loans less deferred fees and discounts and allowance for loan losses and excluding loans held for sale) increased $144.7decreased $786.2 million, or 2%8%, to $7.51$9.08 billion at December 31, 2017,2021, from $7.37$9.87 billion at December 31, 2016.2020.  The increasedecrease in nettotal loans included increases of $84.4 millionin construction loans, $72.0 million inreceivable reflects decreased commercial business loans, $66.0 million inloan balances due to SBA PPP loan forgiveness repayments, as well as decreased commercial construction, multifamily construction, one-to-four family residential, consumer, and agricultural business loan balances, partially offset by increased commercial real estate, multifamily real estate, loans and $35.2 million in one- to four-family loans. The increase in theseconstruction, and land and land development loan types was partially offset by decreases of $117.5balances. Excluding SBA PPP loans, total loans receivable increased $124.3 million in commercial real estate loans and $30.8 million in agricultural loans. The increase in construction loans was particularly helpful toduring the net interest margin as interest rates, loan fees and the velocity of turnover in this lending activity are generally higher than for most other categories of loans.year ended December 31, 2021. Loans held for sale decreased to $40.7$96.5 million at December 31, 2017,2021, compared to $246.4$243.8 million at December 31, 2016,2020, principally as a result of one- to four- family and multifamily loan sales that outpaced loan originations and decreased originations ofexceeding one- to four-family loans reflecting reduced refinance activity due to interest rate increases.four- family and multifamily originations. Loans held for sale at December 31, 20172021 included $12.9$49.9 million of multifamily loans and $27.8$46.6 million of one- to four-family loans.loans, compared to $122.0 million of multifamily loans and $121.8 million of one- to four-family loans at December 31, 2020.


Securities increased to $1.20$4.19 billion at December 31, 2017,2021, from $1.10$2.77 billion at December 31, 2016, and2020, as the Company invested excess liquidity. The aggregate total of securities and interest-bearing deposits increased $94.1 million,$2.57 billion, or 8%70%, to $1.26$6.26 billion at December 31, 2017,2021, compared to $1.17$3.69 billion a year earlier.  The increase in securities balances reflects security purchases in the first part of the year exceeding paydowns and maturities during the year as well security sales particularly during the fourth quarter as the Company deleveraged the balance sheet primarily through reductions in our investment portfolio consistent with our strategy to remain below $10 billion in assets at December 31, 2017. The average effective duration of Banner'sour securities portfolio was approximately 4.14.6 years at December 31, 2017. Primarily reflecting significant adjustments in prior years, the2021. The fair value of our trading securities was $4.9 million$222,000 less than their amortized cost at December 31, 2017.2021.  In addition, fair value adjustments for securities designated as available-for-sale reflected a decrease of $3.3$80.1 million for the year ended December 31, 2017,2021, which was included net of the associated tax benefit of $1.2$19.2 million as a component of other comprehensive income, and largely occurred as a result of slightly increaseddecreased market interest rates. Periodically, weyields and spreads on certain types of securities. We also acquire securities (primarily municipal bonds) which are designated as held-to-maturity and this portfolio decreasedincreased by $7.6$99.2 million from the prior year-end balance. (See Notes 43 and 1816 of the Notes to the Consolidated Financial Statements.)


Goodwill was $373.1 million at both December 31, 2021 and December 31, 2020. Other intangibles decreased $1.9$6.6 million to $242.7$14.9 million at December 31, 2017,2021, compared to $244.6$21.4 million at December 31, 2016. The decrease during the year represents goodwill allocated to the sale of the Utah branches. Other intangibles decreased $7.5 million to $22.7 million at December 31, 2017, compared to $30.2 million at December 31, 2016,2020, primarily due to scheduled amortization of CDI, leasehold intangibles and the derecognition of CDI associated with the sold Utah branches.CDI.


Deposits increased $62.0 million,$1.76 billion, or 1%14%, to $8.18$14.33 billion at December 31, 2017,2021, from $8.12$12.57 billion at December 31, 2016, largely as a result of2020, primarily due to SBA PPP loan funds deposited into client accounts, fiscal stimulus payments, and an increase in client deposit accounts due to reduced business investment, fiscal stimulus payments and changes in consumer spending habits during the organic growth in core deposits partially offset by the sale of the Utah branches which included $160.3 million in related deposits, and declines in certificate of deposits.COVID-19 pandemic.  Core deposits increased to 88%were 94% of total deposits at December 31, 2017,2021, compared to 87%93% of total deposits one year earlier. Non-interest-bearing deposits increased by $125.1$892.3 million, or 4%16%, to $3.27$6.39 billion from $3.14$5.49 billion at December 31, 2020; interest-bearing transaction and savings accounts increased by $15.3$944.1 million, to $3.95$7.10 billion at December 31, 20172021 from $3.94$6.16 billion at December 31, 2016,2020; and certificates of deposit decreased $78.4$76.7 million, or 7%8%, to $966.9$838.6 million at December 31, 20172021 from $1.05 billion at December 31, 2016. Brokered deposits increased to $57.2$915.3 million at December 31, 2017, compared to $34.1 million a year earlier.2020.


FHLB advances decreased $54.0$100.0 million, to $202,000 at December 31, 2017 from $54.2$50.0 million at December 31, 2016,2021 from $150.0 million at December 31, 2020, as borrowings have been allowed to mature without replacement due to increased deposits were used to fund a larger portion of the balance sheet.core deposits. Other borrowings, consisting of retail and wholesale repurchase agreements primarily related to customerclient cash management accounts, decreased $9.8increased $79.7 million to $95.9$264.5 million at December 31, 2017,2021, compared to $105.7$184.8 million at December 31, 2016. Junior2020. On June 30, 2020, Banner issued and sold in an underwritten offer subordinated notes, resulting in net proceeds, after underwriting discounts and offering expenses, of $98.1 million. No additional junior subordinated debentures, which are
52

carried at fair value, were issued or matured during the year ended December 31, 2021; however, $8.2 million of junior subordinated debentures were redeemed during the year. In addition, the estimated fair value of these instruments increased $3.5by $10.4 million, to $98.7reflecting tighter market spreads. Junior subordinated debentures totaled $119.8 million at December 31, 2017 from $95.22021 compared to $117.0 million a year ago.at December 31, 2020.  Subsequent to December 31, 2021, we redeemed an additional $50.5 million of junior subordinated debentures. For more information, see Notes 8, 9 10 and 1110 of the Notes to the Consolidated Financial Statements.


Total shareholders’ equity decreased $33.1increased $24.1 million, to $1.27$1.69 billion at December 31, 20172021, compared to $1.31$1.67 billion at December 31, 2016.2020. The decreaseincrease in equity primarily reflects $201.0 million of net income, partially offset by the payment$68.9 million decrease in accumulated other comprehensive income, primarily representing the decrease in the fair value of $66.4securities available-for-sale, net of tax, the accrual of $57.6 million of dividends to common shareholders and the repurchase of $31.0$56.5 million of common stock which were partially offset by net income of $60.8 million.stock. In the year ended December 31, 2017,2021, we repurchased 545,1661,050,000 shares of our common stock at an average price of $56.91$53.84 per share. Tangible common shareholders'shareholders’ equity (a non-GAAP financial measure), which excludes goodwill and other intangible assets decreased $23.7 million to $1.01was $1.30 billion, or 10.61%7.93% of tangible assets at December 31, 2017,2021, compared to $1.03$1.27 billion, or 10.83%8.69% at December 31, 2016. Banner's2020. Banner’s tangible book value per share (a non-GAAP financial measure) was $30.78$38.02 at December 31, 2017,2021, compared to $31.06$36.17 per share a year ago.


Investments.  At December 31, 2017,2021, our consolidated investment securities portfolio totaled $1.20$4.19 billion and consisted principally of mortgage-backed and mortgage-related securities and municipal bonds and to a lesser extent U.S. Government and agency obligations, mortgage-backed and mortgage-related securities, municipal bonds, corporate debt obligations, and asset-backed securities.  From time to time, ourOur investment levels may be increased or decreased depending upon yields available on investment alternatives and management’s projections as to the demand for funds to be used in our loan origination, deposit and other activities.  During the year ended December 31, 2017,2021, our aggregate investment in securities increased $103.2 million,$1.42 billion. Securities purchased increased as the security purchaseswe deployed excess balance sheet liquidity during the first part of the year exceeded sales that occurred during the fourth quarter of 2017 as part of our strategy to reduce assets below $10 billion atended December 31, 2017.2021. Holdings of mortgage-backed securities increased $142.7 million and$1.21 billion, U.S. Government and agency obligations increased $14.1 million. Partially offsetting these increases,$59.6 million, municipal bonds decreased $48.5increased $54.7 million, corporate bondsdebt obligations decreased $3.9$102.6 million and asset-backed securities decreased $1.2increased $197.0 million.


U.S. Government and Agency Obligations:  Our portfolio of U.S. Government and agency obligations had a carrying value of $73.5$201.6 million (with an amortized cost of $73.9$201.4 million) at December 31, 2017,2021, a weighted average contractual maturity of 15.510.7 years and a weighted average


coupon rate of 2.51%1.05%.  Many of the U.S. Government and agency obligations we own include call features which allow the issuing agency the right to call the securities at various dates prior to the final maturity.


Mortgage-Backed Obligations:  At December 31, 2017,2021, our mortgage-backed and mortgage-related securities had a carrying value of $805.0 million$2.90 billion ($811.4 million2.93 billion at amortized cost, with a net fair value adjustment of $6.4$32.2 million).  The weighted average coupon rate of these securities was 3.29%2.24% and the weighted average contractual maturity was 21.423.3 years, although we receive principal payments on these securities each month resulting in a much shorter expected average life.  As of December 31, 2017, 96%2021, 94% of the mortgage-backed and mortgage-related securities pay interest at a fixed rate and 4%6% pay at an adjustable interest rate.


Municipal Bonds:  The carrying value of our tax-exempt bonds at December 31, 20172021 was $212.0$605.8 million ($211.8592.0 million at amortized cost), and was comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by revenues from the specific project being financed) issued by cities and counties and various housing authorities, and hospital, school, water and sanitation districts.  We also had taxable bonds in our municipal bond portfolio, which at December 31, 20172021 had a carrying value of $46.7$123.4 million (also $46.7($122.4 million at amortized cost).  Many of our qualifying municipal bonds are not rated by a nationally recognized credit rating agency due to the smaller size of the total issuance and a portion of these bonds have been acquired through direct private placement by the issuers. We have not experienced any defaults or payment deferrals on our current portfolio of municipal bonds.  Our combined municipal bond portfolio is geographically diverse, with the majority within the states of Washington, Oregon, IdahoTexas and California. At December 31, 2017,2021, our municipal bond portfolio, including taxable and tax-exempt, had a weighted average maturity of approximately 12.019.5 years and a weighted average coupon rate of 4.21%3.37%.


Corporate Bonds:  Our corporate bond portfolio had a carrying value of $31.4$147.4 million ($36.5144.7 million at amortized cost, with a net fair value adjustment of $5.1$2.7 million) at December 31, 2017. Long-term adjustable-rate capital securities issued by financial institutions make up over half of our corporate bond portfolio.  The market for these capital securities deteriorated significantly in 2008 and 2009 and in our opinion has not completely returned to an efficiently functioning state.  As a result, the fair value estimates for many of these securities are more subjective.  Nonetheless, it is apparent that the values have declined appreciably since purchase, which is reflected in our financial statements and results of operations. During 2015 we had approximately $1.9 million of recovery in our fair value adjustments as a result of the full payoff and sales of several investments in similar collateralized debt obligations that had previously been valued substantially below their amortized cost.2021.  (See “Critical Accounting Policies” above and Note 1816 of the Notes to the Consolidated Financial Statements.)  At December 31, 2017,2021, the portfolio had a weighted average maturity of 17.69.6 years and a weighted average coupon rate of 2.98%3.55%.


Asset-Backed Securities:  At December 31, 2017,2021, our asset-backed securities portfolio had a carrying value of $27.8$206.4 million (with an amortized cost of $27.7$206.4 million), and was comprised of collateralized loan obligations, securitized pools of student loans issued or guaranteed by the Student Loan Marketing Association (SLMA) and credit card receivables.  The weighted average coupon rate of these securities was 2.27%1.84% and the weighted average contractual maturity was 8.413.0 years. Approximately 64%At December 31, 2021, 100% of these securities havehad adjustable interest rates tied to three-month LIBOR while the remaining securities have fixed interest rates.LIBOR.



53


The following tables set forth certain information regarding carrying values and percentage of total carrying values of our portfolio of securities—trading and securities—available-for-sale, both carried at estimated fair market value, and securities—held-to-maturity, carried at amortized cost as of December 31, 2017, 20162021, 2020 and 20152019 (dollars in thousands):


Table 1: Securities
December 31
 202120202019
 Carrying
Value		Percent of
Total		Carrying
Value		Percent of
Total		Carrying
Value		Percent of
Total
Trading
Corporate bonds$26,981 100.0 %$24,980 100.0 %$25,636 100.0 %
Total securities—trading$26,981 100.0 %$24,980 100.0 %$25,636 100.0 %
Available-for-Sale
U.S. Government and agency obligations$201,332 5.5 %$141,735 6.1 %$89,598 5.8 %
Municipal bonds308,612 8.5 303,518 13.1 107,157 6.9 
Corporate bonds117,347 3.2 221,769 9.5 4,365 0.3 
Mortgage-backed or related securities2,805,268 77.1 1,646,152 70.9 1,342,311 86.5 
Asset-backed securities206,434 5.7 9,419 0.4 8,126 0.5 
Total securities—available-for-sale$3,638,993 100.0 %$2,322,593 100.0 %$1,551,557 100.0 %
Held-to-Maturity
U.S. Government and agency obligations$316 0.1 %$340 0.1 %$385 0.2 %
Municipal bonds420,555 80.6 370,998 87.9 177,208 75.0 
Corporate bonds3,092 0.6 3,222 0.8 3,353 1.4 
Mortgage-backed or related securities97,392 18.7 47,247 11.2 55,148 23.4 
Total securities—held-to-maturity$521,355 100.0 %$421,807 100.0 %$236,094 100.0 %
Estimated market value$541,853  $448,681  $237,805  


54
 December 31
 2017 2016 2015
 
Carrying
Value
 
Percent of
Total
 
Carrying
Value
 
Percent of
Total
 
Carrying
Value
 
Percent of
Total
Trading           
U.S. Government and agency obligations$—
 —% $1,326
 5.4% $1,368
 4.0%
Municipal bonds100
 0.5
 335
 1.4
 341
 1.0
Corporate bonds22,058
 98.8
 21,143
 86.0
 18,699
 54.8
Mortgage-backed or related securities—
 —
 1,641
 6.7
 13,663
 40.0
Equity securities160
 0.7
 123
 0.5
 63
 0.2
Total securities—trading$22,318
 100.0% $24,568
 100.0% $34,134
 100.0%

Available-for-Sale           
U.S. Government and agency obligations$72,466
 7.9% $56,978
 7.1% $30,231
 2.6%
Municipal bonds68,733
 7.5
 109,853
 13.6
 143,319
 12.5
Corporate bonds5,393
 0.6
 10,283
 1.3
 15,981
 1.4
Mortgage-backed or related securities739,557
 80.4
 594,712
 73.7
 918,259
 80.3
Asset-backed securities27,758
 3.0
 28,993
 3.6
 30,685
 2.7
Equity securities5,578
 0.6
 5,609
 0.7
 5,488
 0.5
Total securities—available-for-sale$919,485
 100.0% $806,428
 100.0% $1,143,963
 100.0%
Held-to-Maturity           
U.S. Government and agency obligations$1,024
 0.4% $1,065
 0.4% $1,106
 0.5%
Municipal bonds189,860
 73.0
 196,989
 73.5
 162,778
 73.8
Corporate bonds3,978
 1.5
 3,876
 1.5
 4,273
 1.9
Mortgage-backed or related securities65,409
 25.1
 65,943
 24.6
 52,509
 23.8
Total securities—held-to-maturity$260,271
 100.0% $267,873
 100.0% $220,666
 100.0%
Estimated market value$262,188
  
 $270,528
  
 $226,627
  




The following table shows the maturity or period to repricing of our consolidated portfolio of available-for-sale and held-to-maturity securities as of December 31, 20172021 (dollars in thousands):


Table 2:  Securities—Maturity/Securities Available-for-Sale and Held-to-Maturity —Maturity/Repricing and Rates
December 31, 2021
 One Year or LessAfter One to Five YearsAfter Five to Ten YearsAfter Ten YearsTotal
 Carrying ValueWeighted Average YieldCarrying
Value		Weighted Average YieldCarrying
Value		Weighted Average YieldCarrying
Value		Weighted Average YieldCarrying ValueWeighted Average Yield
U.S. Government and agency obligations$— — %$1,223 2.65 %$175,366 0.51 %$25,059 0.72 %$201,648 0.55 %
Municipal bonds:          
Taxable4,925 0.70 31,827 3.10 2,210 3.45 84,401 2.73 123,363 2.76 
Tax exempt (1)
2,832 2.76 15,588 3.01 42,546 3.65 544,838 3.19 605,804 3.22 
 7,757 1.45 47,415 3.07 44,756 3.64 629,239 3.13 729,167 3.14 
Corporate bonds10,851 4.82 34,367 3.93 73,679 3.76 1,542 — 120,439 4.45 
Mortgage-backed or related securities7,592 2.62 177,368 3.17 554,161 1.53 2,163,539 1.89 2,902,660 1.90 
Asset-backed securities— — 3,382 1.70 21,000 1.97 182,052 1.88 206,434 1.89 
Total securities available-for-sale and held-to-maturity—carrying value$26,200 3.19 $263,755 3.23 $868,962 1.64 $3,001,431 2.14 $4,160,348 2.12 
Total securities available-for-sale and held-to-maturity—estimated market value$26,260  $265,405  $870,175  $3,019,006  $4,180,846  
(1)Tax-exempt weighted average yield is calculated on a tax equivalent basis using a federal tax rate of 21% and a TEFRA disallowance of 10%.
55
 December 31, 2017
 One Year or Less After One to Five Years After Five to Ten Years 
After Ten to Twenty
Years
 After Twenty Years Total
 Carrying Value Weighted Average Yield 
Carrying
Value
 Weighted Average Yield 
Carrying
Value
 Weighted Average Yield 
Carrying
Value
 Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield
U.S. Government and agency
     obligations:
                       
Fixed-rate$712
 0.84% $312
 2.12% $27,001
 2.45% $20,465
 2.74% $—
 —% $48,490
 2.54%
Adjustable-rate25,000
 1.62
 —
 —
 —
 —
 —
 —
 —
 —
 25,000
 1.62
 25,712
 1.60
 312
 2.12
 27,001
 2.45
 20,465
 2.74
 —
 —
 73,490
 2.23
Municipal bonds:                       
Fixed-rate taxable1,059
 1.78
 4,879
 2.53
 36,230
 3.11
 4,528
 3.87
 —
 —
 46,696
 3.09
Fixed-rate tax exempt3,527
 2.05
 28,308
 1.67
 47,872
 3.31
 97,904
 2.99
 32,699
 2.71
 210,310
 2.83
Adjustable-rate tax exempt—
 —
 1,688
 3.88
 —
 —
 —
 —
 —
 —
 1,688
 3.88
 4,586
 1.99
 34,875
 1.90
 84,102
 3.22
 102,432
 3.03
 32,699
 2.71
 258,694
 2.88
Corporate bonds:                       
Fixed-rate—
 —
 1,346
 3.46
 250
 2.00
 —
 2.81
 2,178
 —
 3,774
 1.37
Adjustable-rate27,655
 4.23
 —
 —
 —
 —
 —
 —
 —
 —
 27,655
 4.23
 27,655
 4.23
 1,346
 3.46
 250
 2.00
 —
 2.81
 2,178
 —
 31,429
 3.94
Mortgage-backed or related
     securities:
                       
Fixed-rate—
 —
 24,220
 2.36
 183,766
 2.68
 40,890
 —
 522,384
 2.75
 771,260
 2.72
Adjustable-rate25,042
 2.55
 4,655
 2.48
 4,008
 3.10
 —
 —
 —
 —
 33,705
 2.61
 25,042
 2.55
 28,875
 2.38
 187,774
 2.69
 40,890
 —
 522,384
 2.75
 804,965
 2.72
Asset-backed securities:                       
Fixed-rate—
 —
 9,926
 1.65
 —
 —
 —
 —
 —
 —
 9,926
 1.65
Adjustable-rate17,832
 2.64
 —
 —
 —
 —
 —
 —
 —
 —
 17,832
 2.64
 17,832
 2.64
 9,926
 1.65
 —
 —
 —
 —
 —
 —
 27,758
 2.29
Equity securities5,739
 —
 —
 —
 —
 —
 —
 —
 —
 —
 5,739
 —
Total securities—carrying value$106,566
 2.69
 $75,334
 2.08
 $299,127
 2.82
 $163,787
 2.94
 $557,261
 2.74
 $1,202,075
 2.74
Total securities—estimated market value$106,572
   $75,236
   $300,132
   $165,673
   $556,379
   $1,203,992
  




Loans and Lending.  Loans are our most significant and generally highest yielding earning assets. We attempt to maintain a portfolio of loans into total deposits ratio at a range of 90% to 95% of total depositslevel designed to enhance our revenues, while adhering to sound underwriting practices and appropriate diversification guidelines in order to maintain a moderate risk profile. Our loan to deposit ratio at December 31, 2021 was 64%, which reflects the unprecedented level of market liquidity and decrease in business activity due to the impacts of the COVID-19 pandemic and is below our historical range of 90% to 95%. We expect the loan to deposit ratio to remain below historical levels for the foreseeable future. At December 31, 2017,2021, our nettotal loan portfolio totaled $7.51$9.08 billion compared to $7.37$9.87 billion at December 31, 2016.2020. Our total loan portfolio increased $147.7decreased $786.2 million, or 2%8%, during the year ended December 31, 2017,2021, compared to an increase of $136.6$565.6 million, or 2%6%, during the year ended December 31, 2016.2020.  The decrease in total loans receivable for the year ended December 31, 2021 primarily reflects $1.48 billion of SBA PPP loan forgiveness repayments during 2021. The increase wasfor the resultyear ended December 31, 2020 primarily reflected the origination of originations and loan purchases partially offset by the saleSBA PPP loans, which totaled $1.04 billion as of $253.8 million of loans as part of the sale of the Utah branches.December 31, 2020. While we originate a variety of loans, our ability to originate each type of loan is dependent upon the relative customerclient demand and competition in each market we serve.  We have implementedcontinue to implement strategies designed to capture more market share and achieve increases in targeted loans resulting in strong loan originations in 2017 and 2016. Nonetheless, looking forward, newloans. New loan originations and portfolio balances will continue to be significantly affected by the course of economic activity and changes in interest rates. For

Originations of loans for sale decreased to $1.10 billion for the year ended December 31, 2021 from $1.46 billion during 2020, primarily due to decreased refinance activity for one- to four-family loans residential mortgage loans. Originations of loans for sale included $225.0 million and $234.0 million of multifamily held for sale loan production for the years ended December 31, 2017, 20162021 and 2015, we originated loans, net of repayments and charge-offs, of $985.7 million, $1.11 billion and $741.7 million,December 31, 2020, respectively.  The level of net originations during all three years was significantly impacted by a substantial amount of loan repayments. We generally sell a significant portion of our newly originated one- to four-family residential mortgage loans and multifamily loans to secondary market purchasers.  Proceeds from sales of loans for the years ended December 31, 2017, 20162021 and 20152020 totaled $1.12 billion, $1.11$1.32 billion and $801.6 million (including $151.9 million from the sale of multifamily loans acquired through the merger with AmericanWest),$1.49 billion, respectively.  See “Loan Servicing Portfolio” below.  Loans held for sale decreased $205.6$147.3 million to $40.7$96.5 million at December 31, 2017,2021, compared to $246.4$243.8 million at December 31, 2016.2020. The decrease in loans held for sale was primarily due to a decrease inone- to four- family residential and multifamily loan sales exceeding the volume of originations of one- to four-family residential and multifamily loans held for sale.sale during the year.


At various times, we also purchase wholeThe following table shows loan origination (excluding loans and participation interests in loans.  Duringheld for sale) activity for the years ended December 31, 2017, 20162021, 2020, and 2015, we purchased $306.9 million, $314.3 million and $323.5 million, respectively, of loans and loan participation interests. The loan purchases primarily reflect participations in commercial real estate loans.2019 (in thousands):


Table 3: Loan Origination
 Years Ended
Dec 31, 2021Dec 31, 2020Dec 31, 2019
Commercial real estate$565,809 $356,361 $428,936 
Multifamily real estate110,640 27,119 71,124 
Construction and land1,975,664 1,588,311 1,433,313 
Commercial business:
Commercial business731,315 628,981 840,237 
SBA PPP485,077 1,176,018 — 
Agricultural business61,997 76,096 85,663 
One-to four- family residential206,662 116,713 112,165 
Consumer465,213 423,526 350,601 
Total loan originations (excluding loans held for sale)$4,602,377 $4,393,125 $3,322,039 

One- to Four-Family Residential Real Estate Lending:  At December 31, 2017, $848.32021, $683.3 million, or 11%8% of our loan portfolio, consisted of permanent loans on one- to four-family residences.  Our residential mortgage loan originations have been relatively strong in recent years, as exceptionally low interest rates have supported demand for loans to refinance existing debt as well as loans to finance home purchases, althoughbeen low and declined during 2017 refinance activity was reduced due to interest rate increases.the current year. We are active originators of one- to four-family residential loans in most communities where we have established offices in Washington, Oregon, California and Idaho.  Our one- to four-family loan originations, including loans held for sale and originated for portfolio, totaled $699.7 million for the year ended December 31, 2017, compared to $709.0 million and $710.7 million for the years ended December 31, 2016 and 2015, respectively.  Most of the one- to four-family loans that we originate are sold in the secondary markets with net gains on sales and loan servicing fees reflected in our revenues from mortgage banking. Our balance of loans for one- to four-family residences increaseddecreased by $35.2$34.7 million in 2017, largely2021, compared to the prior year. The decrease in one-to-four family real estate loans during 2021 reflects portfolio loans being refinanced and sold as a result of a larger percentage of our originations being held for portfolio.sale loans.


Construction and Land Lending:   Our construction loan originations have increasedbeen relatively strong in recent years as builders have expanded production and experienced strong home sales in many markets where we operate.  We have also experienced an increase in originationsAt December 31, 2021, construction, land and land development loans totaled $1.31 billion (including $568.8 million of construction loans for owner occupants, although construction balances for these loans are modest as the loans convertone- to one-to-four family loans upon completion of the homes. As a result, one-to four-family construction loans, have increased by $58.6$313.5 million in 2015, $97.2 million in 2016 and $39.6 million in 2017, to total $415.3 million at December 31, 2017. During the year ended December 31, 2017,of land and land development loans (both residential and commercial) decreased by $10.1 million to $189.1 million at December 31, 2017.  Our construction, land, and land development loan originations including loans for residential and commercial properties totaled $1.39 billion for the year ended December 31, 2017, compared to $1.29 billion for the year ended December 31, 2016, and $987.5 million for the year ended December 31, 2015.  At December 31, 2017, construction, land and land development loans totaled $907.5 million (including $415.3 million of one- to four-family construction loans, $164.5 million of residential land or land development loans, $303.1$428.6 million of commercial and multifamily real estate construction loans and $24.6 million of commercial land or land development loans), or 12%14% of total loans, compared to $823.1 million,$1.29 billion, or 11%13%, at December 31, 2016.2020. One-to four-family construction loans increased by $60.9 million in 2021, as builders have expanded production and experienced strong home sales during the year. During the year ended December 31, 2021, land and land development loans (both residential and commercial) increased by $64.5 million, primarily reflecting increased residential land and land development loans also due to the strong housing market.


56

Commercial and Multifamily Real Estate Lending:  We also originate loans secured by multifamilycommercial and commercialmultifamily real estate.  MultifamilyCommercial and commercialmultifamily real estate loans originated by us areinclude both fixed- and adjustable-rate loans generally with intermediate terms of generally five to ten years.  Our commercial real estate portfolio consists of loans on a variety of property types with no significant concentrations by property type, borrowers or locations.  Our investment in commercial and multifamily real estate loans decreased in 2017 as a result of significant repayments in excess of originations and the sale of approximately $163 million of commercial real estate loans as part of the sale of our Utah branches. At December 31, 2017,2021, our loan portfolio included $3.22$3.72 billion of commercial real estate loans, or 42%41% of the total loan portfolio, compared to $3.34$3.61 billion, or 44.8%37%, at December 31, 2016.2020.  Our portfolio of multifamily real estate loans was $314.2$564.1 million, or 4%6% of total loans at December 31, 2017,2021, compared to $248.2$428.2 million, or 3.3%4%, at December 31, 2016.2020.


Commercial Business Lending:  Our commercial business lending is directed toward meeting the credit and related deposit needs of various small- to medium-sized business and agribusiness borrowers operating in our primary market areas.  In addition to providing earning assets, this type of lending has helped increase our deposit base. At December 31, 2017,2021, commercial business loans totaled $1.28$1.17 billion, or 17%13% of total loans, compared to $1.21$2.18 billion, or 16%22%, at December 31, 2016. This increase2020. The decrease reflects $1.48 billion of SBA PPP loan repayments from organic growth was partially offset by the saleSBA loan forgiveness during 2021 and to a lesser extent lower line of approximately $62 million of commercialcredit usage due to decreased business activity and seasonal decreases in agricultural loan balances. SBA PPP loans as part of the sale of our Utah branches. In recent years our commercial lending has also included participation in certain national syndicated loans, including share national credits, which totaled $129.5decreased 87% to $133.9 million at December 31, 2017.2021, compared to $1.04 billion at December 31, 2020. Our commercial business lending, to a lesser extent, includes participation in certain syndicated loans, including shared national credits that totaled $173.9 million at December 31, 2021.


Agricultural Lending:  Agriculture is a major industry in many Washington, Oregon, California and Idaho locations in our service area.  While agricultural loans are not a large part of our portfolio, we routinely make agricultural loans to borrowers with a strong capital base, sufficient management depth, proven ability to operate through agricultural cycles, reliable cash flows and adequate financial reporting.  Payments on


agricultural loans depend, to a large degree, on the results of operation of the related farm entity.  The repayment is also subject to other economic and weather conditions as well as market prices for agricultural products, which can be highly volatile at times.  At December 31, 2017,2021, agricultural loans totaled $338.4$285.8 million, or 4%3% of the loan portfolio, compared to $369.2$299.9 million, or 5%3%, at December 31, 2016.2020.


Consumer and Other Lending:  Consumer lending has traditionally been a modest part of our business with loans made primarily to accommodate our existing customerclient base. Outstanding balances increased during 2017 primarily from a successful campaign to generate additional home equity lines of credit.  At December 31, 2017,2021, our consumer loans increased $38.4decreased $49.9 million to $688.8$555.9 million, or 9%6% of our loan portfolio, compared to $650.5$605.8 million, or 9%6%, at December 31, 2016.2020.  As of December 31, 2017, 76%2021, 82% of our consumer loans were secured by one- to four-family real estate,residential, including home equity lines of credit.  Credit card balances totaled $37.1$37.8 million at December 31, 20172021 compared to $33.4$35.8 million a year earlier.


Loan Servicing Portfolio:  At December 31, 2017,2021, we were servicing $2.64$3.04 billion of loans for others and held $11.0$12.4 million in escrow for our portfolio of loans serviced for others.  The loan servicing portfolio at December 31, 20172021 was composed of $1.09$1.34 billion of Freddie Mac residential mortgage loans, $963.3 million$1.14 billion of Fannie Mae residential mortgage loans, $338.1$291.1 million of Oregon Housing residential mortgage loans, $80.4 million of SBA loans and $245.3$195.1 million of other loans serviced for a variety of investors.  The portfolio included loans secured by property located primarily in the states of Washington, Oregon, Idaho and California.  For the yearyears ended December 31, 2017,2021 and 2020, we recognized $2.3$7.7 million and $7.4 million of loan servicing feesincome in our results of operations, which was net of $4.0respectively. For the years ended December 31, 2021 and 2020 we recognized $6.6 million and $7.7 million of amortization for MSRs and includedSBA servicing rights, respectively, and no impairment charges or reversals for a valuation adjustment to MSRs.


Mortgage and SBA Servicing Rights:  For the years ended December 31, 2017, 20162021 and 2015,2020, we capitalized $3.4 million, $6.0$7.3 million and $5.3$8.6 million, respectively, of MSRsservicing rights relating to loans sold with servicing retained.  Amortization of MSRs and SBA Servicing rights for the years ended December 31, 2017, 20162021 and 20152020 was $4.0 million, $4.0$6.6 million and $3.2$7.7 million, respectively.  Management periodically evaluates the estimates and assumptions used to determine the carrying values of MSRs and the amortization of MSRs. At December 31, 2017,2021, our MSRs and SBA serving rights were carried at a value of $14.7$17.2 million, net of amortization, compared to $15.2 million at December 31, 2016.2020.





57

The following table sets forth the composition of the Company’s loan portfolio, net of discounts and deferred fees and costs, by type of loan as of the dates indicated (dollars in thousands):


Table 3:4:  Loan Portfolio Analysis

As a result of the adoption of Financial Instruments - Credit Losses (ASC 326), effective January 1, 2020, the Company changed the segmentation of its loan portfolio based on the common risk characteristics used to measure the allowance for credit losses.  The following table presents the loans receivable at December 31, 2021, 2020 and 2019 by class (dollars in thousands). The presentation of loans receivable at December 31, 2019 has been updated to conform to the loan portfolio segmentation that became effective on January 1, 2020.

 December 31, 2021December 31, 2020December 31, 2019
 AmountPercent of TotalAmountPercent of TotalAmountPercent of Total
Commercial real estate:    
Owner-occupied$1,131,828 12.4 %$1,076,467 10.9 %$980,021 10.5 %
Investment properties1,990,461 21.9 1,955,684 19.8 2,024,988 21.8 
Small balance CRE598,212 6.6 573,849 5.8 613,484 6.6 
Multifamily real estate564,100 6.2 428,223 4.4 388,388 4.2 
Construction, land and land development:
Commercial construction169,530 1.9 228,937 2.3 210,668 2.3 
Multifamily construction259,116 2.9 305,527 3.1 233,610 2.5 
One- to four-family construction568,753 6.3 507,810 5.1 544,308 5.8 
Land and land development313,454 3.5 248,915 2.5 245,530 2.6 
Commercial business:
Commercial business1,039,502 11.4 1,133,989 11.5 1,364,650 14.7 
SBA PPP132,574 1.5 1,044,472 10.6 — — 
Small business scored792,310 8.7 743,451 7.5 772,657 8.3 
Agricultural business, including secured by farmland:
Agricultural business, including secured by farmland284,399 3.1 299,949 3.0 337,271 3.6 
SBA PPP1,354 — — — — — 
One- to four-family residential683,268 7.5 717,939 7.3 925,531 9.9 
Consumer:
Consumer—home equity revolving lines of credit458,533 5.0 491,812 5.0 519,336 5.6 
Consumer—other97,369 1.1 113,958 1.2 144,915 1.6 
Total loans9,084,763 100.0 %9,870,982 100.0 %9,305,357 100.0 %
Less allowance for credit losses - loans(132,099)(167,279)(100,559)
Net loans$8,952,664 $9,703,703 $9,204,798 

58
 December 31
 2017 2016 2015 2014 2013
 Amount Percent of Total Amount Percent of Total Amount Percent of Total Amount Percent of Total Amount Percent of Total
Commercial real estate:                   
Owner-occupied$1,284,363
 16.9% $1,352,999
 18.1% $1,327,807
 18.2% $546,783
 14.3% $502,601
 14.7%
Investment properties1,937,423
 25.5
 1,986,336
 26.7
 1,765,353
 24.1
 856,942
 22.3
 692,457
 20.2
Multifamily real estate314,188
 4.1
 248,150
 3.3
 472,976
 6.5
 167,524
 4.4
 137,153
 4.0
Commercial construction148,435
 2.0
 124,068
 1.7
 72,103
 1.0
 17,337
 0.5
 12,168
 0.4
Multifamily construction154,662
 2.0
 124,126
 1.7
 63,846
 0.9
 60,193
 1.6
 52,081
 1.5
One- to four-family construction415,327
 5.5
 375,704
 5.0
 278,469
 3.8
 219,889
 5.7
 200,864
 5.9
Land and land development:                   
Residential164,516
 2.2
 170,004
 2.3
 126,773
 1.7
 102,435
 2.7
 75,695
 2.2
Commercial24,583
 0.3
 29,184
 0.4
 33,179
 0.5
 11,152
 0.3
 10,450
 0.3
Commercial business1,279,894
 16.8
 1,207,879
 16.2
 1,207,944
 16.5
 723,964
 18.9
 682,169
 20.0
Agricultural business, including secured by farmland338,388
 4.4
 369,156
 5.0
 376,531
 5.1
 238,499
 6.2
 228,291
 6.7
One- to four-family real estate848,289
 11.2
 813,077
 10.9
 952,633
 13.0
 537,108
 14.0
 529,494
 15.5
Consumer secured by one- to four-family real estate522,931
 6.9
 493,211
 6.6
 478,420
 6.5
 222,205
 5.8
 173,188
 5.1
Consumer—other165,885
 2.2
 157,254
 2.1
 158,470
 2.2
 127,003
 3.3
 121,834
 3.5
Total loans outstanding7,598,884
 100.0% 7,451,148
 100.0% 7,314,504
 100.0% 3,831,034
 100.0% 3,418,445
 100.0%
Less allowance for loan losses(89,028)   (85,997)   (78,008)   (75,907)   (74,258)  
Net loans$7,509,856
   $7,365,151
   $7,236,496
   $3,755,127
   $3,344,187
  




The following table sets forth the Company’s loans by geographic concentration at December 31, 2017, 20162021, 2020 and 20152019 (dollars in thousands):


Table 4:5:  Loans by Geographic Concentration
 December 31, 2021December 31, 2020December 31, 2019
AmountPercentAmountPercentAmountPercent
Washington$4,264,590 47.0 %$4,647,553 47.0 %$4,364,764 46.9 %
California2,138,340 23.5 2,279,749 23.1 2,129,789 22.9 
Oregon1,652,364 18.2 1,792,156 18.2 1,650,704 17.7 
Idaho525,141 5.8 537,996 5.5 530,016 5.7 
Utah74,913 0.8 80,704 0.8 60,958 0.7 
Other429,415 4.7 532,824 5.4 569,126 6.1 
Total$9,084,763 100.0 %$9,870,982 100.0 %$9,305,357 100.0 %
 December 31, 2017 December 31, 2016 December 31, 2015
 Amount Percent Amount Percent Amount Percent
Washington$3,508,542
 46.2% $3,433,617
 46.1% $3,343,112
 45.7%
Oregon1,590,233
 20.9
 1,505,369
 20.2
 1,446,531
 19.8
California1,415,076
 18.6
 1,239,989
 16.6
 1,234,016
 16.9
Idaho492,603
 6.5
 495,992
 6.7
 496,870
 6.8
Utah73,382
 1.0
 283,890
 3.8
 325,011
 4.4
Other519,048
 6.8
 492,291
 6.6
 468,964
 6.4
Total$7,598,884
 100.0% $7,451,148
 100.0% $7,314,504
 100.0%


The following table sets forth certain information at December 31, 20172021 regarding the dollar amount of loans maturing in our portfolio based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments.  Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances are net of unamortized premiums and discounts and exclude loans held for sale and the allowance for loan losses (in thousands):


Table 5:6:  Loans by Maturity
 Maturing in One Year or LessMaturing After One to Five YearsMaturing After Five to Fifteen YearsMaturing After Fifteen YearsTotal
Commercial real estate:     
Owner-occupied$94,456 $183,561 $812,638 $41,173 $1,131,828 
Investment properties88,141 378,408 1,207,259 316,653 1,990,461 
Small balance CRE31,760 177,450 366,745 22,257 598,212 
Multifamily real estate20,033 85,981 303,518 154,568 564,100 
Construction, land and land development:
Commercial construction105,116 15,199 43,486 5,729 169,530 
Multifamily construction151,377 64,686 37,004 6,049 259,116 
One- to four-family construction500,961 67,791 1 — 568,753 
Land and land development115,027 79,788 111,431 7,208 313,454 
Commercial business:
Commercial business262,759 282,601 376,834 117,308 1,039,502 
SBA PPP13,926 118,648 — — 132,574 
Small business scored63,485 225,092 237,934 265,799 792,310 
Agricultural business, including secured by farmland:
Agricultural business, including secured by farmland80,260 59,272 144,433 434 284,399 
SBA PPP548 806 — — 1,354 
One- to four-family residential9,890 18,421 62,548 592,409 683,268 
Consumer:
Consumer—home equity revolving lines of credit2,057 7,752 11,285 437,439 458,533 
Consumer—other32,354 22,292 23,263 19,460 97,369 
Total loans$1,572,150 $1,787,748 $3,738,379 $1,986,486 $9,084,763 
 Maturing in One Year or Less Maturing After One to Three Years Maturing After Three to Five Years Maturing After Five to Ten Years Maturing After Ten Years Total
Commercial real estate:           
Owner-occupied$84,464
 $65,425
 $149,446
 $726,063
 $258,965
 $1,284,363
Investment properties122,863
 76,960
 224,597
 939,553
 573,450
 1,937,423
Multifamily real estate8,378
 12,161
 28,355
 115,109
 150,185
 314,188
Commercial construction95,551
 18,413
 7,401
 16,149
 10,921
 148,435
Multifamily construction64,863
 79,817
 —
 —
 9,982
 154,662
One- to four-family construction391,376
 22,989
 —
 —
 962
 415,327
Land and land development:           
Residential112,287
 46,572
 1,167
 4,490
 —
 164,516
Commercial16,776
 3,490
 1,735
 1,647
 935
 24,583
Commercial business496,988
 243,560
 236,651
 195,579
 107,116
 1,279,894
Agricultural business, including secured by farmland122,891
 38,841
 31,847
 130,035
 14,774
 338,388
One- to four-family real estate8,935
 12,189
 6,827
 54,905
 765,433
 848,289
Consumer secured by one- to four-family real estate3,549
 6,739
 10,789
 15,733
 486,121
 522,931
Consumer—other36,733
 15,551
 14,932
 27,778
 70,891
 165,885
Total loans$1,565,654
 $642,707
 $713,747
 $2,227,041
 $2,449,735
 $7,598,884


Contractual maturities of loans do not necessarily reflect the actual life of such assets.  The average life of loans typically is substantially less than their contractual maturities because of principal repayments and prepayments.  In addition, due-on-sale clauses on certain mortgage loans generally give us the right to declare loans immediately due and payable in the event that the borrower sells the real property subject to the mortgage and the loan is not repaid.  The average life of mortgage loans tends to increase however when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and, conversely, decreases when rates on existing mortgage loans are substantially higher than current mortgage loan market rates.



