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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2021
OR
☐ 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 000-26584
BANNER CORPORATION
(Exact name of registrant as specified in its charter)

Washington | 91-1691604
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer 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

Title of each class | Trading Symbol(s) | Name of each exchange on which registered
Common Stock, par value $.01 per share | BANR | The NASDAQ Stock Market LLC

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 every Interactive Data File required to be submitted 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 such files).
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Yes | [x] |  | No | [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “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 provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | ☐ |  | No | [x]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Title of class: |  |  | As of October 31, 2021
Common Stock, $.01 par value per share |  |  |  |  |  | 34,252,367 shares

1

BANNER CORPORATION AND SUBSIDIARIES
Table of Contents

PART I – FINANCIAL INFORMATION |
Item 1 – Financial Statements. The Unaudited Condensed Consolidated Financial Statements of Banner Corporation and Subsidiaries filed as a part of the report are as follows: |
Consolidated Statements of Financial Condition as of September 30, 2021 and December 31, 2020 | 4
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020 | 5
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and 2020 | 6
Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2021 and the Year Ended December 31, 2020 | 7
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 | 11
Selected Notes to the Consolidated Financial Statements | 13
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Executive Overview | 51
Comparison of Financial Condition at September 30, 2021 and December 31, 2020 | 60
Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2021 and 2020 | 63
Asset Quality | 71
Liquidity and Capital Resources | 73
Capital Requirements | 74
Item 3 – Quantitative and Qualitative Disclosures About Market Risk |
Market Risk and Asset/Liability Management | 76
Sensitivity Analysis | 76
Item 4 – Controls and Procedures | 80
PART II – OTHER INFORMATION |
Item 1 – Legal Proceedings | 81
Item 1A – Risk Factors | 81
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds | 81
Item 3 – Defaults upon Senior Securities | 82
Item 4 – Mine Safety Disclosures | 82
Item 5 – Other Information | 82
Item 6 – Exhibits | 83
SIGNATURES | 85

2

Special Note Regarding Forward-Looking Statements
Certain matters in this Form 10-Q 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 actual results to differ materially from the results anticipated or implied by our forward-looking statements. The novel coronavirus (COVID-19) pandemic, is adversely affecting us, our clients, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Deterioration in general business and economic conditions, including increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. Other factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses and provisions for credit losses; the ability to manage loan delinquency rates; competitive pressures among financial services companies; changes in consumer spending or borrowing and spending habits; interest rate movements generally and the relative differences between short and long-term interest rates, loan and deposit interest rates, 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 values; 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 “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; secondary market conditions for loans and the 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 by the Board of Governors of the Federal Reserve System (the Federal Reserve), 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 which could require an increase in reserves for loan losses, write-downs of assets or changes in regulatory capital position, or affect the ability to borrow funds, or maintain or increase deposits, or impose additional requirements and restrictions, any of which could adversely affect liquidity and earnings; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; the inability of key third-party providers to perform their obligations; changes in accounting principles, policies or guidelines, 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 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, including as a result of the COVID-19 pandemic, including recent vaccination efforts, or other factors; 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-Q. 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 Bank” refer to its wholly-owned subsidiary, Banner Bank.
3

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) (In thousands, except shares)
September 30, 2021 and December 31, 2020

ASSETS | September 30, 2021 |  | December 31, 2020
Cash and due from banks | $ | 392,035 |  |  | $ | 311,899 |
Interest bearing deposits | 1,808,547 |  |  | 922,284 |
Total cash and cash equivalents | 2,200,582 |  |  | 1,234,183 |
Securities—trading | 26,875 |  |  | 24,980 |
Securities—available-for-sale, amortized cost $3,443,516 and $2,256,189, respectively | 3,446,575 |  |  | 2,322,593 |
Securities—held-to-maturity, net of allowance for credit losses of $104 and $94, respectively, fair value $466,002 and $448,681, respectively | 447,708 |  |  | 421,713 |
Total securities | 3,921,158 |  |  | 2,769,286 |
Federal Home Loan Bank (FHLB) stock | 12,000 |  |  | 16,358 |
Securities purchased under agreements to resell | 300,000 |  |  | — |
Loans held for sale (includes $41,480 and $133,554, at fair value, respectively) | 63,678 |  |  | 243,795 |
Loans receivable | 9,218,384 |  |  | 9,870,982 |
Allowance for credit losses – loans | (139,915) |  |  | (167,279) |
Net loans receivable | 9,078,469 |  |  | 9,703,703 |
Accrued interest receivable | 43,644 |  |  | 46,617 |
Real estate owned (REO), held for sale, net | 852 |  |  | 816 |
Property and equipment, net | 151,503 |  |  | 164,556 |
Goodwill | 373,121 |  |  | 373,121 |
Other intangibles, net | 16,429 |  |  | 21,426 |
Bank-owned life insurance (BOLI) | 192,950 |  |  | 191,830 |
Deferred tax assets, net | 70,130 |  |  | 65,742 |
Operating lease right-of-use assets | 58,523 |  |  | 55,367 |
Other assets | 154,840 |  |  | 144,823 |
Total assets | $ | 16,637,879 |  |  | $ | 15,031,623 |
LIABILITIES |  |  |
Deposits: |  |  |
Non-interest-bearing | $ | 6,400,864 |  |  | $ | 5,492,924 |
Interest-bearing transaction and savings accounts | 6,912,759 |  |  | 6,159,052 |
Interest-bearing certificates | 851,054 |  |  | 915,320 |
Total deposits | 14,164,677 |  |  | 12,567,296 |
Advances from FHLB | 50,000 |  |  | 150,000 |
Other borrowings | 247,358 |  |  | 184,785 |
Subordinated notes, net | 98,472 |  |  | 98,201 |
Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities) | 124,853 |  |  | 116,974 |
Operating lease liabilities | 62,946 |  |  | 59,343 |
Accrued expenses and other liabilities | 175,960 |  |  | 143,300 |
Deferred compensation | 46,494 |  |  | 45,460 |
Total liabilities | 14,970,760 |  |  | 13,365,359 |
COMMITMENTS AND CONTINGENCIES (Note 12) |  |  |
SHAREHOLDERS’ EQUITY |  |  |
Preferred stock - $0.01 par value per share, 500,000 shares authorized; no shares outstanding at September 30, 2021 and December 31, 2020 | — |  |  | — |
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized; 34,251,991 shares issued and outstanding at September 30, 2021; 35,159,200 shares issued and outstanding at December 31, 2020 | 1,297,145 |  |  | 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 September 30, 2021; no shares issued and outstanding at December 31, 2020 | — |  |  | — |
Retained earnings | 355,035 |  |  | 247,316 |
Carrying value of shares held in trust for stock-based compensation plans | (7,421) |  |  | (7,636) |
Liability for common stock issued to stock related compensation plans | 7,421 |  |  | 7,636 |
Accumulated other comprehensive income | 14,939 |  |  | 69,069 |
Total shareholders’ equity | 1,667,119 |  |  | 1,666,264 |
Total liabilities and shareholders’ equity | $ | 16,637,879 |  |  | $ | 15,031,623 |

See Selected Notes to the Consolidated Financial Statements
4

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands, except shares and per share amounts)
For the Three and Nine Months Ended September 30, 2021 and 2020