59


The following table sets forth the dollar amount of all loans maturing after December 31, 20182022 which have fixed interest rates and floating or adjustable interest rates (in thousands):


Table 6:7:  Loans Maturing after One Year
 Fixed RatesFloating or Adjustable RatesTotal
Commercial real estate:   
Owner-occupied$334,531 $702,841 $1,037,372 
Investment properties525,095 1,377,225 1,902,320 
Small balance CRE112,948 453,504 566,452 
Multifamily real estate330,321 213,746 544,067 
Construction, land and land development:
Commercial construction8,651 55,763 64,414 
Multifamily construction64,261 43,478 107,739 
One- to four-family construction1,483 66,309 67,792 
Land and land development16,453 181,974 198,427 
Commercial business:
Commercial business494,635 282,108 776,743 
SBA PPP118,648 — 118,648 
Small business scored197,956 530,869 728,825 
Agricultural business, including secured by farmland:
Agricultural business, including secured by farmland78,182 125,957 204,139 
SBA PPP806 — 806 
One- to four-family residential543,601 129,777 673,378 
Consumer:
Consumer—home equity revolving lines of credit1,484 454,992 456,476 
Consumer—other60,276 4,739 65,015 
Total loans maturing after one year$2,889,331 $4,623,282 $7,512,613 
 Fixed Rates Floating or Adjustable Rates Total
Commercial real estate:     
Owner-occupied$264,892
 $935,007
 $1,199,899
Investment properties357,871
 1,456,689
 1,814,560
Multifamily real estate109,429
 196,381
 305,810
Commercial construction13,004
 39,880
 52,884
Multifamily construction66,422
 23,377
 89,799
One- to four-family construction787
 23,164
 23,951
Land and land development: 
  
  
Residential2,326
 49,903
 52,229
Commercial1,584
 6,223
 7,807
Commercial business440,332
 342,574
 782,906
Agricultural business, including secured by farmland78,362
 137,135
 215,497
One- to four-family real estate562,134
 277,220
 839,354
Consumer secured by one- to four-family real estate16,649
 502,733
 519,382
Consumer—other82,226
 46,926
 129,152
Total loans maturing after one year$1,996,018
 $4,037,212
 $6,033,230


Deposits. We compete with other financial institutions and financial intermediaries in attracting deposits and we generally attract deposits within our primary market areas. Much of the focus of our expansion and current marketing efforts have been directed toward attracting additional deposit customerclient relationships and balances.  This effort has been particularly directed towards increasing transaction and savings accounts which has contributed to us being very successful in increasing these core deposit balances. The long-term success of our deposit gathering activities is reflected not only in the growth of deposit balances, but also in increases in the level of deposit fees, service charges and other payment processing revenues.


One of our key strategies is to strengthen our franchise by emphasizing core deposit activity in non-interest-bearing and other transaction and savings accounts with less reliance on higher cost certificates of deposit.  Increasing core deposits is a fundamental element of our business strategy. This strategy continues to improvehelp control our cost of funds and increase the opportunity for deposit fee revenues, while stabilizing our funding base.  Total deposits increased $62.0 million,$1.76 billion, or 1%14%, to $8.18$14.33 billion at December 31, 20172021 from $8.12$12.57 billion at December 31, 2016. Deposit growth for 20172020. The increase in total deposits from the prior year end was partially offset byprimarily due to SBA PPP loan funds deposited into client accounts, fiscal stimulus payments, and an increase in client deposit accounts due to reduced business investment and changes in consumer spending habits during the sale of the seven Utah branches which included $160.3 million of related deposits.COVID-19 pandemic. Non-interest-bearing deposits increased by $125.1$892.3 million, or 4%16%, to $3.27$6.39 billion at year end from $3.14$5.49 billion at December 31, 2016.2020. Interest-bearing transaction and savings accounts increased by $15.3$944.1 million, to $3.95$7.10 billion at December 31, 20172021 compared to $3.94$6.16 billion a year earlier.  Certificates of deposit decreased $78.4$76.7 million, or 7%8%, to $966.9$838.6 million at December 31, 20172021 from $1.05 billion at December 31, 2016.  The decrease in certificate balances in 2017 was partially offset by a $23.2 million increase in brokered deposits to $57.2$915.3 million at December 31, 2017.2020.




60

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


Table 7:8:  Deposits
December 31 December 31
2017 2016 2015 202120202019
Amount Percent of Total Increase (Decrease) Amount Percent of Total Increase (Decrease) Amount Percent of Total AmountPercent of TotalIncrease (Decrease)AmountPercent of TotalIncrease (Decrease)AmountPercent of Total
Non-interest-bearing checking$3,265,544
 39.9% $125,093
 $3,140,451
 38.6% $520,833
 $2,619,618
 32.5%Non-interest-bearing checking$6,385,177 44.6 %$892,253 $5,492,924 43.7 %$1,547,924 $3,945,000 39.3 %
Interest-bearing checking971,137
 11.9
 56,653
 914,484
 11.3
 (245,362) 1,159,846
 14.4
Interest-bearing checking1,947,414 13.6 377,979 1,569,435 12.5 289,432 1,280,003 12.7 
Regular savings1,557,500
 19.0
 34,109
 1,523,391
 18.8
 238,749
 1,284,642
 16.0
Regular savings2,784,716 19.4 386,234 2,398,482 19.1 464,441 1,934,041 19.3 
Money market1,422,313
 17.4
 (75,442) 1,497,755
 18.4
 (139,337) 1,637,092
 20.3
Money market2,370,995 16.5 179,860 2,191,135 17.4 421,941 1,769,194 17.6 
Total interest-bearing transaction and savings accounts3,950,950
 48.3
 15,320
 3,935,630
 48.5
 (145,950) 4,081,580
 50.7
Total interest-bearing transaction and savings accounts7,103,125 49.5 944,073 6,159,052 49.0 1,175,814 4,983,238 49.6 
Certificates maturing: 
  
  
  
  
  
  
  
Certificates maturing:        
Within one year685,592
 8.4
 (79,814) 765,406
 9.4
 (219,787) 985,193
 12.2
Within one year652,694 4.6 (48,779)701,473 5.6 (145,468)846,941 8.4 
After one year, but within two years98,257
 1.2
 (61,179) 159,436
 2.0
 (66,945) 226,381
 2.8
After one year, but within two years117,013 0.8 (6,277)123,290 1.0 (44,567)167,857 1.7 
After two years, but within five years180,886
 2.2
 63,804
 117,082
 1.4
 (22,000) 139,082
 1.7
After two years, but within five years67,467 0.5 (21,082)88,549 0.7 (14,808)103,357 1.0 
After five years2,202
 —
 (1,207) 3,409
 —
 195
 3,214
 0.1
After five years1,457 — (551)2,008 — (240)2,248 — 
Total certificate accounts966,937
 11.8
 (78,396) 1,045,333
 12.9
 (308,537) 1,353,870
 16.8
Total certificate accounts838,631 5.9 (76,689)915,320 7.3 (205,083)1,120,403 11.1 
Total Deposits$8,183,431
 100.0% $62,017
 $8,121,414
 100.0% $66,346
 $8,055,068
 100.0%Total Deposits$14,326,933 100.0 %$1,759,637 $12,567,296 100.0 %$2,518,655 $10,048,641 100.0 %
 
Included in Total Deposits:        
Public transaction accounts$353,874 2.5 %$50,999 $302,875 2.4 %$58,457 $244,418 2.4 %
Public interest-bearing certificates39,961 0.3 (19,166)59,127 0.5 23,943 35,184 0.4 
Total public deposits$393,835 2.8 %$31,833 $362,002 2.9 %$82,400 $279,602 2.8 %
Total brokered deposits$— — %$— $— — %$(202,884)$202,884 2.0 %
Total deposits in excess of the FDIC insurance limit$5,144,386 35.9 %$736,451 $4,407,935 35.1 %$1,579,962 $2,827,973 28.1 %

61
Included in Total Deposits:               
Public transaction accounts$198,719
 2.5% $(23,046) $221,765
 2.7% $12,335
 $209,430
 2.6%
Public interest-bearing certificates23,685
 0.3
 (1,965) 25,650
 0.3
 (5,631) 31,281
 0.4
Total public deposits$222,404
 2.8% $(25,011) $247,415
 3.0% $6,704
 $240,711
 3.0%
Total brokered deposits$57,228
 0.7% $23,154
 $34,074
 0.4% $(128,862) $162,936
 2.0%




The following table indicates the amount of the Banks’Bank’s certificates of deposit with balances equal to or greater than $100,000in excess of the FDIC insurance limit by time remaining until maturity as of December 31, 20172021 (in thousands):


Table 8:9:  Maturity Period—$100,000 or greater CDs
Certificates of Deposit in excess of the FDIC insurance limit
Certificates of

Deposit $100,000
 or Greater
in Excess of FDIC Insurance Limit
Maturing in three months or less$128,69458,637 
Maturing after three months through six months82,33528,611 
Maturing after six months through twelve months116,40360,270 
Maturing after twelve months140,17933,497 
Total$467,611181,015 


The following table provides additional detail on geographic concentrations of our deposits at December 31, 20172021, 2020, and 2019 (in thousands):


Table 9:10: Geographic Concentration of Deposits
December 31, 2021December 31, 2020December 31, 2019
AmountPercentAmountPercentAmountPercent
Washington$7,952,376 55.5 %$7,058,404 56.2 %$5,861,809 58.3 %
Oregon3,067,054 21.4 2,604,908 20.7 2,006,163 20.0 
California2,524,296 17.6 2,237,949 17.8 1,698,289 16.9 
Idaho783,207 5.5 666,035 5.3 482,380 4.8 
Total deposits$14,326,933 100.0 %$12,567,296 100.0 %$10,048,641 100.0 %
 December 31, 2017 December 31, 2016 December 31, 2015
 Amount Percent Amount Percent Amount Percent
Washington$4,506,249
 55.0% $4,347,644
 53.6% $4,219,304
 52.4%
Oregon1,797,147
 22.0
 1,708,973
 21.0
 1,648,421
 20.4
California1,432,819
 17.5
 1,469,748
 18.1
 1,592,365
 19.8
Idaho447,216
 5.5
 447,019
 5.5
 435,099
 5.4
Utah—
 —
 148,030
 1.8
 159,879
 2.0
Total deposits$8,183,431
 100.0% $8,121,414
 100.0% $8,055,068
 100.0%


Borrowings.  The FHLB-Des MoinesFHLB serves as our primary borrowing source.  To access funds, we are required to own a sufficient level of capital stock in the FHLB-Des Moines and may apply for advances on the security of such stock and certain of our mortgage loans and securities provided that certain creditworthiness standards have been met.  At December 31, 2017,2021, we had $202,000$50.0 million of FHLB advances outstanding (at fair value) at a weighted average rate of 5.94%2.72%, a decrease of $54.0$100.0 million compared to a year earlier.earlier, as core deposits were used to fund a larger portion of the balance sheet.  Also, at December 31, 2017,2021, we had an investment of $10.3$12.0 million in FHLB capital stock.  At that date, based on pledged collateral, Banner Bank was authorized byhad $2.38 billion of available credit capacity with the FHLB-Des Moines to borrow up to $3.55 billion under a blanket floating lien security agreement, while Islanders Bank was approved to borrow up to $98.7 million under a similar agreement.FHLB.

The following table provides additional detail on our FHLB advances as of December 31, 2017 and 2016 (dollars in thousands):

Table 10:  FHLB Advances Outstanding
 December 31
 2017 2016
 Amount Weighted Average Rate Amount Weighted Average Rate
Maturing in one year or less$—
 —% $54,000
 0.81%
Maturing after one year through three years—
 —
 —
 —
Maturing after three years through five years—
 —
 —
 —
Maturing after five years169
 5.94
 179
 5.94
Total FHLB advances, at par169
 5.94
 54,179
 0.83
Fair value adjustment33
   37
  
Total FHLB advances, carried at fair value$202
   $54,216
  


At certain times the Federal Reserve Bank has also served as an important source of borrowings.  The Federal Reserve Bank provides credit based upon acceptable loan collateral, which includes certain loan types not eligible for pledging to the FHLB-Des Moines.FHLB.  At December 31, 2017,2021, based upon our available unencumbered collateral, Banner Bank was eligible to borrow $1.15 billion$782.3 million from the Federal Reserve Bank;Bank, however, at that date we had no funds borrowed under this arrangement.




We also issue retail repurchase agreements to customersclients that are primarily related to customerclient cash management accounts and in the past have borrowed funds through the use of secured wholesale repurchase agreements with securities brokers.  In each case, the repurchase agreements are generally due within 90 days.  At December 31, 2017,2021, retail and wholesale repurchase agreements totaling $95.9totaled $264.5 million, withhad a weighted average rate of 0.29%0.13%, and were secured by pledges of certain mortgage-backed securities and agency securities.  Retail repurchase agreement balances, which are primarily associated with customerclient sweep account arrangements, decreased $9.8increased $79.7 million, or 10%, from the 20162020 year-end balance.  We had $5.0 million ofno borrowings under wholesale repurchase agreements at both December 31, 2017 and2021 or December 31, 2016.2020.


We haveAt December 31, 2021, we had an aggregate of $136.0$135.5 million net of repayments, of TPS.  This includes $120.0 million issued by us and $16.0$15.5 million acquired in theour bank acquisitions. The junior subordinated debentures associated with the TPS have been recorded as liabilities on our Consolidated Statements of Financial Condition, although the TPS qualifies as Tier 1 capital for regulatory capital purposes.  The junior subordinated debentures are carried at fair value on our Consolidated Statements of Financial Condition and had an estimated fair value of $98.7$119.8 million at December 31, 2017.2021.  Banner redeemed $8.2 million of junior subordinated debentures during the fourth quarter of 2021 and subsequent to December 31, 2021 redeemed an additional $50.5 million of junior subordinated debentures. At December 31, 2017,2021, the TPS had a weighted average rate of 3.57%2.24%.  In addition, on June 30, 2020, Banner issued and sold in an underwritten offering Subordinated Notes, resulting in net proceeds, after underwriting discounts and offering expenses, of $98.1 million. At December 31, 2021, the Subordinated Notes had a remaining balance of $98.6 million and weighted average interest rate of 5.00%. The Subordinated Notes qualify as Tier 2 capital for regulatory capital purposes. See Note 11, Junior Subordinated DebenturesDebt and Mandatorily Redeemable Trust Preferred Trust Preferred Securities, of the Notes to the Consolidated Financial Statements for additional information with respect to the TPS.TPS and Subordinated Notes.


Asset Quality. Achieving and maintainingMaintaining a moderate risk profile by employing appropriate underwriting standards, avoiding excessive asset concentrations and aggressively managing troubled assets has been and will continue to be a primary focus for us. During 2017, we continued to be actively engaged with our borrowers in resolving remaining problem assets and with the effective management of real estate owned as a result of foreclosures and at year end our asset quality metrics were very good.

62


Non-performing assets decreased to $27.5$23.7 million, or 0.28%0.14% of total assets, at December 31, 2017,2021, from $33.8$36.5 million, or 0.35%0.24% of total assets, at December 31, 2016, and from $27.1 million, or 0.28% of total assets, at December 31, 2015.2020.  At December 31, 2017,2021, our allowance for loancredit losses - loans was $89.0$132.1 million, or 329%578% of non-performing loans, compared to $86.0$167.3 million, or 381%470% of non-performing loans at December 31, 2016.2020.  In addition to the allowance for credit losses - loans, the Company maintains an allowance for credit losses - unfunded loan commitments which was $12.4 million at December 31, 2021 compared to $13.3 million at December 31, 2020. We continue to believe our level of non-performing loans and other assets is manageable and further believe that we have sufficient capital and human resources to manage the collection of our non-performing assets in an orderly fashion.


Loans are reported as restructuredtroubled debt restructures when we grant concessions to a borrower experiencing financial difficulties that we would not otherwise consider.  As a result of these concessions, restructured loans or TDRs are impaired as the Banks will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement.  If any restructuredTDR loan becomes delinquent or other matters call into question the borrower'sborrower’s ability to repay full interest and principal in accordance with the restructured terms, the restructured loan(s)TDR loan would be reclassified as nonaccrual.  At December 31, 2017,2021, we had $16.1$5.5 million of restructuredTDR loans of which $5.3 million were currently performing under their restructured terms.


Loans acquired in the merger transactions with deteriorated credit quality are accounted for as purchased credit-impaired pools. Typically this would includeAt December 31, 2021, we had 21 mortgage loans totaling $6.4 million operating under forbearance agreements due to COVID-19. Since these loans were performing loans that were considered non-performing or restructured as ofcurrent on their payments prior to the acquisition date. Accordingly, subsequent to acquisition, loans included in the purchased credit-impaired poolsCOVID-19 pandemic, these modifications are not reported as non-performing loans based upon their individual performance status, so the categories of nonaccrual, impaired and 90 day past due and accruing do not include any purchased credit-impaired loans. Purchased credit-impaired loans were $21.3 millionconsidered to be troubled debt restructurings at December 31, 2017, compared2021 pursuant to $32.3 million at December 31, 2016.applicable accounting and regulatory guidance.




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


Table 11:  Non-Performing Assets
 December 31
 202120202019
Nonaccrual loans: (1)
   
Secured by real estate:   
Commercial$14,159 $18,199 $5,952 
Multifamily— — 85 
Construction/land479 936 1,905 
One- to four-family2,711 3,556 3,410 
Commercial business2,156 5,407 23,015 
Agricultural business, including secured by farmland1,022 1,743 661 
Consumer1,754 2,719 2,473 
 22,281 32,560 37,501 
Loans more than 90 days delinquent, still on accrual: 
Secured by real estate: 
Commercial— — 89 
Construction/land— — 332 
One- to four-family436 1,899 877 
Commercial business2 1,025 401 
Consumer117 130 398 
 555 3,054 2,097 
Total non-performing loans22,836 35,614 39,598 
REO assets held for sale, net852 816 814 
Other repossessed assets held for sale, net17 51 122 
Total non-performing assets$23,705 $36,481 $40,534 
Total non-performing assets to total assets0.14 %0.24 %0.32 %
Total nonaccrual loans to net loans before allowance for credit losses/allowance for loan losses(2)
0.25 %0.33 %0.40 %
Restructured loans performing under their restructured terms (3)
$5,309 $6,673 $6,466 
Loans 30-89 days past due and on accrual (4)
$11,558 $12,291 $20,178 
 December 31
 2017 2016 2015 2014 2013
Nonaccrual loans: (1)
         
Secured by real estate:         
Commercial$10,646
 $8,237
 $3,751
 $1,132
 $6,287
Construction/land798
 1,748
 2,260
 1,275
 1,193
One- to four-family3,264
 2,263
 4,700
 8,834
 12,532
Commercial business3,406
 3,074
 2,159
 537
 723
Agricultural business, including secured by farmland6,132
 3,229
 697
 1,597
 —
Consumer1,297
 1,875
 703
 1,187
 1,173
 25,543
 20,426
 14,270
 14,562
 21,908
Loans more than 90 days delinquent, still on accrual: 
  
  
  
  
Secured by real estate: 
  
  
  
  
Commercial—
 701
 —
 —
 —
Multifamily—
 147
 —
 —
 —
Construction/land298
 —
 —
 —
 —
One- to four-family1,085
 1,233
 899
 2,095
 2,611
Commercial business18
 —
 8
 —
 —
Agricultural business, including secured by farmland—
 —
 —
 —
 105
Consumer85
 72
 45
 79
 144
 1,486
 2,153
 952
 2,174
 2,860
Total non-performing loans27,029
 22,579
 15,222
 16,736
 24,768
REO assets held for sale, net (2)
360
 11,081
 11,627
 3,352
 4,044
Other repossessed assets held for sale, net107
 166
 268
 76
 115
Total non-performing assets$27,496
 $33,826
 $27,117
 $20,164
 $28,927
Total non-performing loans to net loans before allowance for loan losses0.36% 0.30% 0.21% 0.44% 0.72%
Total non-performing loans to total assets0.28% 0.23% 0.16% 0.35% 0.56%
Total non-performing assets to total assets0.28% 0.35% 0.28% 0.43% 0.66%
Restructured loans (3)
$16,115
 $18,907
 $21,777
 $29,154
 $47,428
Loans 30-89 days past due and on accrual$29,278
 $11,571
 $18,834
 $8,387
 $8,784


(1)
Includes $917,000 of nonaccrual restructured loans. For the year ended December 31, 2017, interest income was reduced by $1.4 million as a result of nonaccrual loan activity.
(2)
Real estate acquired by us as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate held for sale until it is sold.  When property is acquired, it is recorded at the lower of the estimated fair value of the property, less expected selling costs, or the carrying value of the defaulted loan.  Subsequent to foreclosure, the property is carried at the lower of the foreclosed amount or net realizable value.  Upon receipt of a new appraisal and market analysis, the carrying value is written down through the establishment of a specific reserve to the anticipated sales price, less selling and holding costs.
(3)
These loans were performing under their restructured terms.

In addition to the non-performing loans noted in Table 11 and purchased credit-impaired(1)    Includes $233,000 of nonaccrual TDR loans as of December 31, 2017, we had other classified loans with an aggregate outstanding balance2021. For the year ended December 31, 2021, interest income was reduced by $970,000 as a result of $85.5 million that are notnonaccrual loan activity, which includes the reversal of $154,000 of accrued interest as of the date the loan was placed on nonaccrual. There was no interest income recognized on nonaccrual status with respect to which known information concerning possible credit problems withloans during the borrowers or the cash flows of the properties securing the respective loans has caused management to be concerned about the ability of the borrowers to comply with present loan repayment terms.  This may resultyear ended December 31, 2021.
(2)    The reduction in the future inclusionratio of suchnonaccrual loans to total loans is due a decrease in nonaccrual loans during 2021 as the nonaccrual loan category.number of borrowers being impacted by the COVID-19 pandemic lessened.

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

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

63


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

Table 12: Loans by Grade

For the years ended December 31,
 202120202019
 
Pass$8,874,468 $9,494,147 $9,130,662 
Special Mention11,932 36,598 61,189 
Substandard198,363 340,237 113,448 
Doubtful— — 58 
Total$9,084,763 $9,870,982 $9,305,357 

The decrease in substandard loans during the year ended December 31, 2017, 20162021 primarily reflects the payoff and 2015 (in thousands):balance paydowns of substandard loans as well as risk rating upgrades as certain industries impacted by the COVID-19 pandemic have begun to stabilize.


Table 12: REO
 For the years ended December 31,
 2017 2016 2015
Balance, beginning of the period$11,081
 $11,627
 $3,352
Additions from loan foreclosures46
 8,909
 4,351
Additions from acquisitions—
 400
 8,231
Additions from capitalized costs54
 —
 298
Proceeds from dispositions of REO(13,474) (10,812) (4,740)
Gain on sale of REO2,909
 1,833
 351
Valuation adjustments in period(256) (876) (216)
Balance, end of period$360
 $11,081
 $11,627


REO decreased $10.7 million, to $360,000 at December 31, 2017 compared to $11.1 million at December 31, 2016 and $11.6 million at December 31, 2015. The decrease during 2017 reflects sales of REO properties exceeding additions.

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

Comparison of Results of Operations for the Years Ended December 31, 20172021 and 20162020


For the year ended December 31, 2017, we had2021, our net income of $60.8was $201.0 million, or $1.84$5.76 per diluted share.  This comparesshare, compared to net income of $85.4$115.9 million, or $2.52$3.26 per diluted share for the year ended December 31, 2016. The reduced 20172020. Current year results reflectwere positively impacted by a $42.6 million, or $1.29 per diluted share, net charge relatedrecapture of provision for credit losses, primarily due to the revaluationimprovement in the level of our deferred tax assetsadversely classified loans and liabilitiesforecasted economic indicators utilized to calculate credit losses, increased interest income and decreased funding costs, partially offset by decreased mortgage banking income and increased non-interest expense. Our net income for the year ended December 31, 2021 included a recapture of provision for credit losses of $33.4 million, partially offset by decreased non-interest income, including a $17.1 million decrease in mortgage banking income and increased non-interest expense, including increases of $4.4 million in payment and card processing services expense and $10.2 million in professional services expense. Our results for the year ended December 31, 2021 included $436,000 of COVID-19 related expenses and $660,000 of merger and acquisition-related expenses as a resultcompared to $3.5 million of the enactmentCOVID-19 related expenses and $2.1 million of the 2017 Tax Act, which reduced the marginal federal corporate income tax rate from 35% to 21%. In addition, there were nomerger and acquisition-related expenses in 2017 compared to acquisition-related expensesthe prior year. The results for year ended December 31, 2021 reflect the impact of $11.7 millionthe low interest rate environment, the unprecedented level of market liquidity and the reduction in 2016. By contrast,business activity in some of our net income before provision for income taxes increased to $151.3 million in 2017 compared to $129.6 million in 2016, reflecting improved earnings from core operations as well as a gain onmarkets due the Utah Branch Sale.lingering impacts of the COVID-19 pandemic.


Our operating results depend largely on our net interest income which increased by $18.0$15.6 million to $393.0$496.9 million, primarily reflecting an acceleration of deferred loan fee income due to SBA PPP loan repayments from SBA loan forgiveness coupled with growth in the balance of average interest-earning assets and deposit growth as well increased yieldsdecreased funding costs, partially offset by the decline in the average yield on earninginterest-earning assets.  The increase in net interest income contributed to an increase of $13.4 million, or 2%, in revenue to $593.3 million for the year ended December 31, 2021, compared to $579.9 million for the year ended December 31, 2020. Our operating results for the year ended December 31, 20172021 also reflected an increasea $2.2 million decrease in non-interest income primarily as growtha result of decreased mortgage banking income, partially offset by an increase in deposit fees and other serviceservices charges and gains from the salea net gain recognized for fair value adjustments as a result of the Utah branches more than offset decreases in revenues from mortgage banking operations, losses on sales of securities and the adverse variance from changes in the valuation of financial instruments carried at fair value. Excluding fair value adjustments, net gains and losses on sale of securities and the gain on the sale of the Utah branches, our non-interest income from core operations increased by $1.0 million to $86.3 million for the year ended December 31, 2017 compared to $85.2 million the preceding year, primarily as a result of a $2.6 millionThe increase in deposit fees and other service charges as well as increases in miscellaneous income partially offset byis primarily a $4.7 millionresult of increased transaction deposit account activity and higher fees on certain transactions. The decrease in mortgage banking operations.  This increaseincome reflects a reduction in non-interest income from core operations, coupled with the increasevolume of one- to four-family loans sold as well as a decrease in net interest income, produced an increase of $19.0 million, or 4%, in revenue from core operationsthe gain on sale margin on one- to $479.3four-family held-for-sale loans. Non-interest expense increased to $380.1 million for the year ended December 31, 20172021 compared to $460.3with $369.6 million for the year ended December 31, 2016. Non-interest2020, largely as a result of increases in payment and card processing services expense and professional services expense, primarily due to an increase in consulting expenses related to the Banner Forward initiative, as well as a $2.3 million loss on extinguishment of debt as a result of the redemption of $8.2 million of junior subordinated debentures during the current year. These increases were partially offset by decreases in COVID-19 expenses and merger and acquisition-related expenses.

Net Interest Income.  Net interest income increased by $15.6 million, or 3%, to $327.3$496.9 million for the year ended December 31, 20172021, compared with $322.9to $481.3 million one year earlier, due to an acceleration of deferred loan fee income due to SBA PPP loan repayments from SBA loan forgiveness, decreases in the cost of funding liabilities and an increase in the average balance of interest-earning assets, partially offset by lower yields on other average interest-earning assets. The lower yields reflect the growth in the average balance of interest-earning assets primarily being invested in short term investments including interest-bearing deposits and securities available for sale. The net interest margin on a tax equivalent basis of 3.39% for the year ended December 31, 2016, largely as a result of higher salary and employee benefits and costs for professional services mostly due to enhanced regulatory requirements attributable to compliance and risk management infrastructure build-out.

Net Interest Income.  Net2021 was 46 basis points lower than the prior year. The net interest income before provision for loan losses increased by $18.0 million, or 5%, to $393.0 millionmargin included four basis points from acquisition accounting adjustments for the year ended December 31, 2017, compared to $375.1 million one year earlier, largely reflecting continued new client acquisition. Net interest margin was enhanced by the amortization of acquisition accounting discounts on purchased loans acquired from bank acquisitions, which are accreted into loan interest income, as well as by net premiums on non-market-rate certificate of deposit liabilities assumed which are amortized as a reduction to deposit interest expense.2021 and seven basis points for 2020. The decrease in net interest margin of 4.24% for the year ended December 31, 2017 was four basis points higher than the prior year and included ten basis points from acquisition accounting adjustments compared to sixteen basis points from acquisition accounting adjustmentsa year earlier primarily reflects lower yields on average interest-earning assets and a larger percentage of interest-earnings assets being invested in 2016.short term investments and interest-bearing deposits, partially offset by decreases in the cost of funding liabilities. The average yield on interest-earning assets of 4.45%3.55% for the year ended December 31, 2017 increased seven2021 decreased 60 basis points compared to the prior year, as higher contractuallargely due to the impact of decreases to the targeted Fed Funds Rate during the first quarter of 2020, resulting in a prolonged low rate environment which resulted in the yields on loansadjustable rate loan repricing lower and securitiesthe yields on new loan originations and security purchases being lower than the existing portfolios as well as a higher percentage of assets being invested in low yielding short term investments and interest-bearing deposits. The Federal Reserve has held the targeted Fed Funds Rate constant since reducing it 150 basis points during first quarter of 2020 to a range of 0.00% to 0.25%; however, it has indicated that the targeted Fed Funds Rate will be increased commencing in the first quarter of 2022 which should benefit our net interest income. The
64

decreases in interest-earnings asset yields were partially offset by decreases in the lower acquisition accounting adjustments.  Funding costs of funding liabilities compared to a year earlier which were higher, asalso largely due to the prolonged low rate environment. The average cost of funding liabilities increaseddecreased by three15 basis points to 0.22%0.16% as compared to the prior year.  The decreases in the costs of funding liabilities compared to a year earlier were also largely due to the impact of decreases to the targeted Fed Funds Rate on the interest rate environment, although the pace of decline in the cost of funding liabilities typically lags the effect on the yield earned on interest-earning assets primarily because offer rates on interest-bearing deposit accounts typically reprice more slowly than loans for a given change in market rates. As a result, the net interest spread increaseddecreased to 4.23%3.39% for the year ended December 31, 20172021 compared to 4.19%3.84% for the prior year.


Interest Income.  Interest income for the year ended December 31, 20172021 was $412.3$520.5 million, compared to $391.5$519.1 million for the prior year, an increase of $20.8 million, or 5%.$1.4 million.  The increase in interest income occurred as a result of an acceleration of deferred loan fee income due to SBA PPP loan repayments from SBA loan forgiveness and increases in both the average balances and yields of investment securities, partially offset by the decrease in the yield on total interest-earning assets. The average balance of total interest-earning assets was $9.26$14.91 billion for the year ended December 31, 2017,2021, an increase of


$330.6 million, $2.20 billion, or 4%17%, compared to $8.93$12.70 billion one year earlier. The yield on average interest-earning assets was 4.45%3.55% for the year ended December 31, 2017,2021, compared to 4.38%4.15% for the year ended December 31, 2016.2020. The increaseddecreased yield on interest-earning assets reflects improvementdecreases in the average yields on loans and securities partially offset by less positive impact from acquisition accountingand excess liquidity being invested in short term investments and interest-bearing deposits. Average loan discount accretion. Loan yields increased threedecreased two basis points to 4.87%4.64% for the year ended December 31, 20172021 compared to 4.84%4.66% in the preceding year, reflecting the positive impact of increases in the prime rate and other marketlower interest rates, on adjustable-rate loans partially offset by a decrease inan acceleration of deferred loan fee income due to SBA PPP loan repayments from SBA loan forgiveness during the current year. The acquisition accounting loan discount accretion to 11and related balance sheet impact added seven basis points in 2017 from 17to the loan yield for the year ended December 31, 2021, compared to ten basis points in 2016.for the year ended December 31, 2020.  Average loans receivable for the year ended December 31, 2017 increased $253.02021 decreased $410.3 million, or 3%4%, to $7.69$9.71 billion, compared to $7.43$10.12 billion for the prior year.year, principally as a result of the forgiveness of SBA PPP loans.  Interest income on loans increaseddecreased by $14.8$20.6 million, or 4%, to $374.4$445.7 million for the year ended December 31, 2017,2021, from $359.6$466.4 million for the prior year, reflecting the impact of the $253 million increase in average loan balances and the three basis point increasedecrease in the balance of average yield on total loans.loans receivable.


The combined average balance of mortgage-backed securities, other investment securities, equity securities, daily interest-bearing deposits and FHLB stock increased to $1.57$5.20 billion for the year ended December 31, 20172021 (excluding the effect of fair value adjustments), compared to $1.50$2.58 billion for the year ended December 31, 2016,2020, contributing to the $6.0$22.6 million increase in interest and dividend income compared to the prior year.  The average yield on the combined portfolio increaseddecreased to 2.40%1.52% for the year ended December 31, 2017,2021, from 2.13%2.18% for the prior year. Portfolio yields improved primarily as a result of security purchases in 2017 at a higher yields than our existing portfolio. For the year ended December 31, 2017,2021, the average yield on mortgage-backed securities increased 27decreased 54 basis points to 2.35%1.88% compared to the prior year, while the yield on other securities increased eightdecreased 56 basis points to 2.68%2.25% compared to the prior year. The decrease in yield reflects the overall decline in market interest rates as well as the investment of excess liquidity in low yielding short term investments and interest-bearing deposits.


Interest Expense.  Interest expense for the year ended December 31, 20172021 was $19.3$23.6 million, compared to $16.4$37.8 million for the prior year, an increasea decrease of $2.8$14.2 million, or 17%38%.  The increasedecrease in interest expense occurred as a result of a $324.1 million, or 4%, increase in average funding liabilities and a three15 basis point increasedecrease in the average cost of all funding liabilities to 0.22%0.16% for the year ended December 31, 2017,2021, compared to 0.19%0.31% for the year ended December 31, 2016.  This2020, partially offset by a $2.16 billion, or 18%, increase in average funding liabilities.  The increase in average funding liabilities reflects increases in low costing core deposits, including non-interest-bearing deposits and interest-bearing transaction and savings accounts.The growth in non-interest-bearing deposits and other core deposits continued to significantly contribute to our low funding costs despite increases in market interest rates resulting from changes in Federal Reserve monetary policy actions during 2016 and 2017.


Deposit interest expense increased $1.2decreased $13.2 million, or 11%53%, to $12.3$11.8 million for the year ended December 31, 20172021 compared to $11.1$25.0 million for the prior year as a result of a $311.2 million,13 basis point decrease in the average cost of deposits, partially offset by a $2.19 billion, or 4%19%, increase in the average balance of deposits, and a one basis point increase in the average cost of deposits.  Average deposit balances increased to $8.36$13.72 billion for the year ended December 31, 2017,2021, from $8.05$11.54 billion for the year ended December 31, 2016,2020, while the average rate paid on deposit balances increaseddecreased to 0.15%0.09% in the current year from 0.14%0.22% for the prior year.  The average cost of interest-bearing deposits increaseddecreased by two22 basis points to 0.24%0.16% for the year ended December 31, 20172021 compared to 0.22%0.38% in the prior year. The $200.3 million$1.20 billion increase in the average balance of non-interest-bearing accounts during 2017 reducedalso contributed to the increasedecrease in total deposit costs. In addition, amortization of acquisition accounting net premiums on certificates of deposit reducedThe decrease in the cost of interest-bearing deposits between the periods was driven by less than one basis point in 2017, compared to two basis points in 2016. Deposit costs are significantly affected by changesmarket and competitive factors following decreases in the leveltarget Fed Funds Rate during the first quarter of market interest rates; however, changes in the average rate paid for2020 as well as a higher percentage of our interest-bearing deposits frequently tend to lag changes in market interest rates. Further, continuing changes in our deposit mix, especially growth inbeing lower cost transaction and savings accounts, in particular non-interest-bearing deposits, through organic growth meaningfully contributed to our low funding costs.costing core deposits.


Average total borrowings increaseddecreased to $403.4$586.3 million for the year end December 31, 2017,2021, compared to $390.5$607.4 million for the prior year. The increasedecrease in average total borrowings was largely due to a $9.4$117.1 million decrease in average FHLB advances. The decrease in average FHLB advances was partially offset by an increase in average FHLB advances.other borrowings due to increases in retail repurchase agreements primarily related to client cash management accounts and the first full year of interest expense for the subordinated debt issued in 2020. The average rate paid on total borrowings increased 37decreased nine basis points to 2.02% from 1.36% to 1.73%2.11%, reflecting the 51eight basis point increasedecrease in the average cost forof our junior subordinated debentures (which reprice every three months based on changes in the three-month LIBOR index) anddebt partially offset by a 5931 basis point increase in the average cost of FHLB advances reflecting increases to the Fed Funds target rate over the last year.advances. The increasedecrease in the average cost of total borrowingborrowings was the primary reason for the $1.7 million increase$991,000 decrease in the related interest expense to $7.0$11.8 million for the year ended December 31, 2017,2021, from $5.3$12.8 million in the prior year.


Table 13, Analysis of Net Interest Spread, presents, for the periods indicated, our condensed average balance sheet information, together with interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities.  Average balances are computed using daily average balances.  (See the footnotes to the tables for more information on average balances.)




65

The following table provides an analysis of our net interest spread for the last three years (dollars in thousands):
Table 13: Analysis of Net Interest Spread
Year Ended December 31, 2017 Year Ended December 31, 2016 Year Ended December 31, 2015 Year Ended December 31, 2021Year Ended December 31, 2020Year Ended December 31, 2019
Average
Balance
 Interest and Dividends 
Yield/
Cost (3)
 
Average
Balance
 
Interest and
Dividends
 
Yield/
Cost (3)
 
Average
Balance
 Interest and Dividends 
Yield/
Cost (3)
 Average
Balance		Interest and Dividends
Yield/
Cost (3)
Average
Balance		Interest and
Dividends
Yield/
Cost (3)
Average
Balance		Interest and Dividends
Yield/
Cost (3)
Interest-earning assets:                 Interest-earning assets:         
Held for sale loansHeld for sale loans$94,252 $3,066 3.25 %$144,220 $5,482 3.80 %$126,086 $5,343 4.24 %
Mortgage loans$6,060,780
 $295,377
 4.87% $5,807,397
 $282,419
 4.86% $3,754,386
 $183,260
 4.88%Mortgage loans7,225,860 328,115 4.54 7,303,584 352,878 4.83 6,911,067 363,241 5.26 
Commercial/agricultural loans1,485,985
 70,266
 4.73
 1,485,390
 68,405
 4.61
 1,076,440
 46,053
 4.28
Commercial/agricultural loans1,498,808 62,479 4.17 1,765,265 80,567 4.56 1,784,468 95,915 5.37 
SBA PPP loansSBA PPP loans770,041 49,854 6.47 760,912 23,133 3.04 — — — 
Consumer and other loans140,500
 8,806
 6.27
 141,460
 8,788
 6.21
 130,367
 7,979
 6.12
Consumer and other loans122,520 7,298 5.96 147,827 9,208 6.23 176,373 11,230 6.37 
Total loans (1)
7,687,265
 374,449
 4.87
 7,434,247
 359,612
 4.84
 4,961,193
 237,292
 4.78
Total loans(1)(3)
Total loans(1)(3)
9,711,481 450,812 4.64 10,121,808 471,268 4.66 8,997,994 475,729 5.29 
Mortgage-backed securities1,043,599
 24,535
 2.35
 931,111
 19,328
 2.08
 490,002
 9,049
 1.85
Mortgage-backed securities2,451,110 46,199 1.88 1,330,355 32,188 2.42 1,368,927 38,809 2.83 
Other securities464,680
 12,448
 2.68
 454,977
 11,814
 2.60
 311,701
 7,646
 2.45
Other securities1,336,974 30,114 2.25 777,378 21,839 2.81 441,402 13,926 3.15 
Equity securitiesEquity securities429 — — 182,846 373 0.20 169 8 4.73 
Interest-bearing deposits with banks49,573
 583
 1.18
 94,456
 395
 0.42
 122,479
 334
 0.27
Interest-bearing deposits with banks1,392,619 1,955 0.14 272,725 907 0.33 72,579 1,649 2.27 
FHLB stock16,379
 269
 1.64
 16,119
 328
 2.03
 16,768
 112
 0.67
FHLB stock13,966 592 4.24 18,952 947 5.00 29,509 1,407 4.77 
Total investment securities1,574,231
 37,835
 2.40
 1,496,663
 31,865
 2.13
 940,950
 17,141
 1.82
Total investment securities (3)
Total investment securities (3)
5,195,098 78,860 1.52 2,582,256 56,254 2.18 1,912,586 55,799 2.92 
Total interest-earning assets9,261,496
 412,284
 4.45
 8,930,910
 391,477
 4.38
 5,902,143
 254,433
 4.31
Total interest-earning assets14,906,579 529,672 3.55 12,704,064 527,522 4.15 10,910,580 531,528 4.87 
Non-interest-earning assets892,052
     904,181
     413,503
    Non-interest-earning assets1,268,348   1,262,170   1,078,108   
Total assets$10,153,548
     $9,835,091
     $6,315,646
    Total assets$16,174,927   $13,966,234   $11,988,688   
Deposits:                 Deposits:         
Interest-bearing checking accounts$933,978
 $850
 0.09
 $859,621
 $767
 0.09
 $634,398
 $518
 0.08
Interest-bearing checking accounts$1,755,293 $1,188 0.07 $1,385,252 $1,479 0.11 $1,188,985 $2,224 0.19 
Savings accounts1,559,042
 2,138
 0.14
 1,370,014
 1,796
 0.13
 1,134,849
 1,511
 0.13
Savings accounts2,652,018 1,833 0.07 2,194,418 4,257 0.19 1,890,467 8,310 0.44 
Money market accounts1,515,854
 2,638
 0.17
 1,575,877
 3,098
 0.20
 747,019
 1,538
 0.21
Money market accounts2,305,814 2,670 0.12 1,996,870 6,275 0.31 1,534,909 10,693 0.70 
Certificates of deposit1,116,304
 6,647
 0.60
 1,208,702
 5,444
 0.45
 928,545
 4,818
 0.52
Certificates of deposit876,509 6,079 0.69 1,030,722 13,004 1.26 1,175,942 16,403 1.39 
Total interest-bearing deposits5,125,178
 12,273
 0.24
 5,014,214
 11,105
 0.22
 3,444,811
 8,385
 0.24
Total interest-bearing deposits7,589,634 11,770 0.16 6,607,262 25,015 0.38 5,790,303 37,630 0.65 
Non-interest-bearing deposits3,233,889
 —
 —
 3,033,604
 —
 —
 1,764,539
 —
 —
Non-interest-bearing deposits6,132,875 — — 4,929,768 — — 3,751,878 — — 
Total deposits8,359,067
 12,273
 0.15
 8,047,818
 11,105
 0.14
 5,209,350
 8,385
 0.16
Total deposits13,722,509 11,770 0.09 11,537,030 25,015 0.22 9,542,181 37,630 0.39 
Other interest-bearing liabilities:                 Other interest-bearing liabilities:         
FHLB advances151,295
 1,908
 1.26
 141,885
 953
 0.67
 49,808
 311
 0.62
FHLB advances97,945 2,592 2.65 215,093 5,023 2.34 477,796 12,234 2.56 
Other borrowings111,903
 317
 0.28
 108,427
 310
 0.29
 94,176
 211
 0.22
Other borrowings240,817 467 0.19 193,862 603 0.31 122,343 330 0.27 
Junior subordinated debentures140,212
 4,752
 3.39
 140,212
 4,040
 2.88
 132,597
 3,247
 2.45
Subordinated debtSubordinated debt247,583 8,780 3.55 198,490 7,204 3.63 141,504 6,574 4.65 
Total borrowings403,410
 6,977
 1.73
 390,524
 5,303
 1.36
 276,581
 3,769
 1.36
Total borrowings586,345 11,839 2.02 607,445 12,830 2.11 741,643 19,138 2.58 
Total funding liabilities8,762,477
 19,250
 0.22
 8,438,342
 16,408
 0.19
 5,485,931
 12,154
 0.22
Total funding liabilities14,308,854 23,609 0.16 12,144,475 37,845 0.31 10,283,824 56,768 0.55 
Other non-interest-bearing liabilities (2)
61,592
     65,508
     17,051
    
Other non-interest-bearing liabilities (2)
206,774   197,422   164,318   
Total liabilities8,824,069
     8,503,850
     5,502,982
    Total liabilities14,515,628   12,341,897   10,448,142   
Shareholders’ equity1,329,479
     1,331,241
     812,664
    Shareholders’ equity1,659,299   1,624,337   1,540,546   
Total liabilities and shareholders’ equity$10,153,548
     $9,835,091
     $6,315,646
    Total liabilities and shareholders’ equity$16,174,927   $13,966,234   $11,988,688   
Net interest income/rate spread  $393,034
 4.23%   $375,069
 4.19%   $242,279
 4.09%
Net interest margin    4.24%     4.20%     4.10%
Net interest income/rate spread (tax equivalent)Net interest income/rate spread (tax equivalent) $506,063 3.39 % $489,677 3.84 % $474,760 4.32 %
Net interest margin (tax equivalent)Net interest margin (tax equivalent)  3.39 %  3.85 %  4.35 %
Reconciliation to reported net interest income:Reconciliation to reported net interest income:
Adjustments for taxable equivalent basisAdjustments for taxable equivalent basis(9,172)(8,376)(5,841)
Net interest income and margin, as reportedNet interest income and margin, as reported$496,891 3.33 %$481,301 3.79 %$468,919 4.30 %
Average interest-earning assets / average interest-bearing liabilities    167.52%     165.24%     158.60%Average interest-earning assets / average interest-bearing liabilities  182.32 %  176.09 %  167.03 %
Average interest-earning assets / average funding liabilities    105.69%     105.84%     107.59%Average interest-earning assets / average funding liabilities104.18 %104.61 %106.09 %
(footnotes follow)

66

(1)
Average balances include loans accounted for on a nonaccrual basis and loans 90 days or more past due.  Amortization of net deferred loan fees/costs is included with interest on loans.
(2)
Average other non-interest-bearing liabilities include fair value adjustments related to FHLB advances and junior subordinated debentures.
(3)
Yields and costs have not been adjusted for the effect of tax-exempt interest.


(1)Average balances include loans accounted for on a nonaccrual basis and loans 90 days or more past due.  Amortization of net deferred loan fees/costs is included with interest on loans.
(2)Average other non-interest-bearing liabilities include fair value adjustments related to junior subordinated debentures.
(3)Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $5.1 million, $4.9 million, and $4.3 million for the years ended December 31, 2021, December 31, 2020, and December 31, 2019, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $4.1 million, $3.5 million, and $1.6 million for the years ended December 31, 2021, December 31, 2020, and December 31, 2019, respectively.

The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown (in thousands).  Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume).  Effects on interest income attributable to changes in rate and volume (changes in rate multiplied by changes in volume) have been allocated between changes in rate and changes in volume (in thousands):


Table 14:  Rate/Volume Analysis
 
Year Ended December 31, 2021
Compared to Year Ended
December 31, 2020
Increase (Decrease) in
Income/Expense Due to
Year Ended December 31, 2020
Compared to Year Ended
December 31, 2019
Increase (Decrease) in
Income/Expense Due to
RateVolumeNetRateVolumeNet
Interest-earning assets:      
Held for sale loans$(712)$(1,704)$(2,416)$(348)$487 $139 
Mortgage loans(20,989)(3,774)(24,763)(35,247)24,884 (10,363)
Commercial/agricultural loans(6,509)(11,579)(18,088)(14,309)(1,039)(15,348)
SBA PPP loans26,409 312 26,721 3,939 19,194 23,133 
Consumer and other loans(385)(1,525)(1,910)(242)(1,780)(2,022)
Total loans(2,186)(18,270)(20,456)(46,207)41,746 (4,461)
Mortgage-backed securities(5,003)19,014 14,011 (5,480)(1,141)(6,621)
Other securities(3,154)11,429 8,275 (1,312)9,225 7,913 
Equity securities(183)(190)(373)— 365 365 
Interest-bearing deposits with banks(171)1,219 1,048 336 (1,078)(742)
FHLB stock(130)(225)(355)72 (532)(460)
Total investment securities(8,641)31,247 22,606 (6,384)6,839 455 
Total net change in interest income on interest-earning assets(10,827)12,977 2,150 (52,591)48,585 (4,006)
Interest-bearing liabilities:      
Interest-bearing checking accounts(1,112)821 (291)(1,209)464 (745)
Savings accounts(3,453)1,029 (2,424)(5,786)1,733 (4,053)
Money market accounts(4,579)974 (3,605)(9,904)5,486 (4,418)
Certificates of deposit(5,215)(1,710)(6,925)(1,447)(1,952)(3,399)
Total interest-bearing deposits(14,359)1,114 (13,245)(18,346)5,731 (12,615)
FHLB advances784 (3,215)(2,431)(973)(6,238)(7,211)
Other borrowings(383)247 (136)55 218 273 
Subordinated debt(155)1,731 1,576 (748)1,378 630 
Total borrowings246 (1,237)(991)(1,666)(4,642)(6,308)
Total net change in interest expense on interest-bearing liabilities(14,113)(123)(14,236)(20,012)1,089 (18,923)
Net change in net interest income (tax equivalent)$3,286 $13,100 $16,386 $(32,579)$47,496 $14,917 
 
Year Ended December 31, 2017
Compared to Year Ended
December 31, 2016
Increase (Decrease) in
Income/Expense Due to
 
Year Ended December 31, 2016
Compared to Year Ended
December 31, 2015
Increase (Decrease) in
Income/Expense Due to
 Rate Volume Net Rate Volume Net
Interest-earning assets:           
Mortgage loans$610
 $12,348
 $12,958
 $(683) $99,843
 $99,160
Commercial/agricultural loans1,834
 27
 1,861
 3,743
 18,609
 22,352
Consumer and other loans78
 (60) 18
 121
 687
 808
Total loans (1)
2,522
 12,315
 14,837
 3,181
 119,139
 122,320
Mortgage-backed securities2,725
 2,483
 5,208
 1,245
 9,034
 10,279
Other securities379
 254
 633
 471
 3,697
 4,168
Interest-bearing deposits with banks447
 (259) 188
 149
 (88) 61
FHLB stock(63) 4
 (59) 229
 (13) 216
Total investment securities3,488
 2,482
 5,970
 2,094
 12,630
 14,724
Total net change in interest income on interest-earning assets6,010
 14,797
 20,807
 5,275
 131,769
 137,044
Interest-bearing liabilities:           
Deposits (2)
1,412
 (244) 1,168
 (839) 3,559
 2,720
FHLB advances888
 67
 955
 25
 617
 642
Other borrowings(3) 10
 7
 64
 35
 99
Junior subordinated debentures712
 —
 712
 599
 194
 793
Total borrowings1,597
 77
 1,674
 688
 846
 1,534
Total net change in interest expense on interest-bearing liabilities3,009
 (167) 2,842
 (151) 4,405
 4,254
Net change in net interest income$3,001
 $14,964
 $17,965
 $5,426
 $127,364
 $132,790

(1)
Includes loans accounted for on a nonaccrual basis and loans 90 days or more past due.  Amortization of net deferred loan fees/costs is included with interest on loans.
(2)
Includes non-interest-bearing deposits.

Provision and Allowance for LoanCredit Losses.  Although our credit quality metrics continue to reflect good performance and our moderate risk profile, weWe recorded an $8.0a $33.1 million recapture of provision for loancredit losses - loans in the year ended December 31, 2017, primarily due to the organic growth in the loan portfolio and the maturity, subsequent renewal and migration of acquired loans out of the discounted loan portfolios and increased net charge-offs,2021, compared to the $6.0a $64.3 million provision for loancredit losses - loans recorded in 2016.2020. As discussed in the “Summary of Critical Accounting Policies” section above and in Note 1 of the Notes to the Consolidated Financial Statements, the provision and allowance for loancredit losses is one of the most critical accounting estimates included in our Consolidated Financial Statements.  


67

The provision for loancredit losses - loans reflects the amount required to maintain the allowance for credit losses - loans at an appropriate level based upon management’s evaluation of the adequacy of generalcollective and individual loss reserves. The recapture of provision for credit losses - loans for the current year primarily reflects improvement in forecasted economic indicators and a decrease in adversely classified loans. In addition, management has updated its assessment of qualitative factors including assessing the current conditions within the specific loss reserves, trendsmarkets we serve compared to the nationally forecasted economic indicators. The prior year provision for credit losses reflected the forecasted economic deterioration during 2020 and risk rating downgrades on loans that were considered at heightened risk due to the COVID-19 pandemic. In addition, the change for the year ended December 31, 2020 included a $7.8 million increase related to the adoption of CECL. Future assessments of the expected credit losses will not only be impacted by changes to the reasonable and supportable forecast, but will also include an updated assessment of qualitative factors, as well as consideration of any required changes in delinquencies, net charge-offsthe reasonable and current economic conditions. We continue to maintain a strongsupportable forecast reversion period. No allowance for loan lossescredit losses-loans was recorded on the $133.9 million balance of SBA PPP loans at December 31, 2017.2021 as these loans are fully guaranteed by the SBA.




In accordance with acquisition accounting, loans acquired from acquisitions were recorded at their estimated fair value, which resulted in a net discount to the loans contractual amounts, of which a portion reflects a discount for possible credit losses. Credit discounts are included in the determination of fair value and as a result no allowance for loan and lease losses is recorded for acquired loans at the acquisition date. Although the discount recorded on the acquired loans is not reflected in the allowance for loan losses, or related allowance coverage ratios, we believe it should be considered when comparing the current ratios to similar ratios in periods prior to the acquisitions. The discount on acquired loans was $21.1 million at December 31, 2017 compared to $31.1 million at December 31, 2016.

We recorded net charge-offs of $5.0$2.1 million for the year ended December 31, 2017,2021, compared to net recoveriescharge-offs of $2.0$5.4 million for the prior year. Non-performingThe reduction in net charge-offs in 2021 reflects the improvement in overall loan portfolio performance during 2021. Nonaccrual loans modestly increaseddecreased by $4.5$10.3 million during the year to $27.0$22.3 million at December 31, 2017,2021, compared to $22.6$32.6 million at December 31, 2016.2020.  The allowance for credit losses – loans as a percentage of nonaccrual loans increased to 593% at December 31, 2021, compared to 514% at December 31, 2020. The increase in the allowance for credit losses – loans as a percentage of nonaccrual loans is due to the decrease in nonaccrual loans during 2021 as the number of borrowers being impacted by the COVID-19 pandemic lessened. A comparison of the allowance for loancredit losses - loans at December 31, 20172021 and 20162020 reflects an increasea decrease of $3.0$35.2 million, or 4%21%, to $89.0$132.1 million at December 31, 2017,2021, from $86.0$167.3 million at December 31, 2016. Included in our allowance at December 31, 2017 was an unallocated portion of $8.7 million, which was based upon our evaluation of various factors that were not directly measured in the determination of the formula and specific allowances.2020.  The allowance for loancredit losses - loans as a percentage of total loans (loans receivable excluding allowance for credit losses) increaseddecreased to 1.17%1.45% at December 31, 2017,2021, compared to 1.15%1.69% at December 31, 2016.  

We believe that2020.  The decrease in the allowance for loancredit losses was adequate to absorb- loans as a percentage of loans reflects the known and inherent risksrecapture of lossprovision for credit losses - loans recorded during the year ended December 31, 2021, primarily as the result of the improvement in the loan portfolio aslevel of December 31, 2017. While we believe the estimatesadversely classified loans and assumptions used in our determination of the adequacy of the allowance are reasonable, there can be no assurance that these estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations.  In addition, the determination of the amount of the allowance for loan losses is subjectforecasted economic indicators utilized to review by bank regulators as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of information available to them at the time of their examination.calculate credit losses.




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


Table 15:  Changes in Allowance for LoanCredit Losses - Loans
 Years Ended December 31
 202120202019
Balance, beginning of period$167,279 $100,559 $96,485 
Beginning balance adjustment for adoption of ASC 326— 7,812 — 
(Recapture)/provision for credit losses – loans(33,112)64,285 10,000 
Recoveries of loans previously charged off:
Commercial real estate1,729 275 476 
Construction and land100 105 208 
One- to four-family residential199 467 561 
Commercial business1,797 3,265 625 
Agricultural business, including secured by farmland30 1,823 47 
Consumer760 328 548 
 4,615 6,263 2,465 
Loans charged off:
Commercial real estate(3,767)(1,854)(1,138)
Multifamily real estate(59)(66)— 
Construction and land— (100)(45)
One- to four-family residential— (136)(86)
Commercial business(1,762)(7,253)(4,171)
Agricultural business, including secured by farmland(181)(591)(911)
Consumer(914)(1,640)(2,040)
(6,683)(11,640)(8,391)
Net charge-offs(2,068)(5,377)(5,926)
Balance, end of period$132,099 $167,279 $100,559 
Total loans$9,084,763 $9,870,982 $9,305,357 
Average outstanding loans$9,711,481 $10,121,808 $8,997,994 
Total nonaccrual loans$22,281 $32,560 $37,501 
Allowance for credit losses - loans as a percent of total loans1.45 %1.69 %1.08 %
Net loan charge-offs as a percent of average outstanding loans during the period(0.02)%(0.05)%(0.07)%
Allowance for credit losses - loans as a percent of nonaccrual loans593 %514 %268 %
68
 Years Ended December 31
 2017
 2016
 2015
 2014
 2013
Balance, beginning of period$85,997
 $78,008
 $75,907
 $74,258
 $76,759
Provision8,000
 6,030
 —
 —
 —
Recoveries of loans previously charged off: 
  
  
  
  
Commercial real estate372
 582
 819
 1,507
 2,367
Multifamily real estate11
 —
 113
 —
 —
Construction and land1,237
 2,171
 1,811
 1,776
 2,275
Commercial business1,226
 1,993
 772
 988
 1,673
Agricultural business, including secured by farmland134
 59
 948
 1,576
 697
One- to four-family real estate270
 1,283
 1,927
 618
 145
Consumer481
 610
 570
 528
 340
 3,731
 6,698
 6,960
 6,993
 7,497
Loans charged off: 
  
  
  
  
Commercial real estate(1,180) (746) (64) (1,239) (2,569)
Multifamily real estate—
 —
 —
 (20) —
Construction and land—
 (616) (891) (207) (1,821)
Commercial business(3,803) (948) (419) (1,344) (1,782)
Agricultural business, including secured by farmland(2,374) (567) (746) (179) (248)
One- to four-family real estate(38) (375) (1,225) (885) (2,139)
Consumer(1,305) (1,487) (1,514) (1,470) (1,439)
 (8,700) (4,739) (4,859) (5,344) (9,998)
Net (charge-offs) recoveries(4,969) 1,959
 2,101
 1,649
 (2,501)
Balance, end of period$89,028
 $85,997
 $78,008
 $75,907
 $74,258
Allowance for loan losses as a percent of total loans1.17 % 1.15% 1.07% 1.98% 2.17 %
Net loan (charge-offs) recoveries as a percent of average outstanding loans during the period(0.06)% 0.03% 0.04% 0.04% (0.08)%
Allowance for loan losses as a percent of non-performing loans329 % 381% 512% 454% 300 %






The following table sets forth the breakdown of the allowance for loancredit losses - loans by loan category at the dates indicated (dollars in thousands):


Table 16:  Allocation of Allowance for Credit Losses - Loans
 December 31
 202120202019
 AmountPercent
of Loans
in Each
Category
to Total
Loans		AmountPercent
of Loans
in Each
Category
to Total
Loans		AmountPercent
of Loans
in Each
Category
to Total
Loans
Allowance for credit losses - loans:   
Commercial real estate$52,995 41.0 %$57,791 36.5 %$30,591 41.8 %
Multifamily real estate7,043 6.2 3,893 4.4 4,754 5.1 
Construction and land27,294 14.5 41,295 13.0 22,994 12.6 
One-to-four-family real estate8,205 7.5 9,913 7.3 4,136 10.1 
Commercial business26,421 21.6 35,007 29.6 23,370 18.2 
Agricultural business, including secured by farmland3,190 3.1 4,914 3.0 4,120 4.0 
Consumer6,951 6.1 14,466 6.2 8,202 8.2 
Total allocated132,099  167,279  98,167  
Unallocated— n/a— n/a2,392 n/a
Total allowance for credit losses - loans$132,099 100.0 %$167,279 100.0 %$100,559 100.0 %


The allowance for credit losses - unfunded loan commitments was $12.4 million at December 31, 2021 compared to $13.3 million at December 31, 2020. The decrease in the allowance for credit losses - unfunded loan commitments reflects the recapture of provision for credit losses - unfunded loan commitments recorded during year ended December 31, 2021. During the year ended December 31, 2021, we recorded a recapture of provision for credit losses - unfunded loan commitments of $865,000, compared to a $3.6 million provision for loan losses - unfunded loan commitments during the prior year. The recapture of provision for loan credit losses - unfunded loan commitments for the year ended December 31, 2021 was primarily the result of an improvement in the forecasted economic indicators.

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

Table 17:  Changes in Allowance for Credit Losses - Unfunded Loan LossesCommitments
 Years Ended, December 31,
202120202019
  
Balance, beginning of period$13,297 $2,716 $2,599 
Beginning balance adjustment for adoption of ASC 326— 7,022 — 
(Recapture)/provision for credit losses - unfunded loan commitments(865)3,559 — 
Additions through acquisitions— — 117 
Balance, end of period$12,432 $13,297 $2,716 
69
 December 31
 2017 2016 2015 2014 2013
 Amount 
Percent
of Loans
in Each
Category
to Total
Loans
 Amount 
Percent
of Loans
in Each
Category
to Total
Loans
 Amount 
Percent
of Loans
in Each
Category
to Total
Loans
 Amount 
Percent
of Loans
in Each
Category
to Total
Loans
 Amount 
Percent
of Loans
in Each
Category
to Total
Loans
Specific or allocated loss allowances (1):
                   
Commercial real estate$22,824
 42.4% $20,993
 44.9% $20,716
 42.3% $18,784
 36.6% $16,759
 34.9%
Multifamily real estate1,633
 4.1
 1,360
 3.3
 4,195
 6.5
 4,562
 4.4
 5,306
 4.0
Construction and land27,568
 12.0
 34,252
 11.0
 27,131
 7.9
 23,545
 10.8
 17,640
 10.3
Commercial business18,311
 16.8
 16,533
 16.2
 13,856
 16.5
 2,821
 18.9
 2,841
 20.0
Agricultural business, including secured by farmland4,053
 4.4
 2,967
 5.0
 3,645
 5.1
 8,447
 6.2
 11,486
 6.7
One-to-four-family real estate2,055
 11.2
 2,238
 10.9
 4,732
 13.0
 12,043
 14.0
 11,773
 15.5
Consumer3,866
 9.1
 4,104
 8.7
 902
 8.7
 483
 9.1
 1,335
 8.6
Total allocated80,310
   82,447
   75,177
   70,685
   67,140
  
Unallocated (1)
8,718
 n/a
 3,550
 n/a
 2,831
 n/a
 5,222
 n/a
 7,118
 n/a
Total allowance for loan losses$89,028
 100.0% $85,997
 100.0% $78,008
 100.0% $75,907
 100.0% $74,258
 100.0%


(1)
We establish specific loss allowances when individual loans are identified that present a possibility of loss (i.e., that full collectability is not reasonably assured).  The remainder of the allocated and unallocated allowance for loan losses is established for the purpose of providing for estimated losses which are inherent in the loan portfolio.



Non-interest Income. The following table presents the key components of non-interest income for the years ended December 31, 2017, 2016, 20152021, 2020, 2019 (dollars in thousands):


Table 17:18: Non-interest Income
2021 compared to 20202020 compared to 2019
20212020Change AmountChange Percent20202019Change AmountChange Percent
Deposit fees and other service charges$39,495 $34,384 $5,111 14.9 %$34,384 $46,632 $(12,248)(26.3)%
Mortgage banking operations33,948 51,083 (17,135)(33.5)%51,083 22,215 28,868 129.9 %
Bank owned life insurance5,000 5,972 (972)(16.3)%5,972 4,645 1,327 28.6 %
Miscellaneous12,875 6,821 6,054 88.8 %6,821 8,624 (1,803)(20.9)%
91,318 98,260 (6,942)(7.1)%98,260 82,116 16,144 19.7 %
Net gain on sale of securities482 1,012 (530)(52.4)%1,012 33 979 nm
Net change in valuation of financial instruments carried at fair value4,616 (656)5,272 (803.7)%(656)(208)(448)215.4 %
Total non-interest income$96,416 $98,616 $(2,200)(2.2)%$98,616 $81,941 $16,675 20.4 %
 2017 compared to 2016 2016 compared to 2015
 2017 2016 Change Amount Change Percent 2016 2015 Change Amount Change Percent
Deposit fees and other service charges$51,787
 $49,156
 $2,631
 5.4 % $49,156
 $40,607
 $8,549
 21.1 %
Mortgage banking operations20,880
 25,552
 (4,672) (18.3)% 25,552
 17,720
 7,832
 44.2 %
Bank owned life insurance4,618
 4,538
 80
 1.8 % 4,538
 2,497
 2,041
 81.7 %
Miscellaneous8,985
 6,001
 2,984
 49.7 % 6,001
 2,821
 3,180
 112.7 %
 86,270
 85,247
 1,023
 1.2 % 85,247
 63,645
 21,602
 33.9 %
Net (loss) gain on sale of securities(2,080) 843
 (2,923) (346.7)% 843
 (540) 1,383
 (256.1)%
Net change in valuation of financial instruments carried at fair value(2,844) (2,620) (224) 8.5 % (2,620) (813) (1,807) 222.3 %
Gain on sale of branches, including related loans and deposits12,189
 —
 12,189
 — % —
 —
 —
 — %
Total non-interest income$93,535
 $83,470
 $10,065
 12.1 % $83,470
 $62,292
 $21,178
 34.0 %


Non-interest income decreased $2.2 million, or 2%, which includesto $96.4 million for the year ended December 31, 2021, compared to $98.6 million for the year ended December 31, 2020.  This decrease was primarily due to the decrease in mortgage banking income, partially offset by increases in deposit fees and other services charges and miscellaneous income as well as a net gain recognized for fair value adjustments as a result of changes in the valuation of financial instruments carried at fair value, net gain on sale of securities and gain on sale of the Utah branches, as well as non-interest revenues from core operations, increased $10.1 million, or 12%, to $93.5 million for the year ended December 31, 2017, compared to $83.5 million for the year ended December 31, 2016.  This increase was primarily due to the strong growth in deposit fees and other service charges and the gain on the sale of the Utah branches partially offset by the decline in income from mortgage banking operations.  Excluding fair value adjustments, net gains on the sale of securities and the gain on the Utah Branch Sale, non-interest income from core operations increased $1.0 million to $86.3 million for the year ended December 31, 2017 compared to $85.2 million at December 31, 2016.value.  Income from deposit fees and other service charges increased by $2.6$5.1 million, or 5%15%, to $51.8$39.5 million for the year ended December 31, 2017,2021, compared to $49.2$34.4 million for the prior year.year, primarily as a result of increased transaction deposit account activity and higher fees on certain transactions. Mortgage banking revenues,income, including gains on one- to four-family and multifamily loan sales and loan servicing fees, decreased by $4.7$17.1 million to $20.9$33.9 million for the year ended December 31, 2017,2021, compared to $25.6$51.1 million in the prior year. Sales of one- to four-family loans held for sale for the year ended December 31, 20172021 resulted in gains of $15.2$28.7 million, compared to $20.3$50.1 million for the year ended December 31, 2016. The decrease in gains on the sales of one- to four-family loans was primarily due to a decline in the volume of loans sold as well as both the increase in loans held for portfolio and decreased loan originations reflecting reduced refinancing activity. For the year ended December 31, 2017 sales of one- to four-family loans totaled $552.5 million compared to $682.8 million for the year ended December 31, 2016.2020. In addition, for the year ended December 31, 2017,2021, mortgage banking revenuesincome included $3.1$5.8 million of gains on the sale of multifamily loans, compared to $3.3$1.8 million for the year ended December 31, 2016.2020. The $3.0lower mortgage banking revenue reflected a decrease in the gain on sale margin on one- to four-family held-for-sale loans, as well as a reduction in the volume of one- to four-family loans sold, reflecting a decrease in refinance activity, partially offset by higher gains on the sale of multifamily held-for-sale loans. The decrease in bank owned life insurance income for year ended December 31, 2021 compared to the prior year was due to death benefit proceeds received in the second quarter of 2020. The $6.1 million increase in miscellaneous income was primarily driven by a one-time gain of $2.5 millionvaluation adjustment on the saleSBA servicing asset, higher gains on the sales of a single loan that had been acquired a numberSBA loans and higher gains related to the disposition of years ago as a partial settlement on a non-performing credit relationship and was carried at a significant discount to its contractual amount and eventual sale price. Securityclosed branch locations.

Securities sales for the year ended December 31, 2017, largely related to the year-end balance sheet restructuring strategy,2021 resulted in a lossgain of $2.1 million$482,000, compared to a $843,000$1.0 million gain for securities sold for the year ended December 31, 2016.
2020. The higher gain recognized in 2020 was primarily the result of the gain recognized on the sale of Visa Class B shares held by us. For the year ended December 31, 2017,2021, we recorded a net lossgain of $2.8$4.6 million for changes in the valuation of financial instruments carried at fair value, compared to a net loss of $2.6 million$656,000 for the year ended December 31, 2016.  The adjustments in 2017 primarily reflect changes in the valuation of certain investment securities, which resulted in $658,000 in net gains, as well as changes in the valuation of the junior subordinated debentures we have issued, which resulted in $3.5 million in charges, in each case largely as a result of increased market interest rates.  The net fair value losses in 2016 primarily reflected changes in the valuation of certain investment securities resulting in $376,000 in net losses and changes in the valuation of the junior subordinated debentures, which resulted in $2.7 million in charges.  As discussed more thoroughly in Note 18 of the Notes to the Consolidated Financial Statements, the valuation for many of these financial instruments has been difficult and more subjective in recent periods as current and reliable observable transaction data is very limited.2020.

70



Non-interest Expense.  The following table represents key elements of non-interest expense for the years ended December 31, 2017, 2016, 20152021, 2020, 2019 (dollars in thousands).


Table 18:19: Non-interest Expense
2021 compared to 20202020 compared to 2019
20212020Change AmountChange Percent20202019Change AmountChange Percent
Salary and employee benefits$244,351 $245,400 $(1,049)(0.4)%$245,400 $226,409 $18,991 8.4 %
Less capitalized loan origination costs(34,401)(34,848)447 (1.3)%(34,848)(28,934)(5,914)20.4 %
Occupancy and equipment52,850 53,362 (512)(1.0)%53,362 52,390 972 1.9 %
Information/computer data services24,356 24,386 (30)(0.1)%24,386 22,458 1,928 8.6 %
Payment and card processing expenses20,544 16,095 4,449 27.6 %16,095 16,993 (898)(5.3)%
Professional and legal expenses22,274 12,093 10,181 84.2 %12,093 9,736 2,357 24.2 %
Advertising and marketing6,036 6,412 (376)(5.9)%6,412 7,836 (1,424)(18.2)%
Deposit insurance5,583 6,516 (933)(14.3)%6,516 2,840 3,676 129.4 %
State/Municipal business and use taxes4,343 4,355 (12)(0.3)%4,355 3,880 475 12.2 %
REO operations(22)(190)168 (88.4)%(190)303 (493)(162.7)%
Amortization of core deposit intangibles6,571 7,732 (1,161)(15.0)%7,732 8,151 (419)(5.1)%
Loss on extinguishment of debt2,284 — 2,284 nm— 735 (735)(100.0)%
Miscellaneous24,236 22,712 1,524 6.7 %22,712 27,387 (4,675)(17.1)%
$379,005 $364,025 $14,980 4.1 %$364,025 $350,184 $13,841 4.0 %
COVID-19 expenses436 3,502 (3,066)(87.5)%3,502 — 3,502 nm
Merger and acquisition-related costs660 2,062 (1,402)(68.0)%2,062 7,544 (5,482)(72.7)%
Total non-interest expense$380,101 $369,589 $10,512 2.8 %$369,589 $357,728 $11,861 3.3 %
 2017 compared to 2016 2016 compared to 2015
 2017 2016 Change Amount Change Percent 2016 2015 Change Amount Change Percent
Salary and employee benefits$192,096
 $180,883
 $11,213
 6.2 % $180,883
 $127,282
 $53,601
 42.1 %
Less capitalized loan origination costs(17,379) (18,895) 1,516
 (8.0)% (18,895) (14,379) (4,516) 31.4 %
Occupancy and equipment47,866
 45,000
 2,866
 6.4 % 45,000
 30,366
 14,634
 48.2 %
Information/computer data services17,245
 19,281
 (2,036) (10.6)% 19,281
 12,110
 7,171
 59.2 %
Payment and card processing expenses22,665
 21,604
 1,061
 4.9 % 21,604
 16,430
 5,174
 31.5 %
Professional services17,534
 8,120
 9,414
 115.9 % 8,120
 4,828
 3,292
 68.2 %
Advertising and marketing8,637
 9,709
 (1,072) (11.0)% 9,709
 7,649
 2,060
 26.9 %
Deposit insurance4,689
 4,551
 138
 3.0 % 4,551
 3,189
 1,362
 42.7 %
State/Municipal business and use taxes2,594
 3,516
 (922) (26.2)% 3,516
 1,889
 1,627
 86.1 %
REO operations(2,030) 175
 (2,205) (1,260.0)% 175
 397
 (222) 55.9 %
Amortization of core deposit intangibles6,246
 7,061
 (815) (11.5)% 7,061
 3,164
 3,897
 123.2 %
Miscellaneous27,142
 30,131
 (2,989) (9.9)% 30,131
 17,565
 12,566
 71.5 %
 $327,305
 $311,136
 $16,169
 5.2 % $311,136
 $210,490
 $100,646
 47.8 %
Acquisition-related costs$—
 $11,733
 $(11,733) (100.0)% $11,733
 $26,110
 $(14,377) (55.1)%
Total non-interest expense$327,305
 $322,869
 $4,436
 1.4 % $322,869
 $236,600
 $86,269
 36.5 %


Non-interest expense for the year ended December 31, 20172021 was $327.3$380.1 million, an increase of $4.4$10.5 million, or 1%3%, as compared to the same period in 2016.2020. The increase was largely attributableprimarily due to higher salaryincreases in payment and employee benefitscard processing services expense and costs for professional services mostlyexpense, primarily due to enhanced regulatory requirements attributablean increase in consulting expenses related to compliance and risk management infrastructure build-out, whichthe Banner Forward initiative, as well as a $2.3 million loss on extinguishment of debt as a result of the redemption of $8.2 million of junior subordinated debentures during the current year. These increases were partially offset by a decreasedecreases in COVID-19 expenses and merger and acquisition-related costs.expenses. There were no acquisition-related costs added to non-interest expense$436,000 of COVID-19 expenses in the current year, compared to $11.7$3.5 million in the year ended December 31, 2016. Salaries2020. We expect to see COVID-19 expenses continue throughout the duration of the current pandemic.

Salary and employee benefits expenses increased $11.2decreased $1.0 million to $192.1$244.4 million for the year ended December 31, 20172021 from $180.9$245.4 million for the year ended December 31, 2016,2020, primarily reflecting incrementala reduction in staffing, associated withpartially offset by severance related expenses. Capitalized loan origination costs decreased $447,000 for the build-outyear ended December 31, 2021, compared to the prior year, primarily due to higher originations of the Company's compliance and risk management infrastructure as well as to a lesser extent normal salary and wage adjustments.SBA PPP loans during 2020. Occupancy and equipment expenses increased $2.9 million,decreased $512,000, or 6%1%, to $47.9$52.9 million in 2017,2021, compared to $45.0$53.4 million in 2016. The increase in occupancy2020. Payment and equipment expense primarily reflects increased depreciation associated with equipment purchased for acquired locations and increased seasonal building repair and maintenance. Information and computer data services expense decreased $2.0 million, or 11%, to $17.2 million in the current year, compared to $19.3 million in the prior year, reflecting savings from post-acquisition systems integrations. Professionalcard processing services expense increased $9.4$4.4 million to $17.5$20.5 million for the year ended December 31, 20172021 from $8.1$16.1 million for the year ended December 31, 2016, largely due to2020, primarily reflecting an increase in client rewards program expenses as well as an increase in fraud related losses. Professional and legal expense increased consulting services related to enhanced regulatory requirements attributable to our compliance and risk management infrastructure build-out. REO operations for the year ended December 31, 2017 resulted in income of $2.0 million, compared to an expense of $175,000 in the prior year. The income in 2017 resulted primarily from $2.9 million of net gains on the sale of properties offset by the carrying costs related to repossessed properties. Miscellaneous expense decreased $3.0$10.2 million to $27.1$22.3 million for the year ended December 31, 20172021 from $30.1$12.1 million for the year ended December 31, 2020, primarily due to an increase in consulting expenses, which included $8.3 million of expense related to the releaseBanner Forward initiative as well as a $4.0 million accrual recorded during the current year related to pending litigation. Advertising and marketing expenses decreased $376,000 to $6.0 million for the year ended December 31, 2021 from $6.4 million for the year ended December 31, 2020. Deposit insurance expense decreased $933,000 for the year ended December 31, 2021, compared to the same period in 2020. There were $660,000 of a $1.2merger and acquisition-related costs in the current year, compared to $2.1 million reservein the year ended December 31, 2020. Miscellaneous expenses increased $1.5 million for possible losses on an unfunded commitment for a single credit relationship that was terminated in 2017.the year ended December 31, 2021, compared to the prior year, primarily reflecting increased loan related expenses.
Income Taxes. For the year ended December 31, 2017,2021, we recognized $90.5$45.5 million in income tax expense for an effective rate of 59.8%18.5%, which reflects a $42.6 million revaluation of our net deferred tax asset as a result the passage of the 2017 Tax Act which reduced the federal statutory corporate income tax rate from 35%reduced by the effect of tax-exempt income, certain tax credits, and tax benefits related to 21% and higher pre-tax income.restricted stock vesting. Our normal, expected blended federal and state statutory income tax rate was approximately 37% prior to the change in the corporate federal tax rate. Our new expected blended statutory income tax rate will be approximately 24%is 23.7%, representing a blend of the statutory federal income tax rate of 21.0% and apportioned effects of the state and local jurisdictions where we do business. For the year ended December 31, 2016,2020, we recognized $44.3$26.5 million in income tax expense for an effective tax rate of 34.1% 18.6%. For more information on income taxes and deferred taxes, see Note 1211 of the Notes to the Consolidated Financial Statements.

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Comparison of Results of Operations for the Years Ended December 31, 20162020 and 20152019


For the year ended December 31, 2016 we had net incomeSee Management’s Discussion and Analysis of $85.4 million, or $2.52 per diluted share. This compares to net incomeFinancial Condition and Results of $45.2 million, or $1.89 per diluted share,Operations in our Annual Report on Form 10-K for the year ended December 31, 2015. The 2016 results reflect the first full year of earnings contribution from the operations acquired in the AmericanWest and Siuslaw acquisitions and lower acquisition-related expenses. Acquisition-related expenses were $11.7 million, or $0.22 per diluted share net of tax benefit, in 2016 compared to $26.1 million, or $0.76 per diluted share net of tax benefit, in 2015.

Our net interest income increased by $132.8 million to $375.1 million in 2016, primarily reflecting a full year contribution in 2016 of the operations acquired in the the AmericanWest and Siuslaw acquisitions and organic loan and deposit growth from the legacy Banner Bank franchise. Our operating results for the year ended December 31, 2016 also reflected an increase in non-interest income, as strong growth in deposit fees and other service charges and revenues from mortgage banking operations more than offset the adverse variance from changes in valuation of financial instruments carried at fair value. Excluding fair value adjustments and net gains on sale of securities, our non-interest income from core operations increased by $21.6 million to $85.2 million for the year ended December 31, 2016 compared to $63.6 million the preceding year, primarily as a result of an $8.5 million increase in deposit fees and other service charges and a $7.8 million increase in mortgage banking operations. This increase in non-interest income from core operations, coupled2020 filed with the increase in net interest income, produced an increase of $154.4 million, or 50%, in revenue from core operations to $460.3 million for the year ended December 31, 2016 compared to $305.9 million for the year ended December 31, 2015. Non-interest expense increased to $322.9 million for the year ended December 31, 2016 compared with $236.6 million for the year ended December 31, 2015 largely as a result of a full year's expense associated with operating the branches acquired in the AmericanWest acquisition on October 1, 2015 and the Siuslaw Bank branches acquired in March 2015 as well as generally increased compensation, occupancy and payment and card processing services reflecting increased transaction volume.SEC.

Net Interest Income. Net interest income before provision for loan losses increased by $132.8 million, or 55%, to $375.1 million for the year ended December 31, 2016, compared to $242.3 million one year earlier largely reflecting the acquisitions and continued new client acquisition. Net interest margin was enhanced by the amortization of acquisition accounting discounts on purchased loans received in Banner's acquisitions, which is accreted into loan interest income, as well as by net premiums on non-market-rate certificate of deposit liabilities assumed which are amortized as a reduction to deposit interest expense. The net interest margin of 4.20% for the year ended December 31, 2016 was ten basis points higher than the prior year and included 16 basis points from acquisition accounting adjustments, compared to eight basis point from acquisition accounting adjustments in 2015. The average yield on interest-earning assets for the year ended December 31, 2016 of 4.38% was seven basis points greater compared to the prior year as favorable purchase accounting adjustments and changes in the mix of earning assets offset the impact of the low interest rate environment on loan yields. Funding costs were lower, as the average cost of funding liabilities decreased by three basis points to 0.19% as compared to the prior year. As a result of the lower funding liability costs and the seven point increase in the yield on interest earning assets, the net interest spread increased to 4.19% for the year ended December 31, 2016 compared to 4.09% for the prior year.

Interest Income. Interest income for the year ended December 31, 2016 was $391.5 million, compared to $254.4 million for the prior year, an increase of $137.1 million, or 54%. The increase in interest income occurred as a result of the significant increase in the average balances of interest-earning assets. The average balance of interest-earning assets was $8.93 billion for the year ended December 31, 2015, an increase of$3.03 billion, or 51%, compared to $5.90 billion one year earlier. The yield on average interest-earning assets was 4.38% for the year ended December 31, 2016 compared to 4.31% for the year ended December 31, 2015. The increased yield on earning assets reflected a larger positive impact of the purchase accounting loan discount accretion, as well as improvement in securities yields and changes in the asset mix. Loan yields increased six basis points to 4.84% for the year ended December 31, 2016 compared to 4.78% in the preceding year, reflecting a 17 basis point positive impact from loan discount accretion in 2016 compared to a nine basis point positive impact in 2015 partially offset by the continuing reduction in contractual loan yields due to the low interest rate environment. Average loans receivable for the year ended December 31, 2016 increased $2.47 billion, or 50%, to $7.43 billion, compared to $4.96 billion for the prior year. Interest income on loans increased by $122.3 million, or 52%, to $359.6 million for the year ended December 31, 2016, from $237.3 million for the prior year, reflecting the impact of the $2.47 billion increase in average loan balances and the six basis point increase in the average yield on loans.