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
INTEREST INCOME: |  |  |  |  |  |  |
Loans receivable | $ | 116,487 |  |  | $ | 116,716 |  |  | $ | 340,802 |  |  | $ | 350,815 |
Mortgage-backed securities | 11,695 |  |  | 7,234 |  |  | 32,503 |  |  | 24,354 |
Securities and cash equivalents | 7,686 |  |  | 5,631 |  |  | 20,649 |  |  | 14,824 |
Total interest income | 135,868 |  |  | 129,581 |  |  | 393,954 |  |  | 389,993 |
INTEREST EXPENSE: |  |  |  |  |  |  |
Deposits | 2,749 |  |  | 5,179 |  |  | 9,386 |  |  | 20,623 |
FHLB advances | 655 |  |  | 988 |  |  | 2,244 |  |  | 4,036 |
Other borrowings | 125 |  |  | 128 |  |  | 358 |  |  | 482 |
Subordinated debt | 2,193 |  |  | 2,260 |  |  | 6,605 |  |  | 4,988 |
Total interest expense | 5,722 |  |  | 8,555 |  |  | 18,593 |  |  | 30,129 |
Net interest income | 130,146 |  |  | 121,026 |  |  | 375,361 |  |  | 359,864 |
(RECAPTURE)/PROVISION FOR CREDIT LOSSES | (8,638) |  |  | 15,180 |  |  | (28,145) |  |  | 67,273 |
Net interest income after (recapture)/provision for credit losses | 138,784 |  |  | 105,846 |  |  | 403,506 |  |  | 292,591 |
NON-INTEREST INCOME: |  |  |  |  |  |  |
Deposit fees and other service charges | 10,457 |  |  | 8,742 |  |  | 29,154 |  |  | 26,091 |
Mortgage banking operations | 9,752 |  |  | 16,562 |  |  | 28,670 |  |  | 40,891 |
Bank-owned life insurance (BOLI) | 1,245 |  |  | 1,286 |  |  | 3,797 |  |  | 4,653 |
Miscellaneous | 2,046 |  |  | 951 |  |  | 7,808 |  |  | 5,017 |
| 23,500 |  |  | 27,541 |  |  | 69,429 |  |  | 76,652 |
Net gain on sale of securities | 56 |  |  | 644 |  |  | 618 |  |  | 815 |
Net change in valuation of financial instruments carried at fair value | 1,778 |  |  | 37 |  |  | 1,895 |  |  | (2,360) |
Total non-interest income | 25,334 |  |  | 28,222 |  |  | 71,942 |  |  | 75,107 |
NON-INTEREST EXPENSE: |  |  |  |  |  |  |
Salary and employee benefits | 59,799 |  |  | 61,171 |  |  | 186,553 |  |  | 184,494 |
Less capitalized loan origination costs | (8,290) |  |  | (8,517) |  |  | (26,754) |  |  | (25,433) |
Occupancy and equipment | 13,153 |  |  | 13,022 |  |  | 38,965 |  |  | 39,114 |
Information/computer data services | 6,110 |  |  | 6,090 |  |  | 17,915 |  |  | 17,984 |
Payment and card processing expenses | 6,181 |  |  | 4,044 |  |  | 15,482 |  |  | 12,135 |
Professional and legal expenses | 12,324 |  |  | 2,368 |  |  | 20,023 |  |  | 6,450 |
Advertising and marketing | 1,521 |  |  | 1,105 |  |  | 3,965 |  |  | 3,584 |
Deposit insurance expense | 1,469 |  |  | 1,628 |  |  | 4,243 |  |  | 4,968 |
State/municipal business and use taxes | 1,219 |  |  | 1,196 |  |  | 3,367 |  |  | 3,284 |
REO operations, net | 53 |  |  | (11) |  |  | (71) |  |  | 93 |
Amortization of core deposit intangibles | 1,575 |  |  | 1,864 |  |  | 4,997 |  |  | 5,867 |
Miscellaneous | 6,977 |  |  | 5,285 |  |  | 18,642 |  |  | 16,841 |
| 102,091 |  |  | 89,245 |  |  | 287,327 |  |  | 269,381 |
COVID-19 expenses | 44 |  |  | 778 |  |  | 309 |  |  | 3,169 |
Merger and acquisition - related expenses | 10 |  |  | 5 |  |  | 660 |  |  | 1,483 |
Total non-interest expense | 102,145 |  |  | 90,028 |  |  | 288,296 |  |  | 274,033 |
Income before provision for income taxes | 61,973 |  |  | 44,040 |  |  | 187,152 |  |  | 93,665 |
PROVISION FOR INCOME TAXES | 12,089 |  |  | 7,492 |  |  | 36,031 |  |  | 16,694 |
NET INCOME | $ | 49,884 |  |  | $ | 36,548 |  |  | $ | 151,121 |  |  | $ | 76,971 |
Earnings per common share: |  |  |  |  |  |  |
Basic | $ | 1.45 |  |  | $ | 1.04 |  |  | $ | 4.35 |  |  | $ | 2.18 |
Diluted | $ | 1.44 |  |  | $ | 1.03 |  |  | $ | 4.32 |  |  | $ | 2.17 |
Cumulative dividends declared per common share | $ | 0.41 |  |  | $ | 0.41 |  |  | $ | 1.23 |  |  | $ | 0.82 |
Weighted average number of common shares outstanding: |  |  |  |  |  |  |
Basic | 34,446,510 |  |  | 35,193,109 |  |  | 34,716,914 |  |  | 35,285,567 |
Diluted | 34,669,492 |  |  | 35,316,679 |  |  | 35,012,228 |  |  | 35,524,771 |

See Selected Notes to the Consolidated Financial Statements
5

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
For the Three and Nine Months Ended September 30, 2021 and 2020

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
NET INCOME | $ | 49,884 |  |  | $ | 36,548 |  |  | $ | 151,121 |  |  | $ | 76,971 |
OTHER COMPREHENSIVE INCOME, NET OF INCOME TAXES: |  |  |  |  |  |  |
Unrealized holding (loss) gain on available-for-sale securities arising during the period | (23,223) |  |  | (3,090) |  |  | (62,711) |  |  | 47,000 |
Income tax benefit (expense) related to available-for-sale securities unrealized holding (loss) gain | 5,574 |  |  | 742 |  |  | 15,051 |  |  | (11,280) |
Reclassification for net gain on available-for-sale securities realized in earnings | (118) |  |  | (125) |  |  | (634) |  |  | (296) |
Income tax expense related to available-for-sale securities realized in earnings | 28 |  |  | 30 |  |  | 152 |  |  | 71 |
Changes in fair value of junior subordinated debentures related to instrument specific credit risk | (7,333) |  |  | (208) |  |  | (7,879) |  |  | 9,483 |
Income tax benefit (expense) related to junior subordinated debentures | 1,760 |  |  | 50 |  |  | 1,891 |  |  | (2,276) |
Other comprehensive (loss) income | (23,312) |  |  | (2,601) |  |  | (54,130) |  |  | 42,702 |
COMPREHENSIVE INCOME | $ | 26,572 |  |  | $ | 33,947 |  |  | $ | 96,991 |  |  | $ | 119,673 |

See Selected Notes to the Consolidated Financial Statements
6

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited) (In thousands, except shares)
For the Nine Months Ended September 30, 2021 and the Year Ended December 31, 2020

|  |  | Common Stock and Paid in Capital |  | Retained Earnings |  | Accumulated Other Comprehensive Income |  |  |  | Shareholders’ Equity
|  |  |  |  | Shares |  | Amount |  |  |  |
Balance, January 1, 2020 |  |  |  | 35,751,576 |  |  | $ | 1,373,940 |  |  | $ | 186,838 |  |  | $ | 33,256 |  |  |  |  | $ | 1,594,034 |
New credit standard (Accounting Standards Codification (ASC) 326) - impact in year of adoption |  |  |  |  |  |  |  |  | (11,215) |  |  |  |  |  |  | (11,215) |
Net income |  |  |  |  |  |  |  |  | 16,882 |  |  |  |  |  |  | 16,882 |
Other comprehensive income, net of income tax |  |  |  |  |  |  |  |  |  |  | 46,823 |  |  |  |  | 46,823 |
Accrual of dividends on common stock ($0.41/share) |  |  |  |  |  |  |  |  | (14,583) |  |  |  |  |  |  | (14,583) |
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered |  |  |  |  | (24,337) |  |  | 1,534 |  |  |  |  |  |  |  |  | 1,534 |
Repurchase of common stock |  |  |  |  | (624,780) |  |  | (31,775) |  |  |  |  |  |  |  |  | (31,775) |
Balance, March 31, 2020 |  |  |  | 35,102,459 |  |  | $ | 1,343,699 |  |  | $ | 177,922 |  |  | $ | 80,079 |  |  |  |  | $ | 1,601,700 |

| Common Stock and Paid in Capital |  | Retained Earnings |  | Accumulated Other Comprehensive Income |  | Shareholders’ Equity
| Shares |  | Amount |  |  |
Balance, April 1, 2020 | 35,102,459 |  |  | $ | 1,343,699 |  |  | $ | 177,922 |  |  | $ | 80,079 |  |  | $ | 1,601,700 |
Net income |  |  |  |  | 23,541 |  |  |  |  | 23,541 |
Other comprehensive loss, net of income tax |  |  |  |  |  |  | (1,520) |  |  | (1,520) |
Adjustment to previously accrued dividends |  |  |  |  | (15) |  |  |  |  | (15) |
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered | 55,440 |  |  | 1,397 |  |  |  |  |  |  | 1,397 |
Balance, June 30, 2020 | 35,157,899 |  |  | $ | 1,345,096 |  |  | $ | 201,448 |  |  | $ | 78,559 |  |  | $ | 1,625,103 |

Continued on next page
7

| Common Stock and Paid in Capital |  | Retained Earnings |  | Accumulated Other Comprehensive Income |  | Shareholders’ Equity
| Shares |  | Amounts |  |  |
Balance, July 1, 2020 | 35,157,899 |  |  | $ | 1,345,096 |  |  | $ | 201,448 |  |  | $ | 78,559 |  |  | $ | 1,625,103 |
Net income |  |  |  |  | 36,548 |  |  |  |  | 36,548 |
Other comprehensive loss, net of income tax |  |  |  |  |  |  | (2,601) |  |  | (2,601) |
Accrual of dividends on common stock ($0.41/share) |  |  |  |  | (15,037) |  |  |  |  | (15,037) |
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered | 669 |  |  | 2,516 |  |  |  |  |  |  | 2,516 |
Balance, September 30, 2020 | 35,158,568 |  |  | $ | 1,347,612 |  |  | $ | 222,959 |  |  | $ | 75,958 |  |  | $ | 1,646,529 |

| Common Stock and Paid in Capital |  | Retained Earnings |  | Accumulated Other Comprehensive Income |  | Shareholders’ Equity
| Shares |  | Amounts |  |  |
Balance, October 1, 2020 | 35,158,568 |  |  | $ | 1,347,612 |  |  | $ | 222,959 |  |  | $ | 75,958 |  |  | $ | 1,646,529 |
Net income |  |  |  |  | 38,957 |  |  |  |  | 38,957 |
Other comprehensive loss, net of income tax |  |  |  |  |  |  | (6,889) |  |  | (6,889) |
Accrual of dividends on common stock ($0.41/share) |  |  |  |  | (14,600) |  |  |  |  | (14,600) |
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered | 632 |  |  | 2,267 |  |  |  |  |  |  | 2,267 |
Balance, December 31, 2020 | 35,159,200 |  |  | $ | 1,349,879 |  |  | $ | 247,316 |  |  | $ | 69,069 |  |  | $ | 1,666,264 |