The combined average balance of mortgage-backed securities, other investment securities, daily interest-bearing deposits and FHLB stock increased to $1.50 billion for the year ended December 31, 2016 (excluding the effect of fair value adjustments), compared to $941.0 million for the year ended December 31, 2015, accounting for most of the $14.7 million increase in interest and dividend income compared to the prior year. The average yield on the combined portfolio increased to 2.13% for the year ended December 31, 2016, from 1.82% for the prior year. Portfolio yields improved as a result of the full year impact of the higher interest rates on the securities acquired in the AmericanWest acquisition. For the year ended December 31, 2016, the average yield on mortgage-backed securities increased 23 basis points to 2.08% compared to the prior year, while the yield on other securities increased 15 basis points to 2.60% compared to the prior year.

Interest Expense. Interest expense for the year ended December 31, 2016 was $16.4 million, compared to $12.2 million for the prior year, an increase of $4.3 million, or 35%. The increase in interest expense occurred as a result of a $2.95 billion, or 54%, increase in average funding liabilities, partially offset by a three basis point decrease in the average cost of all funding liabilities to 0.19% for the year ended December 31, 2016, from 0.22% for the year ended December 31, 2015. This increase in average funding liabilities reflected increases in core deposits, including non-interest-bearing deposits and interest-bearing transaction and savings accounts, as the result of the 2015 bank acquisitions as well as organic growth. The growth in non-interest-bearing deposits and other core deposits significantly contributed to our reduced funding costs in 2016.



Deposit interest expense increased $2.7 million, or 32%, to $11.1 million for the year ended December 31, 2016 compared to $8.4 million for the prior year as a result of a $2.84 billion, or 54%, increase in the average balance of deposits, partially offset by a two basis point decrease in the cost of deposits. Average deposit balances increased to $8.05 billion for the year ended December 31, 2016, from $5.21 billion for the year ended December 31, 2015, while the average rate paid on deposit balances decreased to 0.14% in the year ended December 31, 2016 from 0.16% for the prior year. The cost of interest-bearing deposits decreased by two basis points to 0.22% for the year ended December 31, 2016 compared to 0.24% in the prior year. Also contributing to the decrease in total deposit costs was a $1.27 billion increase in the average balances of non-interest-bearing accounts during 2016. In addition, amortization of acquisition accounting net premiums on certificates of deposit reduced the cost of deposits by eight basis point for the year ended December 31, 2016, compared to six basis points in 2015.

Average total borrowings increased to $390.5 million for the year end December 31, 2016, compared to $276.6 million for the prior year. The increase in average total borrowings was largely due to a $92.1 million increase in average FHLB advances. The increase in the average balance of total borrowings was primarily responsible for the $1.5 million increase in the related interest expense to $5.3 million for the year ended December 31, 2016, from $3.8 million in the prior year. The average rate on total borrowings remained unchanged from the prior year despite higher market interest rates, particularly for our junior subordinated debentures, as lower costing FHLB advances and other borrowings comprised a higher percentage of our total borrowing mix, stabilizing the average rate paid on total borrowings between the two years.

Provision and Allowance for Loan Losses. We recorded net recoveries of $2.0 million for the year ended December 31, 2016, compared to net recoveries of $2.1 million for the prior year, while non-performing loans increased by $7.4 million during the year to $22.6 million at December 31, 2016, compared to $15.2 million at December 31, 2015. A comparison of the allowance for loan losses at December 31, 2016 and 2015 reflects an increase of $8.0 million, or 10%, to $86.0 million at December 31, 2016, from $78.0 million at December 31, 2015. Included in our allowance at December 31, 2016 was an unallocated portion of $3.6 million, which was based upon our evaluation of various factors that were not directly measured in the determination of the formula and specific allowances. The allowance for loan losses as a percentage of total loans (loans receivable excluding allowance for losses) increased to 1.15% at December 31, 2016, compared to 1.07% at December 31, 2015.

Non-interest Income.  Non-interest income, including changes in the valuation of financial instruments carried at fair value and net gain on sale of securities, as well as non-interest revenues from core operations, increased $21.2 million, or 34%, to $83.5 million for the year ended December 31, 2016, compared to $62.3 million for the year ended December 31, 2015. This increase was primarily due to the strong growth in deposit fees and other service charges and mortgage banking operations. Reflecting a full year of transaction account activity from the deposit accounts acquired in the 2015 bank acquisitions as well as organic growth, income from deposit fees and other service charges increased by $8.5 million, or 21%, to $49.2 million for the year ended December 31, 2016, compared to $40.6 million for the prior year. Mortgage banking revenues increased by $7.8 million to $25.6 million for the year ended December 31, 2016, compared to $17.7 million in the prior year. Sales of one-to-four family loans held for sale for the year ended December 31, 2016 totaled $682.8 million compared to $610.4 million for the year ended December 31, 2015, reflecting increased refinancing activity, as well as a strong home purchase market and our increased market presence. In addition, for the year ended December 31, 2016, mortgage banking revenues included $3.3 million of gains on the sale of multifamily loans which were originated by our multifamily production unit that was acquired in the AmericanWest acquisition. For the year ended December 31, 2016, we recorded a net loss of $2.6 million for changes in the valuation of financial instruments carried at fair value, compared to a net loss of $813,000 for the year ended December 31, 2015. The adjustments in 2016 primarily reflected changes in the valuation of certain investment securities, which resulted in $376,000 in net losses, as well as changes in the valuation of the junior subordinated debentures we have issued, which resulted in $2.7 million in charges. The net fair value losses in 2015 primarily reflected changes in the valuation of certain investment securities resulting in $2.0 million in net gains and changes in the valuation of the junior subordinated debentures, which resulted in $2.7 million in charges.

Non-interest Expense. Non-interest expense for the year ended December 31, 2016 was $322.9 million, an increase of $86.3 million, or 36%, as compared to the same period in 2015. The increase was largely as a result of the costs associated with operating the branches acquired from AmericanWest, as well as generally increased salary and employee benefit costs, payment and card processing expenses, and occupancy and equipment expenses, which were partially offset by an increase in the credit for capitalized loan origination costs. Acquisition-related costs added $11.7 million in the current year compared to $26.1 million in the year ended December 31, 2015. Salary and employee benefit expenses increased $53.6 million to $180.9 million for the year ended December 31, 2016 from $127.3 million for the year ended December 31, 2015, primarily reflecting additional staffing as a result of our acquisitions and to a lesser extent normal salary and wage adjustments, partially offset by a $4.5 million increase in the amount of the credit for capitalized loan origination costs, reflecting an increase in loan originations. Payment and card processing expenses increased by $5.2 million, reflecting the significant growth in core deposits and account activity from acquisitions and organic growth. Occupancy and equipment expenses increased $14.6 million, or 48%, to $45.0 million in 2016, compared to $30.4 million in 2015 largely as a result of the branches and support facilities acquired in 2015. Information and computer data services expense increased $7.2 million, or 59%, to $19.3 million in the current year, compared to $12.1 million in the prior year, reflecting additional costs required for expanding systems and operations associated with the bank acquisitions in 2015. REO operations for the year ended December 31, 2016 resulted in expense of $175,000, compared to expense of $397,000 in the prior year, and included $876,000 of valuation adjustments and $1.8 million of net gains on the sale of properties in addition to the carrying costs related to repossessed properties. Miscellaneous expense increased $12.6 million to $30.1 million for the year ended December 31, 2016 from $17.6 million, reflecting higher general expenses associated with the increased scale of the Company.
Income Taxes. For the year ended December 31, 2016, we recognized $44.3 million in income tax expense for an effective rate of 34.1%, which reflected our normal statutory rate reduced by the impact of tax-exempt income and certain tax credits. For the year ended December 31, 2015, we recognized $22.7 million in income tax expense for an effective tax rate of 33.5% with proportionally less of our income subject to state income taxes compared to 2016.



Market Risk and Asset/Liability Management


Our financial condition and operations are influenced significantly by general economic conditions, including the absolute level of interest rates as well as changes in interest rates and the slope of the yield curve.  Our profitability is dependent to a large extent on our net interest income, which is the difference between the interest received from our interest-earning assets and the interest expense incurred on our interest-bearing liabilities.


Our activities, like all financial institutions, inherently involve the assumption of interest rate risk.  Interest rate risk is the risk that changes in market interest rates will have an adverse impact on the institution’s earnings and underlying economic value.  Interest rate risk is determined by the maturity and repricing characteristics of an institution’s assets, liabilities and off-balance-sheet contracts.  Interest rate risk is measured by the variability of financial performance and economic value resulting from changes in interest rates.  Interest rate risk is the primary market risk affecting our financial performance.


The greatest source of interest rate risk to us results from the mismatch of maturities or repricing intervals for rate sensitive assets, liabilities and off-balance sheet contracts.  This mismatch or gap is generally characterized by a substantially shorter maturity structure for interest-bearing liabilities than interest-earning assets, although our floating-rate assets tend to be more immediately responsive to changes in market rates than most funding deposit liabilities.  Additional interest rate risk results from mismatched repricing indices and formula (basis risk and yield curve risk), and product caps and floors and early repayment or withdrawal provisions (option risk), which may be contractual or market driven, that are generally more favorable to customersclients than to us.  An exception to this generalization is the beneficial effect of interest rate floors on a substantial portion of our performing floating-rate loans, which help us maintain higher loan yields in periods when market interest rates decline significantly.  However, in a declining interest rate environment, as loans with floors are repaid they generally are replaced with new loans which have lower interest rate floors.  As of December 31, 2017,2021, our loans with interest rate floors totaled approximately $2.45$3.56 billion and had a weighted average floor rate of 4.65%4.17% compared to a current average note rate of 5.08%4.32%.  As of December 31, 2021, our loans with interest rates at their floors totaled $2.28 billion and had a weighted average note rate of 4.22% and our loans with interest rates below their floors totaled $344.2 million and had a weighted average note rate of 4.23%. The Company actively manages its exposure to interest rate risk through on-going adjustments to the mix of interest earning assets and funding sources that affect the repricing speeds of loans, investments, interest-bearing deposits and borrowings.


The principal objectives of asset/liability management are:  to evaluate the interest rate risk exposure; to determine the level of risk appropriate given our operating environment, business plan strategies, performance objectives, capital and liquidity constraints, and asset and liability allocation alternatives; and to manage our interest rate risk consistent with regulatory guidelines and policies approved by the Board of Directors.  Through such management, we seek to reduce the vulnerability of our earnings and capital position to changes in the level of interest rates.  Our actions in this regard are taken under the guidance of the Asset/Liability Management Committee, which is comprised of members of our senior management.  The Committee closely monitors our interest sensitivity exposure, asset and liability allocation decisions, liquidity and capital positions, and local and national economic conditions and attempts to structure the loan and investment portfolios and funding sources to maximize earnings within acceptable risk tolerances.


Sensitivity Analysis


Our primary monitoring tool for assessing interest rate risk is asset/liability simulation modeling, which is designed to capture the dynamics of balance sheet, interest rate and spread movements and to quantify variations in net interest income resulting from those movements under different rate environments.  The sensitivity of net interest income to changes in the modeled interest rate environments provides a measurement of interest rate risk.  We also utilize economic value analysis, which addresses changes in estimated net economic value of equity arising from changes in the level of interest rates.  The net economic value of equity is estimated by separately valuing our assets and liabilities under varying interest rate environments.  The extent to which assets gain or lose value in relation to the gains or losses of liability values under the various interest rate assumptions determines the sensitivity of net economic value to changes in interest rates and provides an additional measure of interest rate risk.


The interest rate sensitivity analysis performed by us incorporates beginning-of-the-period rate, balance and maturity data, using various levels of aggregation of that data, as well as certain assumptions concerning the maturity, repricing, amortization and prepayment characteristics of loans and other interest-earning assets and the repricing and withdrawal of deposits and other interest-bearing liabilities into an asset/liability computer simulation model.  We update and prepare simulation modeling at least quarterly for review by senior management and the directors. We believe the data and assumptions are realistic representations of our portfolio and possible outcomes under the various interest rate scenarios.  Nonetheless, the interest rate sensitivity of our net interest income and net economic value of equity could vary substantially if different assumptions were used or if actual experience differs from the assumptions used.



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The following table sets forth as of December 31, 2017,2021, the estimated changes in our net interest income over one-year and two-year time horizons and the estimated changes in economic value of equity based on the indicated interest rate environments (dollars in thousands):


Table 19:20: Interest Rate Risk Indicators
 December 31, 2021
 Estimated Increase (Decrease) in
Change (in Basis Points) in Interest Rates (1)
Net Interest Income
Next 12 Months		Net Interest Income
Next 24 Months		Economic Value of Equity
+400$66,247 14.0 %$159,263 17.0 %$(367,054)(14.7)%
+30059,403 12.6 142,773 15.2 (261,396)(10.5)
+20045,489 9.6 110,147 11.7 (148,750)(6.0)
+10025,477 5.4 62,624 6.7 (22,617)(0.9)
0— — — — — — 
-25(5,288)(1.1)(14,252)(1.5)(24,392)(1.0)
  December 31, 2017
  Estimated Increase (Decrease) in
Change (in Basis Points) in Interest Rates (1)
 
Net Interest Income
Next 12 Months
 
Net Interest Income
Next 24 Months
 Economic Value of Equity
+400 $20,217
 5.2 % $55,978
 7.1 % $(362,472) (16.7)%
+300 18,709
 4.8
 51,234
 6.5
 (261,707) (12.0)
+200 14,351
 3.7
 40,027
 5.1
 (146,014) (6.7)
+100 8,251
 2.1
 23,545
 3.0
 (53,328) (2.5)
0 —
 —
 —
 —
 —
 —
-25 (4,473) (1.1) (11,384) (1.5) 4,126
 0.2


(1)Assumes an instantaneous and sustained uniform change in market interest rates at all maturities; however, no rates are allowed to go below zero.  The current targeted federal funds rate is between 0.00% and 0.25%.
(1)
Assumes an instantaneous and sustained uniform change in market interest rates at all maturities; however, no rates are allowed to go below zero.  The current targeted federal funds rate is between 1.25% and 1.50%.


Interest Rate Swaps: The Bank enters into interest rate swaps with certain qualifying commercial loan clients to meet their interest rate risk management needs. The Bank simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the client pays a fixed rate of interest and the Bank receives a floating rate. These interest rate swaps are derivative financial instruments and the gross fair values are recorded in other assets and liabilities on the consolidated balance sheets, with changes in fair value during the period recorded in other non-interest expense on the consolidated statements of income.

Cash Flow Hedges of Interest Rate Risk: The Bank’s objectives in using interest rate derivatives are to reduce volatility in net interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Bank primarily uses interest rate swaps as part of its interest rate risk management strategy. During the fourth quarter of 2021, the Bank entered into interest rate swaps designated as cash flow hedges to hedge the variable cash flows associated with existing floating rate loans. These hedge contracts involve the receipt of fixed-rate amounts from a counterparty in exchange for the Bank making floating-rate payments over the life of the agreements without exchange of the underlying notional amount.

Another (although less reliable) monitoring tool for assessing interest rate risk is gap analysis.  The matching of the repricing characteristics of assets and liabilities may be analyzed by examining the extent to which assets and liabilities are interest sensitive and by monitoring an institution’s interest sensitivity gap.  An asset or liability is said to be interest sensitive within a specific time period if it will mature or reprice within that time period.  The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated, based upon certain assumptions, to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated to mature or reprice, based upon certain assumptions, within that same time period.  A gap is considered positive when the amount of interest-sensitive assets exceeds the amount of interest-sensitive liabilities.  A gap is considered negative when the amount of interest-sensitive liabilities exceeds the amount of interest-sensitive assets.  Generally, during a period of rising rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income.  During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income.


Certain shortcomings are inherent in gap analysis.  For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market rates.  Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market rates, while interest rates on other types may lag behind changes in market rates.  Additionally, certain assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset.  Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table.  Finally, the ability of some borrowers to service their debt may decrease in the event of a severe change in market rates.


Table 20, 21, Interest Sensitivity Gap, presents our interest sensitivity gap between interest-earning assets and interest-bearing liabilities at December 31, 2017 and 2016.2021.  The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities which are anticipated by us, based upon certain assumptions, to reprice or mature in each of the future periods shown.  At December 31, 2017,2021, total interest-earning assets maturing or repricing within one year exceeded total interest-bearing liabilities maturing or repricing in the same time period by $2.37$5.17 billion, representing a one-year cumulative gap to total assets ratio of 24.31%30.78%.


Management is aware of the sources of interest rate risk and in its opinion actively monitors and manages it to the extent possible. The interest rate risk indicators and interest sensitivity gaps as of December 31, 2017 and 2016 are within our internal policy guidelines and management considersManagement believes that our current level of interest rate risk is reasonable.




73

The following table provides a GAP analysis as of December 31, 20172021 (dollars in thousands):


Table 20:21:  Interest Sensitivity Gap
 December 31, 2021
 Within
6 Months		After 6
Months
Within 1 Year		After 1 Year
Within 3 Years		After 3 Years
Within 5
Years		After 5 Years
Within 10 Years		Over
10 Years		Total
Interest-earning assets: (1)
       
Construction loans$782,987 $35,002 $120,646 $31,364 $17,435 $839 $988,273 
Fixed-rate mortgage loans354,117 271,490 793,599 452,847 430,423 15,325 2,317,801 
Adjustable-rate mortgage loans1,221,963 381,307 1,033,603 866,287 181,198 1,075 3,685,433 
Fixed-rate mortgage-backed securities180,013 167,937 563,263 492,441 824,023 500,608 2,728,285 
Adjustable-rate mortgage-backed securities469,995 5,658 19,534 2,443 7,089 — 504,719 
Fixed-rate commercial/agricultural loans109,802 91,548 282,885 161,243 120,648 45,141 811,267 
Adjustable-rate commercial/agricultural loans658,079 32,013 75,332 39,201 4,831 — 809,456 
Consumer and other loans448,901 19,727 37,467 14,680 16,397 32,569 569,741 
Investment securities and interest-earning deposits2,180,139 15,770 98,677 132,658 395,949 167,664 2,990,857 
Total rate sensitive assets6,405,996 1,020,452 3,025,006 2,193,164 1,997,993 763,221 15,405,832 
Interest-bearing liabilities: (2)
Interest-bearing checking accounts275,802 176,260 586,311 435,026 662,455 648,861 2,784,715 
Regular savings198,527 79,007 276,163 225,866 412,301 755,550 1,947,414 
Money market deposit accounts273,399 143,723 480,160 360,406 559,762 553,545 2,370,995 
Certificates of deposit393,066 259,629 164,070 20,410 1,457 — 838,632 
FHLB advances50,000 — — — — — 50,000 
Subordinated notes— — — 100,000 — — 100,000 
Junior subordinated debentures139,696 — — — — — 139,696 
Retail repurchase agreements264,489 — — — — — 264,489 
Total rate sensitive liabilities1,594,979 658,619 1,506,704 1,141,708 1,635,975 1,957,956 8,495,941 
Excess (deficiency) of interest-sensitive assets over interest-sensitive liabilities$4,811,017 $361,833 $1,518,302 $1,051,456 $362,018 $(1,194,735)$6,909,891 
Cumulative excess of interest-sensitive assets$4,811,017 $5,172,850 $6,691,152 $7,742,608 $8,104,626 $6,909,891 $6,909,891 
Cumulative ratio of interest-earning assets to interest-bearing liabilities401.64 %329.54 %277.94 %257.95 %223.96 %181.33 %181.33 %
Interest sensitivity gap to total assets28.63 %2.15 %9.03 %6.26 %2.15 %(7.11)%41.12 %
Ratio of cumulative gap to total assets28.63 %30.78 %39.82 %46.07 %48.23 %41.12 %41.12 %
 December 31, 2017
 
Within
6 Months
 
After 6
Months
Within 1 Year
 
After 1 Year
Within 3 Years
 
After 3 Years
Within 5
Years
 
After 5 Years
Within 10 Years
 
Over
10 Years
 Total
Interest-earning assets: (1)
             
Construction loans$575,519
 $62,299
 $94,624
 $13,433
 $7,777
 $2,084
 $755,736
Fixed-rate mortgage loans281,930
 157,695
 412,734
 330,994
 393,340
 14,913
 1,591,606
Adjustable-rate mortgage loans865,975
 317,456
 947,102
 757,644
 289,199
 5,005
 3,182,381
Fixed-rate mortgage-backed securities42,615
 44,385
 178,799
 140,448
 302,710
 84,625
 793,582
Adjustable-rate mortgage-backed securities67,449
 276
 5,000
 495
 2,876
 —
 76,096
Fixed-rate commercial/agricultural loans104,394
 90,298
 214,312
 58,235
 31,386
 6,477
 505,102
Adjustable-rate commercial/agricultural loans850,140
 17,751
 54,305
 24,196
 10,989
 —
 957,381
Consumer and other loans396,693
 48,544
 111,615
 23,661
 18,258
 36,160
 634,931
Investment securities and interest-earning deposits124,959
 16,619
 71,355
 46,798
 73,772
 49,326
 382,829
Total rate sensitive assets3,309,674
 755,323
 2,089,846
 1,395,904
 1,130,307
 198,590
 8,879,644
Interest-bearing liabilities: (2)
             
Interest-bearing checking accounts134,420
 59,937
 198,435
 145,950
 218,716
 213,677
 971,135
Regular savings201,804
 105,009
 337,913
 239,016
 344,698
 329,060
 1,557,500
Money market deposit accounts160,664
 108,013
 346,792
 242,076
 332,108
 232,660
 1,422,313
Certificates of deposit449,669
 235,890
 239,639
 39,534
 2,193
 —
 966,925
FHLB advances6
 6
 25
 28
 85
 53
 203
Other borrowings5,000
 —
 —
 —
 —
 —
 5,000
Trust preferred securities140,212
 —
 —
 —
 —
 —
 140,212
Retail repurchase agreements90,860
 —
 —
 —
 —
 —
 90,860
Total rate sensitive liabilities1,182,635
 508,855
 1,122,804
 666,604
 897,800
 775,450
 5,154,148
Excess (deficiency) of interest-sensitive assets over interest-sensitive liabilities$2,127,039
 $246,468
 $967,042
 $729,300
 $232,507
 $(576,860) $3,725,496
Cumulative excess of interest-sensitive assets$2,127,039
 $2,373,507
 $3,340,549
 $4,069,849
 $4,302,356
 $3,725,496
 $3,725,496
Cumulative ratio of interest-earning assets to interest-bearing liabilities279.86% 240.32% 218.70% 216.92% 198.26% 172.28 % 172.28%
Interest sensitivity gap to total assets21.79% 2.52% 9.90% 7.47% 2.38% (5.91)% 38.16%
Ratio of cumulative gap to total assets21.79% 24.31% 34.22% 41.69% 44.07% 38.16 % 38.16%


(footnotes follow)






74
(1)
Adjustable-rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due to mature, and fixed-rate assets are included in the period in which they are scheduled to be repaid based upon scheduled amortization, in each case adjusted to take into account estimated prepayments.  Mortgage loans and other loans are not reduced for allowances for loan losses and non-performing loans.  Mortgage loans, mortgage-backed securities, other loans and investment securities are not adjusted for deferred fees and unamortized acquisition premiums and discounts.
(2)
Adjustable-rate liabilities are included in the period in which interest rates are next scheduled to adjust rather than in the period they are due to mature.  Although regular savings, demand, interest-bearing checking, and money market deposit accounts are subject to immediate withdrawal, based on historical experience management considers a substantial amount of such accounts to be core deposits having significantly longer maturities.  For the purpose of the gap analysis, these accounts have been assigned decay rates to reflect their longer effective maturities.  If all of these accounts had been assumed to be short-term, the one-year cumulative gap of interest-sensitive assets would have been $(807.6) million, or (8.27%) of total assets at December 31, 2017.  Interest-bearing liabilities for this table exclude certain non-interest-bearing deposits that are included in the average balance calculations reflected in Table 17, Analysisof Net Interest Spread.


(1)    Adjustable-rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due to mature, and fixed-rate assets are included in the period in which they are scheduled to be repaid based upon scheduled amortization, in each case adjusted to take into account estimated prepayments.  Mortgage loans and other loans are not reduced for allowances for loan losses and non-performing loans.  Mortgage loans, mortgage-backed securities, other loans and investment securities are not adjusted for deferred fees and unamortized acquisition premiums and discounts.
(2)    Adjustable-rate liabilities are included in the period in which interest rates are next scheduled to adjust rather than in the period they are due to mature.  Although regular savings, demand, interest-bearing checking, and money market deposit accounts are subject to immediate withdrawal, based on historical experience management considers a substantial amount of such accounts to be core deposits having significantly longer maturities.  For the purpose of the gap analysis, these accounts have been assigned decay rates to reflect their longer effective maturities.  If all of these accounts had been assumed to be short-term, the one-year cumulative gap of interest-sensitive assets would have been $(783,558), or (4.66)% of total assets at December 31, 2021.  Interest-bearing liabilities for this table exclude certain non-interest-bearing deposits that are included in the average balance calculations reflected in Table 13, Analysisof Net Interest Spread.

Liquidity and Capital Resources


Our primary sources of funds are deposits, borrowings, proceeds from loan principal and interest payments and sales of loans, and the maturity of and interest income on mortgage-backed and investment securities.  While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, competition and our pricing strategies.


Our primary investing activity is the origination and purchase of loans and, in certain periods, the purchase of securities.securities or loans.  During the years ended December 31, 2017, 20162021 and 2015,2020, our loan originations, including originations of loans held for sale, exceeded our loan repayments by $985.7$306.8 million $1.11and $2.02 billion, and $741.7 million, respectively.  During those periods we purchased loans of $306.9 million, $314.3$5.1 million and $323.5$2.5 million, respectively. This activity was funded primarily by salesincreased core deposits and the sale of loans in 2021 and increased deposits.by principal repayment and maturities of securities in 2020. During the years ended December 31, 2017, 20162021 and 2015,2020, we sold $1.12 billion, $1.11received proceeds of $1.32 billion and $801.6 million,$1.49 billion, respectively, from the sale of loans.  Securities purchased during the years ended December 31, 2017, 20162021 and 20152020 totaled $844.7 million, $305.2 million,$2.94 billion and $161.7 million,$1.58 billion, respectively, and securities repayments, maturities and sales in those periods were $724.6 million, $583.9 million,$1.43 billion and $373.0$659.1 million, respectively.


Our primary financing activity is gathering deposits. Largely as a result of the increase in non-interest-bearing transaction accounts partially offset by a planned decrease in certificates of deposit and the sale of the seven Utah branches and transfer of $160.3 million of related deposits, ourTotal deposits increased by $62.0 million during the year ended December 31, 2017. Deposits increased by $66.3 million$1.76 billion during the year ended December 31, 2016. Our2021, as core deposits have continued to increase as a result of our increased marketing focus on retail deposits and our pricing decisions designed to shift our deposit portfolio into lower cost checking, savings and money market accounts and allow higher rateby $1.84 billion, partially offset by certificates of deposits decreasing by $76.7 million.The increase in total deposits during 2021 was due primarily to SBA PPP loan funds deposited into client accounts, fiscal stimulus payments, and an increase in average deposit account balances due to run-off.an increase in general client liquidity due to client’s maintaining a higher level of liquidity during the COVID-19 pandemic. At December 31, 2021, core deposits totaled $13.49 billion, or 94% of total deposits, compared with $11.65 billion, or 93% of total deposits at December 31, 2020. Certificates of depositsdeposit are generally more vulnerable to competition and more price sensitive than other retail deposits and our pricing of those deposits varies significantly based upon our liquidity management strategies at any point in time. At December 31, 2017,2021, certificates of deposit amountedtotaled to $966.9$838.6 million, or 12%6% of our total deposits, including $685.6$652.7 million which were scheduled to mature within one year.  Certificates of deposit declineddecreased from 13%7% of our total deposits at December 31, 2016, and 17% of total deposits at December 31, 2015, reflecting our efforts to shift the portfolio mix into lower cost core deposits.2020.  While no assurance can be given as to future periods, historically, we have been able to retain a significant amount of our deposits as they mature.


FHLB advances (excluding fair value adjustments) decreased $54.0$100.0 million for the year ended during 2021 to $50.0 million at December 31, 2017,2021, after decreasing $78.6$300.0 million for the year ended December 31, 2016 due to a reduction in short-term borrowing.2020.  Other borrowings at December 31, 2017 decreased $9.82021 increased $79.7 million to $95.9$264.5 million following an increase of $7.4$66.3 million in 2016.2020. Both the FHLB advances decreasedand other borrowings outstanding at December 31, 2021 mature during 2017 as increased deposits were used to fund a larger portion of the balance sheet and loans held for sale were reduced.2022. 


We must maintain an adequate level of liquidity to ensure the availability of sufficient funds to accommodate deposit withdrawals, to support loan growth, to satisfy financial commitments and to take advantage of investment opportunities.  During the years ended December 31, 2017, 20162021 and 2015,2020, we used our sources of funds primarily to fund loan commitments and purchase securities and pay maturing savings certificates and deposit withdrawals.securities.  At December 31, 2017,2021, we had outstanding loan commitments totaling $3.80 billion, primarily relating to extendundisbursed loans in process and unused credit originate loans and for letters of credit totaling $2.43 billion.lines.  While representing potential growth in the loan portfolio and lending activities, this level of commitments is proportionally consistent with our historical experience and does not represent a departure from normal operations. For the year ended December 31, 2022, we have $26.6 million of purchase obligations under contracts with vendors to provide services, for which our financial obligations are dependent upon acceptable performance by the vendor. In addition, for the year ended December 31, 2022, we have $14.4 million of commitments under operating lease agreements. For additional information regarding future financial commitments, this discussion should be read in conjunction with our Consolidated Financial Statements and related notes included elsewhere in this filing, including Note 20: “Commitments and Contingencies” and Note 23: “Leases.”


We generally maintain sufficient cash and readily marketable securities to meet short-term liquidity needs; however, our primary liquidity management practice to supplement deposits is to increase or decrease short-term borrowings, including FHLB advances and Federal Reserve Bank of San Francisco (FRBSF) borrowings.  We maintain credit facilities with the FHLB-Des Moines,FHLB, which at December 31, 2017 provideprovided for advances that in the aggregate maywould equal the lesser of 35%45% of Banner Bank’s assets or adjusted qualifying collateral (subject to a sufficient level of ownership of FHLB stock), up to a total possible.  At December 31, 2021, under these credit linefacilities based on pledged collateral, Banner Bank had $2.38 billion of $3.55 billion, and 35% of Islanders Bank’s assets or adjusted qualifying collateral, up to a total possibleavailable credit line of $98.7 million.capacity.  Advances under these credit facilities (excluding fair value adjustments) totaled $169,000$50.0 million at December 31, 2017.2021.  In addition, Banner Bank has been approved for participation in the FRBSF'sFRBSF’s Borrower-In-Custody (BIC) program.  Under this program, based on pledged collateral, Banner Bank had available lines of credit of approximately $1.15 billion$782.3 million as of December 31, 2017,2021, subject to certain collateral requirements, namely the collateral type and risk rating of eligible pledged loans. We had no funds borrowed from the FRBSF at December 31, 20172021 or 2016.2020. At December 31, 2017,2021, Banner Bank also had uncommitted federal funds line of credit agreements with other
75

financial institutions totaling $110.0 million, while Islanders Bank had an uncommitted federal funds line of credit agreement with another financial institution totaling $5.0$125.0 million. No balances were outstanding under these agreements as of December 31, 2017.2021 or 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. Management believes it has adequate resources and funding potential to meet our foreseeable liquidity requirements.


Banner Corporation is a separate legal entity from the BanksBank and, on a stand-alone level, must provide for its own liquidity and pay its own operating expenses and cash dividends. Banner'sBanner Corporation’s primary sources of funds consist of capital raised through dividends or capital distributions from the Banks,Bank, although there are regulatory restrictions on the ability of the BanksBank to pay dividends. At We currently expect to continue our current practice of paying quarterly cash dividends on our common stock subject to our Board of Directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is $0.44 per share, as approved by our Board of Directors, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank, and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2022 at this rate of $0.44 per share, our average total dividend paid each quarter would be approximately $15.1 million based on the number of outstanding shares at December 31, 2017,2021. At December 31, 2021, Banner Corporation (on an unconsolidated basis) had liquid assets of $44.9$106.3 million.


As noted below, Banner Corporation and its subsidiary banksbank continued to maintain capital levels in excess of the requirements to be categorized as “Well-Capitalized” under applicable regulatory standards. During the year ended December 31, 2017,2021, total shareholders’ equity decreased $33.1increased $24.1 million to $1.27$1.69 billion. At December 31, 2017,2021, tangible common shareholders’ equity, which excludes goodwill and other intangible assets, was $1.01$1.30 billion, or 10.61%7.93% of tangible assets. See the discussion and reconciliation of non-GAAP financial information above in the Executive Overview section of this Management’s Discussion and Analysis of Financial Condition and Results of Operation for more detailed information with respect to tangible common shareholders’ equity. Also, see the capital requirements discussion and table below with respect to our regulatory capital positions.


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, and Islanders Bank, as state-chartered, federally insured commercial banks, arebank, is subject to the capital requirements established by the FDIC.  


The capital adequacy requirements are quantitative measures established by regulation that require Banner Corporation and the BanksBank to maintain minimum amounts and ratios of capital.  The Federal Reserve requires Banner Corporation to maintain capital adequacy that generally parallels the FDIC requirements.  The FDIC requires the BanksBank to maintain minimum ratios of Total Capital, Tier 1 Capital, and Common Equity Tier 1 Capital to risk-weighted assets as well as Tier 1 leverage capital to average assets.  In addition to the minimum capital ratios, the Banks now haveBank has to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This new capital conservation buffer requirement began to be phased in starting in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented to an amount greater than 2.5% of risk-weighted assets in January 2019.bonuses. At December 31, 2017,2021, Banner Corporation and the BanksBank each exceeded all current regulatory capital requirements.requirements and the fully phased-in capital conservation buffer requirement.


The following table shows the regulatory capital ratios offor Banner Corporation and its subsidiaries, Banner Bank and Islanders Bank, as of December 31, 2017.2021.


Table 21:22:  Regulatory Capital Ratios
Capital RatiosBanner CorporationBanner Bank
Total capital to risk-weighted assets14.71 %13.73 %
Tier 1 capital to risk-weighted assets12.74 12.64 
Tier 1 capital to average leverage assets8.76 8.69 
Tier 1 common equity to risk-weighted assets11.54 12.64 
Capital Ratios Banner Corporation Banner Bank Islanders Bank 
Total capital to risk-weighted assets 13.81% 12.83% 16.39% 
Tier 1 capital to risk-weighted assets 12.77
 11.79
 15.18
 
Tier 1 capital to average leverage assets 11.34
 10.53
 10.65
 
Tier 1 common equity to risk-weighted assets 11.30
 11.79
 15.18
 


(See Item 1, “Business–Regulation,” and Note 1614 of the Notes to the Consolidated Financial Statements for additional information regarding Banner Corporation’s and Banner Bank’s regulatory capital requirements.)


Effect of Inflation and Changing Prices

The Consolidated Financial Statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering the changes in relative purchasing power of money over time due to inflation.  The primary effect of inflation on our operations is reflected in increased operating costs.  Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature.  As a result, interest rates generally have a more significant effect on a financial institution’s performance than do general levels of inflation.  Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.



Contractual Obligations

The following table shows the obligations of Banner Corporation and its subsidiaries as of December 31, 2017 by maturity (in thousands):

Table 22: Contractual Obligations
 One Year or Less After One to Three Years After Three to Five Years After Five Years Total
Advances from Federal Home Loan Bank$—
 $—
 $—
 $169
 $169
Junior subordinated debentures—
 —
 —
 140,212
 140,212
Repurchase agreements95,860
 —
 —
 —
 95,860
Certificates of Deposit685,592
 239,466
 39,677
 2,202
 966,937
Operating lease obligations16,029
 25,279
 16,825
 13,926
 72,059
Purchase obligation17,711
 14,653
 6,086
 384
 38,834
Total$815,192
 $279,398
 $62,588
 $156,893
 $1,314,071

In addition, we have contracts with various vendors to provide services, including information processing, for periods generally ranging from one to five years, for which our financial obligations are dependent upon acceptable performance by the vendor.  For additional information regarding future financial commitments, this discussion should be read in conjunction with our Consolidated Financial Statements and related notes included elsewhere in this filing, including Note 23: “Commitments and Contingencies.”

ITEM 7A – Quantitative and Qualitative Disclosures Aboutabout Market Risk


See pages 70–74 of Management’s Discussion and Analysis of Financial Condition and Results of Operations.


ITEM 8 – Financial Statements and Supplementary Data


For financial statements, see index on page 83.


76

ITEM 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


Not applicable.


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, 2017,2021, 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, 2017,2021, 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, 2017.2021.




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 and Ethics for our directors, officers (including its senior financial officers), directors, 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 and Ethicsin substantially its current form was filed as an exhibit to our Annual Reportwith Form 8-K on Form 10-K for the year ended December 31, 2004August 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, customers,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 Lawsfederal 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“Security Ownership of Certain Beneficial Owners and Management"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“Security Ownership of Certain Beneficial Owners and Management"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, 2017:2021:
(A)(B)(C)
Plan categoryNumber of securities to be issued upon exercise of outstanding options or vesting of outstanding restricted stock and unit grantsWeighted average exercise price of outstanding options and rightsNumber 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/a30,189 
2014 Omnibus Incentive Plan98,828 n/a183,030 
2018 Omnibus Incentive Plan377,394 n/a432,396 
476,222 645,615 
Equity compensation plans not approved by security holders— — 
Total476,222 645,615 
  (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 7,299
 n/a 29,301
2014 Omnibus Incentive Plan 294,778
 n/a 493,683
  302,077
   522,984
Equity compensation plans not approved by security holders —
   —
Total 302,077
   522,984



There were no shares tendered in connection with option exercises during the years ended December 31, 2017 and 2016, respectively. Restricted shares canceled to pay withholding taxes totaled 29,579 and 25,628 during the years ended December 31, 2017 and 2016, respectively.

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 Auditor”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 143154.
(b)Exhibits
See Index of Exhibits on page 143154.




80

Item 16 - Form 10-K Summary.


None.




Signatures





81

Signatures
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 23, 201824, 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/ Lloyd W. BakerPeter J. Conner
Mark J. GrescovichLloyd W. BakerPeter J. Conner
President and Chief Executive Officer; DirectorExecutive Vice President and Chief Financial Officer
(Principal Executive Officer)(Principal Financial and Accounting Officer)
Date: February 23, 201824, 2022Date: February 23, 201824, 2022
/s/ John R. Layman/s/ Robert D. AdamsDavid I. Matson
John R. LaymanRobert D. AdamsDavid I. Matson
DirectorDirector
Date: February 23, 201824, 2022Date: February 23, 201824, 2022
/s/ Connie R. Collingsworth/s/ David I. Matson
Connie R. CollingsworthDavid I. Matson
DirectorDirector
Date: February 23, 2018Date: February 23, 2018
/s/ Gary Sirmon/s/ Merline Saintil
Gary SirmonConnie R. CollingsworthMerline Saintil
Chairman of the BoardDirectorDirector
Date: February 23, 201824, 2022Date: February 23, 201824, 2022
/s/ Brent A. Orrico/s/ Gordon E. Budke
Brent A. OrricoGordon E. Budke
DirectorDirector
Date: February 23, 2018Date: February 23, 2018
/s/ Michael M. Smith/s/ David A. Klaue
Michael M. SmithBrent A. OrricoDavid A. Klaue
DirectorChairman of the BoardDirector
Date: February 23, 201824, 2022Date: February 23, 201824, 2022
/s/ Terry Schwakopf/s/ Kevin F. Riordan
Terry SchwakopfKevin F. Riordan
DirectorDirector
Date: February 24, 2022Date: February 24, 2022
/s/ Roberto R. Herencia/s/ Ellen R.M. Boyer
Roberto R. HerenciaEllen R.M. Boyer
DirectorDirector
Date: February 23, 201824, 2022Date: 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, 20172021 and 20162020
8789
Consolidated Statements of Operations for the Years Ended December 31, 2017, 20162021, 2020 and 20152019
8890
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 20162021, 2020 and 20152019
8991
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2017, 20162021, 2020 and 20152019
9092
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 20162021, 2020 and 20152019
9294
Notes to the Consolidated Financial Statements
9496




83

February 23, 201824, 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
Lloyd W. Baker,Peter J. Conner, Chief Financial Officer












Management Report on Internal Control over Financial Reporting


February 23, 201824, 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'sCompany’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'sCompany’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'sCompany’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'sCompany’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'sCompany’s internal control over financial reporting as of December 31, 2017. In making this2021. This assessment we usedwas 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 ourthis assessment and those criteria, we believemanagement believes that, as of December 31, 2017,2021, the Company maintained effective internal control over financial reporting.


The Company'sCompany’s independent registered public accounting firm has audited the Company's consolidated financial statementsCompany’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, 20172021 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'sCompany’s internal control over financial reporting as of December 31, 2017.2021.