Continued on next page
8

|  |  | Common Stock and Paid in Capital |  | Retained Earnings |  | Accumulated Other Comprehensive Income |  |  |  | Shareholders’ Equity
|  |  |  |  | Shares |  | Amount |  |  |  |
Balance, January 1, 2021 |  |  |  |  | 35,159,200 |  |  | $ | 1,349,879 |  |  | $ | 247,316 |  |  | $ | 69,069 |  |  |  |  | $ | 1,666,264 |
Net income |  |  |  |  |  |  |  |  | 46,855 |  |  |  |  |  |  | 46,855 |
Other comprehensive loss, net of income tax |  |  |  |  |  |  |  |  |  |  | (56,103) |  |  |  |  | (56,103) |
Accrual of dividends on common stock ($0.41/share) |  |  |  |  |  |  |  |  | (14,589) |  |  |  |  |  |  | (14,589) |
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered |  |  |  |  | 76,143 |  |  | 1,714 |  |  |  |  |  |  |  |  | 1,714 |
Repurchase of common stock |  |  |  |  | (500,000) |  |  | (25,324) |  |  |  |  |  |  |  |  | (25,324) |
Balance, March 31, 2021 |  |  |  |  | 34,735,343 |  |  | $ | 1,326,269 |  |  | $ | 279,582 |  |  | $ | 12,966 |  |  |  |  | $ | 1,618,817 |

| Common Stock and Paid in Capital |  | Retained Earnings |  | Accumulated Other Comprehensive Income |  | Shareholders’ Equity
| Shares |  | Amount |  |  |
Balance, April 1, 2021 | 34,735,343 |  |  | $ | 1,326,269 |  |  | $ | 279,582 |  |  | $ | 12,966 |  |  | $ | 1,618,817 |
Net income |  |  |  |  | 54,382 |  |  |  |  | 54,382 |
Other comprehensive income, net of income tax |  |  |  |  |  |  | 25,285 |  |  | 25,285 |
Accrual of dividends on common stock ($0.41/share) |  |  |  |  | (14,459) |  |  |  |  | (14,459) |
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered | 65,545 |  |  | (259) |  |  |  |  |  |  | (259) |
Repurchase of common stock | (250,000) |  |  | (14,555) |  |  |  |  |  |  | (14,555) |
Balance, June 30, 2021 | 34,550,888 |  |  | $ | 1,311,455 |  |  | $ | 319,505 |  |  | $ | 38,251 |  |  | $ | 1,669,211 |

9

| Common Stock and Paid in Capital |  | Retained Earnings |  | Accumulated Other Comprehensive Income |  | Shareholders’ Equity
| Shares |  | Amount |  |  |
Balance, July 1, 2021 | 34,550,888 |  |  | $ | 1,311,455 |  |  | $ | 319,505 |  |  | $ | 38,251 |  |  | $ | 1,669,211 |
Net income |  |  |  |  | 49,884 |  |  |  |  | 49,884 |
Other comprehensive loss, net of income tax |  |  |  |  |  |  | (23,312) |  |  | (23,312) |
Accrual of dividends on common stock ($0.41/share) |  |  |  |  | (14,354) |  |  |  |  | (14,354) |
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered | 1,103 |  |  | 2,339 |  |  |  |  |  |  | 2,339 |
Repurchase of common stock | (300,000) |  |  | (16,649) |  |  |  |  |  |  | (16,649) |
Balance, September 30, 2021 | 34,251,991 |  |  | $ | 1,297,145 |  |  | $ | 355,035 |  |  | $ | 14,939 |  |  | $ | 1,667,119 |

See Selected Notes to the Consolidated Financial Statements
10

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
For the Nine Months Ended September 30, 2021 and 2020

| Nine Months Ended September 30,
| 2021 |  | 2020
OPERATING ACTIVITIES: |  |  |
Net income | $ | 151,121 |  |  | $ | 76,971 |
Adjustments to reconcile net income to net cash provided from operating activities: |  |  |
Depreciation | 13,071 |  |  | 13,677 |
Deferred income/expense and capitalized servicing rights, net of amortization | (34,389) |  |  | (8,503) |
Amortization of core deposit intangibles | 4,997 |  |  | 5,867 |
Gain on sale of securities, net | (618) |  |  | (815) |
Net change in valuation of financial instruments carried at fair value | (1,895) |  |  | 2,360 |
Reinvested dividends – equity securities | — |  |  | (255) |
Increase in deferred taxes | (4,388) |  |  | (1,279) |
Increase in current taxes payable | 499 |  |  | 1,426 |
Stock-based compensation | 7,012 |  |  | 6,893 |
Net change in cash surrender value of BOLI | (3,482) |  |  | (3,721) |
Gain on sale of loans, excluding capitalized servicing rights | (22,623) |  |  | (34,951) |
(Gain) loss on disposal of real estate held for sale and property and equipment, net | (1,452) |  |  | 496 |
(Recapture) provision for credit losses | (28,145) |  |  | 67,273 |
Provision for losses on real estate held for sale | — |  |  | 18 |
Origination of loans held for sale | (912,467) |  |  | (1,032,523) |
Proceeds from sales of loans held for sale | 1,115,207 |  |  | 1,091,984 |
Net change in: |  |  |
Other assets | 23,630 |  |  | (51,796) |
Other liabilities | 23,645 |  |  | 5,040 |
Net cash provided from operating activities | 329,723 |  |  | 138,162 |
INVESTING ACTIVITIES: |  |  |
Purchases of securities—available-for-sale | (2,390,756) |  |  | (608,192) |
Principal repayments and maturities of securities—available-for-sale | 1,136,965 |  |  | 311,781 |
Proceeds from sales of securities—available-for-sale | 59,591 |  |  | 128,939 |
Purchases of securities—held-to-maturity | (52,440) |  |  | (215,780) |
Principal repayments and maturities of securities—held-to-maturity | 23,842 |  |  | 20,691 |
Purchases of equity securities | (4,750) |  |  | (1,060,000) |
Proceeds from sales of equity securities | 4,796 |  |  | 610,519 |
Loan repayments (originations), net | 660,016 |  |  | (855,936) |
Purchases of loans and participating interest in loans | (4,258) |  |  | (18) |
Proceeds from sales of other loans | 38,386 |  |  | 8,454 |
Purchases of property and equipment | (6,355) |  |  | (9,936) |
Proceeds from sale of real estate held for sale and sale of other property | 8,299 |  |  | 2,869 |
Proceeds from FHLB stock repurchase program | 4,358 |  |  | 52,164 |
Purchase of FHLB stock | — |  |  | (40,185) |
Purchase of securities purchased under agreements to resell | (300,000) |  |  | — |
Other | 2,343 |  |  | 3,913 |
Net cash used in investing activities | (819,963) |  |  | (1,650,717) |
FINANCING ACTIVITIES: |  |  |
Increase in deposits, net | 1,597,381 |  |  | 2,166,700 |
Repayment of long term FHLB advances | (100,000) |  |  | — |
Repayment of overnight and short term FHLB advances, net | — |  |  | (300,000) |
Increase in other borrowings, net | 62,572 |  |  | 58,508 |
Net proceeds from issuance of subordinated notes | — |  |  | 98,027 |
Cash dividends paid | (43,568) |  |  | (79,655) |
Taxes paid related to net share settlement of equity awards | (3,218) |  |  | (1,447) |
Cash paid for the repurchase of common stock | (56,528) |  |  | (31,775) |
Net cash provided from financing activities | 1,456,639 |  |  | 1,910,358 |
NET CHANGE IN CASH AND CASH EQUIVALENTS | 966,399 |  |  | 397,803 |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 1,234,183 |  |  | 307,735 |
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 2,200,582 |  |  | $ | 705,538 |

Continued on next page
11

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Nine Months Ended September 30, 2021 and 2020

| Nine Months Ended September 30,
| 2021 |  | 2020
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |  |  |
Interest paid in cash | $ | 17,927 |  |  | $ | 31,817 |
Tax paid (refunds received) | 20,081 |  |  | (27,515) |
NON-CASH INVESTING AND FINANCING TRANSACTIONS: |  |  |
Transfer of loans to real estate owned and other repossessed assets | 512 |  |  | 1,588 |
Dividends accrued but not paid until after period end | 1,191 |  |  | 1,179 |

See Selected Notes to the Consolidated Financial Statements
12

BANNER CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements include the accounts of Banner Corporation (the Company or Banner), a bank holding company incorporated in the State of Washington and its wholly-owned subsidiary, Banner Bank (the Bank).
These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (SEC). In preparing these financial statements, the Company has evaluated events and transactions subsequent to September 30, 2021 for potential recognition or disclosure. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and note disclosures have been condensed or omitted pursuant to the rules and regulations of the SEC and the accounting standards for interim financial statements. Certain reclassifications have been made to the 2020 Consolidated Financial Statements and/or schedules to conform to the 2021 presentation. Prior to the first quarter of 2021, the (recapture) provision for credit losses - unfunded loan commitment was recorded as non-interest expense. Beginning in the first quarter of 2021 the (recapture) provision for credit losses - unfunded loan commitment is recorded as a component of the provision for credit losses. These reclassifications may have affected certain ratios for the prior periods. The effect of these reclassifications is considered immaterial. All significant intercompany transactions and balances have been eliminated.
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 significant to an understanding of Banner’s financial statements. These policies relate to (i) the methodology for the recognition of interest income, (ii) determination of the provision and allowance for credit losses, (iii) the valuation of financial assets and liabilities recorded at fair value (iv) the valuation of intangibles, such as goodwill, core deposit intangibles (CDI) and mortgage servicing rights, (v) the valuation of real estate held for sale, (vi) the valuation of assets acquired and liabilities assumed in business combinations and subsequent recognition of related income and expense, and (vii) the valuation or recognition of deferred tax assets and liabilities. These policies and judgments, estimates and assumptions are described in greater detail in subsequent notes to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations (Critical Accounting Policies) in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC (2020 Form 10-K). There have been no significant changes in our application of these accounting policies during the first nine months of 2021.
The information included in this Form 10-Q should be read in conjunction with our 2020 Form 10-K. Interim results are not necessarily indicative of results for a full year or any other interim period.
13