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 Subsidiariessubsidiaries (the “Company”) as of December 31, 20172021 and 2016,2020, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flowsfor each of the three years in the period ended December 31, 2017,2021, and the related notes (collectively referred to as the “consolidatedfinancial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017,2021, 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, 20172021 and 2016,2020, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2021, 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, 2017,2021, 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 consolidatedfinancial 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;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 companyCompany are being made only in accordance with authorizations of management and directors of the company;Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’sCompany’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


Portland, OregonSpokane, Washington
87

February 23, 201824, 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, 20172021 and 20162020
ASSETS2017 2016ASSETSDecember 31,
2021		December 31,
2020
Cash and due from banks$199,624
 $177,083
Cash and due from banks$358,461 $311,899 
Interest bearing deposits61,576
 70,636
Interest bearing deposits1,775,839 922,284 
Total cash and cash equivalents261,200
 247,719
Total cash and cash equivalents2,134,300 1,234,183 
Securities—trading, amortized cost $27,246 and $30,154, respectively22,318
 24,568
Securities—available-for-sale, amortized cost $926,112 and $811,847, respectively919,485
 806,428
Securities—held-to-maturity, fair value $262,188 and $270,528, respectively260,271
 267,873
Securities—tradingSecurities—trading26,981 24,980 
Securities—available-for-sale, amortized cost $3,653,160 and $2,256,189, respectivelySecurities—available-for-sale, amortized cost $3,653,160 and $2,256,189, respectively3,638,993 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, respectivelySecurities—held-to-maturity, net of allowance for credit losses of $433 and $94, respectively, fair value $541,853 and $448,681, respectively520,922 421,713 
Total securities Total securities4,186,896 2,769,286 
Federal Home Loan Bank (FHLB) stock10,334
 12,506
Federal Home Loan Bank (FHLB) stock12,000 16,358 
Loans held for sale (includes $32.4 million and $9.6 million, respectively, at fair value)40,725
 246,353
Securities purchased under agreements to resellSecurities purchased under agreements to resell300,000 — 
Loans held for sale (includes $39,775 and $133,554, at fair value, respectively)Loans held for sale (includes $39,775 and $133,554, at fair value, respectively)96,487 243,795 
Loans receivable7,598,884
 7,451,148
Loans receivable9,084,763 9,870,982 
Allowance for loan losses(89,028) (85,997)
Net loans7,509,856
 7,365,151
Allowance for credit losses - loansAllowance for credit losses - loans(132,099)(167,279)
Net loans receivableNet loans receivable8,952,664 9,703,703 
Accrued interest receivable31,259
 30,178
Accrued interest receivable42,916 46,617 
Real estate owned (REO), held for sale, net360
 11,081
Real estate owned (REO), held for sale, net852 816 
Property and equipment, net154,815
 166,481
Property and equipment, net148,759 164,556 
Goodwill242,659
 244,583
Goodwill373,121 373,121 
Other intangible assets, net22,655
 30,162
Other intangibles, netOther intangibles, net14,855 21,426 
Bank-owned life insurance (BOLI)162,668
 158,936
Bank-owned life insurance (BOLI)244,156 191,830 
Deferred tax assets, net71,427
 127,694
Deferred tax assets, net71,138 65,742 
Operating lease right-of-use assetsOperating lease right-of-use assets55,257 55,367 
Other assets53,177
 53,955
Other assets171,471 144,823 
Total assets$9,763,209
 $9,793,668
Total assets$16,804,872 $15,031,623 
LIABILITIES   LIABILITIES
Deposits:   Deposits:
Non-interest-bearing$3,265,544
 $3,140,451
Non-interest-bearing$6,385,177 $5,492,924 
Interest-bearing transaction and savings accounts3,950,950
 3,935,630
Interest-bearing transaction and savings accounts7,103,125 6,159,052 
Interest-bearing certificates966,937
 1,045,333
Interest-bearing certificates838,631 915,320 
Total deposits8,183,431
 8,121,414
Total deposits14,326,933 12,567,296 
Advances from FHLB at fair value202
 54,216
Advances from FHLBAdvances from FHLB50,000 150,000 
Other borrowings95,860
 105,685
Other borrowings264,490 184,785 
Subordinated notes, netSubordinated notes, net98,564 98,201 
Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)98,707
 95,200
Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)119,815 116,974 
Operating lease liabilitiesOperating lease liabilities59,756 59,343 
Accrued expenses and other liabilities71,344
 71,369
Accrued expenses and other liabilities148,303 143,300 
Deferred compensation41,039
 40,074
Deferred compensation46,684 45,460 
Total liabilities8,490,583
 8,487,958
Total liabilities15,114,545 13,365,359 
COMMITMENTS AND CONTINGENCIES (Note 23)
 
COMMITMENTS AND CONTINGENCIES (Note 20)COMMITMENTS AND CONTINGENCIES (Note 20)00
SHAREHOLDERS’ EQUITY   SHAREHOLDERS’ EQUITY
Preferred stock - $0.01 par value per share, 500,000 shares authorized; no shares issued and outstanding at December 31, 2017 and December 31, 2016—
 —
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized, 32,626,456 shares issued and outstanding at December 31, 2017; 33,108,599 shares issued and outstanding at December 31, 20161,185,919
 1,213,225
Common stock (non-voting) and paid in capital - $0.01 par value per share, 5,000,000 shares authorized; 100,029 shares issued and outstanding at December 31, 2017; 84,788 shares issued and outstanding at December 31, 20161,208
 612
Preferred stock - $0.01 par value per share, 500,000 shares authorized; no shares outstanding at December 31, 2021 and December 31, 2020Preferred 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, 2020Common 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, 20201,299,381 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, 2020Common 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 earnings90,535
 95,328
Retained earnings390,762 247,316 
Accumulated other comprehensive loss(5,036) (3,455)
Carrying value of shares held in trust for stock related compensation plans(7,351) (7,283)
Liability for common stock issued for stock related compensation plans7,351
 7,283
Total shareholders' equity1,272,626
 1,305,710
Total liabilities and shareholders' equity$9,763,209
 $9,793,668
Carrying value of shares held in trust for stock-based compensation plansCarrying value of shares held in trust for stock-based compensation plans(7,435)(7,636)
Liability for common stock issued to stock related compensation plansLiability for common stock issued to stock related compensation plans7,435 7,636 
Accumulated other comprehensive incomeAccumulated other comprehensive income184 69,069 
Total shareholders’ equityTotal shareholders’ equity1,690,327 1,666,264 
Total liabilities and shareholders’ equityTotal 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, 2017, 20162021, 2020 and 2015
2019
2017 2016 2015 202120202019
INTEREST INCOME:     INTEREST INCOME:   
Loans receivable$374,449
 $359,612
 $237,292
Loans receivable$445,731 $466,360 $471,473 
Mortgage-backed securities24,535
 19,328
 9,049
Mortgage-backed securities45,723 31,792 38,640 
Securities and cash equivalents13,300
 12,537
 8,092
Securities and cash equivalents29,046 20,994 15,574 
Total interest income412,284
 391,477
 254,433
Total interest income520,500 519,146 525,687 
INTEREST EXPENSE:     INTEREST EXPENSE:  
Deposits12,273
 11,105
 8,385
Deposits11,770 25,015 37,630 
FHLB advances1,908
 953
 311
FHLB advances2,592 5,023 12,234 
Other borrowings317
 310
 211
Other borrowings467 603 330 
Junior subordinated debentures4,752
 4,040
 3,247
Subordinated debtSubordinated debt8,780 7,204 6,574 
Total interest expense19,250
 16,408
 12,154
Total interest expense23,609 37,845 56,768 
Net interest income before provision for loan losses393,034
 375,069
 242,279
PROVISION FOR LOAN LOSSES8,000
 6,030
 —
Net interest income385,034
 369,039
 242,279
Net interest income496,891 481,301 468,919 
(RECAPTURE)/PROVISION FOR CREDIT LOSSES(RECAPTURE)/PROVISION FOR CREDIT LOSSES(33,388)67,875 10,000 
Net interest income after (recapture)/provision for credit lossesNet interest income after (recapture)/provision for credit losses530,279 413,426 458,919 
NON-INTEREST INCOME     NON-INTEREST INCOME  
Deposit fees and other service charges51,787
 49,156
 40,607
Deposit fees and other service charges39,495 34,384 46,632 
Mortgage banking operations20,880
 25,552
 17,720
Mortgage banking operations33,948 51,083 22,215 
BOLI4,618
 4,538
 2,497
BOLI5,000 5,972 4,645 
Miscellaneous8,985
 6,001
 2,821
Miscellaneous12,875 6,821 8,624 
86,270
 85,247
 63,645
91,318 98,260 82,116 
Net (loss) gain on sale of securities(2,080) 843
 (540)
Net gain on sale of securitiesNet gain on sale of securities482 1,012 33 
Net change in valuation of financial instruments carried at fair value(2,844) (2,620) (813)Net change in valuation of financial instruments carried at fair value4,616 (656)(208)
Gain on sale of branches, including related loans and deposits12,189
 —
 —
Total non-interest income93,535
 83,470
 62,292
Total non-interest income96,416 98,616 81,941 
NON-INTEREST EXPENSE:     NON-INTEREST EXPENSE:  
Salary and employee benefits192,096
 180,883
 127,282
Salary and employee benefits244,351 245,400 226,409 
Less capitalized loan origination costs(17,379) (18,895) (14,379)Less capitalized loan origination costs(34,401)(34,848)(28,934)
Occupancy and equipment47,866
 45,000
 30,366
Occupancy and equipment52,850 53,362 52,390 
Information/computer data services17,245
 19,281
 12,110
Information/computer data services24,356 24,386 22,458 
Payment and card processing expenses22,665
 21,604
 16,430
Payment and card processing expenses20,544 16,095 16,993 
Professional services17,534
 8,120
 4,828
Professional and legal expensesProfessional and legal expenses22,274 12,093 9,736 
Advertising and marketing8,637
 9,709
 7,649
Advertising and marketing6,036 6,412 7,836 
Deposit insurance4,689
 4,551
 3,189
Deposit insurance5,583 6,516 2,840 
State/municipal business and use taxes2,594
 3,516
 1,889
State/municipal business and use taxes4,343 4,355 3,880 
REO operations(2,030) 175
 397
REO operations(22)(190)303 
Amortization of core deposit intangibles6,246
 7,061
 3,164
Amortization of core deposit intangibles6,571 7,732 8,151 
Loss on extinguishment of debtLoss on extinguishment of debt2,284 — 735 
Miscellaneous27,142
 30,131
 17,565
Miscellaneous24,236 22,712 27,387 
327,305
 311,136
 210,490
379,005 364,025 350,184 
Acquisition related costs—
 11,733
 26,110
COVID-19 expensesCOVID-19 expenses436 3,502 — 
Merger and acquisition - related expensesMerger and acquisition - related expenses660 2,062 7,544 
Total non-interest expense327,305
 322,869
 236,600
Total non-interest expense380,101 369,589 357,728 
Income before provision for income taxes151,264
 129,640
 67,971
Income before provision for income taxes246,594 142,453 183,132 
PROVISION FOR INCOME TAXES90,488
 44,255
 22,749
PROVISION FOR INCOME TAXES45,546 26,525 36,854 
NET INCOME$60,776
 $85,385
 $45,222
NET INCOME$201,048 $115,928 $146,278 
     
Earnings per common share     Earnings per common share 
Basic$1.85
 $2.52
 $1.90
Basic$5.81 $3.29 $4.20 
Diluted$1.84
 $2.52
 $1.89
Diluted$5.76 $3.26 $4.18 
Cumulative dividends declared per common share$2.00
 $0.88
 $0.72
Cumulative dividends declared per common share$1.64 $1.23 $2.64 
     
Weighted average number of common shares outstanding:     Weighted average number of common shares outstanding:
Basic32,888,007
 33,820,148
 23,801,373
Basic34,610,056 35,264,252 34,868,434 
Diluted32,986,707
 33,853,511
 23,866,621
Diluted34,919,188 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, 2017, 20162021, 2020 and 20152019

 202120202019
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 losses19,217 (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 gains120 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 hedges302 — — 
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 debentures2,501 (559)(144)
Reclassification of fair value of junior subordinated debentures redeemed1,613 — — 
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 
 2017 2016 2015
NET INCOME$60,776
 $85,385
 $45,222
OTHER COMPREHENSIVE LOSS, NET OF INCOME TAXES:     
Unrealized holding loss on securities—available-for-sale arising during the period(3,318) (3,940) (645)
Income tax benefit related to securities—available-for-sale unrealized holding losses1,182
 1,414
 249
Reclassification for net (gains) losses on securities—available-for-sale realized in earnings2,109
 (311) (119)
Income tax (benefit) expense related to securities—available-for-sale realized (gains) losses(759) 112
 43
Other comprehensive loss(786) (2,725) (472)
COMPREHENSIVE INCOME$59,990
 $82,660
 $44,750


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, 2017, 20162021, 2020 and 20152019
Common Stock
and Paid in Capital		Retained EarningsAccumulated Other Comprehensive
(Loss) Income		Shareholders’ Equity
SharesAmount
Balance, January 1, 201935,182,772 $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 acquisition1,578,351 85,200 85,200 
Balance, December 31, 201935,751,576 $1,373,940 $186,838 $33,256 $1,594,034 
  
Common Stock
and Paid in Capital
 Retained Earnings Accumulated Other Comprehensive
Loss		 Shareholders' Equity
  Shares Amount   
Balance, January 1, 2015 19,571,548
 $568,882
 $14,264
 $(258) $582,888
Net income     45,222
   45,222
Other comprehensive loss       (472) (472)
Accrual of dividends on common stock ($0.72/share-cumulative)     (19,871)   (19,871)
Proceeds from issuance of common stock for shareholder reinvestment program 810
 34
     34
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered 120,043
 3,088
     3,088
Excess tax benefits on stock-based compensation   397
     397
Issuance of shares for acquisitions 14,549,854
 688,773
     688,773
Balance, December 31, 2015 34,242,255
 $1,261,174
 $39,615
 $(730) $1,300,059
           
Balance, January 1, 2016 34,242,255
 $1,261,174
 $39,615
 $(730) $1,300,059
Net income     85,385
   85,385
Other comprehensive loss       (2,725) (2,725)
Accrual of dividends on common stock ($0.88/share-cumulative)     (29,672)   (29,672)
Repurchase of common stock (1,145,250) (50,772)     (50,772)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered 96,382
 3,401
     3,401
Excess tax benefit on stock-based compensation   34
     34
Balance, December 31, 2016 33,193,387
 $1,213,837
 $95,328
 $(3,455) $1,305,710



Balance, January 1, 202035,751,576 $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 income115,928 115,928 
Other comprehensive income35,813 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 surrendered32,404 7,714 7,714 
Balance, December 31, 202035,159,200 $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, 2017, 20162021, 2020 and 20152019



Common Stock
and Paid in Capital		Retained EarningsAccumulated Other Comprehensive
Income		Shareholders’ Equity
SharesAmount
Balance, January 1, 202135,159,200 $1,349,879 $247,316 $69,069 $1,666,264 
Net income201,048 201,048 
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 surrendered143,432 6,030 6,030 
Balance, December 31, 202134,252,632 $1,299,381 $390,762 $184 $1,690,327 
  
Common Stock
and Paid in Capital
 Retained Earnings Accumulated Other Comprehensive
Loss		 Shareholders' Equity
  Shares Amount   
Balance, January 1, 2017 33,193,387
 $1,213,837
 $95,328
 $(3,455) $1,305,710
Net income     60,776
   60,776
Other comprehensive loss       (786) (786)
Reclassification of stranded tax effects from accumulated other comprehensive loss to retained earnings     795
 (795) —
Accrual of dividends on common stock ($2.00/share-cumulative)     (66,364)   (66,364)
  Repurchase of common stock (545,166) (31,045)     (31,045)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered 78,264
 4,335
     4,335
Balance, December 31, 2017 32,726,485
 $1,187,127
 $90,535
 $(5,036) $1,272,626


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, 2017, 20162021, 2020 and 2015
2019
2017 2016 2015 202120202019
OPERATING ACTIVITIES:     OPERATING ACTIVITIES:   
Net income$60,776
 $85,385
 $45,222
Net income$201,048 $115,928 $146,278 
Adjustments to reconcile net income to net cash provided from (used by) operating activities: 
  
  
Adjustments to reconcile net income to net cash provided from operating activities:Adjustments to reconcile net income to net cash provided from operating activities:   
Depreciation14,701
 13,464
 9,957
Depreciation17,345 18,130 17,282 
Deferred income and expense, net of amortization1,972
 (1,323) (1,534)
Deferred income/expense, net of amortizationDeferred income/expense, net of amortization(38,786)(15,040)(1,543)
Capitalized loan servicing rights, net of amortizationCapitalized loan servicing rights, net of amortization(1,805)(894)662 
Amortization of core deposit intangibles6,246
 7,061
 3,164
Amortization of core deposit intangibles6,571 7,732 8,151 
Loss (gain) on sale of securities, net2,080
 (843) 540
Gain on sale of securities, netGain on sale of securities, net(482)(1,012)(33)
Net change in valuation of financial instruments carried at fair value2,844
 2,620
 813
Net change in valuation of financial instruments carried at fair value(4,616)656 208 
Purchases of securities—trading—
 (1,725) (6,338)
Proceeds from sales of securities—trading1,258
 7,839
 4,419
Principal repayments and maturities of securities—trading1,849
 3,746
 9,535
Gain on sale of branches, including related loans and deposits(12,189) —
 —
Reinvested dividends – equity securitiesReinvested dividends – equity securities— (353)— 
Decrease (increase) in deferred taxes56,267
 7,883
 (3,906)Decrease (increase) in deferred taxes16,357 (13,963)7,290 
Decrease in current taxes payable(2,965) (2,184) (1,519)
Equity-based compensation5,965
 4,305
 4,334
Increase in cash surrender value of BOLI(4,057) (4,507) (2,481)
Gain on sale of loans, net of capitalized servicing rights(15,225) (17,713) (10,716)
Gain on disposal of real estate held for sale and property and equipment(4,295) (1,389) (391)
Provision for loan loss8,000
 6,030
 —
Provision for real estate held for sale256
 876
 216
(Decrease) increase in current taxes payable(Decrease) increase in current taxes payable(3,643)(2,193)607 
Stock-based compensationStock-based compensation9,258 9,168 7,142 
Net change in cash surrender value of BOLINet change in cash surrender value of BOLI(4,685)(5,030)(4,246)
Gain on sale of loans, excluding capitalized servicing rightsGain 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(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(Recapture) provision for credit losses(33,388)67,875 10,000 
Provision for losses on real estate held for saleProvision for losses on real estate held for sale— 45 — 
Loss on extinguishment of debtLoss on extinguishment of debt2,284 — 735 
Origination of loans held for sale(807,137) (1,063,328) (709,035)Origination of loans held for sale(1,102,663)(1,461,872)(1,094,237)
Proceeds from sales of loans held for sale1,027,989
 880,890
 677,166
Proceeds from sales of loans held for sale1,276,111 1,471,828 1,070,814 
Net change in: 
  
  
Net change in:   
Other assets2,546
 3,759
 (7,319)Other assets2,200 (27,559)(10,171)
Other liabilities(179) (6,664) 4,090
Other liabilities(11,083)4,385 5,588 
Net cash provided from (used by) operating activities346,702
 (75,818) 16,217
Net cash provided from operating activitiesNet cash provided from operating activities301,578 125,386 149,609 
INVESTING ACTIVITIES: 
  
  
INVESTING ACTIVITIES:   
Purchases of securities—available-for-sale(838,247) (243,115) (141,989)Purchases of securities—available-for-sale(2,805,251)(1,361,132)(277,503)
Principal repayments and maturities of securities—available-for-sale187,080
 191,534
 113,431
Principal repayments and maturities of securities—available-for-sale1,314,484 474,876 321,510 
Proceeds from sales of securities—available-for-sale
522,564
 369,755
 232,620
Proceeds from sales of securities—available-for-sale
83,663 150,374 86,083 
Purchases of securities—held-to-maturity
(6,490) (60,344) (13,357)
Purchases of securities—held-to-maturity
(135,615)(222,094)(54,850)
Principal repayments and maturities of securities—held-to-maturity
11,817
 11,009
 12,978
Principal repayments and maturities of securities—held-to-maturity
32,487 33,848 50,962 
Loan originations, net of repayments(178,609) (46,042) (32,675)
Purchases of equity securitiesPurchases of equity securities(4,750)(1,060,000)— 
Proceeds from sales of equity securitiesProceeds from sales of equity securities4,796 1,060,695 — 
Loan repayments (originations), netLoan repayments (originations), net795,892 (561,338)(304,191)
Purchases of loans and participating interest in loans(306,937) (314,301) (323,533)Purchases of loans and participating interest in loans(5,086)(2,510)(9,798)
Proceeds from sales of other loans92,010
 233,419
 124,407
Proceeds from sales of other loans46,028 19,469 27,560 
Net cash received from acquisitions and branch divestitures113,222
 —
 24,208
Net cash received related to branch divestituresNet cash received related to branch divestitures— — 26,944 
Purchases of property and equipment(12,244) (16,239) (12,072)Purchases of property and equipment(10,493)(12,803)(24,700)
Proceeds from sale of real estate held for sale and sale of other property20,121
 14,513
 4,740
Proceeds from sale of real estate held for sale and sale of other property11,759 8,893 7,815 
Proceeds from FHLB stock repurchase program118,304
 80,681
 48,843
Proceeds from FHLB stock repurchase program4,358 52,169 175,998 
Purchase of FHLB stock(116,132) (77,130) (23,634)Purchase of FHLB stock— (40,185)(170,380)
Purchase of securities purchased under agreements to resellPurchase of securities purchased under agreements to resell(300,000)— — 
Investment in bank-owned life insuranceInvestment in bank-owned life insurance(50,053)(83)(75)
Other254
 2,707
 1,092
Other2,355 5,197 1,511 
Net cash (used by) provided from investing activities(393,287) 146,447
 15,059
Net cash used by investing activitiesNet 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, 2017, 20162021, 2020 and 20152019

202120202019
FINANCING ACTIVITIES:
Increase in deposits, net1,759,638 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, net79,704 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 debentures248 — — 
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 activities1,613,965 2,255,686 29,044 
NET CHANGE IN CASH AND CASH EQUIVALENTS900,117 926,448 35,539 
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR1,234,183 307,735 272,196 
CASH AND CASH EQUIVALENTS, END OF YEAR$2,134,300 $1,234,183 $307,735 

 2017 2016 2015
FINANCING ACTIVITIES:     
Increase in deposits, net222,334
 66,346
 226,821
Proceeds from FHLB advances150,000
 —
 —
Repayment of long term FHLB borrowing(150,009) (95,009) (8)
Advances, net of (repayments) of overnight and short-term FHLB borrowings(54,000) 16,400
 (120,400)
(Decrease) increase in other borrowings, net(9,825) 7,360
 16,140
Cash dividends paid(65,759) (28,282) (17,170)
Cash proceeds from issuance of shares for shareholder reinvestment plan—
 —
 34
Cash paid for repurchase of common stock(31,045) (50,772) —
Taxes paid related to net share settlement for equity awards(1,630) (870) (848)
Net cash provided from (used by) financing activities60,066
 (84,827) 104,569
NET CHANGE IN CASH AND CASH EQUIVALENTS13,481
 (14,198) 135,845
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR247,719
 261,917
 126,072
CASH AND CASH EQUIVALENTS, END OF YEAR$261,200
 $247,719
 $261,917
 202120202019
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:   
Interest paid in cash$24,278 $40,942 $58,239 
Taxes paid in cash29,017 39,672 27,329 
NON-CASH INVESTING AND FINANCING TRANSACTIONS:   
Transfer of loans to real estate owned and other repossessed assets512 1,602 303 
Dividends accrued but not paid until after period end1,338 1,357 51,199 
ACQUISITIONS (DISPOSITIONS):
Assets acquired— — 426,609 
Liabilities assumed— — 373,016 



 2017 2016 2015
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:     
Interest paid in cash$18,875
 $16,722
 $12,252
Taxes paid in cash35,500
 36,153
 27,256
NON-CASH INVESTING AND FINANCING TRANSACTIONS: 
  
  
Loans, net of discounts, specific loss allowances and unearned income, transferred to real estate owned and other repossessed assets10
 9,146
 4,456
Dividends accrued but not paid until after period end8,226
 7,662
 6,271
ACQUISITIONS (DISPOSITIONS):     
Assets acquired (disposed)(259,398) —
 4,829,748
Liabilities assumed (transferred)(160,465) —
 4,249,751



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 twoits wholly-owned subsidiaries,subsidiary, Banner Bank and Islanders Bank. Banner Bank is a Washington-chartered commercial bank that conducts business from its headquarters in Walla Walla, Washington and, as of December 31, 2017,2021, its 175150 branch offices located in Washington, Oregon, California and Idaho. Banner Bank also has 1318 loan production offices located in Washington, Oregon, California, Idaho and Utah.  Islanders Bank is also a Washington-chartered commercial bank that conducts business from three locations in San Juan County, Washington.  Banner Corporation is subject to regulation by the Board of Governors of the Federal Reserve System (Federal Reserve Board).  Banner Bank and Islanders Bank (the Banks) areBank) 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 customerclient 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 subsidiaries.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 9 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, 20172021 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.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 statementsConsolidated Statements of financial conditionFinancial Condition and related consolidated statementsConsolidated Statements of operations, comprehensive income, changesOperations, Comprehensive Income, Changes in shareholders’ equityShareholders’ Equity and cash flowsCash 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 loan and leasecredit losses, (iii) the valuation of financial assets and liabilities recorded at fair value, including other-than-temporary impairment (OTTI) losses, (iv) the valuation of intangible assets, such as goodwill,core deposit intangibles (CDI) and mortgageloan 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
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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:SecuritiesDebt securities are classified as held-to-maturity when the Company has the ability and positive intent to hold them to maturity.  SecuritiesDebt securities classified as available-for-sale are available for future liquidity requirements and may be sold prior to maturity.  SecuritiesDebt 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.  SecuritiesDebt 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 and, if appropriate, any other-than-temporary impairment losses.  Securitiesmaturity.  Debt securities classified as available-for-sale are recordedmeasured 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.  SecuritiesDebt securities classified as trading are also recordedmeasured at fair value.  Unrealized holding gains and losses on securities classified as trading are included in earnings.  (See Note 1816 for a more complete discussion of accounting for the fair value of financial instruments.)  Declines in the fair value of securities below their cost that are deemed to be other-than-temporary are recognized in earnings as realized losses.  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 reviews investmenthas 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 an ongoing basis for the presence of OTTI or permanent impairment, taking into consideration current market conditions, fair value in relationship to cost, extent and naturemunicipal bond portfolio. Less than 2% of the changeCompany’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 fair value, issuer rating changes and trends,an unrealized loss position, the Company first assesses whether the Companyit intends to sell, a security or if it is more likely than not that it will be required to sell the security before recovery of theits amortized cost basis of the investment, which may be maturity, and other factors.

For debt securities, ifbasis. 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 as an OTTI.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 but the Company does not expectevaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to recoverwhich fair value is less than amortized costs, any changes to the entirerating 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, only the portion of the impairment loss representing credit losses would be recognized in earnings.  The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected.security.  Projected cash flows are discounted by the original or current effective interest rate depending onrate.  If the naturepresent value of cash flows expected to be collected is less than the security being measuredamortized cost basis, a credit loss exists and an allowance for potential OTTI.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.  Impairment

Changes in the allowance for credit losses related to all other factors are presentedrecorded as separate categories within AOCI.

For investment securities transferred fromprovision 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 to available-for-sale, unrealized gainssecurity is confirmed or losses from the time of transfer are accreted or amortized over the remaining lifewhen either of the debt security based on the amount and timingcriteria regarding intent of future estimated cash flows.  The accretion or amortization of the amount recorded in AOCI increases the carrying value of the investment and does not affect earnings.requirement to sell is met.


Investment in FHLB Stock: At December 31, 2017,2021, the BanksBank had $10.3$12.0 million in FHLB of Des Moines stock (FHLB stock), compared to $12.5$16.4 million at December 31, 2016. The Banks' investments in FHLB stock are generally viewed as a long-term investment and are carried at par value ($100 per share), which reasonably approximates its fair value.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.par, therefore there has been no observable changes in market prices. As membersa member of the FHLB system, the Banks areBank is required to maintain a minimum level of investment in FHLB stock based on specific percentages of theirits outstanding FHLB advances.


Management periodically evaluates FHLB stock for impairment. Management'sManagement’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 customerclient 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, 2017.2021 and 2020.


Loans Receivable:Receivable:  The Banks originateBank originates residential one- to four-family and multifamily mortgage loans for both portfolio investment and sale in the secondary market.  The BanksBank also originateoriginates 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
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of the allowance for credit losses. Amortized cost is the principal amount outstanding, net of allowance for loan losses, 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.


Some of the Company’s loans are reported as troubled debt restructures (TDRs).  Loans are reported as TDRs when the Banks grant a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider.  Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for a transaction of similar risk.  As a result of these concessions, loans identified as TDRs are impaired as the Banks will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement.  TDRs are accounted for in accordance with the Banks’ impaired loan accounting policies.

Loans Held for Sale.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 delivery 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. As of December 31, 2016,The multifamily held for sale loans were carried at the lower of aggregate cost or estimated market value. During 2017, the Company elected fair value accounting on newly originated multifamily held for sale loans; as a result, as of December 31, 2017, multifamily held for sale loansprior 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 specific identificationaggregate method and are recorded in the mortgage banking operations component of non-interest income.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 Loans: Purchased loans, including loansin Business Combinations: Loans acquired in business combinations are recorded at their fair value at the acquisition date. Credit discountsEstablishing 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 included ininaccurate actual credit losses could vary significantly from the determinationcredit discount used to calculate the fair value of fair value; therefore, an allowance for loan and lease losses is not recorded at the acquisition date.acquired loans. Acquired loans are evaluated upon acquisition and classified as either purchased credit-impairedcredit-deteriorated or purchased non-credit-impaired.non-credit-deteriorated. Purchased credit-impaired (PCI)credit-deteriorated (PCD) loans reflecthave experienced more than insignificant credit deterioration since origination such that itorigination. For PCD loans, an allowance for credit losses is probabledetermined at the acquisition thatdate using the Company will be unablesame methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to collect all contractually required payments.individual loans. The excessloan’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 cash flows expected to be collected overloan is a PCI pool's carrying valuenoncredit discount or premium, which is considered to be the accretable yield and is recognized asamortized into interest income over the estimated life of the pool usingloan. Subsequent changes to the effective yield method. The excess of the undiscounted contractual balances due over the cash flows expected to be collected is considered to be the nonaccretable difference. The nonaccretable difference represents the Company's estimate of theallowance for credit losses expected to occur and was considered in determining the fair value of the loans as of the acquisition date. Subsequent to the acquisition date, any increases in expected cash flows over those expected at the purchase date are adjustedrecorded through a change to the accretable yield on a prospective basis. Any subsequent decreases in expected cash flows attributable to credit deterioration are recognized by recording a provision for loancredit losses.


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


Income Recognition on Nonaccrual and Impaired Loans and Securities: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 Loan Losses: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 loancredit losses reflects the amount required to maintain the allowance for loancredit losses at an appropriate level based upon management’s evaluation of the adequacy of generalcollective and specificindividual loss reserves.  The Company maintains an allowance for loan losses consistent in all material respects with GAAP.  The Company has established systematic methodologies for the determination of the adequacy of the Company’s allowance for loancredit losses.  The methodologies are set forth in a formal policy and take into consideration the need for a general valuation allowance for loans evaluated on a collective (pool) basis which have similar risk characteristics as well as specific allowances that are tied to individual problem loans.loans that do not share risk characteristics.  The Company increases its allowance for loancredit losses by charging provisions for probable loancredit losses againston its income and values impaired loans consistent with accounting guidelines.

The allowance for loan losses is maintained at a level sufficient to provide for estimated losses based on evaluating known and inherent risks in the loan portfolio and upon the Company’s continuing analysisConsolidated Statement of the factors underlying the quality of the loan portfolio.  These factors include, among others, changes in the size and composition of the loan portfolio, delinquency rates, actual loan loss experience, current economic conditions, detailed analysis of individual loans for which full collectability may not be assured, and determination of the existence and realizable value of the collateral and guarantees securing the loans.  Realized lossesOperations. Losses related to specific assets are applied as a reduction of the carrying value of the assets and charged immediately against the
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allowance for credit loss reserve when management believes the uncollectibility of a loan loss reserve.balance is confirmed.  Recoveries on previously charged off loans are credited to the allowance for loancredit losses.  The reserve is based upon factors and trends identified by Banner at the time financial statements are prepared.  Although the Company uses the best information available, future adjustments to

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 may- 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 necessary due to economic, operating, regulatoryreasonable and other conditionssupportable. To the extent the lives of the loans in the portfolio extend beyond the Company’s control.  The adequacyperiod 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 general12 months with a reversion period of 12 months. Both the reasonable and specific reserves is based on a continuing evaluationsupportable 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 pertinent factorsloans 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 loan portfolio as well as individualCompany’s credit review system, the quality of certain large balance loans.  Large groups of smaller-balance homogeneous loansthe Company’s management and lending staff, and the regulatory and economic environments in the areas in which the Company’s lending activities are collectively evaluated for impairment.  concentrated.

Loans that are collectively evaluated for impairment include residential real estate and consumerdo not share risk characteristics with other loans and, as appropriate, smaller balance non-homogeneous loans.  Larger balance non-homogeneous residential construction and land, commercial real estate, commercial business loans and unsecured loansin the portfolio are individually evaluated for impairment.  Loansimpairment and are considered impaired when, based on current information and events,not included in the Company determines that it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement.collective evaluation.  Factors involved in determining impairmentwhether 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.  ImpairedExpected 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 as a practical expedient, atwhen the loan’s observable market price, or ifBank determines that foreclosure is probable, the loanexpected credit loss is collateral dependent, atmeasured 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 selling costs.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 value of impairedexpected credit losses for loans evaluated individually are included within the provision for loancredit losses in the same manner in which impairmentthe 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 Company’s methodologycontractual term excludes expected extensions, renewals, and modifications unless either management has a reasonable expectation at the
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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 assessinga transaction of similar risk.  The allowance for credit losses on a TDR is determined using the appropriatenesssame 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 loancredit losses consistsis determined by discounting the expected future cash flows at the original interest rate of several key elements,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 include specific allowances, an allocated formula allowanceoutlined, 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 an unallocated allowance.  Lossesregulatory guidance if they are less than 30 days past due on specific loans are provided for when the losses are probable and estimable.  General loan loss reserves are established to provide for inherent loan portfolio risks not specifically provided for.  The level of general reserves is based on analysis of potential exposures existing in the loan portfolio including evaluation of historical trends, current market conditions and other relevant factors identified by ustheir contractual payments at the time a modification program is implemented. The CAA extends relief offered under the financial statements are prepared.  The formula allowance is calculated by applying loss factorsCARES Act related to outstanding loans, excluding those loans that are subject to individual analysis for specific allowances.  Loss factors are based on the Company’s historical loss experience adjusted for significant environmental considerations, including the experienceTDRs as a result of other banking organizations, which in the judgment of management affects the collectability of the loan portfolio as of the evaluation date.  The unallocated allowance is based upon the Company’s evaluation of various factors that are not directly measured in the determination of the formula and specific allowances.COVID-19 through January 1, 2022.




While the Company believes the estimates and assumptions used in the determination of the adequacy of the allowance for loan losses are reasonable, there can be no assurance that such estimates and assumptions will not be proved incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact the financial condition and results of operations of the Company.  In addition, the determination of the amount of the allowance for loan losses is subject to review by bank regulators as part of the routine examination process, which may result in the adjustment of reserves based upon their judgment of information available to them at the time of their examination.

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.  Net deferred fees or costs related to loans held for sale are recognized as part of the cost basis of the loan.  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.


ReserveAllowance for Unfunded Commitments: A reserveCredit 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 probableexpected credit losses associated with the Banks'contractual life of the Bank’s commitments to lend funds under existing agreements such as letters or lines of credit. Management determinesThe Bank uses a methodology for determining the adequacyallowance 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 the reserve for unfunded commitments based upon reviews of individual credit facilities, current economic conditions, the risk characteristics of the various categories of commitments and other relevant factors. The reserve is based on estimates and ultimate losses may vary from the current estimates. These estimates are evaluated on a regular basis and, as adjustments become necessary, they are reported in earnings in the periods in which they become known.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 losses. Provisions for unfunded commitment lossescommitments are recognized in non-interestas provision for (or recapture of) credit loss expense and added to the reserveallowance for credit losses - unfunded loan commitments, which is included in other liabilities.liabilities in the Consolidated Statements of Financial Condition.


Real Estate Owned:Owned, Held for Sale: Property acquired by foreclosure or deed in lieu of foreclosure is initially recorded at the estimated fair value of the property, less expected selling costs.  Development and improvement costs relating to the property aremay be capitalized, while directother 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 BanksBank will ultimately recover from real estate held for sale may differ substantially from the carrying value of the assets because of market factors beyond the Banks’Bank’s control or because of changes in the Banks’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 improvements10–39 years
Furniture and equipment
3–3–10 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.


HeldRight 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 sale property isoperating leases with a lease term greater than 12 months. The ROU asset and lease liability are recorded in the Consolidated Statement of Financial Condition.

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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 lowerpresent 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 estimated fair valuelease 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 property, less expected selling costs,leases provide the Company with the option to extend the lease term one or more times following expiration of the book value atinitial term. The ROU asset and lease liability terms may include options to extend or terminate the datelease 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 property is transferred to held for sale. Depreciation is not recorded on held for sale property.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'sunit’s estimated fair values, including goodwill, to its carrying amount. If the fair value exceeds the carrycarrying 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 thatthe 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. Since the sale of the Utah branches met the definition of a business, goodwill was allocated to the sale based on the fair value of the Utah branches compared to the relative fair value of the reporting unit.


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 customerclient relationships associated with the deposits.  CDI is being amortized on an accelerated basis over a weighted average estimated useful life of threeeight 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.




Other intangibles also include favorable leasehold intangibles (LHI). LHI represents the value assigned to leases assumed in an acquisition in which the lease terms are favorable compared to a market lease at the date of acquisition. LHI is amortized over the underlying lease termMortgage and is reviewed at least annually for events or circumstances that could impair the value.

MortgageSBA 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.


ServicingMortgage 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 andloans. 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 Banks haveBank 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 Banks’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 Banks areBank is the respective ownersowner 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
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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 $7.1$400.0 million ($4.4 million designated in a hedge relationship) in notional amounts of these types of interest rate swaps at December 31, 2017.  Some of these swaps serve as hedges to an equal amount of fixed rate loans which include market value prepayment penalties that mirror the provision of the specifically matched interest rate swaps.  2021.

In addition, Banner Bank uses an interest rate swap program for commercial loan customersclients 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 customerclient swaps are matched with third party swaps with qualified broker/dealer or banks to offset the risk.  At December 31, 2017,2021, Banner Bank had $282.3$551.6 million in notional amounts of these customerclient 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"“rate lock” commitments and one- to four-family loans held for sale.  The Company also uses forward contracts for the sale of mortgage backed securities to hedge multifamily held for sale loans.  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 2421 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 Banks,Bank, (2) the transferee obtainshas the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets beyond a trivial benefit, and (3) the Banks doBank 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 willare 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.

In December 2017, the federal government enacted the Tax Cuts and Jobs Act (the 2017 Tax Act). Among other provisions, the 2017 Tax Act reduced the federal marginal corporate income tax rate from 35% to 21%. As a result of the passage of the 2017 Tax Act, the Company recorded a $42.6 million charge for the revaluation of its net deferred tax asset to account for the future impact of the decrease in the corporate income tax rate and other provisions of the legislation. The charge was recorded as an increase to tax expense and reduction of the net deferred asset. The Company’s financial results reflect the income tax effects of the 2017 Tax Act for which the accounting is complete and provisional amounts for those specific income tax effects of the 2017 Tax Act for which the accounting is incomplete but a reasonable estimate could be determined. As a result, these amounts could be adjusted during the measurement period, which will end in December 2018. The Company did not identify items for which the income tax effects of the 2017 Tax Act have not been completed and a reasonable estimate could not be determined as of December 31, 2017.  The $42.6 million charge recorded by the Company includes $4.2 million of provisional income tax expense related to Alternative Minimum Tax (AMT) credits that are limited under Section 383 of the Internal Revenue Code of 1986 (Code), which resulted in a reduction in the AMT deferred tax asset.  The utilization of the limited AMT credits under the refundable AMT credit law is uncertain and will require further analysis as guidance is released by the Internal Revenue Service during 2018.


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.


As of December 31, 2017, the Company had an insignificant amount of unrecognized tax benefits for uncertain tax positions, none of which if recognized would materially affect the effective tax rate if recognized.Stock-Based Compensation:  The Company does not anticipate thatmaintains a number of stock-based incentive plans, which are discussed in more detail in Note 13, Stock-Based Compensation Plans. Under these plans, 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, 2017, 2016 and 2015 is immaterial. The Company files consolidated income tax returns in Oregon, California, Utah and Idaho and for federal purposes. The Company has tax years 2014–2016 open for tax examination under the statute of limitation provisions of the Code.

Stock-Based Compensation:  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, nonvestednon-vested stock-based payment awards that contain nonforfeitablenon-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
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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 and warrants for common stock 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.  Each of the BanksThe Bank is a community oriented commercial bank chartered in the State of Washington.  The Banks’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 Banks offerBank offers a wide variety of deposit products to theirits consumer and commercial customers.clients.  Lending activities include the origination of real estate, commercial/agriculture business and consumer loans.  BannerThe 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 Banks receiveBank receives other income from deposit service charges, loan servicing fees and from the sale of loans and investments.  The performance of the BanksBank 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


Revenue from Contracts with CustomersReference Rate Reform (Topic 848)


In May 2014,March 2020, the Financial Accounting Standards Board (FASB) issued guidance within Accounting Standards Update (ASU) No. 2014-09, Revenue2020-04, 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 Contracts with Customersthe accounting analysis and impacts that may otherwise be required for modifications to agreements (e.g., which creates Topic 606 and supersedes Topic 605, Revenue Recognition. 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 core principlefollowing optional expedients for applying the requirements of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goodscertain Topics or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, the new guidance requires companies to use more judgment and make more estimates than under current guidance, including identifying performance obligationsIndustry Subtopics in the contract, estimating the amountCodification are permitted for contracts that are modified because of variable consideration to include in the transaction pricereference rate reform and allocating the transaction price to each separate performance obligation. Under the termsthat meet certain scope guidance: 1) modifications of ASU 2015-14 the standard is effective for interim and annual periods beginning after December 15, 2017. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. Management adopted the new guidance on January 1, 2018.  Management has completed its identification of all revenue streams included in the financial statements (excluding interest income, which is outside of the scope of the pronouncement) and identified which revenue streams arecontracts within the scope of Topics 310, Receivables, and 470, Debt, should be accounted for by prospectively adjusting the pronouncement. Management is finalizing its evaluation on whether the implementationeffective interest rate; 2) modifications of this ASU will result in any accounting changes for the revenue streamscontracts 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 ASU. ManagementTopic 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 expectrequire 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 ASU toaccounting guidance did not have a material impact on the Company’s Consolidated Financial Statements other than reclassification of expenses from non-interest expense to non-interest income and additional disclosure requirements.Statements.