Note 2: ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED
Reference Rate Reform (Topic 848)
In March 2020, the Financial Accounting Standards Board (FASB) issued guidance within Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, in response to the scheduled discontinuation of LIBOR on December 31, 2021. The amendments in this ASU provide optional guidance designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements (e.g., loans, debt securities, derivatives, borrowings) necessitated by reference rate reform. Since the issuance of this guidance, the publication cessation of U.S. dollar LIBOR has been extended to June 30, 2023.
The following optional expedients for applying the requirements of certain Topics or Industry Subtopics in the Codification are permitted for contracts that are modified because of reference rate reform and that meet certain scope guidance: 1) modifications of contracts within the scope of Topics 310, Receivables, and 470, Debt, should be accounted for by prospectively adjusting the effective interest rate; 2) modifications of contracts within the scope of Topic 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required under this Topic for modifications not accounted for as separate contracts; 3) modifications of contracts do not require an entity to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract under Subtopic 815-15, Derivatives and Hedging- Embedded Derivatives; and 4) for other Topics or Industry Subtopics in the Codification, the amendments in this ASU also include a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. Upon adoption, an entity may make a one-time election to sell, transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that are classified as held to maturity before January 1, 2020.
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 once adopted will apply to contract modifications made and new hedging relationships entered into through December 31, 2022. The Company will be able to use the expedients in this guidance to manage through the transition away from LIBOR, specifically as they relate to loans and leases. The adoption of this accounting guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.
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Note 3: SECURITIES
The amortized cost, gross unrealized gains and losses and estimated fair value of securities at September 30, 2021 and December 31, 2020 are summarized as follows (in thousands):

| September 30, 2021
| Amortized Cost |  |  |  |  |  | Fair Value
Trading: |  |  |  |  |  |  |
Corporate bonds | $ | 27,203 |  |  |  |  |  |  | $ | 26,875 |
| $ | 27,203 |  |  |  |  |  |  | $ | 26,875 |

| September 30, 2021
| Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Allowance for Credit Losses |  | Fair Value
Available-for-Sale: |  |  |  |  |  |  |  |  |
U.S. Government and agency obligations | $ | 180,585 |  |  | $ | 1,067 |  |  | $ | (600) |  |  | $ | — |  |  | $ | 181,052 |
Municipal bonds | 296,784 |  |  | 14,395 |  |  | (788) |  |  | — |  |  | 310,391 |
Corporate bonds | 160,404 |  |  | 3,903 |  |  | (63) |  |  | — |  |  | 164,244 |
Mortgage-backed or related securities | 2,599,229 |  |  | 25,918 |  |  | (40,883) |  |  | — |  |  | 2,584,264 |
Asset-backed securities | 206,514 |  |  | 110 |  |  | — |  |  | — |  |  | 206,624 |
| $ | 3,443,516 |  |  | $ | 45,393 |  |  | $ | (42,334) |  |  | $ | — |  |  | $ | 3,446,575 |

| September 30, 2021
| Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value |  | Allowance for Credit Losses
Held-to-Maturity: |  |  |  |  |  |  |  |  |
U.S. Government and agency obligations | $ | 317 |  |  | $ | 6 |  |  | $ | — |  |  | $ | 323 |  |  | $ | — |
Municipal bonds | 391,583 |  |  | 18,716 |  |  | (2,188) |  |  | 408,111 |  |  | (63) |
Corporate bonds | 3,124 |  |  | — |  |  | (2) |  |  | 3,122 |  |  | (41) |
Mortgage-backed or related securities | 52,788 |  |  | 1,668 |  |  | (10) |  |  | 54,446 |  |  | — |
| $ | 447,812 |  |  | $ | 20,390 |  |  | $ | (2,200) |  |  | $ | 466,002 |  |  | $ | (104) |

| December 31, 2020
| Amortized Cost |  |  |  |  |  | Fair Value
Trading: |  |  |  |  |  |  |
Corporate bonds | $ | 27,203 |  |  |  |  |  |  | $ | 24,980 |
| $ | 27,203 |  |  |  |  |  |  | $ | 24,980 |

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| December 31, 2020
| Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Allowance for Credit Losses |  | Fair Value
Available-for-Sale: |  |  |  |  |  |  |  |  |
U.S. Government and agency obligations | $ | 141,668 |  |  | $ | 1,002 |  |  | $ | (935) |  |  | $ | — |  |  | $ | 141,735 |
Municipal bonds | 283,997 |  |  | 19,523 |  |  | (2) |  |  | — |  |  | 303,518 |
Corporate bonds | 219,086 |  |  | 2,762 |  |  | (79) |  |  | — |  |  | 221,769 |
Mortgage-backed or related securities | 1,602,033 |  |  | 45,179 |  |  | (1,060) |  |  | — |  |  | 1,646,152 |
Asset-backed securities | 9,405 |  |  | 77 |  |  | (63) |  |  | — |  |  | 9,419 |
| $ | 2,256,189 |  |  | $ | 68,543 |  |  | $ | (2,139) |  |  | $ | — |  |  | $ | 2,322,593 |

| December 31, 2020
| Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value |  | Allowance for Credit Losses
Held-to-Maturity: |  |  |  |  |  |  |  |  |
U.S. Government and agency obligations | $ | 340 |  |  | $ | 7 |  |  | $ | — |  |  | $ | 347 |  |  | $ | — |
Municipal bonds | 370,998 |  |  | 24,130 |  |  | (94) |  |  | 395,034 |  |  | (59) |
Corporate bonds | 3,222 |  |  | — |  |  | (12) |  |  | 3,210 |  |  | (35) |
Mortgage-backed or related securities | 47,247 |  |  | 2,843 |  |  | — |  |  | 50,090 |  |  | — |
| $ | 421,807 |  |  | $ | 26,980 |  |  | $ | (106) |  |  | $ | 448,681 |  |  | $ | (94) |

Accrued interest receivable on held-to-maturity debt securities was $2.7 million and $3.0 million as of September 30, 2021 and December 31, 2020, respectively, and was $9.3 million and $6.9 million on available-for-sale debt securities as of September 30, 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 September 30, 2021 and December 31, 2020, 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):

| September 30, 2021
| Less Than 12 Months |  | 12 Months or More |  | Total
| Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
Available-for-Sale: |  |  |  |  |  |  |  |  |  |  |
U.S. Government and agency obligations | $ | 40,115 |  |  | $ | (39) |  |  | $ | 33,447 |  |  | $ | (561) |  |  | $ | 73,562 |  |  | $ | (600) |
Municipal bonds | 60,522 |  |  | (788) |  |  | — |  |  | — |  |  | 60,522 |  |  | (788) |
Corporate bonds | 7,937 |  |  | (63) |  |  | — |  |  | — |  |  | 7,937 |  |  | (63) |
Mortgage-backed or related securities | 1,503,114 |  |  | (39,701) |  |  | 54,570 |  |  | (1,182) |  |  | 1,557,684 |  |  | (40,883) |
| $ | 1,611,688 |  |  | $ | (40,591) |  |  | $ | 88,017 |  |  | $ | (1,743) |  |  | $ | 1,699,705 |  |  | $ | (42,334) |

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| December 31, 2020
| Less Than 12 Months |  | 12 Months or More |  | Total
| Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
Available-for-Sale: |  |  |  |  |  |  |  |  |  |  |
U.S. Government and agency obligations | $ | 3,126 |  |  | $ | (8) |  |  | $ | 50,603 |  |  | $ | (927) |  |  | $ | 53,729 |  |  | $ | (935) |
Municipal bonds | 495 |  |  | (2) |  |  | — |  |  | — |  |  | 495 |  |  | (2) |
Corporate bonds | 3,586 |  |  | (79) |  |  | — |  |  | — |  |  | 3,586 |  |  | (79) |
Mortgage-backed or related securities | 181,871 |  |  | (1,046) |  |  | 2,337 |  |  | (14) |  |  | 184,208 |  |  | (1,060) |
Asset-backed securities | — |  |  | — |  |  | 5,676 |  |  | (63) |  |  | 5,676 |  |  | (63) |
| $ | 189,078 |  |  | $ | (1,135) |  |  | $ | 58,616 |  |  | $ | (1,004) |  |  | $ | 247,694 |  |  | $ | (2,139) |