103
In April 2016, FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing. The amendments in this ASU do not change the core principle of the guidance in Topic 606. Rather, the amendments in this ASU clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The amendments in this ASU affect the guidance in ASU 2014-09, discussed above, which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition requirements in Topic 606 (Revenues from Contracts with Customers). Refer to Company's status of implementation in the first paragraph of this section.


In May 2016, FASB issued ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients, amending ASC Topic 606 (Revenue from Contracts with Customers). The amendments in this ASU do not change the core principle of the guidance in Topic 606. Rather, the amendments in this ASU affect only several narrow aspects of Topic 606. The amendments in this ASU affect the guidance in ASU 2014-09, discussed above, which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition requirements in Topic 606. Refer to Company's status of implementation in the first paragraph of this section.

Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU require equity securities to be measured at fair value with changes in the fair value recognized through net income. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value under certain circumstances and require enhanced disclosures about those investments. This ASU simplifies the impairment assessment of equity investments without readily determinable fair values. This ASU also eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The amendments in this ASU require separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This ASU excludes from net income gains or losses that the entity may not realize because those financial liabilities are not usually transferred or settled at their fair values before maturity. The amendments in this ASU require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or in the accompanying notes to the financial statements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. At December 31, 2017, Banner held $5.6 million of available-for-sale equity investment securities. The provisions of ASU No. 2016-01 require changes in the value of equity securities to be recognized in the income statement which could result in additional volatility in income.

Leases (Topic 842)

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this ASU require lessees to recognize the following for all leases (with the exception of short-term) at the commencement date; a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control


the use of, a specified asset for the lease term. The amendments in this ASU leave lessor accounting largely unchanged, although certain targeted improvements were made to align lessor accounting with the lessee accounting model. This ASU simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently evaluating the provisions of ASU No. 2016-02 to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements and regulatory capital ratios and has contracted with a third party software solution to meet new requirements of this ASU with implementation to begin later in 2018. The Company leases 108 buildings and offices under non-cancelable operating leases, the majority of which will be subject to this ASU. While the Company has not quantified the impact to its balance sheet, upon the adoption of this ASU the Company expects to report increased assets and increased liabilities on its Consolidated Statements of Financial Condition as a result of recognizing right-of-use assets and lease liabilities related to these leases and certain equipment under non-cancelable operating lease agreements, which currently are not reflected in its Consolidated Statements of Financial Condition.

Derivatives and Hedging (Topic 815)

In August 2017, FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU are intended to provide investors better insight to an entity's risk management hedging strategies by permitting a company to recognize the economic results of its hedging strategies in its financial statements. The amendments in this ASU permit hedge accounting for hedging relationships involving nonfinancial risk and interest rate risk by removing certain limitations in cash flow and fair value hedging relationships. In addition, the ASU requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. This ASU is effective for fiscal years beginning after December 15, 2018, and early adoption is permitted. Adoption of ASU 2017-12 is not expected to have a material impact on the Company's Consolidated Financial Statements.

Financial Instruments—Credit Losses (Topic 326)

In June 2016, FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The ASU affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial asset not excluded from the scope that have the contractual right to receive cash. The ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU require a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This ASU broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. This ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is still evaluating the effects this ASU will have on the Company’s Consolidated Financial Statements. The Company has formed an internal committee to oversee the project, engaged a third-party vendor to assist with the project and is nearing completion of its gap analysis phase of the project. Upon adoption, the Company expects changes in the processes and procedures used to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. The new guidance may result in an increase in the allowance for loan losses which will also reflect the new requirement to include the nonaccretable principal differences on purchased credit-impaired loans; however, the Company is still in the process of determining the magnitude of the change and its impact on the Consolidated Financial Statements. In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities available-for-sale will be replaced with an allowance approach. The Company has begun developing and implementing processes to address this ASU.

Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20)

In March 2017, FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for certain callable debt securities held at a premium. Specifically, the ASU requires the premium to be amortized to the earliest call date. Under current GAAP, premiums and discounts on callable debt securities generally are amortized to the maturity date. The ASU does not require an accounting change for securities held at a discount; the discount continues to be amortized to the maturity date. This ASU more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is still evaluating the effects this ASU will have on the Company’s Consolidated Financial Statements.

Application of US GAAP to the Tax Cuts and Jobs Act



On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. SAB 118 provides guidance to registrants under three scenarios: (1) Measurement of certain income tax effects is complete, (2) Measurement of certain income tax effects can be reasonably estimated and (3) Measurement of certain income tax effects cannot be reasonably estimated. SAB 118 provides a one year measurement period for the registrant to complete its accounting for certain income tax effects that are considered provisional or for which reasonable estimates cannot be made. The Company recognized the income tax effects of the 2017 Tax Act in its 2017 financial statements in accordance with SAB 118.

Income Statement - Reporting Comprehensive Income (Topic 220)

In February 2018, FASB Issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows a reclassification from AOCI to retained earnings for stranded tax effects resulting from the 2017 Tax Act. The ASU eliminates the stranded tax effects resulting from the 2017 Tax Act and improves the usefulness of information reported to financial statement users. The ASU also requires certain disclosures about the stranded tax effects. This ASU is effective for all entities for fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. The ASU should be applied to either in the period of adoption or retrospectively to each period in which the effect of the change in the federal corporate tax rate is recognized. The Company elected to early adopt this ASU and to reclassify $795,000 of stranded tax effects from AOCI to retained earnings in the fourth quarter of 2017.



Note 3:  BRANCH DIVESTITURE

On October 6, 2017, Banner Bank completed the sale of its Utah branches and related assets and liabilities to People’s Intermountain Bank, a banking subsidiary of People’s Utah Bancorp (NASDAQ: PUB).

Under the terms of the purchase and assumption agreement, the sale included $253.8 million in loans, $160.3 million in deposits and all of Banner Bank’s seven Utah bank branches located in Provo, Orem, Salem, Springville, South Jordan, Salt Lake City and Woods Cross. The sale also included $4.0 million of property and equipment and $581,000 of accrued interest. In addition, Banner allocated an associated $1.9 million of goodwill and $1.1 million of other intangible assets with the divestiture, which constituted the disposal of a business. The deposit premium paid to Banner was $13.8 million based on average daily deposits for a period prior to closing. The net gain recorded on the sale was $12.2 million.




Note 4:  SECURITIES


The amortized cost, gross unrealized gains and losses and estimated fair value of securities at December 31, 20172021 and 2016December 31, 2020 are summarized as follows (in thousands):
 December 31, 2021
 Amortized CostFair
Value
Trading:
Corporate bonds$27,203 $26,981 
$27,203 $26,981 
 December 31, 2021
 Amortized CostGross Unrealized GainsGross Unrealized LossesAllowance for Credit LossesFair
Value
Available-for-Sale:
U.S. Government and agency obligations$201,101 $852 $(621)$— $201,332 
Municipal bonds293,761 15,171 (320)— 308,612 
Corporate bonds114,427 3,103 (183)— 117,347 
Mortgage-backed or related securities2,837,480 17,749 (49,961)— 2,805,268 
Asset-backed securities206,391 52 (9)— 206,434 
 $3,653,160 $36,927 $(51,094)$— $3,638,993 

 December 31, 2021
 Amortized CostGross Unrealized GainsGross Unrealized LossesFair
Value		Allowance for Credit Losses
Held-to-Maturity:
U.S. Government and agency obligations$316 $3 $— $319 $— 
Municipal bonds420,555 20,743 (1,393)439,905 (203)
Corporate bonds3,092 — (3)3,089 (230)
Mortgage-backed or related securities97,392 1,171 (23)98,540 — 
$521,355 $21,917 $(1,419)$541,853 $(433)

December 31, 2020
Amortized CostFair
Value
Trading:
Corporate bonds27,203 $24,980 
$27,203 $24,980 

104

December 31, 2020
December 31, 2017
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
Trading:       
Municipal bonds$100
     $100
Corporate bonds27,132
     22,058
Equity securities14
     160
$27,246
     $22,318
Amortized CostGross Unrealized GainsGross Unrealized LossesAllowance for Credit LossesFair
Value
Available-for-Sale:       Available-for-Sale:
U.S. Government and agency obligations$72,829
 $68
 $(431) $72,466
U.S. Government and agency obligations$141,668 $1,002 $(935)$— $141,735 
Municipal bonds68,513
 665
 (445) 68,733
Municipal bonds283,997 19,523 (2)— 303,518 
Corporate bonds5,431
 6
 (44) 5,393
Corporate bonds219,086 2,762 (79)— 221,769 
Mortgage-backed or related securities745,956
 1,003
 (7,402) 739,557
Mortgage-backed or related securities1,602,033 45,179 (1,060)— 1,646,152 
Asset-backed securities27,667
 184
 (93) 27,758
Asset-backed securities9,405 77 (63)— 9,419 
Equity securities5,716
 10
 (148) 5,578
$926,112
 $1,936
 $(8,563) $919,485
Held-to-Maturity:       
U.S. Government and agency obligations$1,024
 $29
 $—
 $1,053
Municipal bonds:189,860
 3,385
 (1,252) 191,993
Corporate bonds3,978
 7
 —
 3,985
Mortgage-backed or related securities65,409
 266
 (518) 65,157
$260,271
 $3,687
 $(1,770) $262,188
 $2,256,189 $68,543 $(2,139)$— $2,322,593 

December 31, 2020
December 31, 2016Amortized CostGross Unrealized GainsGross Unrealized LossesFair
Value		Allowance for Credit Losses
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
Trading:       
Held-to-Maturity:Held-to-Maturity:
U.S. Government and agency obligations$1,230
     $1,326
U.S. Government and agency obligations$340 $7 $— $347 $— 
Municipal bonds331
     335
Municipal bonds370,998 24,130 (94)395,034 (59)
Corporate bonds26,959
     21,143
Corporate bonds3,222 — (12)3,210 (35)
Mortgage-backed or related securities1,620
     1,641
Mortgage-backed or related securities47,247 2,843 — 50,090 — 
Equity securities14
     123
$30,154
     $24,568
$421,807 $26,980 $(106)$448,681 $(94)
Available-for-Sale:       
U.S. Government and agency obligations$57,288
 $146
 $(456) $56,978
Municipal bonds110,487
 455
 (1,089) 109,853
Corporate bonds10,255
 77
 (49) 10,283
Mortgage-backed or related securities598,899
 2,064
 (6,251) 594,712
Asset-backed securities29,319
 —
 (326) 28,993
Equity securities5,599
 10
 —
 5,609
$811,847
 $2,752
 $(8,171) $806,428
Held-to-Maturity:       
U.S. Government and agency obligations$1,065
 $—
 $(18) $1,047
Municipal bonds:196,989
 4,173
 (1,272) 199,890
Corporate bonds3,876
 —
 —
 3,876
Mortgage-backed or related securities65,943
 309
 (537) 65,715
$267,873
 $4,482
 $(1,827) $270,528





At Accrued interest receivable on held-to-maturity debt securities was $3.3 million and $3.0 million as of December 31, 20172021 and 2016,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 Months12 Months or MoreTotal
 Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses
Available-for-Sale:
U.S. Government and agency obligations$— $— $71,306 $(621)$71,306 $(621)
Municipal bonds40,397 (221)8,541 (99)48,938 (320)
Corporate bonds8,009 (121)9,938 (62)17,947 (183)
Mortgage-backed or related securities1,307,411 (38,028)721,454 (11,933)2,028,865 (49,961)
Asset-backed securities3,382 (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 waswere as follows (in thousands):
 December 31, 2020
 Less Than 12 Months12 Months or MoreTotal
 Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses
Available-for-Sale:
U.S. Government and agency obligations$3,126 $(8)$50,603 $(927)$53,729 $(935)
Municipal bonds495 (2)— — 495 (2)
Corporate bonds3,586 (79)— — 3,586 (79)
Mortgage-backed or related securities181,871 (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)
 December 31, 2017
 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$31,276
 $(211) $23,341
 $(220) $54,617
 $(431)
Municipal bonds20,879
 (185) 13,360
 (260) 34,239
 (445)
Corporate bonds296
 (4) 4,682
 (40) 4,978
 (44)
Mortgage-backed or related securities559,916
 (5,138) 100,662
 (2,264) 660,578
 (7,402)
Asset-backed securities—
 —
 9,926
 (93) 9,926
 (93)
Equity securities5,480
 (148) —
 —
 5,480
 (148)
 $617,847
 $(5,686) $151,971
 $(2,877) $769,818
 $(8,563)
Held-to-Maturity:           
Municipal bonds$21,839
 $(171) $34,314
 $(1,081) $56,153
 $(1,252)
Mortgage-backed or related securities38,023
 (378) 4,434
 (140) 42,457
 (518)
 $59,862
 $(549) $38,748
 $(1,221) $98,610
 $(1,770)
 December 31, 2016
 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$39,043
 $(442) $1,012
 $(14) $40,055
 $(456)
Municipal bonds60,765
 (1,087) 556
 (2) 61,321
 (1,089)
Corporate bonds5,206
 (49) —
 —
 5,206
 (49)
Mortgage-backed or related securities403,431
 (5,604) 47,467
 (647) 450,898
 (6,251)
Asset-backed securities9,928
 (101) 19,064
 (225) 28,992
 (326)
 $518,373
 $(7,283) $68,099
 $(888) $586,472
 $(8,171)
Held-to-Maturity:           
U.S. Government and agency obligations$1,047
 $(18) $—
 $—
 $1,047
 $(18)
Municipal bonds$64,802
 $(1,267) $204
 $(5) $65,006
 $(1,272)
Mortgage-backed or related securities42,245
 (537) —
 —
 42,245
 (537)
 $108,094
 $(1,822) $204
 $(5) $108,298
 $(1,827)


At December 31, 2017,2021, there were 22697 securities—available-for-sale with unrealized losses, compared to 24354 at December 31, 2016.  At December 31, 2017, there were 66 securities—held-to-maturity with unrealized losses, compared to 73 at December 31, 2016.2020.  Management does not believe that any individual unrealized loss as of December 31, 20172021 or 2016 represented OTTI.December 31, 2020 resulted from credit loss.  The decline in fair market value of these securities was generally due to changes in interest rates.rates and changes in market-desired spreads subsequent to their purchase.


Sales of securities—trading totaled $1.3 million with a resulting net gain of $28,000 for the year ended December 31, 2017 and totaled $7.8 million with a resulting net gain of $530,000 for the year ended December 31, 2016. SalesThere were no sales of securities—trading for the year ended December 31, 2015 totaled $4.4 million with a resulting net loss of $690,000. The Company did not recognize any OTTI charges or recoveries on securities—trading during the years ended December 31, 2017, 20162021, 2020 or 2015.2019. There were no securities—trading in a nonaccrual status at December 31, 2017 and 2016.2021 or December 31, 2020.  Net unrealized holding gains of $658,000$2.0 million were recognized in 20172021 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 $376,000 in 2016.securities available-for-sale (in thousands):


Sales of securities—available-for-sale totaled $522.6 million with a resulting net loss of $2.1 million for the year ended December 31, 2017.  Sales of securities—available-for-sale totaled $369.8 million with a resulting net gain of $311,000 for the year ended December 31, 2016. Sales of securities—available-for-sale totaled $232.6 million with a resulting net gain of $126,000 for the year ended December 31, 2015.  
 For the Year Ended December 31,
 202120202019
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, 20172021 and 2016.2020.


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, 2017, 20162020 or 2015.2019, 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, 20172021 and 2016.2020.



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, 2017,2021, 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
TradingAvailable-for-SaleHeld-to-Maturity
 Amortized CostFair ValueAmortized CostFair ValueAmortized CostFair 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 years27,203 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 
 December 31, 2017
 Trading Available-for-Sale Held-to-Maturity
 Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
Maturing in one year or less$100
 $100
 $3,241
 $3,230
 $1,968
 $1,967
Maturing after one year through five years—
 —
 39,513
 39,070
 37,734
 37,626
Maturing after five years through ten years—
 —
 215,837
 213,923
 97,736
 98,747
Maturing after ten years through twenty years17,132
 14,543
 100,862
 101,181
 84,352
 86,249
Maturing after twenty years10,000
 7,515
 560,943
 556,503
 38,481
 37,599
 27,232
 22,158
 920,396
 913,907
 260,271
 262,188
Equity securities14
 160
 5,716
 5,578
 —
 —
 $27,246
 $22,318
 $926,112
 $919,485
 $260,271
 $262,188


The following table presents, as of December 31, 2017,2021, investment securities which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law (in thousands):
 Carrying ValueAmortized CostFair Value
Purpose or beneficiary:  
State and local governments public deposits$209,304 $208,827 $221,319 
Interest rate swap counterparties24,268 23,723 24,285 
Repurchase transaction accounts292,700 300,441 292,700 
Other2,529 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 obligationsMunicipal bondsCorporate bondsMortgage-backed or related securitiesTotal
AAA/AA/A$— $406,363 $500 $— $406,863 
Not Rated316 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 obligationsMunicipal bondsCorporate bondsMortgage-backed or related securitiesTotal
AAA/AA/A$— $349,123 $500 $— $349,623 
Not Rated340 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

 Carrying Value Amortized Cost Fair Value
Purpose or beneficiary:     
State and local governments public deposits$126,512
 $126,438
 $128,984
Interest rate swap counterparties14,698
 14,740
 14,703
Repurchase transaction accounts123,911
 124,049
 123,936
Other3,924
 3,924
 3,835
Total pledged securities$269,045
 $269,151
 $271,458
For the Year Ended December 31, 2021
U.S. Government and agency obligationsMunicipal bondsCorporate bondsMortgage-backed or related securitiesTotal
Allowance for credit losses – securities
Beginning Balance$— $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 obligationsMunicipal bondsCorporate bondsMortgage-backed or related securitiesTotal
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 5:4:  LOANS RECEIVABLE AND THE ALLOWANCE FOR LOANCREDIT LOSSES


LoansThe following table presents the loans receivable at December 31, 20172021 and 2016 are summarized as follows2020 by class (dollars in thousands):.

 December 31, 2021December 31, 2020
 AmountPercent of TotalAmountPercent of Total
Commercial real estate:    
Owner-occupied$1,131,828 12.4 %$1,076,467 10.9 %
Investment properties1,990,461 21.9 1,955,684 19.8 
Small balance CRE598,212 6.6 573,849 5.8 
Multifamily real estate564,100 6.2 428,223 4.4 
Construction, land and land development:
Commercial construction169,530 1.9 228,937 2.3 
Multifamily construction259,116 2.9 305,527 3.1 
One- to four-family construction568,753 6.3 507,810 5.1 
Land and land development313,454 3.5 248,915 2.5 
Commercial business:
Commercial business (1)
1,172,076 12.9 2,178,461 22.1 
Small business scored792,310 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 residential683,268 7.5 717,939 7.3 
Consumer:
Consumer—home equity revolving lines of credit458,533 5.0 491,812 5.0 
Consumer—other97,369 1.1 113,958 1.2 
Total loans9,084,763 100.0 %9,870,982 100.0 %
Less allowance for credit losses - loans(132,099)(167,279)
Net loans$8,952,664 $9,703,703 

108

 December 31, 2017 December 31, 2016
 Amount Percent of Total Amount Percent of Total
Commercial real estate:       
Owner-occupied$1,284,363
 16.9% $1,352,999
 18.1%
Investment properties1,937,423
 25.5
 1,986,336
 26.7
Multifamily real estate314,188
 4.1
 248,150
 3.3
Commercial construction148,435
 2.0
 124,068
 1.7
Multifamily construction154,662
 2.0
 124,126
 1.7
One- to four-family construction415,327
 5.5
 375,704
 5.0
Land and land development:       
Residential164,516
 2.2
 170,004
 2.3
Commercial24,583
 0.3
 29,184
 0.4
Commercial business1,279,894
 16.8
 1,207,879
 16.2
Agricultural business, including secured by farmland338,388
 4.4
 369,156
 5.0
One- to four-family residential848,289
 11.2
 813,077
 10.9
Consumer:       
Consumer secured by one- to four-family522,931
 6.9
 493,211
 6.6
Consumer—other165,885
 2.2
 157,254
 2.1
Total loans outstanding7,598,884
 100.0% 7,451,148
 100.0%
Less allowance for loan losses(89,028)   (85,997)  
Net loans$7,509,856
   $7,365,151
  
(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 NaN as of December 31, 2020.



Loan amounts includedare net of unearned loan fees in excess of unamortized costs of $158,000 at$8.6 million as of December 31, 20172021 and were net$25.6 million as of unearned fees of $5.8 million at December 31, 2016.2020. Net loans include net discounts on acquired loans of $21.1$9.7 million and $31.1$16.1 million as of December 31, 20172021 and 2016,2020, 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 $3.5 million$700,000 and $4.3 million at December 31, 2017 and 2016, respectively.

Purchased credit-impaired loans: The outstanding contractual unpaid principal balance of PCI loans, excluding acquisition accounting adjustments, were $32.5$1.5 million at December 31, 20172021 and $48.4 million2020, respectively.

Purchased credit-deteriorated and purchased non-credit-deteriorated loans. Loans acquired in business combinations are recorded at December 31, 2016. The carrying balance of PCItheir 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 $21.3 million at December 31, 2017 and $32.3 million at December 31, 2016.
The following table presents the changes in the accretable yield for PCIno PCD loans foracquired during the years ended December 31, 20172021 and 2016 (in thousands):2020.

 Years Ended December 31
 2017
 2016
Balance, beginning of period$8,717
 $10,375
Accretion to interest income(5,929) (9,333)
Disposals and other(564) (1,018)
Reclassifications from non-accretable difference4,296
 8,693
Balance, end of period$6,520
 $8,717
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, 20172021 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, 2016,2021 and 2020.

There were no new TDRs that occurred during the non-accretable difference between the contractually required payments and cash flows expected to be collected was $11.3 million and $15.7 million, respectively.

Impaired Loans and the Allowance for Loan Losses:  A loan is considered impaired when, based on current information and circumstances, the Company determines it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments.  Factors involved in determining impairment include, but are not limited to, the financial condition of the borrower, the value of the underlying collateral and the current status of the economy.  Impaired loans are comprised of loans on nonaccrual, TDRs, and loans that are 90 days or more past due, but are still on accrual. Purchased credit-impaired loans are considered performing within the scope of the PCI accounting guidance and are not included in the impaired loan tables.



year ended December 31, 2021. The following tables provide additional information on impaired loans, excluding PCI loans, with and without specific allowance reserves at December 31, 2017 and 2016.  Recorded investment includes the unpaid principal balance or the carrying amount of loans less charge-offs and net deferred loan fees (in thousands):
 December 31, 2017
 Unpaid Principal Balance Recorded Investment Related Allowance
  
Without Allowance (1)
 
With Allowance (2)
 
Commercial real estate:       
Owner-occupied$7,807
 $6,447
 $199
 $18
Investment properties11,296
 4,200
 6,884
 263
One- to four-family construction298
 298
 —
 —
Land and land development:       
Residential1,134
 798
 —
 —
Commercial business4,441
 3,424
 555
 50
Agricultural business/farmland9,388
 6,230
 3,031
 264
One- to four-family residential9,547
 3,709
 5,775
 178
Consumer:       
Consumer secured by one- to four-family1,498
 1,324
 139
 7
Consumer—other134
 58
 73
 2
 $45,543
 $26,488
 $16,656
 $782
        
 December 31, 2016
 Unpaid Principal Balance Recorded Investment Related Allowance
  
Without Allowance (1)
 
With Allowance (2)
 
Commercial real estate:       
Owner-occupied$3,786
 $3,373
 $203
 $20
Investment properties9,916
 5,565
 4,304
 408
Multifamily real estate508
 147
 349
 64
One- to four-family construction1,180
 —
 1,180
 156
Land and land development:       
Residential3,012
 750
 1,106
 219
Commercial1,608
 998
 —
 —
Commercial business3,753
 3,074
 651
 69
Agricultural business/farmland6,438
 6,354
 —
 —
One- to four-family residential11,439
 3,149
 8,026
 479
Consumer:       
Consumer secured by one- to four-family1,904
 1,721
 144
 1
Consumer—other391
 226
 166
 4
 $43,935
 $25,357
 $16,129
 $1,420

(1)
Includes loans without an allowance reserve that have been individually evaluated for impairment and that evaluation concluded that no reserve was needed, and $10.6 million and $10.0 million of homogenous and small balance loans as of December 31, 2017 and December 31, 2016, respectively, that are collectively evaluated for impairment for which a general reserve has been established.
(2)
Loans with a specific allowance reserve have been individually evaluated for impairment using either a discounted cash flow analysis or, for collateral dependent loans, current appraisals less costs to sell to establish realizable value.



The following table summarizes our average recorded investment and interest income recognized on impaired loans by loan class for the years ended December 31, 2017, 2016 and 2015 (in thousands):
 Year Ended December 31, 2017 Year Ended December 31, 2016 Year Ended December 31, 2015
 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized
Commercial real estate:           
Owner-occupied$3,697
 $11
 $2,721
 $2
 $1,467
 $9
Investment properties9,136
 195
 18,529
 242
 8,003
 303
Multifamily real estate251
 10
 513
 21
 362
 18
One- to four-family construction418
 27
 1,158
 75
 1,463
 114
Land and land development:           
Residential1,396
 42
 1,948
 85
 2,406
 49
Commercial867
 —
 1,003
 —
 931
 —
Commercial business5,996
 68
 4,290
 37
 1,667
 35
Agricultural business/farmland6,184
 207
 5,004
 119
 1,143
 19
One- to four-family residential9,499
 322
 11,976
 441
 17,770
 630
Consumer:           
Consumer secured by one- to four-family1,635
 9
 1,778
 17
 736
 11
Consumer—other184
 7
 615
 17
 392
 18
 $39,263
 $898
 $49,535
 $1,056
 $36,340
 $1,206

The following table presents TDRs by accrual and nonaccrual status at December 31, 2017 and 2016 (in thousands):
 December 31, 2017 December 31, 2016
 
Accrual
Status
 
Nonaccrual
Status
 
Total
TDRs
 Accrual
Status		 Nonaccrual
Status		 Total
TDRs
Commercial real estate:           
Owner-occupied$199
 $87
 $286
 $203
 $96
 $299
Investment properties6,884
 —
 6,884
 4,304
 —
 4,304
Multifamily real estate—
 —
 —
 349
 —
 349
One- to four-family construction—
 —
 —
 1,180
 —
 1,180
Land and land development:           
Residential—
 —
 —
 1,106
 —
 1,106
Commercial business555
 —
 555
 653
 —
 653
Agricultural business/farmland3,129
 29
 3,158
 3,125
 79
 3,204
One- to four-family residential5,136
 801
 5,937
 7,678
 843
 8,521
Consumer:           
Consumer secured by one- to four-family139
 —
 139
 143
 6
 149
Consumer—other73
 —
 73
 166
 —
 166
 $16,115
 $917
 $17,032
 $18,907
 $1,024
 $19,931

As of December 31, 2017 and 2016, the Company had commitments to advance funds up to an additional amount of $45,000 and $127,000, respectively, related to TDRs.












The following table presentspresent new TDRs that occurred during the years ended December 31, 2017, 20162020 and 20152019 (dollars in thousands):
Number of
Contracts		Pre-modification Outstanding Recorded InvestmentPost-modification Outstanding Recorded Investment
Number of
Contracts
 Pre-modification Outstanding Recorded Investment Post-modification Outstanding Recorded Investment
Year Ended December 31, 2017     
Year Ended December 31, 2020Year Ended December 31, 2020
Recorded Investment (1) (2)
Recorded Investment (1) (2)
Commercial businessCommercial business3 $5,532 $5,532 
Agricultural business/farmlandAgricultural business/farmland1 $169 $169 
TotalTotal4 $5,701 $5,701 
Year Ended December 31, 2019Year Ended December 31, 2019
Recorded Investment (1) (2)
     
Recorded Investment (1) (2)
Commercial real estate:     Commercial real estate:
Investment properties1
 3,714
 3,714
Investment properties1 $1,090 $1,090 
Commercial businessCommercial business1 $160 $160 
Agricultural business/farmlandAgricultural business/farmland1 $596 $596 
Total1
 $3,714
 $3,714
Total3 $1,846 $1,846 
     
Year Ended December 31, 2016     
Recorded Investment (1) (2)
     
Commercial real estate:     
Owner-occupied1
 $194
 $194
One- to four-family residential1
 $78
 $78
Total2
 $272
 $272
     
Year Ended December 31, 2015     
Recorded Investment (1) (2)
     
Land and land development:     
Residential2
 $1,302
 $483
Agricultural business/farmland3
 $822
 $822
One- to four-family residential2
 $431
 $431
Total7
 $2,555
 $1,736
 
(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 loan 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.

(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 yearyears ended December 31, 20172021 and 2020 for which the payment default occurred within twelve months of the restructure date.  There were no TDRs that incurred a payment default in the year ended December 31, 2016.  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 and leases 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 in 2017.for the periods presented.


Risk Rating 1: ExceptionalRatings 1-5: Pass
A credit supported by exceptional financial strength, stability, and liquidity.  TheCredits with risk ratingratings of 1 is reserved forto 5 meet the Company’s top quality loans, generally reserved for investment gradedefinition of a pass risk rating. The strength of credits underwrittenvary within the pass risk ratings, ranging from a risk rated 1 being an exceptional credit to the standards of institutional credit providers.

Risk Rating 2: Excellent
A credit supported by excellent financial strength, stability and liquidity.  Thea risk rating of 2 is reserved for very strong and highly stable customers with ready access to alternative financing sources.



Risk Rating 3: Strong
A credit supported by good overall financial strength and stability.  Collateral margins are strong, cash flow is stable although susceptible to cyclical market changes.

Risk Rating 4: Acceptable
A credit supported by the borrower’s adequate financial strength and stability.  Assets and cash flow are reasonably sound and provide for orderly debt reduction.  Access to alternative financing sources will be more difficult to obtain.

Risk Rating 5: Watch
A credit with the characteristics ofrated 5 being an acceptable credit but one whichthat requires a more than the normal level of supervision and warrants formal quarterly management reporting.  Credits in this category are not yet criticized or classified, but due to adverse events or aspects of underwriting require closer than normal supervision. Generally, credits should be watch credits in most cases for six months or less as the impact of stress factors are analyzed.


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 definedwell-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 strengthen a credit makingmake the amount and timing of any loss indeterminate.indeterminable.  In these situations taking the loss is inappropriate until it is clear thatthe outcome of the pending event has failed to strengthen the credit and improve the capacity to repay debt.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 Bankbank asset is risk rated 9.  Losses areshould 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 show Banner’spresent the Company’s portfolio of risk-rated loans by class and non-risk-rated loans by grade or other characteristic as of December 31, 20172021 and 2016December 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 OriginationRevolving LoansTotal Loans
By class:20212020201920182017Prior
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 Mention1,050 — 2,185 — — 74 — 3,309 
Substandard13,597 — 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 
Substandard29,933 — 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— — — — — — — — 
Substandard4,908 — — — — 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, 2017
By class:
Pass (Risk Ratings 1-5)(1)
 Special Substandard Doubtful Loss Total Loans
Commercial real estate:           
Owner-occupied$1,246,125
 $12,227
 $26,011
 $—
 $—
 $1,284,363
Investment properties1,918,940
 9,118
 9,365
 —
 —
 1,937,423
Multifamily real estate313,432
 —
 756
 —
 —
 314,188
Commercial construction148,435
 —
 —
 —
 —
 148,435
Multifamily construction154,662
 —
 —
 —
 —
 154,662
One- to four-family construction411,802
 —
 3,525
 —
 —
 415,327
Land and land development:           
Residential153,073
 10,554
 889
 —
 —
 164,516
Commercial21,665
 —
 2,918
 —
 —
 24,583
Commercial business1,213,365
 12,135
 54,282
 112
 —
 1,279,894
Agricultural business, including secured by farmland321,110
 3,852
 13,426
 —
 —
 338,388
One- to four-family residential842,304
 569
 5,416
 —
 —
 848,289
Consumer:           
Consumer secured by one- to four-family520,675
 —
 2,256
 —
 —
 522,931
Consumer—other165,594
 13
 278
 —
 —
 165,885
Total$7,431,182
 $48,468
 $119,122
 $112
 $—
 $7,598,884




December 31, 2021
Term Loans by Year of OriginationRevolving LoansTotal Loans
By class:20212020201920182017Prior
Commercial construction
Risk Rating
Pass$103,352 $31,841 $8,791 $8,087 $— $— $— $152,071 
Special Mention— — — — — — — — 
Substandard11,782 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, 2016
By class:
Pass (Risk Ratings 1-5)(1)
 Special Substandard Doubtful Loss Total Loans
Commercial real estate:           
Owner-occupied$1,313,142
 $14,394
 $25,463
 $—
 $—
 $1,352,999
Investment properties1,948,822
 23,846
 13,668
 —
 —
 1,986,336
Multifamily real estate247,258
 —
 892
 —
 —
 248,150
Commercial construction124,068
 —
 —
 —
 —
 124,068
Multifamily construction124,126
 —
 —
 —
 —
 124,126
One- to four-family construction371,636
 —
 4,068
 —
 —
 375,704
Land and land development:           
Residential167,764
 —
 2,240
 —
 —
 170,004
Commercial25,090
 —
 4,094
 —
 —
 29,184
Commercial business1,148,585
 35,036
 24,258
 —
 —
 1,207,879
Agricultural business, including secured by farmland356,656
 3,335
 9,165
 —
 —
 369,156
One- to four-family residential807,837
 967
 4,273
 —
 —
 813,077
Consumer:           
Consumer secured by one- to four-family490,877
 5
 2,327
 2
 —
 493,211
Consumer—other156,547
 108
 594
 5
 —
 157,254
Total$7,282,408
 $77,691
 $91,042
 $7
 $—
 $7,451,148
December 31, 2021
Term Loans by Year of OriginationRevolving LoansTotal Loans
By class:20212020201920182017Prior
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— — — — — — — — 
Substandard2,876 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 Mention65 77 — 241 19 8 2,430 2,840 
Substandard1,941 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
(1)

The Pass category includes some performing loans that are part of homogenous pools which are not individually risk-rated.  This includes all consumer loans, all one- to four-family residential loans and, as of December 31, 2017 and 2016, in the commercial business category, $296.8 million and $225.0 million, respectively, of credit-scored small business loans.  As loans in these homogeneous pools become non-accrual, they are individually risk-rated.


December 31, 2020
Term Loans by Year of OriginationRevolving LoansTotal Loans
By class:20202019201820172016Prior
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 
Substandard7,923 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 
Substandard19,812 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— — — — — — — — 
Substandard2,312 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 OriginationRevolving LoansTotal Loans
By class:20202019201820172016Prior
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 
Substandard12,913 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 Mention1,563 — — — — — 630 2,193 
Substandard501 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 OriginationRevolving LoansTotal Loans
By class:20202019201820172016Prior
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— — — — — — — — 
Substandard14 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 Mention103 412 — 829 — 115 9,507 10,966 
Substandard6,624 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 
Substandard1,542 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 OriginationRevolving LoansTotal Loans
By class:20212020201920182017Prior
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 Due40 — — — 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 Due260 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 OriginationRevolving LoansTotal Loans
By class:20212020201920182017Prior
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 Due147 — — 23 37 568 210 985 
60-89 Days Past Due49 — — — 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 Due6 — 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 OriginationRevolving LoansTotal Loans
By class:20202019201820172016Prior
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 Due129 62 310 723 4 1 230 1,459 
60-89 Days Past Due98 147 3 140 — 352 151 891 
90 Days + Past Due73 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 Due1,051 — 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 OriginationRevolving LoansTotal Loans
By class:20202019201820172016Prior
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 Due48 35 15 22 46 26 44 236 
60-89 Days Past Due242 — — 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 EstateAccounts ReceivableEquipmentTotal
Commercial real estate:  
Owner-occupied$3,806 $— $— $3,806 
Investment properties7,322 — — 7,322 
Small balance CRE1,831 — — 1,831 
Commercial business17 — 47 64 
Agricultural business, including secured by farmland427 — 594 1,021 
Total$13,403 $— $641 $14,044 



 December 31, 2020
Real EstateAccounts ReceivableEquipmentTotal
Commercial real estate:  
Owner-occupied$7,506 $— $— $7,506 
Investment properties8,979 — — 8,979 
Small balance CRE567 — — 567 
Land and land development302 — — 302 
Commercial business
Commercial business557 — — 557 
Small business scored44 — 47 91 
Agricultural business, including secured by farmland427 — 984 1,411 
One- to four-family residential196 — — 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, 20172021 and 20162020 (in thousands):
 December 31, 2021
 30-59 Days
Past Due		60-89 Days
Past Due		90 Days or More
Past Due		Total
Past Due		CurrentTotal LoansNon-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 properties81 — 1,186 1,267 1,989,194 1,990,461 4,892 7,468 — 
Small balance CRE89 — 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 construction162 — — 162 568,591 568,753 — — — 
Land and land development51 — 14 65 313,389 313,454 — 381 — 
Commercial business
Commercial business5,157 1,007 588 6,752 1,165,324 1,172,076 228 1,144 2 
Small business scored924 465 508 1,897 790,413 792,310 — 1,012 — 
Agricultural business, including secured by farmland139 — 1,021 1,160 284,593 285,753 1,021 1,022 — 
One- to four-family residential2,318 327 1,225 3,870 679,398 683,268 — 2,711 436 
Consumer:
Consumer—home equity revolving lines of credit985 268 803 2,056 456,477 458,533 — 1,736 114 
Consumer—other388 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, 2017 December 31, 2020
30–59 Days Past Due
 
60–89 Days Past Due
 90 Days or More Past Due Total Past Due Purchased Credit-Impaired Current Total Loans Loans 90 Days or More Past Due and Accruing Non-accrual 30-59 Days
Past Due		60-89 Days
Past Due		90 Days or More
Past Due		Total
Past Due		CurrentTotal LoansNon-accrual with no Allowance
Total Non-accrual (1)
Loans 90 Days or More Past Due and Accruing
Commercial real estate:                 Commercial real estate:       
Owner-occupied$5,323
 $76
 $5,490
 $10,889
 $7,682
 $1,265,792
 $1,284,363
 $—
 $6,447
Owner-occupied$— $182 $1,447 $1,629 $1,074,838 $1,076,467 $7,509 $8,429 $— 
Investment properties1,737
 —
 4,096
 5,833
 7,166
 1,924,424
 1,937,423
 —
 4,199
Investment properties— — 7,981 7,981 1,947,703 1,955,684 8,979 8,979 — 
Small balance CRESmall balance CRE— 45 790 835 573,014 573,849 567 791 — 
Multifamily real estate105
 —
 —
 105
 169
 313,914
 314,188
 —
 —
Multifamily real estate— — — — 428,223 428,223 — — — 
Construction, land and land development:Construction, land and land development:
Commercial construction—
 —
 —
 —
 —
 148,435
 148,435
 —
 —
Commercial construction— — 98 98 228,839 228,937 — 98 — 
Multifamily construction3,416
 —
 —
 3,416
 —
 151,246
 154,662
 —
 —
Multifamily construction— — — — 305,527 305,527 — — — 
One- to four-family construction4,892
 725
 298
 5,915
 446
 408,966
 415,327
 298
 —
One- to four-family construction356 — 331 687 507,123 507,810 — 331 — 
Land and land development:                 
Residential—
 —
 798
 798
 —
 163,718
 164,516
 —
 798
Commercial—
 —
 —
 —
 2,919
 21,664
 24,583
 —
 —
Land and land developmentLand and land development— — 317 317 248,598 248,915 302 507 — 
Commercial business1,574
 404
 2,577
 4,555
 2,159
 1,273,180
 1,279,894
 18
 3,406
Commercial business
Agricultural business/farmland598
 533
 2,017
 3,148
 565
 334,675
 338,388
 —
 6,132
One- to four-family residential4,475
 1,241
 2,715
 8,431
 136
 839,722
 848,289
 1,085
 3,264
Commercial businessCommercial business3,247 31 2,088 5,366 2,173,095 2,178,461 555 1,988 889 
Small business scoredSmall business scored1,459 891 2,048 4,398 739,053 743,451 91 3,419 136 
Agricultural business, including secured by farmlandAgricultural business, including secured by farmland298 37 1,548 1,883 298,066 299,949 1,412 1,743 — 
One-to four-family residentialOne-to four-family residential4,620 955 4,053 9,628 708,311 717,939 171 3,556 1,899 
Consumer:                 Consumer:
Consumer secured by one- to four-family1,355
 62
 713
 2,130
 —
 520,801
 522,931
 85
 1,239
Consumer—home equity revolving lines of creditConsumer—home equity revolving lines of credit459 439 1,847 2,745 489,067 491,812 — 2,697 130 
Consumer—other609
 136
 15
 760
 68
 165,057
 165,885
 —
 58
Consumer—other236 328 — 564 113,394 113,958 — 22 — 
Total$24,084
 $3,177
 $18,719
 $45,980
 $21,310
 $7,531,594
 $7,598,884
 $1,486
 $25,543
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
 December 31, 2016
 30–59 Days Past Due 60–89 Days Past Due 90 Days or More Past Due Total Past Due Purchased Credit-Impaired Current Total Loans Loans 90 Days or More Past Due and Accruing Non-accrual
Commercial real estate:                 
Owner-occupied$1,938
 $—
 $2,538
 $4,476
 $13,281
 $1,335,242
 $1,352,999
 $—
 $3,373
Investment properties117
 —
 5,447
 5,564
 10,168
 1,970,604
 1,986,336
 701
 4,864
Multifamily real estate—
 —
 147
 147
 139
 247,864
 248,150
 147
 —
Commercial construction—
 —
 —
 —
 —
 124,068
 124,068
 —
 —
Multifamily construction—
 —
 —
 —
 —
 124,126
 124,126
 —
 —
One- to four-family construction—
 —
 —
 —
 862
 374,842
 375,704
 —
 —
Land and land development:                 
Residential48
 —
 750
 798
 —
 169,206
 170,004
 —
 750
Commercial—
 —
 998
 998
 3,016
 25,170
 29,184
 —
 998
Commercial business2,314
 647
 1,591
 4,552
 3,821
 1,199,506
 1,207,879
 —
 3,074
Agricultural business/farmland360
 1,244
 2,768
 4,372
 684
 364,100
 369,156
 —
 3,229
One- to four-family residential1,793
 249
 2,110
 4,152
 274
 808,651
 813,077
 1,233
 2,263
Consumer:                 
Consumer secured by one- to four-family932
 160
 986
 2,078
 18
 491,115
 493,211
 61
 1,660
Consumer—other1,421
 154
 147
 1,722
 59
 155,473
 157,254
 11
 215
Total$8,923
 $2,454
 $17,482
 $28,859
 $32,322
 $7,389,967
 $7,451,148
 $2,153
 $20,426





The following tables provide additional information onthe activity in the allowance for loancredit losses and loan balances individually and collectively evaluated for impairment at orby portfolio segment for the yearyears ended December 31, 20172021 and 2020 (in thousands):
For the Year Ended December 31, 2021
 Commercial
Real Estate		Multifamily
Real Estate		Construction and LandCommercial
Business		Agricultural
Business		One- to Four-Family ResidentialConsumerUnallocatedTotal
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)
Recoveries1,729 — 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 LandCommercial
Business		Agricultural
Business		One- to Four-Family ResidentialConsumerUnallocatedTotal
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 losses31,643 1,409 15,781 12,615 (87)(1,679)4,603 — 64,285 
Recoveries275 — 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
 For the Year Ended December 31, 2017
 
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$20,993
 $1,360
 $34,252
 $16,533
 $2,967
 $2,238
 $4,104
 $3,550
 $85,997
Provision for loan losses2,639
 262
 (7,921) 4,355
 3,326
 (415) 586
 5,168
 8,000
Recoveries372
 11
 1,237
 1,226
 134
 270
 481
 —
 3,731
Charge-offs(1,180) —
 —
 (3,803) (2,374) (38) (1,305) —
 (8,700)
Ending balance$22,824
 $1,633
 $27,568
 $18,311
 $4,053
 $2,055
 $3,866
 $8,718
 $89,028
                  
 December 31, 2017
 
Commercial
Real Estate
 Multifamily
Real Estate		 Construction and Land Commercial Business Agricultural Business One- to Four-Family Residential Consumer Unallocated Total
Allowance individually evaluated for impairment$281
 $—
 $—
 $50
 $264
 $178
 $9
 $—
 $782
Allowance collectively evaluated for impairment22,543
 1,633
 27,567
 18,214
 3,676
 1,877
 3,857
 8,718
 88,085
Allowance for purchased credit-impaired loans—
 —
 1
 47
 113
 —
 —
 —
 161
Total allowance for loan losses$22,824
 $1,633
 $27,568
 $18,311
 $4,053
 $2,055
 $3,866
 $8,718
 $89,028

 December 31, 2017
 
Commercial
Real Estate
 Multifamily
Real Estate		 
Construction
and Land
 Commercial Business Agricultural Business One- to Four-Family Residential Consumer Unallocated Total
Loan balances:                 
Loans individually evaluated for impairment$16,017
 $—
 $750
 $1,812
 $8,585
 $5,136
 $212
 $—
 $32,512
Loans collectively evaluated for impairment3,190,921
 314,019
 903,408
 1,275,923
 329,238
 843,017
 688,536
 —
 7,545,062
Purchased credit-impaired loans14,848
 169
 3,365
 2,159
 565
 136
 68
 —
 21,310
Total loans$3,221,786
 $314,188
 $907,523
 $1,279,894
 $338,388
 $848,289
 $688,816
 $—
 $7,598,884



The following tables provide additional information on the allowance for loan losses and loan balances individually and collectively evaluated for impairment at or for the year ended December 31, 2016 (in thousands):
 For the Year Ended December 31, 2016
 
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$20,716
 $4,195
 $27,131
 $13,856
 $3,645
 $4,732
 $902
 $2,831
 $78,008
Provision for loan losses441
 (2,835) 5,566
 1,632
 (170) (3,402) 4,079
 719
 6,030
Recoveries582
 —
 2,171
 1,993
 59
 1,283
 610
 —
 6,698
Charge-offs(746) —
 (616) (948) (567) (375) (1,487) —
 (4,739)
Ending balance$20,993
 $1,360
 $34,252
 $16,533
 $2,967
 $2,238
 $4,104
 $3,550
 $85,997
                  
 December 31, 2016
 
Commercial
Real Estate
 Multifamily
Real Estate		 
Construction
and Land
 Commercial Business Agricultural Business One- to Four-Family Residential Consumer Unallocated Total
Allowance individually evaluated for impairment$428
 $64
 $374
 $69
 $—
 $480
 $5
 $—
 $1,420
Allowance collectively evaluated for impairment20,565
 1,296
 33,845
 16,464
 2,967
 1,758
 4,099
 3,550
 84,544
Allowance for purchased credit-impaired loans—
 —
 33
 —
 —
 —
 —
 —
 33
Total allowance for loan losses$20,993
 $1,360
 $34,252
 $16,533
 $2,967
 $2,238
 $4,104
 $3,550
 $85,997

 December 31, 2016
 
Commercial
Real Estate
 Multifamily
Real Estate		 
Construction
and Land
 Commercial Business Agricultural Business One- to Four-Family Residential Consumer Unallocated Total
Loan balances:                 
Loans individually evaluated for impairment$10,300
 $349
 $4,034
 $2,946
 $4,766
 $7,678
 $309
 $—
 $30,382
Loans collectively evaluated for impairment3,305,586
 247,662
 815,174
 1,201,112
 363,706
 805,125
 650,079
 —
 7,388,444
Purchased credit-impaired loans23,449
 139
 3,878
 3,821
 684
 274
 77
 —
 32,322
Total loans$3,339,335
 $248,150
 $823,086
 $1,207,879
 $369,156
 $813,077
 $650,465
 $—
 $7,451,148



The following table provides additional information on the allowance for loan losses for the year ended December 31, 20152019 (in thousands):
For the Year Ended December 31, 2019
Commercial
Real Estate		Multifamily
Real Estate		Construction
and Land		Commercial BusinessAgricultural BusinessOne- to Four-Family ResidentialConsumerUnallocatedTotal
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 losses4,121 936 (1,611)7,478 1,206 (1,053)1,722 (2,799)10,000 
Recoveries476 — 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
 For the Year Ended December 31, 2015
 
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$18,784
 $4,562
 $25,545
 $12,043
 $3,821
 $5,447
 $483
 $5,222
 $75,907
Provision for loan losses1,177
 (480) 666
 1,611
 (878) (1,068) 1,363
 (2,391) —
Recoveries819
 113
 1,811
 948
 1,927
 772
 570
 —
 6,960
Charge-offs(64) —
 (891) (746) (1,225) (419) (1,514) —
 (4,859)
Ending balance$20,716
 $4,195
 $27,131
 $13,856
 $3,645
 $4,732
 $902
 $2,831
 $78,008




Note 6:5:  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, 2017, 20162021, 2020 and 20152019 (in thousands):
 Years Ended December 31
 202120202019
Balance, beginning of period$816 $814 $2,611 
Additions from loan foreclosures512 1,588 109 
Additions from acquisitions— — 650 
Proceeds from dispositions of REO(783)(2,360)(2,588)
Gain on sale of REO307 819 32 
Valuation adjustments in the period— (45)— 
Balance, end of period$852 $816 $814 
 Years Ended December 31
 2017 2016 2015
Balance, beginning of period$11,081
 $11,627
 $3,352
Additions from loan foreclosures46
 8,909
 4,351
Additions from capitalized costs54
 —
 298
Additions from acquisitions—
 400
 8,231
Proceeds from dispositions of REO(13,474) (10,812) (4,740)
Gain on sale of REO2,909
 1,833
 351
Valuation adjustments in the period(256) (876) (216)
Balance, end of period$360
 $11,081
 $11,627


At December 31, 2017 theThe Company had no foreclosed residential real estate properties held as REO compared to $917,000 at both December 31, 2016.2021 and December 31, 2020. The recorded investment in one- to four-family residential loans in the process of foreclosure was $2.0 million$609,000 at both December 31, 20172021 and $715,000 at December 31, 2016.2020.


Note 7:6:  PROPERTY AND EQUIPMENT, NET


Land, buildings and equipment owned by the Company and its subsidiaries at December 31, 20172021 and 20162020 are summarized as follows (in thousands):
 December 31
 20212020
Land(1)
$29,387 $32,196 
Buildings and leasehold improvements(1)
150,238 153,934 
Furniture and equipment121,637 126,115 
301,262 312,245 
Less accumulated depreciation(152,503)(147,689)
Property and equipment, net$148,759 $164,556 
 December 31
 2017 2016
Land(1)
$35,080
 $35,463
Buildings and leasehold improvements(1)
154,374
 163,879
Furniture and equipment105,643
 94,999
 295,097
 294,341
Less accumulated depreciation(140,282) (127,860)
Property and equipment, net$154,815
 $166,481
(1) The Company had $3.8$3.3 million and $8.5$8.4 million of properties held for sale that were included in land and buildings at December 31, 20172021 and 2016,2020, respectively.


The Company’s depreciation expense related to property and equipment was $14.7$17.3 million, $13.5$18.1 million, and $10.0$17.3 million for the years ended December 31, 2017, 20162021, 2020 and 2015,2019, respectively.  The Company’s rental expense was $16.4 million, $16.7 million, and $10.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.

The Company’s obligations under long-term property leases are as follows (in thousands):
126
Year Amount
2018 $16,029
2019 13,199
2020 12,080
2021 10,100
2022 6,725
Thereafter 13,926
Total $72,059




Note 8:7:  DEPOSITS


Deposits consist of the following at December 31, 20172021 and 20162020 (in thousands):
 December 31
 20212020
Non-interest-bearing checking$6,385,177 $5,492,924 
Interest-bearing checking1,947,414 1,569,435 
Regular savings accounts2,784,716 2,398,482 
Money market accounts2,370,995 2,191,135 
Total interest-bearing transaction and savings accounts7,103,125 6,159,052 
Certificates of deposit:  
Certificates of deposit less than or equal to $250,000657,615 718,256 
Certificates of deposit greater than $250,000181,016 197,064 
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 certificates39,961 59,127 
Total public deposits$393,835 $362,002 
 December 31
 2017 2016
Non-interest-bearing checking$3,265,544
 $3,140,451
Interest-bearing checking971,137
 914,484
Regular savings accounts1,557,500
 1,523,391
Money market accounts1,422,313
 1,497,755
Total interest-bearing transaction and savings accounts3,950,950
 3,935,630
Certificates of deposit:   
Certificates of deposit less than or equal to $250,000813,997
 884,403
Certificates of deposit greater than $250,000152,940
 160,930
Total certificates of deposit(1)
966,937
 1,045,333
Total deposits$8,183,431
 $8,121,414
Included in total deposits:   
Public fund transaction accounts$198,719
 $221,765
Public fund interest-bearing certificates23,685
 25,650
Total public deposits$222,404
 $247,415
Total brokered deposits$57,228
 $34,074
(1)Certificates of deposit included $11,000 and $426,000 ofno acquisition premiumsdiscounts at December 31, 20172021 and 2016, respectively.$58,000 of acquisition discounts at December 31, 2020.


Deposits at December 31, 20172021 and 20162020 included deposits from the Company’s directors, executive officers and related entities totaling $10.0$13.1 million and $7.2$11.2 million, respectively. At December 31, 20172021 and 2016,2020, the Company had certificates of deposit of $155.9$184.5 million and $165.4$203.6 million, respectively, that were equal to or greater than $250,000.


Scheduled maturities and weighted average interest rates of certificate accountscertificates of deposits at December 31, 20172021 are as follows (dollars in thousands):
 December 31, 2021
 AmountWeighted
Average Rate
Maturing in one year or less$652,694 0.45 %
Maturing after one year through two years117,013 0.63 
Maturing after two years through three years47,057 0.79 
Maturing after three years through four years9,858 0.99 
Maturing after four years through five years10,552 0.38 
Maturing after five years1,457 0.85 
Total certificates of deposit$838,631 0.50 %

127
 December 31, 2017
 Amount 
Weighted
Average Rate
Maturing in one year or less$685,592
 0.49%
Maturing after one year through two years98,257
 0.72
Maturing after two years through three years141,209
 1.30
Maturing after three years through four years25,902
 1.08
Maturing after four years through five years13,775
 1.26
Maturing after five years2,202
 1.05
Total certificates of deposit$966,937
 0.66%




Note 9:8:  ADVANCES FROM FEDERAL HOME LOAN BANK OF DES MOINES


Utilizing a blanket pledge, qualifying loans receivable at December 31, 20172021 and 2016,2020, were pledged as security for FHLB borrowings and there were no securities pledged as collateral as of December 31, 20172021 or 2016.2020.  At December 31, 20172021 and 2016,2020, FHLB advances were scheduled to mature as follows (in thousands):
 At or for the Years Ended December 31
 20212020
AmountWeighted Average RateAmountWeighted 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 %$150,000 2.58 %
 December 31
 2017 2016
Maturing in one year or less$—
 $54,000
Maturing after one year through three years—
 —
Maturing after three years through five years—
 —
Maturing after five years169
 179
Total FHLB advances, at par169
 54,179
Fair value adjustment33
 37
Total FHLB advances, carried at fair value$202
 $54,216


The maximum amount outstanding from the FHLB advances at any month end for the years ended December 31, 20172021 and 20162020 was $453.2$150.0 million and $300.2$380.0 million, respectively. The average FHLB advances balance outstanding for the years ended December 31, 20172021 and 20162020 was $151.3$97.9 million and $141.9$215.1 million, respectively. The average contractual interest rate on the FHLB advances for the years ended December 31, 20172021 and 20162020 was 1.26%2.65% and 0.67%2.34%, respectively. As of December 31, 2017,2021, Banner Bank has established a borrowing line with the FHLB to borrow up to 35%45% of its total assets, contingent on having sufficient qualifying collateral and ownership of FHLB stock.  Islanders Bank similarly may borrow up to 35% of its total assets, also contingent on collateral and FHLB stock.  At December 31, 2017, the maximum total FHLB2021, under these credit line was $3.55 billion and $98.7 million forfacilities based on pledged collateral, Banner Bank and Islanders Bank, respectively.had $2.38 billion of available credit capacity.


Note 10:9:  OTHER BORROWINGS


Other borrowings consist of retail and wholesale repurchase agreements, other term borrowings and Federal Reserve Bank borrowings.


Repurchase Agreements:  At December 31, 2017,2021, retail repurchase agreements carry interest rates ranging from 0.15%0.05% to 0.40%. In addition to the retail repurchase agreements, Banner Bank had one wholesale repurchase agreement with an interest rate of 2.15%0.25%. These repurchase agreements are secured by the pledge of certain mortgage-backed and agency securities with a carrying value of $123.9$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 (BIC) program.  Such borrowings are secured by a pledge of eligible loans.  At December 31, 2017,2021, based upon available unencumbered collateral, Banner Bank was eligible to borrow $1.15 billion$782.3 million from the Federal Reserve Bank, although, at that date, as well as at December 31, 2016,2020, Banner Bank had no funds borrowed under this or other borrowing arrangements.


At December 31, 2017,2021, Banner Bank had uncommitted federal funds lines of credit agreements with other financial institutions totaling $110.0 million, while Islanders Bank had an uncommitted federal funds line of credit agreement with another financial institution totaling $5.0$125.0 million. No balances were outstanding under these agreements as of December 31, 20172021 and 2016.2020. 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, 20172021 and 20162020 by the period remaining to maturity is as follows (dollars in thousands):
 At or for the Years Ended December 31
 20212020
 AmountWeighted
Average Rate		AmountWeighted
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
 At or for the Years Ended December 31
 2017 2016
 Amount 
Weighted
Average Rate
 Amount 
Weighted
Average Rate
Repurchase agreements:       
Maturing in one year or less$95,860
 0.29% $100,685
 0.19%
Maturing after one year through two years—
 —
 5,000
 2.15
Maturing after two years—
 —
 —
 —
Total year-end outstanding$95,860
 0.29
 $105,685
 0.28
Average outstanding$111,872
 0.28
 $108,427
 0.29
Maximum outstanding at any month-end120,245
 n/a
 112,309
 n/a



NOTE 11:  JUNIOR10:  SUBORDINATED DEBENTURESDEBT AND MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES


At December 31, 2017,2021, the Company had nine9 wholly-owned subsidiary grantor trusts (the Trusts), which had issued $136.0$135.5 million of trust preferred securitiesTPS to third parties, as well as $4.2 million of common capital securities, carried among other assets, which were issued to the Company.  Trust preferred securitiesTPS 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 trust preferred securities (TPS)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 trust preferred securitiesTPS issued by the Trusts qualified as Tier 1 capital as of December 31, 2017.2021.  At December 31, 2017,2021, the Trusts comprised $136.0$135.5 million, or 11.2%8.1% of the Company’s total risk-based capital.


The following table is a summary of trust preferred securities at December 31, 20172021 (dollars in thousands):
Name of TrustAggregate Liquidation Amount of Trust Preferred SecuritiesAggregate Liquidation Amount of Common Capital SecuritiesAggregate Principal Amount of Junior Subordinated Debentures
Stated
   Maturity (1)
Current Interest RateReset PeriodInterest Rate Spread
Banner Capital Trust II(3)
$15,000 $464 $15,464 20333.47 %QuarterlyThree-month LIBOR + 3.35%
Banner Capital Trust III(3)
15,000 465 15,465 20333.02 QuarterlyThree-month LIBOR + 2.90%
Banner Capital Trust IV(3)
15,000 465 15,465 20342.97 QuarterlyThree-month LIBOR + 2.85%
Banner Capital Trust V25,000 774 25,774 20351.73 QuarterlyThree-month LIBOR + 1.57%
Banner Capital Trust VI25,000 774 25,774 20371.79 QuarterlyThree-month LIBOR + 1.62%
Banner Capital Trust VII25,000 774 25,774 20371.51 QuarterlyThree-month LIBOR + 1.38%
Greater Sacramento Bancorp Statutory Trust I(3)
4,000 124 4,124 20333.47 QuarterlyThree-month LIBOR + 3.35%
Greater Sacramento Bancorp Statutory Trust II4,000 124 4,124 20351.88 QuarterlyThree-month LIBOR + 1.68%
Mission Oaks Statutory Trust I7,500 232 7,732 20361.85 QuarterlyThree-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     
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 $15,000
 $464
 $15,464
 2033 4.71% Quarterly Three-month LIBOR + 3.35%
Banner Capital Trust III 15,000
 465
 15,465
 2033 4.26
 Quarterly Three-month LIBOR + 2.90%
Banner Capital Trust IV 15,000
 465
 15,465
 2034 4.21
 Quarterly Three-month LIBOR + 2.85%
Banner Capital Trust V 25,000
 774
 25,774
 2035 3.02
 Quarterly Three-month LIBOR + 1.57%
Banner Capital Trust VI 25,000
 774
 25,774
 2037 3.10
 Quarterly Three-month LIBOR + 1.62%
Banner Capital Trust VII 25,000
 774
 25,774
 2037 2.72
 Quarterly Three-month LIBOR + 1.38%
Siuslaw Statutory Trust I 8,000
 248
 8,248
 2034 4.30
 Quarterly Three-month LIBOR + 2.70%
Greater Sacramento Bancorp Statutory Trust I 4,000
 124
 4,124
 2033 4.71
 Quarterly Three-month LIBOR + 3.35%
Greater Sacramento Bancorp Statutory Trust II 4,000
 124
 4,124
 2035 3.27
 Quarterly Three-month LIBOR + 1.68%
Total TPS liability at par $136,000
 $4,212
 140,212
   3.57%    
Fair value adjustment(2)
     (41,505)        
Total TPS liability at fair value(2)
     $98,707
        


(1) All of the Company'sCompany’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 12:11:  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, 2017, 20162021, 2020 and 20152019 (in thousands):
 Years Ended December 31
 202120202019
Current
Federal$20,461 $30,325 $25,278 
State4,359 6,964 2,494 
Total Current24,820 37,289 27,772 
Deferred
Federal18,278 (8,134)7,738 
State2,448 (2,630)1,344 
Total Deferred20,726 (10,764)9,082 
Provision for income taxes$45,546 $26,525 $36,854 
 Years Ended December 31
 2017
 2016
 2015
Current     
Federal$30,961
 $29,787
 $24,683
State3,085
 2,477
 1,399
Total Current34,046
 32,264
 26,082
      
Deferred     
Federal58,646
 9,908
 (3,310)
State(2,204) 2,083
 (23)
Total Deferred56,442
 11,991
 (3,333)
      
Provision for income taxes$90,488
 $44,255
 $22,749


The following table presents the reconciliation of the federal statutory rate to the actual effective rate for the years ended December 31, 2017, 20162021, 2020 and 2015:2019:
 Years Ended December 31
 202120202019
Federal income tax statutory rate21.0 %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 offset2.2 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 amortization1.1 1.6 0.7 
Other(0.9)1.4 0.7 
Effective income tax rate18.5 %18.6 %20.1 %

131

 Years Ended December 31
 2017
 2016
 2015
Federal income tax statutory rate35.0 % 35.0 % 35.0 %
Increase (decrease) in tax rate due to:     
Tax-exempt interest(2.6) (2.6) (3.9)
Investment in life insurance(1.1) (1.2) (1.3)
State income taxes, net of federal tax offset2.0
 2.2
 1.1
Tax credits(0.6) (0.8) (1.6)
Merger and acquisition costs—
 —
 1.9
Federal law change28.2
 —
 —
Other(1.1) 1.5
 2.3
Effective income tax rate59.8 % 34.1 % 33.5 %



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, 20172021 and 20162020 (in thousands):
 December 31
 20212020
Deferred tax assets:  
Loan loss and REO$34,753 $43,158 
Deferred compensation21,193 18,309 
Net operating loss carryforward20,159 26,126 
Federal and state tax credits7,631 7,517 
State net operating losses5,179 5,400 
Loan discount1,830 3,365 
Lease liability14,136 14,088 
Other5,091 9,177 
Total deferred tax assets109,972 127,140 
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-sale91 (21,662)
Financial instruments accounted for under fair value accounting(878)(947)
Total deferred tax liabilities(38,650)(61,214)
Deferred income tax asset71,322 65,926 
Valuation allowance(184)(184)
Deferred tax asset, net$71,138 $65,742 
 December 31
 2017
 2016
Deferred tax assets:   
Loan loss and REO$22,294
 $36,719
Deferred compensation13,045
 23,189
Net operating loss carryforward43,721
 82,714
Federal and state tax credits7,614
 7,711
State net operating losses6,706
 7,396
Loan discount4,736
 9,696
Other4,326
 6,217
Total deferred tax assets102,442
 173,642
Deferred tax liabilities:   
Depreciation(1,343) (2,218)
Deferred loan fees, servicing rights and loan origination costs(9,564) (13,291)
Intangibles(5,690) (11,178)
Financial instruments accounted for under fair value accounting(9,702) (16,186)
Other(325) (880)
Total deferred tax liabilities(26,624) (43,753)
Deferred income tax asset75,818
 129,889
Valuation allowance(4,391) (2,195)
Deferred tax asset, net$71,427
 $127,694


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. In December 2017, the federal government enacted the 2017 Tax Act. Among other provisions, the 2017 Tax Act reduced the federal marginal corporate income tax rate from 35% to 21%. As a result of the passage of the 2017 Tax Act, the Company recorded a $42.6 million charge for the revaluation of its net deferred tax asset to account for the future impact of the decrease in the corporate income tax rate and other provisions of the legislation. The charge was recorded as an increase to tax expense and reduction of the net deferred tax asset. The $42.6 million charge recorded by the Company included $4.2 million of provisional income tax expense related to AMT credits that are limited under Section 383 of the Code, which resulted in a reduction in the AMT deferred tax asset.  The adjustments to deferred tax assets and receivables related to the refundable nature of AMT credits are provisional amounts estimated based on information available as of

At December 31, 2017. As a result, these amounts could be adjusted during the measurement period, which will end in December 2018. The Company did not identify items for which the income tax effects of the 2017 Tax Act have not been completed and a reasonable estimate could not be determined as of December 31, 2017. The utilization of the limited AMT credits under the refundable AMT credit law is uncertain and subject to change as the Company obtains additional guidance on application of the law. The Company will recognize any changes to the provisional amounts as management refines estimates of cumulative temporary differences, and their interpretations of the application of the 2017 Tax Act. The Company expects to complete its analysis of the provisional items during the second half of 2018.

At December 31, 2017,2021, the Company has federal net operating loss carryforwards of approximately $208.2$96.0 million. The Company also has $94.6$72.5 million of state net operating loss carryforwards, against which the Company has established a $184,000 valuation reserve against.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, 20172021 of $3.4$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 a five-year period under the new tax law. As of December 31, 2017, the Company had established a $4.2 million valuation reserve against its alternative minimum tax credit carryforwards. Additionally, at December 31, 2017, the Company has no state credit carryovers.an indefinite period. At December 31, 2016,2020, the Company had federal and state net operating loss carryforwards of approximately $236.3$124.4 million and $145.8$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 ourthe Company’s 2015 acquisition of Starbuck Bancshares, Inc., the holding company for AmericanWest Bank (AmericanWest) 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’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. The


In 2017, the Company has providedestablished a $184,000 valuation reserve against the portion of its various state net operating loss carryforwards and tax credits that it believesbelieved it is more likely than not that it willwould 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.


In addition, asAs a consequence of Banner'sBanner’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, 20172021 and 20162020 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 $1.9$1.1 million at December 31, 2017.2021.


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
 20212020
Balance, beginning of year$450 $275 
Changes related to prior year tax positions365 — 
Changes related to current year tax positions185 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'sCompany’s tax credit investments and related unfunded commitments at December 31, 20172021 and 20162020 (in thousands):

December 31, 2021December 31, 2020
Tax credit investments$56,589 $33,528 
Unfunded commitments—tax credit investments31,174 18,306 
 December 31, 2017 December 31, 2016
Tax credit investments$7,311
 $4,654
Unfunded commitments—tax credit investments4,417
 665


The following table presents other information related to the Company'sCompany’s tax credit investments for the years ended December 31, 20172021, 2020 and 20162019 (in thousands):

For the years ended December 31,
202120202019
Tax credits and other tax benefits recognized$4,390 $3,842 $1,916 
Tax credit amortization expense included in provision for income taxes3,816 2,992 1,633 

 For the year ended December 31,
 2017
 2016
Tax credits and other tax benefits recognized$1,140
 $1,136
Tax credit amortization expense included in provision for income taxes1,144
 672



Note 13:12:  EMPLOYEE BENEFIT PLANS


Employee Retirement Plans: Substantially all of the Company’s and the Banks'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, 20172021, 2020 and 2019, 2016$6.5 million, $6.7 million and 2015, $4.8 million, $4.6 million and $2.8$6.2 million, respectively, was expensed for 401(k) contributions. TheDuring 2021, the Board of Directors has elected to make a 4% of eligible compensation matching contribution for 2018.contribution.


133

Supplemental Retirement and Salary Continuation Plans:  Through the Banks,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 Banks’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, 2017, 20162021, 2020 and 2015,2019, expense recorded for supplemental retirement and salary continuation plan benefits totaled $3.5$3.3 million, $2.7$2.1 million, and $1.3$3.4 million, respectively.  At December 31, 20172021 and 2016,2020, liabilities recorded for the various supplemental retirement and salary continuation plan benefits totaled $38.6$39.4 million and $38.3$40.1 million, respectively, and are recorded in a deferred compensation liability account.


Deferred Compensation Plans and Rabbi Trusts:  The Company and the BanksBank 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, 20172021 and $7.3$7.6 million at December 31, 2016.2020.  At December 31, 20172021 and 2016,2020, liabilities recorded in connection with deferred compensation plan benefits totaled $9.9$15.0 million ($7.4 million in contra-equity) and $9.0$11.4 million ($7.37.6 million in contra-equity), respectively, and are recorded in deferred compensation or equity as appropriate.


The Banks haveBank 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 Banks’Bank’s intent to hold these policies as a long-term investment.  However, there will be an income tax impact if the Banks chooseBank chooses to surrender certain policies.  Although the lives of individual current or former management-level employees are insured, the Banks areBank is the ownersowner and sole or partial beneficiaries.beneficiary.  At December 31, 20172021 and 2016,2020, the cash surrender value of these policies was $162.7$244.2 million and $158.9$191.8 million, respectively.  The Banks areBank 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 Banks useBank uses a variety of insurance companies and regularly monitor their financial condition.


Note 14:13:  STOCK-BASED COMPENSATION PLANS


The Company operates the following stock-based compensation plans as approved by its shareholders:
2012 Restricted Stock and Incentive Bonus Plan.
•2014 Omnibus Incentive Plan.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'sCompany’s shareholders. Under these plans the Company currently has outstanding restricted stock share grants and restricted stock unit grants, and stock options.grants.

2012 Restricted Stock and Incentive Bonus Plan

Under the 2012 Restricted Stock and Incentive Bonus Plan (2012 Restricted Stock Plan), which was approved by shareholders on April 24, 2012, the Company is authorized to issue up to 300,000 shares of its common stock to provide a means for attracting and retaining highly skilled officers of Banner Corporation and its affiliates. Shares granted under the 2012 Restricted Stock Plan have a minimum vesting period of three years. The 2012 Restricted Stock Plan will continue in effect for a term of ten years, after which no further awards may be granted.

The 2012 Restricted Stock Plan was amended on April 23, 2013 to provide for the ability to grant (1) cash-denominated incentive-based awards payable in cash or common stock, including those that are eligible to qualify as qualified performance-based compensation for the purposes of Section 162(m) of the Code and (2) restricted stock awards that qualify as qualified performance-based compensation for the purposes of Section 162(m) of the Code. Vesting requirements may include time-based conditions, performance-based conditions, and/or market-based conditions.

As of December 31, 2017, the Company had granted 270,699 shares of restricted stock from the 2012 Restricted Stock Plan (as amended and restated), of which 263,400 shares had vested and 7,299 shares remain unvested.


2014 Omnibus Incentive Plan


The 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, 2017, 371,3422021, 302,254 restricted stock shares and 34,975414,716 restricted stock units have been granted under the 2014 Plan of which 91,1172,239 restricted stock shares and 20,42296,589 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 vested.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 $6.0$9.3 million, $4.5$9.2 million and $3.5$7.1 million respectively, for the years ended December 31, 2017, 20162021, 2020 and 2015.2019.  Unrecognized compensation expense for these awards as of December 31, 20172021 was $8.0$10.9 million and will be amortized over the next 3135 months.




A summary of the Company'sCompany’s Restricted Stock/Unit award activity during the years ended December 31, 2017, 20162021, 2020 and 20152019 follows:
Shares/UnitsWeighted Average
Grant-Date
Fair Value
Unvested at January 1, 2019318,097 $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, 2019382,872 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, 2020578,136 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
 Shares/Units 
Weighted Average
Grant-Date
Fair Value
Unvested at January 1, 2015195,106
 $32.83
Granted (24,931 non-voting)155,183
 45.59
Vested(109,416) 30.28
Forfeited(9,311) 39.07
Unvested at December 31, 2015231,562
 42.33
Granted (38,934 non-voting)177,775
 41.74
Vested(104,297) 41.47
Forfeited(14,321) 42.54
Unvested at December 31, 2016290,719
 42.26
Granted (41,318 non-voting)153,777
 55.86
Vested(103,259) 43.81
Forfeited(39,160) 39.83
Unvested at December 31, 2017
302,077
 48.97


Note 15:  PREFERRED STOCK AND RELATED WARRANT

On November 21, 2008, as part of the Capital Purchase Program, the Company entered into a Purchase Agreement with U.S. Treasury pursuant to which the Company issued and sold 124,000 shares of Series A Preferred Stock, having a liquidation preference of $1,000 per share ($124 million liquidation preference in the aggregate) and a ten-year warrant to purchase up to 243,998 shares of the Company’s common stock, par value $0.01 per share, at an initial exercise price of $76.23 per share (post reverse-split), for an aggregate purchase price of $18.6 million in cash.

During the year ended December 31, 2012, the Company repurchased or redeemed its Series A Preferred Stock. The related warrants to purchase up to $18.6 million in Banner common stock (243,998 shares) were sold by the U.S. Treasury at public auction in June 2013. That sale did not change the Company's capital position and did not have any impact on the financial accounting and reporting for these securities.



Note 16:14:  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, and Islanders Bank, as a state-chartered federally insured commercial banks, arebank, 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 BanksBank and the minimum regulatory requirements (dollars in thousands):
 ActualMinimum for Capital Adequacy PurposesMinimum to be Categorized as “Well-Capitalized” Under Prompt Corrective Action Provisions
 AmountRatioAmountRatioAmountRatio
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 assets1,440,694 12.74 678,474 6.00 678,474 6.00 
Tier 1 capital to average leverage assets1,440,694 8.76 658,091 4.00 n/an/a
Tier 1 common equity to risk-weighted assets1,305,194 11.54 508,856 4.50 n/an/a
Banner Bank:      
Total capital to risk- weighted assets1,552,204 13.73 904,159 8.00 1,130,199 10.00 
Tier 1 capital to risk- weighted assets1,428,955 12.64 678,119 6.00 904,159 8.00 
Tier 1 capital to average leverage assets1,428,955 8.69 657,882 4.00 822,353 5.00 
Tier 1 common equity to risk-weighted assets1,428,955 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 assets1,371,736 12.56 655,104 6.00 655,104 6.00 
Tier 1 capital to average leverage assets1,371,736 9.50 577,331 4.00 n/an/a
Tier 1 common equity to risk-weighted assets1,228,236 11.25 491,328 4.50 n/an/a
Banner Bank:     
Total capital to risk- weighted assets1,438,012 13.39 859,260 8.00 1,074,075 10.00 
Tier 1 capital to risk- weighted assets1,303,590 12.14 644,445 6.00 859,260 8.00 
Tier 1 capital to average leverage assets1,303,590 9.22 565,620 4.00 707,025 5.00 
Tier 1 common equity to risk-weighted assets1,303,590 12.14 483,334 4.50 698,149 6.50 
Islanders Bank:     
Total capital to risk- weighted assets29,333 15.65 14,997 8.00 18,747 10.00 
Tier 1 capital to risk- weighted assets26,983 14.39 11,248 6.00 14,997 8.00 
Tier 1 capital to average leverage assets26,983 7.87 13,720 4.00 17,150 5.00 
Tier 1 common equity to risk-weighted assets26,983 14.39 8,436 4.50 12,185 6.50 
 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, 2017:           
The Company—consolidated:           
Total capital to risk-weighted assets$1,214,631
 13.81% $703,508
 8.00% $879,385
 10.00%
Tier 1 capital to risk-weighted assets1,123,154
 12.77
 527,631
 6.00
 527,631
 6.00
Tier 1 common equity to risk-weighted assets994,080
 11.30
 395,723
 4.50
 n/a
 n/a
Tier 1 capital to average leverage assets1,123,154
 11.34
 396,313
 4.00
 n/a
 n/a
Banner Bank:           
Total capital to risk- weighted assets1,102,195
 12.83
 687,266
 8.00
 859,083
 10.00
Tier 1 capital to risk- weighted assets1,013,079
 11.79
 515,450
 6.00
 687,266
 8.00
Tier 1 common equity to risk-weighted assets1,013,079
 11.79
 386,587
 4.50
 558,404
 6.50
Tier 1 capital to average leverage assets1,013,079
 10.53
 384,920
 4.00
 481,150
 5.00
Islanders Bank:           
Total capital to risk- weighted assets32,122
 16.39
 15,681
 8.00
 19,602
 10.00
Tier 1 capital to risk- weighted assets29,761
 15.18
 11,761
 6.00
 15,681
 8.00
Tier 1 common equity to risk-weighted assets29,761
 15.18
 8,821
 4.50
 12,741
 6.50
Tier 1 capital to average leverage assets29,761
 10.65
 11,183
 4.00
 13,979
 5.00
December 31, 2016:           
The Company—consolidated:           
Total capital to risk-weighted assets$1,214,913
 13.40% $725,566
 8.00% $906,957
 10.00%
Tier 1 capital to risk-weighted assets1,125,267
 12.41
 544,174
 6.00
 544,174
 6.00
Tier 1 common equity to risk-weighted assets1,014,994
 11.19
 408,131
 4.50
 n/a
 n/a
Tier 1 capital to average leverage assets1,125,267
 11.83
 380,519
 4.00
 n/a
 n/a
Banner Bank:           
Total capital to risk- weighted assets1,043,837
 11.76
 709,882
 8.00
 887,352
 10.00
Tier 1 capital to risk- weighted assets956,298
 10.78
 532,411
 6.00
 709,882
 8.00
Tier 1 common equity to risk-weighted assets956,298
 10.78
 399,308
 4.50
 576,779
 6.50
Tier 1 capital to average leverage assets956,298
 10.34
 369,936
 4.00
 462,420
 5.00
Islanders Bank:           
Total capital to risk- weighted assets35,207
 18.43
 15,281
 8.00
 19,101
 10.00
Tier 1 capital to risk- weighted assets33,099
 17.33
 11,461
 6.00
 15,281
 8.00
Tier 1 common equity to risk-weighted assets33,099
 17.33
 8,598
 4.50
 12,416
 6.50
Tier 1 capital to average leverage assets33,099
 12.72
 10,405
 4.00
 13,006
 5.00


At December 31, 2017,2021, Banner Corporation and the BanksBank each exceeded all regulatorythe requirements to be “well capitalized” and the fully phased-in capital adequacy requirements.conservation buffer requirement. There have been no conditions or events since December 31, 20172021 that have materially adversely changed the Tier 1 or Tier 2 capital of the Company or the Banks.Bank.  However, events beyond the control of the Banks,Bank, such as weak or depressed economic conditions in areas where the Banks haveBank has most of theirits loans, could adversely affect future earnings and, consequently, the ability of the BanksBank to meet theirits 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.




Effective January 1, 2015 (with some changes transitioned into full effectiveness over several years), Banner Corporation and the Banks becameBank are subject to capital regulations adopted by the Federal Reserve and the FDIC, which established minimum required ratios for common equity Tier 1 (“CET1”) capital, Tier 1 capital, total capital and the leverage ratio; risk-weightings of certain assetsratio and other items for purposes of the risk-based capital ratios, a required capital conservation buffer over the required capital ratios, and defined what qualifies as capital for purposes of meeting the capital requirements. These regulations implement the regulatory capital reforms required by the Dodd-Frank Act and the “Basel III” requirements.ratios.


136

Under the capital regulations, the minimum capital ratios applicable to Banner and the Banks are: (i)(1) a CETICET1 capital ratio of 4.5%; (ii) of risk-weighted assets; (2) a Tier 1 capital ratio of 6% (increased from 4%); (iii)6.0% of risk-weighted assets; (3) a total risk-based capital ratio of 8% (unchanged from prior rules);8.0% of risk-weighted assets; and (iv)(4) a leverage ratio (the ratio of Tier 1 leverage ratiocapital to average total consolidated assets) of 4% for all institutions.4.0%.  CET1 generally consists of common stock; retained earnings; accumulated other comprehensive income (AOCI),(“AOCI”) unless an election is madeinstitution 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 loan and leasecredit 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. The regulations changed certain risk-weightings compared to the earlier capital rules, including a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (up from 0%); and a 250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital.


In addition to the minimum CET1, Tier 1, leverage ratio and total capital and leverage ratios, Banner and each of the Banks now have toBank 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, engaging in share repurchases,repurchasing shares, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This new capital conservation buffer requirement began to be phased in starting in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented to an amount greater than 2.5% of risk-weighted assets in January 2019.bonuses.


Note 17:15:  GOODWILL, OTHER INTANGIBLE ASSETS AND MORTGAGE SERVICING RIGHTS


Goodwill and Other Intangible Assets: At December 31, 2017,2021, intangible assets are comprised of goodwill CDI, and LHICDI acquired in business combinations. Goodwill represents the excess of the total 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, 2017,2021, the Company completed a qualitativean assessment of goodwillqualitative 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. Additions to goodwill during the year ended December 31, 2015 relate to the Starbuck and Siuslaw acquisitions.


CDI represents the value of transaction-related deposits and the value of the customerclient relationships associated with the deposits. At December 31, 2018 intangible assets also included favorable leasehold intangibles (LHI). LHI representsrepresented 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 and LHIassets 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 threeeight years to ten years.  The CDI and LHI 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, 2017, 20162021, 2020 and 20152019 (in thousands):
 GoodwillCDILHITotal
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, 2019373,121 29,158 — 402,279 
Amortization— (7,732)— (7,732)
Balance, December 31, 2020373,121 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
 Goodwill CDI LHI Total
Balance, January 1, 2015$—
 $2,831
 $—
 $2,831
Additions through acquisition247,738
 37,395
 776
 285,909
Amortization—
 (3,164) (66) (3,230)
Other changes (1)
—
 (300) —
 (300)
Balance, December 31, 2015247,738
 36,762
 710
 285,210
Amortization—
 (7,061) (249) (7,310)
Adjustments to goodwill(2)
(3,155) —
 —
 (3,155)
Balance, December 31, 2016244,583
 29,701
 461
 274,745
Amortization—
 (6,247) (184) (6,431)
Other changes (1)
(1,924) (1,076) —
 (3,000)
Balance, December 31, 2017$242,659
 $22,378
 $277
 $265,314




(1)
Acquired Goodwill and CDI were adjusted for the sale of the Utah branches in 2017 and acquired CDI was adjusted for a branch that was subsequently sold during 2015.
(2)
The adjustments to goodwill in 2016 related to changes in the preliminary goodwill recorded for the Starbuck acquisition including adjustments to loan discount, deferred taxes and REO valuations.