At September 30, 2021, there were 84 securities—available-for-sale with unrealized losses, compared to 54 at December 31, 2020. Management does not believe that any individual unrealized loss as of September 30, 2021 or December 31, 2020 resulted from credit loss. The decline in fair market value of these securities was generally due to changes in interest rates and changes in market-desired spreads subsequent to their purchase.
There were no sales of securities—trading during the nine months ended September 30, 2021 or 2020. There were no securities—trading in a nonaccrual status at September 30, 2021 or December 31, 2020. Net unrealized holding gains of $1.9 million were recognized during the nine months ended September 30, 2021 compared to $2.4 million of net unrealized holding losses recognized during the nine months ended September 30, 2020.
The following table presents gross gains and losses on sales of securities available-for-sale (in thousands):

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Available-for-Sale: |  |  |  |  |  |  |
Gross Gains | $ | 140 |  |  | $ | 557 |  |  | $ | 766 |  |  | $ | 729 |
Gross Losses | (22) |  |  | (432) |  |  | (132) |  |  | (433) |
Balance, end of the period | $ | 118 |  |  | $ | 125 |  |  | $ | 634 |  |  | $ | 296 |

There were no securities—available-for-sale in a nonaccrual status at September 30, 2021 or December 31, 2020.
During the nine months ended September 30, 2021, we 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 nine months ended September 30, 2020. There were no securities—held-to-maturity in a nonaccrual status or 30 days or more past due at September 30, 2021 or December 31, 2020.
During the nine months ended September 30, 2021, we sold a $4.8 million equity security with a resulting net gain of $46,000. There were no sales of equity securities during the nine months ended September 30, 2020. During the nine months ended September 30, 2020, the Company 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.
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The amortized cost and estimated fair value of securities at September 30, 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.

| September 30, 2021
| 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 | $ | — |  |  | $ | — |  |  | $ | 59,150 |  |  | $ | 59,360 |  |  | $ | 5,444 |  |  | $ | 5,471 |
Maturing after one year through five years | — |  |  | — |  |  | 173,666 |  |  | 181,152 |  |  | 59,705 |  |  | 62,039 |
Maturing after five years through ten years | — |  |  | — |  |  | 845,638 |  |  | 847,708 |  |  | 21,961 |  |  | 23,312 |
Maturing after ten years through twenty years | 27,203 |  |  | 26,875 |  |  | 502,832 |  |  | 514,271 |  |  | 164,303 |  |  | 168,315 |
Maturing after twenty years | — |  |  | — |  |  | 1,862,230 |  |  | 1,844,084 |  |  | 196,399 |  |  | 206,865 |
| $ | 27,203 |  |  | $ | 26,875 |  |  | $ | 3,443,516 |  |  | $ | 3,446,575 |  |  | $ | 447,812 |  |  | $ | 466,002 |

The following table presents, as of September 30, 2021, investment securities which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law (in thousands):

| September 30, 2021
| Carrying Value |  | Amortized Cost |  | Fair Value
Purpose or beneficiary: |  |  |  |  |
State and local governments public deposits | $ | 202,085 |  |  | $ | 201,456 |  |  | $ | 213,687 |
Interest rate swap counterparties | 27,275 |  |  | 26,642 |  |  | 27,402 |
Repurchase agreements | 278,087 |  |  | 285,068 |  |  | 278,087 |
Other | 2,549 |  |  | 2,549 |  |  | 2,597 |
Total pledged securities | $ | 509,996 |  |  | $ | 515,715 |  |  | $ | 521,773 |

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 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 table summarizes the amortized cost of held-to-maturity debt securities by credit rating at September 30, 2021 and December 31, 2020 (in thousands):

| September 30, 2021
| U.S. Government and agency obligations |  | Municipal bonds |  | Corporate bonds |  | Mortgage-backed or related securities |  | Total
AAA/AA/A | $ | — |  |  | $ | 375,865 |  |  | $ | 500 |  |  | $ | — |  |  | $ | 376,365 |
Not Rated | 317 |  |  | 15,718 |  |  | 2,624 |  |  | 52,788 |  |  | 71,447 |
| $ | 317 |  |  | $ | 391,583 |  |  | $ | 3,124 |  |  | $ | 52,788 |  |  | $ | 447,812 |

| December 31, 2020
| U.S. Government and agency obligations |  | Municipal bonds |  | Corporate bonds |  | Mortgage-backed or related securities |  | Total
AAA/AA/A | $ | — |  |  | $ | 349,123 |  |  | $ | 500 |  |  | $ | — |  |  | $ | 349,623 |
Not Rated | 340 |  |  | 21,875 |  |  | 2,722 |  |  | 47,247 |  |  | 72,184 |
| $ | 340 |  |  | $ | 370,998 |  |  | $ | 3,222 |  |  | $ | 47,247 |  |  | $ | 421,807 |

The following table presents the activity in the allowance for credit losses for held-to-maturity debt securities by major type for the three and nine months ended September 30, 2021 and September 30, 2020 (in thousands):
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| For the Three Months Ended September 30, 2021
| U.S. Government and agency obligations |  | Municipal bonds |  | Corporate bonds |  | Mortgage-backed or related securities |  | Total
Allowance for credit losses – securities |  |  |  |  |  |  |  |  |
Beginning Balance | $ | — |  |  | $ | 64 |  |  | $ | 46 |  |  | $ | — |  |  | $ | 110 |
Recapture of provision for credit losses | — |  |  | (1) |  |  | (5) |  |  | — |  |  | (6) |
Ending Balance | $ | — |  |  | $ | 63 |  |  | $ | 41 |  |  | $ | — |  |  | $ | 104 |
| For the Nine Months Ended September 30, 2021
| U.S. Government and agency obligations |  | Municipal bonds |  | Corporate bonds |  | Mortgage-backed or related securities |  | Total
Allowance for credit losses – securities |  |  |  |  |  |  |  |  |
Beginning Balance | $ | — |  |  | $ | 59 |  |  | $ | 35 |  |  | $ | — |  |  | $ | 94 |
Provision for credit losses | — |  |  | 4 |  |  | 6 |  |  | — |  |  | 10 |
Ending Balance | $ | — |  |  | $ | 63 |  |  | $ | 41 |  |  | $ | — |  |  | $ | 104 |

| For the Three Months Ended September 30, 2020
| U.S. Government and agency obligations |  | Municipal bonds |  | Corporate bonds |  | Mortgage-backed or related securities |  | Total
Allowance for credit losses – securities |  |  |  |  |  |  |  |  |
Beginning Balance | $ | — |  |  | $ | 61 |  |  | $ | 41 |  |  | $ | — |  |  | $ | 102 |
Impact of adopting ASC 326 | — |  |  | — |  |  | — |  |  | — |  |  | — |
(Recapture)/provision for credit losses | — |  |  | (1) |  |  | 1 |  |  | — |  |  | — |
Ending Balance | $ | — |  |  | $ | 60 |  |  | $ | 42 |  |  | $ | — |  |  | $ | 102 |
| For the Nine Months Ended September 30, 2020
| U.S. Government and agency obligations |  | Municipal bonds |  | Corporate bonds |  | Mortgage-backed or related securities |  | Total
Allowance for credit losses – securities |  |  |  |  |  |  |  |  |
Beginning Balance | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Impact of adopting ASC 326 | — |  |  | 28 |  |  | 35 |  |  | — |  |  | 63 |
Provision for credit losses | — |  |  | 32 |  |  | 7 |  |  | — |  |  | 39 |
Ending Balance | $ | — |  |  | $ | 60 |  |  | $ | 42 |  |  | $ | — |  |  | $ | 102 |

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Note 4: LOANS RECEIVABLE AND THE ALLOWANCE FOR CREDIT LOSSES - LOANS
The following table presents the loans receivable at September 30, 2021 and December 31, 2020 by class (dollars in thousands).

| September 30, 2021 |  | December 31, 2020
| Amount |  | Percent of Total |  | Amount |  | Percent of Total
Commercial real estate: |  |  |  |  |  |  |
Owner-occupied | $ | 1,122,275 |  |  | 12.2 | % |  | $ | 1,076,467 |  |  | 10.9 | %
Investment properties | 1,980,284 |  |  | 21.5 |  |  | 1,955,684 |  |  | 19.8 |
Small balance CRE | 601,751 |  |  | 6.5 |  |  | 573,849 |  |  | 5.8 |
Multifamily real estate | 532,760 |  |  | 5.8 |  |  | 428,223 |  |  | 4.4 |
Construction, land and land development: |  |  |  |  |  |  |
Commercial construction | 170,205 |  |  | 1.8 |  |  | 228,937 |  |  | 2.3 |
Multifamily construction | 278,184 |  |  | 3.0 |  |  | 305,527 |  |  | 3.1 |
One- to four-family construction | 571,431 |  |  | 6.2 |  |  | 507,810 |  |  | 5.1 |
Land and land development | 308,164 |  |  | 3.4 |  |  | 248,915 |  |  | 2.5 |
Commercial business: |  |  |  |  |  |  |
Commercial business (1) | 1,346,707 |  |  | 14.6 |  |  | 2,178,461 |  |  | 22.1 |
Small business scored | 775,554 |  |  | 8.4 |  |  | 743,451 |  |  | 7.5 |
Agricultural business, including secured by farmland (2) | 287,469 |  |  | 3.1 |  |  | 299,949 |  |  | 3.0 |
One- to four-family residential | 682,368 |  |  | 7.4 |  |  | 717,939 |  |  | 7.3 |
Consumer: |  |  |  |  |  |  |
Consumer—home equity revolving lines of credit | 462,819 |  |  | 5.0 |  |  | 491,812 |  |  | 5.0 |
Consumer—other | 98,413 |  |  | 1.1 |  |  | 113,958 |  |  | 1.2 |
Total loans | 9,218,384 |  |  | 100.0 | % |  | 9,870,982 |  |  | 100.0 | %
Less allowance for credit losses – loans | (139,915) |  |  |  |  | (167,279) |  |  |
Net loans | $ | 9,078,469 |  |  |  |  | $ | 9,703,703 |  |  |

(1) Includes $307.0 million and $1.04 billion of U.S. Small Business Administration (SBA) Paycheck Protection Program (PPP) loans as of September 30, 2021 and December 31, 2020, respectively.
(2) Includes $3.2 million of SBA PPP loans as of September 30, 2021 and none as of December 31, 2020.
Loan amounts are net of unearned loan fees in excess of unamortized costs of $12.2 million as of September 30, 2021 and $25.6 million as of December 31, 2020. Net loans include net discounts on acquired loans of $11.5 million and $16.1 million as of September 30, 2021 and December 31, 2020, respectively. Net loans does not include accrued interest receivable. Accrued interest receivable on loans was $31.5 million as of September 30, 2021 and $36.6 million as of December 31, 2020 and was reported in accrued interest receivable on the Consolidated Statements of Financial Condition.
Purchased credit-deteriorated and purchased non-credit-deteriorated loans. Loans acquired in business combinations are recorded at their fair value at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased credit-deteriorated (PCD) or purchased non-credit-deteriorated. There were no PCD loans acquired during the nine months ended September 30, 2021.
Troubled Debt Restructurings. Loans are reported as troubled debt restructures (TDRs) when the bank grants one or more concessions to a borrower experiencing financial difficulties that it would not otherwise consider. Our 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.
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As of September 30, 2021 and December 31, 2020, the Company had TDRs of $5.6 million and $7.9 million, respectively, and no commitments to advance additional funds related to TDRs.
There were no new TDRs that occurred during the nine months ended September 30, 2021. The following table presents new TDRs that occurred during the three and nine months ended September 30, 2020 (dollars in thousands):

| Three Months Ended September 30, 2020 |  | Nine months ended September 30, 2020
| Number of Contracts |  | Pre-modification Outstanding Recorded Investment |  | Post-modification Outstanding Recorded Investment |  | Number of Contracts |  | Pre- modification Outstanding Recorded Investment |  | Post- modification Outstanding Recorded Investment
Recorded Investment |  |  |  |  |  |  |  |  |  |  |
Commercial business: |  |  |  |  |  |  |  |  |  |  |
Commercial business | — |  |  | — |  |  | — |  |  | 2 |  |  | 4,796 |  |  | 4,796 |
Total | — |  |  | $ | — |  |  | $ | — |  |  | 2 |  |  | $ | 4,796 |  |  | $ | 4,796 |

There were no TDRs which incurred a payment default within twelve months of the restructure date during the three and nine-month periods ended September 30, 2021 and 2020. A default on a TDR results in either a transfer to nonaccrual status or a partial charge-off, or both.
Credit Quality Indicators: To appropriately and effectively manage the ongoing credit quality of the Company’s loan portfolio, management has implemented a risk-rating or loan grading system for its loans. The system is a tool to evaluate portfolio asset quality throughout each applicable loan’s life as an asset of the Company. Generally, loans are risk rated on an aggregate borrower/relationship basis with individual loans sharing similar ratings. There are some instances when specific situations relating to individual loans will provide the basis for different risk ratings within the aggregate relationship. Loans are graded on a scale of 1 to 9. A description of the general characteristics of these categories is shown below:
Overall Risk Rating Definitions: Risk-ratings contain both qualitative and quantitative measurements and take into account the financial strength of a borrower and the structure of the loan or lease. Consequently, the definitions are to be applied in the context of each lending transaction and judgment must also be used to determine the appropriate risk rating, as it is not unusual for a loan or lease to exhibit characteristics of more than one risk-rating category. Consideration for the final rating is centered in the borrower’s ability to repay, in a timely fashion, both principal and interest. The Company’s risk-rating and loan grading policies are reviewed and approved annually. There were no material changes in the risk-rating or loan grading system for the periods presented.
Risk Ratings 1-5: Pass
Credits with risk ratings of 1 to 5 meet the definition of a pass risk rating. The strength of credits vary within the pass risk ratings, ranging from a risk rated 1 being an exceptional credit to a risk rated 5 being an acceptable credit that requires a more than normal level of supervision.
Risk Rating 6: Special Mention
A credit with potential weaknesses that deserves management’s close attention is risk rated a 6. If left uncorrected, these potential weaknesses will result in deterioration in the capacity to repay debt. A key distinction between Special Mention and Substandard is that in a Special Mention credit, there are identified weaknesses that pose potential risk(s) to the repayment sources, versus well defined weaknesses that pose risk(s) to the repayment sources. Assets in this category are expected to be in this category no more than 9-12 months as the potential weaknesses in the credit are resolved.
Risk Rating 7: Substandard
A credit with well-defined weaknesses that jeopardize the ability to repay in full is risk rated a 7. These credits are inadequately protected by either the sound net worth and payment capacity of the borrower or the value of pledged collateral. These are credits with a distinct possibility of loss. Loans headed for foreclosure and/or legal action due to deterioration are rated 7 or worse.
Risk Rating 8: Doubtful
A credit with an extremely high probability of loss is risk rated 8. These credits have all the same critical weaknesses that are found in a substandard loan; however, the weaknesses are elevated to the point that based upon current information, collection or liquidation in full is improbable. While some loss on doubtful credits is expected, pending events may make the amount and timing of any loss indeterminable. In these situations taking the loss is inappropriate until the outcome of the pending event is clear.
Risk Rating 9: Loss
A credit that is considered to be currently uncollectible or of such little value that it is no longer a viable bank asset is risk rated 9. Losses should be taken in the accounting period in which the credit is determined to be uncollectible. Taking a loss does not mean that a credit has absolutely no recovery or salvage value but, rather, it is not practical or desirable to defer writing off the credit, even though partial recovery may occur in the future.
21

The following tables present the Company’s portfolio of risk-rated loans by class and by grade as of September 30, 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.

| September 30, 2021
| Term Loans by Year of Origination |  | Revolving Loans |  | Total Loans
By class: | 2021 |  | 2020 |  | 2019 |  | 2018 |  | 2017 |  | Prior |  |
Commercial real estate - owner occupied |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 202,187 |  |  | $ | 227,782 |  |  | $ | 154,951 |  |  | $ | 126,339 |  |  | $ | 92,197 |  |  | $ | 232,653 |  |  | $ | 11,457 |  |  | $ | 1,047,566 |
Special Mention | 12,309 |  |  | — |  |  | 2,201 |  |  | — |  |  | 2,147 |  |  | 3,384 |  |  | — |  |  | 20,041 |
Substandard | 1,968 |  |  | — |  |  | 13,770 |  |  | — |  |  | 3,058 |  |  | 35,872 |  |  | — |  |  | 54,668 |
Doubtful | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total Commercial real estate - owner occupied | $ | 216,464 |  |  | $ | 227,782 |  |  | $ | 170,922 |  |  | $ | 126,339 |  |  | $ | 97,402 |  |  | $ | 271,909 |  |  | $ | 11,457 |  |  | $ | 1,122,275 |
Commercial real estate - investment properties |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 286,605 |  |  | $ | 227,093 |  |  | $ | 266,240 |  |  | $ | 246,056 |  |  | $ | 227,915 |  |  | $ | 612,438 |  |  | $ | 19,726 |  |  | $ | 1,886,073 |
Special Mention | — |  |  | — |  |  | — |  |  | 4,167 |  |  | — |  |  | — |  |  | — |  |  | 4,167 |
Substandard | 2,162 |  |  | 9,651 |  |  | 5,292 |  |  | 17,197 |  |  | 10,368 |  |  | 45,374 |  |  | — |  |  | 90,044 |
Doubtful | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total Commercial real estate - investment properties | $ | 288,767 |  |  | $ | 236,744 |  |  | $ | 271,532 |  |  | $ | 267,420 |  |  | $ | 238,283 |  |  | $ | 657,812 |  |  | $ | 19,726 |  |  | $ | 1,980,284 |
Multifamily real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 134,404 |  |  | $ | 79,418 |  |  | $ | 71,346 |  |  | $ | 37,285 |  |  | $ | 92,151 |  |  | $ | 109,993 |  |  | $ | 2,517 |  |  | $ | 527,114 |
Special Mention | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Substandard | — |  |  | 2,312 |  |  | 1,420 |  |  | — |  |  | — |  |  | 1,914 |  |  | — |  |  | 5,646 |
Doubtful | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total Multifamily real estate | $ | 134,404 |  |  | $ | 81,730 |  |  | $ | 72,766 |  |  | $ | 37,285 |  |  | $ | 92,151 |  |  | $ | 111,907 |  |  | $ | 2,517 |  |  | $ | 532,760 |