Estimated amortization expense in future years with respect to CDI as of December 31, 20172021 (in thousands):
Year ended:Estimated Amortization
2022$5,317 
20233,814 
20242,659 
20251,575 
2026904 
Thereafter586 
Net carrying amount$14,855 
Year ended:Estimated Amortization
2018$5,372
20194,683
20203,996
20213,307
Thereafter5,020
Net carrying amount$22,378


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 20172021, 20162020 and 2015,2019, 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 $2.19$2.77 billion and $2.05$2.64 billion at December 31, 20172021 and 2016,2020, respectively.  Custodial accounts maintained in connection with this servicing totaled $10.2$3.2 million and $10.3$3.8 million at December 31, 20172021 and 2016,2020, respectively.
 
An analysis of the mortgage and SBA servicing rights for the years ended December 31, 2017, 20162021, 2020 and 20152019 is presented below (in thousands):
 Years Ended December 31
 202120202019
Balance, beginning of the year$15,223 $14,148 $14,638 
Amounts capitalized7,260 8,572 4,392 
Additions through purchase159 175 168 
Amortization (1)
(6,580)(7,672)(5,050)
Fair Value adjustments1,144 — — 
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
 Years Ended December 31
 2017 2016 2015
Balance, beginning of the year$15,249
 $13,295
 $9,030
Amounts capitalized3,361
 5,965
 5,313
Additions through acquisition—
 —
 2,172
Additions through purchase94
 —
 —
Amortization (1)
(3,966) (4,011) (3,220)
Balance, end of the year (2)
$14,738
 $15,249
 $13,295


(1)
Amortization of mortgage servicing rights is recorded as a reduction of loan servicing income and any unamortized balance is fully written off if the loan repays in full.
(2)
There was no valuation allowance as of December 31, 2017 and 2016.



Note 18:16:  FAIR VALUE


The following table presents estimated fair values of the Company’s financial instruments as of December 31, 20172021 and 2016,2020, whether or not recognized or recorded in the Consolidated Statements of Financial Condition (in thousands):
 December 31, 2021December 31, 2020
 LevelCarrying
Value		Estimated
Fair Value		Carrying
Value		Estimated
Fair Value
Assets:    
Cash and cash equivalents1$2,134,300 $2,134,300 $1,234,183 $1,234,183 
Securities—trading326,981 26,981 24,980 24,980 
Securities—available-for-sale23,638,993 3,638,993 2,322,593 2,322,593 
Securities—held-to-maturity2464,008 484,483 410,038 436,882 
Securities—held-to-maturity357,347 57,370 11,769 11,799 
Securities purchased under agreements to resell2300,000 300,000 — — 
Loans held for sale296,487 96,914 243,795 245,667 
Loans receivable39,084,763 9,100,516 9,870,982 9,810,293 
FHLB stock312,000 12,000 16,358 16,358 
Bank-owned life insurance1244,156 244,156 191,830 191,830 
Mortgage servicing rights316,045 24,393 15,223 18,084 
SBA servicing rights31,161 1,161 — — 
Investments in limited partnerships310,257 10,257 2,819 2,819 
Derivatives:
Interest rate swaps220,826 20,826 39,066 39,066 
Interest rate lock and forward sales commitments2,31,555 1,555 5,641 5,641 
Liabilities:    
Demand, interest checking and money market accounts210,703,586 10,703,586 9,253,494 9,253,494 
Regular savings22,784,716 2,784,716 2,398,482 2,398,482 
Certificates of deposit2838,631 836,877 915,320 919,920 
FHLB advances250,000 50,287 150,000 152,779 
Other borrowings2264,490 264,490 184,785 184,785 
Subordinated notes, net298,564 105,241 98,201 98,201 
Junior subordinated debentures3119,815 119,815 116,974 116,974 
Derivatives:
Interest rate swaps211,336 11,336 22,336 22,336 
Interest rate swaps used in cash flow hedges2279 279 — — 
Interest rate lock and forward sales commitments2140 140 1,755 1,755 
   December 31, 2017 December 31, 2016
 Level 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Assets:         
Cash and due from banks1 $261,200
 $261,200
 $247,719
 $247,719
Securities—trading2,3 22,318
 22,318
 24,568
 24,568
Securities—available-for-sale2 919,485
 919,485
 806,428
 806,428
Securities—held-to-maturity2 256,793
 258,710
 263,997
 266,652
Securities—held-to-maturity3 3,478
 3,478
 3,876
 3,876
Loans receivable held for sale2 40,725
 40,923
 246,353
 246,815
Loans receivable3 7,598,884
 7,445,990
 7,451,148
 7,337,608
FHLB stock3 10,334
 10,334
 12,506
 12,506
BOLI1 162,668
 162,668
 158,936
 158,936
Mortgage servicing rights3 14,738
 19,835
 15,249
 16,740
Derivatives:         
Interest rate swaps2 5,083
 5,083
 8,330
 8,330
Interest rate lock and forward sales commitments2 523
 523
 482
 482
Liabilities:         
Demand, interest-bearing checking and money market2 5,658,994
 5,658,994
 5,552,690
 5,552,690
Regular savings2 1,557,500
 1,557,500
 1,523,391
 1,523,391
Certificates of deposit2 966,937
 947,517
 1,045,333
 1,028,866
Advances from FHLB at fair value2 202
 202
 54,216
 54,216
Junior subordinated debentures at fair value3 98,707
 98,707
 95,200
 95,200
Other borrowings2 95,860
 95,860
 105,685
 105,685
Derivatives:         
Interest rate swaps2 5,083
 5,083
 8,330
 8,330
Interest rate lock and forward sales commitments2 201
 201
 289
 289


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, 20172021 and 20162020 (in thousands):
December 31, 2017 December 31, 2021
Level 1 Level 2 Level 3 Total Level 1Level 2Level 3Total
Assets:       Assets:    
Securities—trading       Securities—trading
Municipal bonds$—
 $100
 $—
 $100
Corporate Bonds (TPS securities)—
 —
 22,058
 22,058
Equity securities—
 160
 —
 160
Corporate bonds (TPS securities)Corporate bonds (TPS securities)$— $— $26,981 $26,981 
—
 260
 22,058
 22,318
       
Securities—available-for-sale       Securities—available-for-sale    
U.S. Government and agency$—
 $72,466
 $—
 $72,466
U.S. Government and agency— 201,332 — 201,332 
Municipal bonds—
 68,733
 —
 68,733
Municipal bonds— 308,612 — 308,612 
Corporate bonds—
 5,393
 —
 5,393
Corporate bonds— 117,347 — 117,347 
Mortgage-backed securities—
 739,557
 —
 739,557
Mortgage-backed or related securitiesMortgage-backed or related securities— 2,805,268 — 2,805,268 
Asset-backed securities—
 27,758
 —
 27,758
Asset-backed securities— 206,434 — 206,434 
Equity securities—
 5,578
 —
 5,578
—
 919,485
 —
 919,485
        — 3,638,993 — 3,638,993 
Loans held for sale—
 32,392
 —
 32,392
Loans held for sale(1)
Loans held for sale(1)
— 39,775 — 39,775 
SBA servicing rightsSBA servicing rights— — 1,161 1,161 
Investment in limited partnershipsInvestment in limited partnerships— — 10,257 10,257 
       
Derivatives       Derivatives
Interest rate swaps—
 5,083
 —
 5,083
Interest rate swaps— 20,826 — 20,826 
Interest rate lock and forward sales commitments—
 523
 —
 523
Interest rate lock and forward sales commitments— 88 1,467 1,555 
$—
 $957,743
 $22,058
 $979,801
 $— $3,699,682 $39,866 $3,739,548 
Liabilities       Liabilities    
Advances from FHLB at fair value$—
 $202
 $—
 $202
Junior subordinated debentures at fair value—
 —
 98,707
 98,707
Junior subordinated debenturesJunior subordinated debentures$— $— $119,815 $119,815 
Derivatives 
  
  
  
Derivatives    
Interest rate swaps—
 5,083
 —
 5,083
Interest rate swaps— 11,336 — 11,336 
Interest rate swaps used in cash flow hedgesInterest rate swaps used in cash flow hedges— 279 — 279 
Interest rate lock and forward sales commitments—
 201
 —
 201
Interest rate lock and forward sales commitments— 140 — 140 
$—
 $5,486
 $98,707
 $104,193
$— $11,755 $119,815 $131,570 
    
    


140

December 31, 2016 December 31, 2020
Level 1 Level 2 Level 3 Total Level 1Level 2Level 3Total
Assets:       Assets:    
Securities—trading       Securities—trading    
U.S. Government and agency$—
 $1,326
 $—
 $1,326
Municipal bonds—
 335
 —
 335
Corporate Bonds (TPS securities)—
 —
 21,143
 21,143
Mortgage-backed securities—
 1,641
 —
 1,641
Equity securities—
 123
 —
 123
Corporate bonds (TPS securities)Corporate bonds (TPS securities)$— $— $24,980 $24,980 
—
 3,425
 21,143
 24,568
Securities—available-for-sale       Securities—available-for-sale    
U.S. Government and agency$—
 $56,978
 $—
 $56,978
U.S. Government and agency— 141,735 — 141,735 
Municipal bonds—
 109,853
 —
 109,853
Municipal bonds— 303,518 — 303,518 
Corporate bonds—
 10,283
 —
 10,283
Corporate bonds— 221,769 — 221,769 
Mortgage-backed securities—
 594,712
 —
 594,712
Mortgage-backed or related securitiesMortgage-backed or related securities— 1,646,152 — 1,646,152 
Asset-backed securities—
 28,993
 —
 28,993
Asset-backed securities— 9,419 — 9,419 
Equity securities—
 5,609
 —
 5,609
—
 806,428
 —
 806,428
 — 2,322,593 — 2,322,593 
       
Loans held for sale$—
 $9,600
 $—
 $9,600
Loans held for sale(1)
Loans held for sale(1)
— 133,554 — 133,554 
Investment in limited partnershipsInvestment in limited partnerships— — 2,819 2,819 
       
Derivatives 
  
  
  
Derivatives    
Interest rate swaps—
 8,330
 —
 8,330
Interest rate swaps— 39,066 — 39,066 
Interest rate lock and forward sales commitments—
 482
 —
 482
Interest rate lock and forward sales commitments— 420 5,221 5,641 
$—
 $828,265
 $21,143
 $849,408
 $— $2,495,633 $33,020 $2,528,653 
Liabilities       Liabilities    
Advances from FHLB at fair value$—
 $54,216
 $—
 $54,216
Junior subordinated debentures at fair value—
 —
 95,200
 95,200
Junior subordinated debenturesJunior subordinated debentures$— $— $116,974 $116,974 
Derivatives 
  
  
  
Derivatives    
Interest rate swaps—
 8,330
 —
 8,330
Interest rate swaps— 22,336 — 22,336 
Interest rate lock and forward sales commitments—
 289
 —
 289
Interest rate lock and forward sales commitments— 1,755 — 1,755 
$—
 $62,835
 $95,200
 $158,035
 $— $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:instruments above:


Cash and Cash Equivalents:  The carrying amount of these items is a reasonable estimate of their fair value.

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.


Loans Receivable: Fair values are estimated first by stratifying the portfolios of loans with similar financial characteristics.  Loans are segregated by type such as multifamily real estate, residential mortgage, nonresidential mortgage, commercial/agricultural, consumer and other.  Each loan category is further segmented into fixed- and adjustable-rate interest terms. A preliminary estimate of fair value is then calculated based on discounted cash flows using as a discount rate the current rate offered on similar products, plus an adjustment for liquidity to reflect the non-homogeneous nature of the loans.  The preliminary estimate is then further reduced by the amount of the allowance for loan losses to arrive at a final estimate of fair value. Fair value for impaired loans is also based on recent appraisals or estimated cash flows discounted using rates


commensurate with risk associated with the estimated cash flows.  Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information.

FHLB Stock:  The fair value is based upon the redemption value of the stock which equates to its carrying value.

Bank-Owned Life Insurance: The fair value of BOLI policies owned is based on the various insurance contracts' cash surrender value.

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.


Deposits: SBA Servicing Rights: Fair values are estimated based on an independent dealer analysis by discounting estimated net future cash flows from servicing. The carrying amountevaluation 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 deposits with no stated maturity, such as savings and checking accounts, is a reasonable estimate of their fair value.  The market value of certificates of deposit is based upon the discounted value of contractual cash flows.  The discount rateSBA servicing portfolio is determined usingstratified by loan type and fair value estimates are adjusted up or down based on the serviced loan interest rates currently offeredversus current rates on comparable instruments.new loan originations since the most recent independent analysis.


FHLB Advances:  
141

Investments in Limited Partnerships: Fair valuations for Banner’s FHLB advancesvalues are estimated using fair market values provided by the lender, the FHLBpractical expedient method based on our ownership interest in partners’ capital to which a proportionate share of Des Moines.  The FHLB of Des Moines prices advances by discounting the future contractual cash flowsnet assets is attributed, for individual advances, using its current cost of funds curve to provide the discount rate.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 credit concerns in the capital markets and 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.


Other Borrowings: Other borrowings include securities sold under agreements to repurchase and occasionally federal funds purchased and their carrying amount is considered a reasonable approximation of their fair value.

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, 20172021 and 2016.2020.  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'sCompany’s assets and liabilities classified as Level 3 and measured at fair value on a recurring and nonrecurring basis at December 31, 20172021 and 2016:2020:
December 31
20212020
Financial InstrumentsValuation TechniqueUnobservable InputsWeighted Average RateWeighted Average Rate
Corporate bonds (TPS securities)Discounted cash flowsDiscount rate3.71 %4.24 %
Junior subordinated debenturesDiscounted cash flowsDiscount rate3.71 %4.24 %
Loans individually evaluatedCollateral valuationsDiscount to appraised value8.5% to 20%0.0% to 20.0%
REOAppraisalsDiscount to appraised value60.9 %51.86 %
Interest rate lock commitmentsPricing modelPull-through rate86.64 %86.35 %
Investments in limited partnershipsNet Asset ValueInfrequent transactionsn/an/a
SBA servicing rightsDiscounted cash flowsConstant prepayment rate12%n/a
      December 31
      2017 2016
Financial Instruments Valuation Technique Unobservable Inputs Weighted Average Rate Weighted Average Rate
Corporate Bonds (TPS securities) Discounted cash flows Discount rate 6.69% 6.00%
Junior subordinated debentures Discounted cash flows Discount rate 6.69% 6.00%
Impaired loans Collateral Valuations Discount to appraised value 8.5% to 20.0%
 n/a
REO Appraisals Discount to appraised value 42%
 0% to 45%


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'sBanner’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'sCompany’s junior subordinated debentures at fair value as of December 31, 2017,2021, or the passage of time, will result in negative fair value adjustments. At December 31, 2017,2021, the discount rate utilized was based on a credit spread of 500350 basis points and three month LIBOR of 16921 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, 20172021 and 20162020 (in thousands):
Level 3 Fair Value Inputs
 TPS SecuritiesBorrowings—
Junior Subordinated
Debentures		Interest Rate Lock and Forward sales CommitmentsInvestments in Limited PartnershipsSBA 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, 202024,980 116,974 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 
 Level 3 Fair Value Inputs
 TPS Securities 
Borrowings—
Junior Subordinated
Debentures
Balance at January 1, 2016$18,699
 $92,480
Total gains or losses recognized 
  
Assets gains719
 —
Liabilities losses—
 2,720
Purchases, issuances and settlements1,725
 —
Balance at December 31, 201621,143
 95,200
Total gains or losses recognized   
Assets gains915
 —
Liabilities losses—
 3,507
Balance at December 31, 2017$22,058
 $98,707


The Company has elected to continue to recognize the interestInterest income and dividends from the TPS securities reclassified to fair valueare recorded as a component of interest income as was done in prior years when they were classified as available-for-sale.income. Interest expense related to the FHLB advances and junior subordinated debentures continues to beis measured based on contractual interest rates and reported in interest expense.  The change in fair value of these financial instruments has beenthe 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 table presentstables 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, 20172021 and 20162020 (in thousands):
 December 31, 2021
 Level 1Level 2Level 3Total
Loans individually evaluated$— $— $2,989 $2,989 
REO$— $— $852 $852 
 December 31, 2020
 Level 1Level 2Level 3Total
Loans individually evaluated$— $— $3,482 $3,482 
REO— — 816 816 
 December 31, 2017
 Level 1 Level 2 Level 3 Total
Impaired loans$—
 $—
 $6,535
 $6,535
REO$—
 $—
 $360
 $360
        
 December 31, 2016
 Level 1 Level 2 Level 3 Total
REO—
 —
 11,081
 11,081


The following table presents the losses resulting from non-recurring fair value adjustments for the years ended December 31, 20172021, 2020 and 20162019 (in thousands):
For the years ended December 31,
202120202019
Loans individually evaluated$(303)$(3,482)$(425)
REO— (45)— 
Total loss from nonrecurring measurements$(303)$(3,527)$(425)
143

  For the year ended December 31,
  2017 2016
Impaired loans $(2,852) $(182)
REO (256) (876)
Total loss from nonrecurring measurements $(3,108) $(1,058)




ImpairedLoans individually evaluated: Expected credit losses for loans: Impaired loans evaluated individually are measured based on the present value of expected future cash flows discounted at the loan'sloan’s original effective interest rate or as a practical expedient, atwhen the loan's observable market price orBank 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, isthe Bank will recognize an allowance as the difference between the fair value of the collateral, dependent.less costs to sell (if applicable), at the reporting date and the amortized cost basis of the loan. If this practical expedient is used, the impaired loans are consideredfair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis will be held at fair value. Subsequentlimited to the amount previously charged-off by the subsequent changes in the value of impairedexpected credit losses for loans evaluated individually are included within the provision for loancredit losses in the same manner in which impairmentthe expected credit loss initially was recognized or as a reduction in the provision that would otherwise be reported. Impaired loans are periodically evaluated to determine if valuation adjustments, or partial write-downs, should be recorded. The need for valuation adjustments arises when observable market prices or current appraised values of collateral indicate a shortfall in collateral value compared to current carrying values of the related loan. If the Company determines that the value of the impaired loan is less than the carrying value of the loan, the Company either establishes an impairment reserve as a specific component of the allowance for loan losses or charges off the impaired amount. These valuation adjustments are considered non-recurring fair value adjustments.


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.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 19:17:  BANNER CORPORATION (PARENT COMPANY ONLY)


Summary financial information is as follows (in thousands):
Statements of Financial ConditionDecember 31
 20212020
ASSETS  
Cash$106,329 $131,594 
Investment in trust equities4,196 4,444 
Investment in subsidiaries1,801,764 1,751,141 
Other assets5,877 2,852 
Total assets$1,918,166 $1,890,031 
LIABILITIES AND SHAREHOLDERS’ EQUITY  
Miscellaneous liabilities$5,723 $2,170 
Deferred tax liability, net3,737 6,422 
Subordinated notes, net98,564 98,201 
Junior subordinated debentures at fair value119,815 116,974 
Shareholders’ equity1,690,327 1,666,264 
Total liabilities and shareholders’ equity$1,918,166 $1,890,031 
Statements of OperationsYears Ended December 31
 202120202019
INTEREST INCOME:   
Interest-bearing deposits$97 $112 $98 
OTHER INCOME (EXPENSE): 
Dividend income from subsidiaries99,788 87,748 119,333 
Equity in undistributed income of subsidiaries112,814 36,401 35,134 
Other income146 62 33 
Interest on other borrowings(8,780)(7,204)(6,574)
Other expenses(7,391)(3,530)(4,045)
Net income before taxes196,674 113,589 143,979 
BENEFIT FROM INCOME TAXES(4,374)(2,339)(2,299)
NET INCOME$201,048 $115,928 $146,278 

144

Statements of Financial ConditionDecember 31
 2017 2016
ASSETS   
Cash$44,887
 $86,268
Investment in trust equities4,212
 4,212
Investment in subsidiaries1,329,165
 1,307,475
Other assets3,072
 13,784
Total assets$1,381,336
 $1,411,739
LIABILITIES AND SHAREHOLDERS’ EQUITY   
Miscellaneous liabilities$9,607
 $8,990
Deferred tax liability396
 1,839
Junior subordinated debentures at fair value98,707
 95,200
Shareholders’ equity1,272,626
 1,305,710
Total liabilities and shareholders' equity$1,381,336
 $1,411,739
Statements of Cash FlowsYears Ended December 31
 202120202019
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 value55 — — 
Share-based compensation9,258 9,168 7,142 
Loss on extinguishment of debt2,284 — — 
Net change in other assets(2,970)16,756 2,594 
Net change in other liabilities4,050 (235)(120)
Net cash provided from operating activities100,340 106,654 127,729 
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 debentures248 — — 
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 PERIOD131,594 54,257 38,029 
CASH, END OF PERIOD$106,329 $131,594 $54,257 


145
Statements of OperationsYears Ended December 31
 2017 2016 2015
INTEREST INCOME:     
Interest-bearing deposits$62
 $127
 $122
OTHER INCOME (EXPENSE):     
Dividend income from subsidiaries40,570
 50,971
 170,260
Equity in undistributed (distributions in excess of) income of subsidiaries27,477
 40,852
 (116,120)
Other income53
 60
 69
Net change in valuation of financial instruments carried at fair value(3,507) (2,720) (2,714)
Interest on other borrowings(4,752) (4,040) (3,247)
Other expenses(3,291) (3,450) (7,175)
Net income before taxes56,612
 81,800
 41,195
BENEFIT FROM INCOME TAXES(4,164) (3,585) (4,027)
NET INCOME$60,776
 $85,385
 $45,222





Statements of Cash FlowsYears Ended December 31
 2017 2016 2015
OPERATING ACTIVITIES:     
Net income$60,776
 $85,385
 $45,222
Adjustments to reconcile net income to net cash provided by operating activities:     
Distributions in excess of (equity in undistributed) income of subsidiaries(27,477) (40,852) 116,120
Decrease in deferred taxes(1,442) (702) (1,398)
Net change in valuation of financial instruments carried at fair value3,507
 2,720
 2,714
Share-based compensation5,965
 4,305
 4,334
Decrease (increase) in other assets10,684
 7,332
 (10,655)
Increase (decrease) in other liabilities69
 (202) 433
Net cash provided from operating activities52,082
 57,986
 156,770
INVESTING ACTIVITIES:     
Funds transferred to deferred compensation trust(29) (26) (26)
Reduction in investment in subsidiaries5,000
 50,000
 —
Acquisitions—
 —
 (132,652)
Net cash provided from (used by) investing activities4,971
 49,974
 (132,678)
FINANCING ACTIVITIES:     
Issuance of stock for shareholder reinvestment program—
 —
 34
Withholding taxes paid on share-based compensation(1,630) (870) (848)
Repurchase of common stock(31,045) (50,772) —
Cash dividends paid(65,759) (28,282) (17,170)
Net cash used by financing activities(98,434) (79,924) (17,984)
NET CHANGE IN CASH(41,381) 28,036
 6,108
CASH, BEGINNING OF PERIOD86,268
 58,232
 52,124
CASH, END OF PERIOD$44,887
 $86,268
 $58,232

Note 20:18: STOCK REPURCHASES AND RECHARACTERIZATION


On April 4, 2016,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 1,711,540 shares of the Company's common stock, or 5% of the Company's outstanding shares. During the year ended December 31, 2016, the Company adopted a pre-arranged stock trading plan, pursuant to the Board authorization, in accordance with guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934. Repurchases under the Company’s 10b5-1 stock trading plan were administered through an independent broker. The stock trading plan provided for the repurchase of up to 1,300,000 shares1,712,510 of the Company’s stock. Thecommon stock trading plan terminated on March 12, 2017. Repurchases were subject to the requirements of the Securities and Exchange Commission, including Rule 10b-18, as well as certain price and other requirements specified in the plan. During the year ended December 31, 2016, the Company repurchased 1,145,250 common shares under the stock trading plan. In addition to the shares repurchased during 2016 under the plan there were 25,628 shares surrendered during 2016 by employees to satisfy tax withholding obligations upon vesting of restricted stock grants.

On March 31, 2017 the Company announced that its Board of Directors had renewed its authorization to repurchase up(which was equivalent to 5% of the Company'sCompany’s common stock, or 1,658,245 of the Company's outstanding shares.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, 2017, the Company repurchased 545,166 common2021 no shares under the authorization leaving 1,113,079 shares available for future repurchase. In addition to the shareswere repurchased under the authorization during 2017,2021 authorization. Additionally, there were 29,57959,730 shares surrendered during 20172021 by employees to satisfy tax withholding obligations upon vesting of restricted stock grants.

The Company did not repurchase any shares of its common stock during the year ended December 31, 2015 except for shares surrendered by employees to satisfy tax withholding obligations upon the vestingand settlement of restricted stock grants and shares redeemed relating to the termination of the ESOP. The ESOP was terminated during the year ended December 31, 2014.units.


During the year ended December 31, 2016, the 1.3 million shares of non-voting common stock issued in connection with the acquisition of Starbuck and its subsidiary, AmericanWest were sold by the original holder of the shares. These shares contained a provision where they would automatically convert from non-voting to voting upon a permitted transfer of the shares. Therefore, these shares were included in Banner's voting common stock outstanding as of December 31, 2016.




Note 21:19:  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
 202120202019
Net income$201,048 $115,928 $146,278 
Weighted average number of common shares outstanding
Basic34,610,056 35,264,252 34,868,434 
Diluted34,919,188 35,528,848 34,967,684 
Earnings per common share   
Basic$5.81 $3.29 $4.20 
Diluted$5.76 $3.26 $4.18 
 Years Ended December 31
 2017 2016 2015
Net income$60,776
 $85,385
 $45,222
Weighted average number of common shares outstanding     
Basic32,888,007
 33,820,148
 23,801,373
Diluted32,986,707
 33,853,511
 23,866,621
Earnings per common share     
Basic$1.85
 $2.52
 $1.90
Diluted$1.84
 $2.52
 $1.89


At December 31, 2017, 20162021, 2020 and 20152019 there were 302,077, 290,719,476,222, 578,136, and 231,562,367,230, respectively, of issued but unvested restricted stock shares and units that were included in the computation of diluted earnings per share.


At December 31, 2016 and 2015 there were options to purchase an additional 5,000 shares of common stock that were not included in the computation of diluted earnings per share because their exercise price resulted in them being anti-dilutive. At December 31, 2017, 2016 and 2015 there was a warrant to purchase up to 243,998 shares of common stock and these shares were not included in the computation of diluted earnings per share because their exercise price resulted in them being anti-dilutive.

Note 22:  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Results of operations on a quarterly basis for the years ended December 31, 2017, 2016 and 2015 were as follows (dollars in thousands except for per share data):
 Year Ended December 31, 2017
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Interest income$99,096
 $104,436
 $105,278
 $103,475
Interest expense4,242
 4,730
 5,068
 5,211
Net interest income before provision for loan losses94,854
 99,706
 100,210
 98,264
Provision for loan losses2,000
 2,000
 2,000
 2,000
Net interest income92,854
 97,706
 98,210
 96,264
Non-interest income20,845
 22,469
 20,339
 29,882
Non-interest expense78,078
 81,930
 82,589
 84,709
Income before provision for income taxes35,621
 38,245
 35,960
 41,437
Provision for income taxes11,828
 12,791
 10,883
 54,985
Net income (loss)$23,793
 $25,454
 $25,077
 $(13,548)
Basic earnings (loss) per share$0.72
 $0.77
 $0.76
 $(0.41)
Diluted earnings (loss) per share0.72
 0.77
 0.76
 (0.41)
Dividends declared0.25
 1.25
 0.25
 0.25


 Year Ended December 31, 2016
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Interest income$95,301
 $97,321
 $97,849
 $101,007
Interest expense4,258
 4,173
 4,141
 3,836
Net interest income before provision for loan losses91,043
 93,148
 93,708
 97,171
Provision for loan losses—
 2,000
 2,000
 2,030
Net interest income91,043
 91,148
 91,708
 95,141
Non-interest income19,959
 20,537
 23,512
 19,463
Non-interest expense84,034
 79,887
 79,092
 79,857
Income before provision for income taxes26,968
 31,798
 36,128
 34,747
Provision for income taxes9,194
 10,841
 12,277
 11,943
Net income$17,774
 $20,957
 $23,851
 $22,804
Basic earnings per share$0.52
 $0.62
 $0.70
 $0.69
Diluted earnings per share0.52
 0.61
 0.70
 0.69
Dividends declared0.21
 0.21
 0.23
 0.23

 Year Ended December 31, 2015
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Interest income$49,069
 $54,076
 $54,793
 $96,495
Interest expense2,533
 2,619
 2,605
 4,396
Net interest income before provision for loan losses46,536
 51,457
 52,188
 92,099
Provision for loan losses—
 —
 —
 —
Net interest income46,536
 51,457
 52,188
 92,099
Non-interest income13,696
 16,141
 14,098
 18,356
Non-interest expense41,914
 47,734
 46,697
 100,254
Income before provision for income taxes18,318
 19,864
 19,589
 10,201
Provision for income taxes6,184
 6,615
 6,642
 3,308
Net income$12,134
 $13,249
 $12,947
 $6,893
Basic earnings per share$0.61
 $0.64
 $0.62
 $0.20
Diluted earnings per share0.61
 0.64
 0.62
 0.20
Dividends declared0.18
 0.18
 0.18
 0.18

Note 23:20:  COMMITMENTS AND CONTINGENCIES


Lease Commitments—The Company leases 108 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.

Financial Instruments with Off-Balance Sheet Risk—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 customers.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, 2021December 31, 2020
Commitments to extend credit$3,527,143 $3,207,072 
Standby letters of credit and financial guarantees21,830 18,415 
Commitments to originate loans106,609 101,426 
Risk participation agreement40,064 40,949 
Derivatives also included in Note 21:
Commitments to originate loans held for sale106,590 169,653 
Commitments to sell loans secured by one- to four-family residential properties27,006 79,414 
Commitments to sell securities related to mortgage banking activities127,580 204,000 
 Contract or Notional Amount
 December 31, 2017 December 31, 2016
Commitments to extend credit$2,300,593
 $2,204,795
Standby letters of credit and financial guarantees14,579
 17,694
Commitments to originate loans56,030
 69,833
Risk participation agreement11,451
 7,488
    
Derivatives also included in Note 24:   
Commitments to originate loans held for sale43,502
 69,487
Commitments to sell loans secured by one- to four-family residential properties33,069
 36,907
Commitments to sell securities related to mortgage banking activities57,000
 44,000


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, 2021December 31, 2020
Funded BalanceUnfunded BalanceFunded BalanceUnfunded Balance
Limited partnerships investments$7,642 $9,858 $2,819 $7,181 

Commitments to extend credit are agreements to lend to a customer,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 customer’sclient’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 customer.client.  Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties. The Company's reserveCompany’s allowance for credit losses - unfunded loan commitments was $2.4$12.4 million and $3.6$13.3 million, at December 31, 20172021 and 2016,2020, respectively.


Standby letters of credit are conditional commitments issued to guarantee a customer’sclient’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 customers. Through the acquisition of Starbuck, Banner Bank assumedclients. Under a risk participation agreement. Under the risk participation agreement, Banner Bank guarantees the financial performance of a borrower on the participated portion of aan interest rate swap on a loan.


Interest rates on residential one- to four-family mortgage loan applications are typically rate locked (committed) to customersclients 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 customer. Theclient. 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 customerclient 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 nocounterparty default losses on forward contracts during 20172021 or 2016.2020. 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 customersclients 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 Banks holdBank holds a security interest.  Based upon the information known to management at this time, the Company and the BanksBank 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, 2017.2021.


In connection with certain asset sales, the BanksBank typically makemakes 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 Banks believeBank believes that the potential for material loss under these arrangements is remote.  Accordingly, the fair value of such obligations is not material.


NOTE 24:21: 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 customerclient 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'sCompany’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 customerclient 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'sCompany’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, customersclients 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 customersclients 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, 20172021 and December 31, 2016,2020, the notional values or contractual amounts and fair values of the Company'sCompany’s derivatives designated in hedge relationships were as follows (in thousands):
Asset DerivativesLiability Derivatives
December 31, 2021December 31, 2020December 31, 2021December 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 
 Asset Derivatives Liability Derivatives
 December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016
 
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$4,350
 $447
 $5,855
 $660
 $4,350
 $447
 $5,855
 $660


(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 DerivativeAmount of Gain or (Loss) Recognized in AOCI Included ComponentAmount of Gain or (Loss) Recognized in AOCI Excluded ComponentLocation of Gain or (Loss) Recognized from AOCI into IncomeAmount of Gain or (Loss) Reclassified from AOCI into IncomeAmount of Gain or (Loss) Reclassified from AOCI into Income Included ComponentAmount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component
Interest rate swaps$(920)$(920)$— Interest Income$340 $340 $— 

(1)
Included in Loans Receivable on the Consolidated Statements of Financial Condition.
(2)
Included in Other Liabilities on the Consolidated Statements of Financial Condition.


Derivatives Not Designated in Hedge Relationships


Interest Rate Swaps: Banner Bank uses an interest rate swap program for commercial loan customers,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 free standingfreestanding derivative.


Mortgage Banking: In the normal course of business, the The Company sells originated one- to four-family and multifamily mortgage 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 and multifamily mortgage 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 and multifamily mortgage loans or mortgage-backed securities to broker/dealers at specific prices and dates.



149




As of December 31, 20172021 and December 31, 2016,2020, the notional values or contractual amounts and fair values of the Company'sCompany’s derivatives not designated in hedge relationships were as follows (in thousands):
Asset DerivativesLiability Derivatives
December 31, 2021December 31, 2020December 31, 2021December 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 commitments87,986 1,467 140,390 5,221 26,329 66 72,511 199 
Forward sales contracts56,086 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 
 Asset Derivatives Liability Derivatives
 December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016
 
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$285,047
 $4,636
 $309,936
 $7,670
 $285,047
 $4,636
 $309,936
 $7,670
Mortgage loan commitments29,739
 225
 42,296
 30
 13,763
 153
 27,191
 174
Forward sales contracts43,069
 298
 71,192
 452
 47,000
 48
 9,715
 115
 $357,855
 $5,159
 $423,424
 $8,152
 $345,810
 $4,837
 $346,842
 $7,959


(1)
Included in Other Assets on the Consolidated Statements of Financial Condition, with the exception of those interest rate swaps from prior to 2009 that were not designated in hedge relationships (with a fair value of $499,000 at December 31, 2017 and $822,000 at December 31, 2016), which are included in Loans Receivable.
(2)
Included in Other Liabilities on the Consolidated Statements of Financial Condition.

(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, 20172021, 2020 and 20162019 were as follows (in thousands):
For the Years Ended December 31
Location on Income Statement202120202019
Mortgage loan commitmentsMortgage banking operations$(3,754)$4,430 $518 
Forward sales contractsMortgage banking operations1,243 (1,334)(693)
$(2,511)$3,096 $(175)
   For the Year Ended December 31,
 Location on Income Statement 2017
 2016
Mortgage loan commitmentsMortgage banking operations $195
 $(348)
Forward sales contractsMortgage banking operations (491) 296
   $(296) $(52)


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, 20172021 or December 31, 2016,2020, it could have been required to settle its obligations under the agreements at the termination value. As of December 31, 20172021 and 2016,2020, the termination value of derivatives in a net liability position related to these agreements was $3.7$24.9 million and $7.6$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 $16.9$45.8 million and $29.3$47.1 million as of December 31, 20172021 and 2016,2020, respectively.


Derivative assets and liabilities are recorded at fair value on the balance sheet and do not take into account the effects of master netting agreements.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 table illustratespresents additional information related to the potential effect of the Company'sCompany’s derivative master netting arrangements,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 RecognizedAmounts offset in the Statement
of Financial Condition		Net Amounts
in the Statement
of Financial Condition		Derivative AmountFair 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 RecognizedAmounts offset in the Statement
of Financial Condition		Net Amounts
in the Statement
of Financial Condition		Derivative AmountFair 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
202120202019
Deposit service charges19,162 16,428 19,236 
Debit and credit interchange fees23,271 20,052 27,752 
Debit and credit card expense(10,636)(9,098)(8,527)
Merchant services income14,973 12,554 13,111 
Merchant services expenses(12,084)(10,042)(10,512)
Other service charges4,809 4,490 5,572 
Total deposit fees and other service charges39,495 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 Company'sdollar 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 SheetDecember 31, 2021December 31, 2020
Assets
Operating right-of-use lease assetsOther assets$55,257 $55,367 
Liabilities
Operating lease liabilitiesAccrued expenses and other liabilities$59,756 $59,343 
Weighted-average remaining lease term
Operating leases5.5 years5.8 years
Weighted-average discount rate
Operating leases2.8 %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,
202120202019
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 Condition asPosition (in thousands):
Operating Leases
2022$14,393 
202312,952 
202411,361 
20259,086 
20267,260 
Thereafter9,569 
Total minimum lease payments64,621 
Less: amount of lease payments representing interest(4,865)
Lease obligations$59,756 

As of December 31, 2017 and 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, 2016 (in thousands):2020.

 December 31, 2017
       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
 Netting Adjustment Per Applicable Master Netting Agreements 
Fair Value
of Financial Collateral
in the Statement
of Financial Condition
 Net Amount
Derivative assets           
Interest rate swaps$5,083
 $—
 $5,083
 $(656) $—
 $4,427
 $5,083
 $—
 $5,083
 $(656) $—
 $4,427
            
Derivative liabilities           
Interest rate swaps$5,083
 $—
 $5,083
 $(656) $(3,467) $960
 $5,083
 $—
 $5,083
 $(656) $(3,467) $960
            
 December 31, 2016
       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
 Netting Adjustment Per Applicable Master Netting Agreements 
Fair Value
of Financial Collateral
in the Statement
of Financial Condition
 Net Amount
Derivative assets           
Interest rate swaps$8,330
 $—
 $8,330
 $(362) $—
 $7,968
 $8,330
 $—
 $8,330
 $(362) $—
 $7,968
            
Derivative liabilities           
Interest rate swaps$8,330
 $—
 $8,330
 $(362) $(7,557) $411
 $8,330
 $—
 $8,330
 $(362) $(7,557) $411


BANNER CORPORATION

ExhibitIndex of Exhibits
2.1{3{a}
Agreement and Plan of Merger, dated as of November 5, 2014, by and among the Registrant, SKBHC Holdings LLC and Starbuck Bancshares, Inc. [incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on November 12, 2014 (File No. 000-26584)].
2.1{b}
Amendment, dated as of May 18, 2015, to the Agreement and Plan of Merger, dated as of November 5, 2014, by and among Banner Corporation, SKBHC Holdings, LLC and Starbuck Bancshares, Inc. (incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on May 19, 2015 (File No. 000-26584)).
2.1{c}
Amendment No. 2, dated July 13, 2015, to the Agreement and Plan of Merger, dated as of November 5, 2014, by and among Banner Corporation, SKBHC Holdings LLC, Starbuck Bancshares, Inc., Banner Corporation, and Elements Merger Sub, LLC (incorporated herein by reference to Exhibit 2.1(c) to the Quarterly Report on Form 10-Q filed on November 6, 2015 (File No. 000-26584)).
2.1{d}
Agreement and Plan of Merger dated as of August 7, 2014 by and between Banner Corporation and Siuslaw Financial Group, Inc. [incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on August 8, 2014 (File No. 000-26584)].
3{a}
Amended and Restated Articles of Incorporation of Registrant [incorporated by reference to the Registrant'sRegistrant’s Current Report on Form 8-K filed on April 28,29, 2010 (File No. 000-26584)], as amended on May 26, 2011 [incorporated.
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, 20111,2011 (File No. 000-26584)].)
3{b}c}
Articles of Amendment to Amended and Restated Articles of Incorporation of Banner CorporationRegistrant for nonvoting common stock (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on March 18, 2015 (File No. 00026584)).
3{c}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 December 20, 2016October 29, 2020 (File No. 000-26584)].
4{a}4.2
Warrant to purchase sharesDescription of Company's common stock dated November 21, 2008Capital Stock
4.3
Issuance of base indenture, first supplemental indenture and subordinated note [incorporated by reference to the Registrant's Current Report onexhibits filed with Form 8-K filed on November 24, 2008June 30, 2020 (File No. 000-26584)]
10{a}
Executive Salary Continuation Agreement with Gary L. Sirmon [incorporated by reference to exhibits filed with the Annual Report on Form 10-K for the year ended March 31, 1996 (File No. 000-26584)].
10{b}
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{d}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{f}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{i}d}
Long-Term Incentive Plan and Form of Repricing Agreement [incorporated by reference to the exhibits filed with the Form 8-K on May 6, 2008 (File No. 000-26584)].
10{j}
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{k}e}
Entry into an Indemnification Agreement with each of the Registrant'sRegistrant’s Directors [incorporated by reference to exhibits filed with the Form 8-K on January 29, 2010 (File No. 000-26584)].
10{l}f}
2012 Restricted Stock and Incentive Bonus Plan [incorporated by reference to Appendix B to the Registrant'sRegistrant’s Definitive Proxy Statement on Schedule 14A filed on March 19, 2013 (File No. 000-26584)].
10{m}g}
FormAmended and Restated Executive Severance and Change in Control Plan and Summary Plan Description (Amended and Restated effective as of Performance-Based Restricted Stock Award AgreementOctober 1, 2021) [incorporated by reference to Exhibit 10.1exhibit 10{j} included in the Registrant's Current Report on Form 8-K filed on June 4, 201310-Q dated September 30, 2021 (File No. 000-26584)].
10{n}h}
Form of Time-Based Restricted Stock Award Agreement [incorporated by reference to Exhibit 10.1 included in the Registrant's Current Report on Form 8-K filed on June 4, 2013 (File No. 000-26584)].
10{o}
2014 Omnibus Incentive Plan [incorporated by reference as Appendix C to the Registrant'sRegistrant’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{p}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



2110{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)]
14Code 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.
101101.INSInline XBRL Instance Document - The following materialsinstance document does not appear in the interactive data file because XBRL tags are embedded within the XBRL document.
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
104The cover page from Banner Corporation’sthe Company’s Annual Report on Form 10-K for the year ended December 31, 2017,2021, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Statements of Financial Condition; (b) Consolidated Statements of Operations; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Shareholders' Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements.Inline XBRL (included in Exhibit 101)



144
155