22

| September 30, 2021
| Term Loans by Year of Origination |  | Revolving Loans |  | Total Loans
By class: | 2021 |  | 2020 |  | 2019 |  | 2018 |  | 2017 |  | Prior |  |
Commercial construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 48,100 |  |  | $ | 52,593 |  |  | $ | 24,682 |  |  | $ | 31,084 |  |  | $ | — |  |  | $ | 521 |  |  | $ | — |  |  | $ | 156,980 |
Special Mention | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Substandard | 4,272 |  |  | — |  |  | 4,035 |  |  | 4,820 |  |  | — |  |  | 98 |  |  | — |  |  | 13,225 |
Doubtful | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total Commercial construction | $ | 52,372 |  |  | $ | 52,593 |  |  | $ | 28,717 |  |  | $ | 35,904 |  |  | $ | — |  |  | $ | 619 |  |  | $ | — |  |  | $ | 170,205 |
Multifamily construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 59,818 |  |  | $ | 112,147 |  |  | $ | 86,493 |  |  | $ | 14,840 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 273,298 |
Special Mention | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Substandard | — |  |  | 4,886 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 4,886 |
Doubtful | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total Multifamily construction | $ | 59,818 |  |  | $ | 117,033 |  |  | $ | 86,493 |  |  | $ | 14,840 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 278,184 |
One- to four- family construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 466,258 |  |  | $ | 103,197 |  |  | $ | 331 |  |  | $ | — |  |  | $ | — |  |  | $ | 85 |  |  | $ | 1,560 |  |  | $ | 571,431 |
Special Mention | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Substandard | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Doubtful | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total One- to four- family construction | $ | 466,258 |  |  | $ | 103,197 |  |  | $ | 331 |  |  | $ | — |  |  | $ | — |  |  | $ | 85 |  |  | $ | 1,560 |  |  | $ | 571,431 |

23

| September 30, 2021
| Term Loans by Year of Origination |  | Revolving Loans |  | Total Loans
By class: | 2021 |  | 2020 |  | 2019 |  | 2018 |  | 2017 |  | Prior |  |
Land and land development |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 149,447 |  |  | $ | 112,761 |  |  | $ | 18,967 |  |  | $ | 9,189 |  |  | $ | 4,218 |  |  | $ | 8,174 |  |  | $ | 2,118 |  |  | $ | 304,874 |
Special Mention | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Substandard | 2,874 |  |  | 14 |  |  | 267 |  |  | — |  |  | — |  |  | 135 |  |  | — |  |  | 3,290 |
Doubtful | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total Land and land development | $ | 152,321 |  |  | $ | 112,775 |  |  | $ | 19,234 |  |  | $ | 9,189 |  |  | $ | 4,218 |  |  | $ | 8,309 |  |  | $ | 2,118 |  |  | $ | 308,164 |
Commercial business |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 348,123 |  |  | $ | 274,487 |  |  | $ | 197,462 |  |  | $ | 127,281 |  |  | $ | 48,760 |  |  | $ | 83,084 |  |  | $ | 231,186 |  |  | $ | 1,310,383 |
Special Mention | 68 |  |  | 86 |  |  | 271 |  |  | — |  |  | 690 |  |  | 11 |  |  | 10,667 |  |  | 11,793 |
Substandard | 2,277 |  |  | 2,422 |  |  | 1,090 |  |  | 10,019 |  |  | 3,318 |  |  | 892 |  |  | 4,513 |  |  | 24,531 |
Doubtful | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total Commercial business | $ | 350,468 |  |  | $ | 276,995 |  |  | $ | 198,823 |  |  | $ | 137,300 |  |  | $ | 52,768 |  |  | $ | 83,987 |  |  | $ | 246,366 |  |  | $ | 1,346,707 |
Agricultural business including secured by farmland |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 26,643 |  |  | $ | 27,645 |  |  | $ | 51,961 |  |  | $ | 28,073 |  |  | $ | 15,698 |  |  | $ | 37,116 |  |  | $ | 93,390 |  |  | $ | 280,526 |
Special Mention | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Substandard | — |  |  | 446 |  |  | 2,206 |  |  | 510 |  |  | 144 |  |  | 1,891 |  |  | 1,746 |  |  | 6,943 |
Doubtful | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total Agricultural business including secured by farmland | $ | 26,643 |  |  | $ | 28,091 |  |  | $ | 54,167 |  |  | $ | 28,583 |  |  | $ | 15,842 |  |  | $ | 39,007 |  |  | $ | 95,136 |  |  | $ | 287,469 |

24

| December 31, 2020
| Term Loans by Year of Origination |  | Revolving Loans |  | Total Loans
By class: | 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016 |  | Prior |  |
Commercial real estate - owner occupied |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 243,100 |  |  | $ | 156,838 |  |  | $ | 156,817 |  |  | $ | 122,484 |  |  | $ | 92,312 |  |  | $ | 212,792 |  |  | $ | 3,379 |  |  | $ | 987,722 |
Special Mention | — |  |  | 4,560 |  |  | — |  |  | 2,251 |  |  | — |  |  | 1,869 |  |  | 149 |  |  | 8,829 |
Substandard | 7,923 |  |  | 26,914 |  |  | 3,040 |  |  | 2,516 |  |  | 11,731 |  |  | 27,792 |  |  | — |  |  | 79,916 |
Doubtful | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total Commercial real estate - owner occupied | $ | 251,023 |  |  | $ | 188,312 |  |  | $ | 159,857 |  |  | $ | 127,251 |  |  | $ | 104,043 |  |  | $ | 242,453 |  |  | $ | 3,528 |  |  | $ | 1,076,467 |
Commercial real estate - investment properties |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 237,553 |  |  | $ | 262,543 |  |  | $ | 299,452 |  |  | $ | 218,018 |  |  | $ | 278,348 |  |  | $ | 502,914 |  |  | $ | 20,062 |  |  | $ | 1,818,890 |
Special Mention | — |  |  | 2,712 |  |  | — |  |  | — |  |  | 2,730 |  |  | 1,856 |  |  | — |  |  | 7,298 |
Substandard | 19,812 |  |  | 11,418 |  |  | 20,352 |  |  | 36,310 |  |  | 23,027 |  |  | 18,577 |  |  | — |  |  | 129,496 |
Doubtful | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total Commercial real estate - investment properties | $ | 257,365 |  |  | $ | 276,673 |  |  | $ | 319,804 |  |  | $ | 254,328 |  |  | $ | 304,105 |  |  | $ | 523,347 |  |  | $ | 20,062 |  |  | $ | 1,955,684 |
Multifamily real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 78,632 |  |  | $ | 69,825 |  |  | $ | 39,343 |  |  | $ | 93,442 |  |  | $ | 44,395 |  |  | $ | 96,863 |  |  | $ | 1,983 |  |  | $ | 424,483 |
Special Mention | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Substandard | 2,312 |  |  | 1,428 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 3,740 |
Doubtful | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total Multifamily real estate | $ | 80,944 |  |  | $ | 71,253 |  |  | $ | 39,343 |  |  | $ | 93,442 |  |  | $ | 44,395 |  |  | $ | 96,863 |  |  | $ | 1,983 |  |  | $ | 428,223 |

25

| December 31, 2020
| Term Loans by Year of Origination |  | Revolving Loans |  | Total Loans
By class: | 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016 |  | Prior |  |
Commercial construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 83,506 |  |  | $ | 67,152 |  |  | $ | 41,299 |  |  | $ | 6,038 |  |  | $ | 2,158 |  |  | $ | 1,129 |  |  | $ | — |  |  | $ | 201,282 |
Special Mention | — |  |  | 5,963 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 5,963 |
Substandard | 12,913 |  |  | 3,808 |  |  | 4,873 |  |  | — |  |  | 98 |  |  | — |  |  | — |  |  | 21,692 |
Doubtful | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total Commercial construction | $ | 96,419 |  |  | $ | 76,923 |  |  | $ | 46,172 |  |  | $ | 6,038 |  |  | $ | 2,256 |  |  | $ | 1,129 |  |  | $ | — |  |  | $ | 228,937 |
Multifamily construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 79,710 |  |  | $ | 151,141 |  |  | $ | 59,744 |  |  | $ | 14,932 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 305,527 |
Special Mention | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Substandard | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Doubtful | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total Multifamily construction | $ | 79,710 |  |  | $ | 151,141 |  |  | $ | 59,744 |  |  | $ | 14,932 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 305,527 |
One- to four- family construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 461,294 |  |  | $ | 35,910 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 7,581 |  |  | $ | 504,785 |
Special Mention | 1,563 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 630 |  |  | 2,193 |
Substandard | 501 |  |  | 331 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 832 |
Doubtful | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total One- to four- family construction | $ | 463,358 |  |  | $ | 36,241 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 8,211 |  |  | $ | 507,810 |

26

| December 31, 2020
| Term Loans by Year of Origination |  | Revolving Loans |  | Total Loans
By class: | 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016 |  | Prior |  |
Land and land development |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 156,450 |  |  | $ | 37,397 |  |  | $ | 16,560 |  |  | $ | 6,801 |  |  | $ | 6,264 |  |  | $ | 4,840 |  |  | $ | 17,020 |  |  | $ | 245,332 |
Special Mention | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Substandard | 14 |  |  | 30 |  |  | 3,047 |  |  | 190 |  |  | — |  |  | 302 |  |  | — |  |  | 3,583 |
Doubtful | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total Land and land development | $ | 156,464 |  |  | $ | 37,427 |  |  | $ | 19,607 |  |  | $ | 6,991 |  |  | $ | 6,264 |  |  | $ | 5,142 |  |  | $ | 17,020 |  |  | $ | 248,915 |
Commercial business |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 1,243,276 |  |  | $ | 230,845 |  |  | $ | 203,051 |  |  | $ | 65,524 |  |  | $ | 38,757 |  |  | $ | 66,206 |  |  | $ | 264,741 |  |  | $ | 2,112,400 |
Special Mention | 103 |  |  | 412 |  |  | — |  |  | 829 |  |  | — |  |  | 115 |  |  | 9,507 |  |  | 10,966 |
Substandard | 6,624 |  |  | 14,413 |  |  | 18,569 |  |  | 5,224 |  |  | 1,320 |  |  | 453 |  |  | 8,492 |  |  | 55,095 |
Doubtful | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total Commercial business | $ | 1,250,003 |  |  | $ | 245,670 |  |  | $ | 221,620 |  |  | $ | 71,577 |  |  | $ | 40,077 |  |  | $ | 66,774 |  |  | $ | 282,740 |  |  | $ | 2,178,461 |
Agricultural business including secured by farmland |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 32,032 |  |  | $ | 62,058 |  |  | $ | 31,381 |  |  | $ | 22,635 |  |  | $ | 22,394 |  |  | $ | 24,950 |  |  | $ | 91,660 |  |  | $ | 287,110 |
Special Mention | — |  |  | — |  |  | — |  |  | 810 |  |  | — |  |  | 537 |  |  | — |  |  | 1,347 |
Substandard | 1,542 |  |  | 2,652 |  |  | 1,076 |  |  | 163 |  |  | 675 |  |  | 3,049 |  |  | 2,335 |  |  | 11,492 |
Doubtful | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total Agricultural business including secured by farmland | $ | 33,574 |  |  | $ | 64,710 |  |  | $ | 32,457 |  |  | $ | 23,608 |  |  | $ | 23,069 |  |  | $ | 28,536 |  |  | $ | 93,995 |  |  | $ | 299,949 |

27

The following tables present the Company’s portfolio of non-risk-rated loans by class and delinquency status as of September 30, 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.

| September 30, 2021
| Term Loans by Year of Origination |  | Revolving Loans |  | Total Loans
By class: | 2021 |  | 2020 |  | 2019 |  | 2018 |  | 2017 |  | Prior |  |
Small balance CRE |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Past Due Category |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current | $ | 48,385 |  |  | $ | 80,778 |  |  | $ | 74,482 |  |  | $ | 85,597 |  |  | $ | 73,371 |  |  | $ | 238,549 |  |  | $ | 544 |  |  | $ | 601,706 |
30-59 Days Past Due | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2 |  |  | — |  |  | 2 |
60-89 Days Past Due | 43 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 43 |
90 Days + Past Due | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total small balance CRE | $ | 48,428 |  |  | $ | 80,778 |  |  | $ | 74,482 |  |  | $ | 85,597 |  |  | $ | 73,371 |  |  | $ | 238,551 |  |  | $ | 544 |  |  | $ | 601,751 |
Small business scored |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Past Due Category |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current | $ | 176,262 |  |  | $ | 134,418 |  |  | $ | 119,587 |  |  | $ | 92,657 |  |  | $ | 63,168 |  |  | $ | 79,568 |  |  | $ | 108,154 |  |  | $ | 773,814 |
30-59 Days Past Due | — |  |  | 132 |  |  | 10 |  |  | 128 |  |  | 14 |  |  | 50 |  |  | 172 |  |  | 506 |
60-89 Days Past Due | — |  |  | — |  |  | — |  |  | 142 |  |  | 26 |  |  | — |  |  | 160 |  |  | 328 |
90 Days + Past Due | — |  |  | 8 |  |  | 139 |  |  | 120 |  |  | 335 |  |  | 243 |  |  | 61 |  |  | 906 |
Total small business scored | $ | 176,262 |  |  | $ | 134,558 |  |  | $ | 119,736 |  |  | $ | 93,047 |  |  | $ | 63,543 |  |  | $ | 79,861 |  |  | $ | 108,547 |  |  | $ | 775,554 |
One- to four- family residential |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Past Due Category |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current | $ | 157,577 |  |  | $ | 109,535 |  |  | $ | 65,469 |  |  | $ | 58,832 |  |  | $ | 64,017 |  |  | $ | 223,601 |  |  | $ | 1,751 |  |  | $ | 680,782 |
30-59 Days Past Due | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 107 |  |  | — |  |  | 107 |
60-89 Days Past Due | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 109 |  |  | — |  |  | 109 |
90 Days + Past Due | — |  |  | 276 |  |  | — |  |  | 169 |  |  | — |  |  | 925 |  |  | — |  |  | 1,370 |
Total One- to four- family residential | $ | 157,577 |  |  | $ | 109,811 |  |  | $ | 65,469 |  |  | $ | 59,001 |  |  | $ | 64,017 |  |  | $ | 224,742 |  |  | $ | 1,751 |  |  | $ | 682,368 |

28

| September 30, 2021
| Term Loans by Year of Origination |  | Revolving Loans |  | Total Loans
By class: | 2021 |  | 2020 |  | 2019 |  | 2018 |  | 2017 |  | Prior |  |
Consumer—home equity revolving lines of credit |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Past Due Category |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current | $ | 7,044 |  |  | $ | 1,125 |  |  | $ | 1,711 |  |  | $ | 1,772 |  |  | $ | 2,089 |  |  | $ | 3,007 |  |  | $ | 444,348 |  |  | $ | 461,096 |
30-59 Days Past Due | — |  |  | 65 |  |  | 110 |  |  | — |  |  | 100 |  |  | 385 |  |  | 180 |  |  | 840 |
60-89 Days Past Due | — |  |  | — |  |  | — |  |  | — |  |  | 71 |  |  | 91 |  |  | 2 |  |  | 164 |
90 Days + Past Due | — |  |  | — |  |  | 197 |  |  | 193 |  |  | 108 |  |  | 31 |  |  | 190 |  |  | 719 |
Total Consumer—home equity revolving lines of credit | $ | 7,044 |  |  | $ | 1,190 |  |  | $ | 2,018 |  |  | $ | 1,965 |  |  | $ | 2,368 |  |  | $ | 3,514 |  |  | $ | 444,720 |  |  | $ | 462,819 |
Consumer-other |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Past Due Category |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current | $ | 13,921 |  |  | $ | 15,239 |  |  | $ | 9,426 |  |  | $ | 9,524 |  |  | $ | 6,917 |  |  | $ | 18,640 |  |  | $ | 24,394 |  |  | $ | 98,061 |
30-59 Days Past Due | 5 |  |  | 118 |  |  | 17 |  |  | 79 |  |  | 20 |  |  | 26 |  |  | 49 |  |  | 314 |
60-89 Days Past Due | 1 |  |  | — |  |  | — |  |  | 3 |  |  | 7 |  |  | 6 |  |  | 17 |  |  | 34 |
90 Days + Past Due | — |  |  | 4 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 4 |
Total Consumer-other | $ | 13,927 |  |  | $ | 15,361 |  |  | $ | 9,443 |  |  | $ | 9,606 |  |  | $ | 6,944 |  |  | $ | 18,672 |  |  | $ | 24,460 |  |  | $ | 98,413 |

29

| December 31, 2020
| Term Loans by Year of Origination |  | Revolving Loans |  | Total Loans
By class: | 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016 |  | Prior |  |
Small balance CRE |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Past Due Category |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current | $ | 56,544 |  |  | $ | 80,090 |  |  | $ | 84,749 |  |  | $ | 77,637 |  |  | $ | 68,791 |  |  | $ | 202,653 |  |  | $ | 2,550 |  |  | $ | 573,014 |
30-59 Days Past Due | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
60-89 Days Past Due | — |  |  | — |  |  | — |  |  | 45 |  |  | — |  |  | — |  |  | — |  |  | 45 |
90 Days + Past Due | — |  |  | — |  |  | — |  |  | 567 |  |  | — |  |  | 223 |  |  | — |  |  | 790 |
Total small balance CRE | $ | 56,544 |  |  | $ | 80,090 |  |  | $ | 84,749 |  |  | $ | 78,249 |  |  | $ | 68,791 |  |  | $ | 202,876 |  |  | $ | 2,550 |  |  | $ | 573,849 |
Small business scored |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Past Due Category |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current | $ | 157,161 |  |  | $ | 145,037 |  |  | $ | 126,578 |  |  | $ | 89,734 |  |  | $ | 47,909 |  |  | $ | 63,347 |  |  | $ | 109,287 |  |  | $ | 739,053 |
30-59 Days Past Due | 129 |  |  | 62 |  |  | 310 |  |  | 723 |  |  | 4 |  |  | 1 |  |  | 230 |  |  | 1,459 |
60-89 Days Past Due | 98 |  |  | 147 |  |  | 3 |  |  | 140 |  |  | — |  |  | 352 |  |  | 151 |  |  | 891 |
90 Days + Past Due | 73 |  |  | 228 |  |  | 800 |  |  | 484 |  |  | 169 |  |  | 248 |  |  | 46 |  |  | 2,048 |
Total small business scored | $ | 157,461 |  |  | $ | 145,474 |  |  | $ | 127,691 |  |  | $ | 91,081 |  |  | $ | 48,082 |  |  | $ | 63,948 |  |  | $ | 109,714 |  |  | $ | 743,451 |
One- to four- family residential |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Past Due Category |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current | $ | 105,411 |  |  | $ | 90,425 |  |  | $ | 92,232 |  |  | $ | 101,491 |  |  | $ | 60,738 |  |  | $ | 254,850 |  |  | $ | 3,164 |  |  | $ | 708,311 |
30-59 Days Past Due | 1,051 |  |  | — |  |  | 1,302 |  |  | 829 |  |  | — |  |  | 1,438 |  |  | — |  |  | 4,620 |
60-89 Days Past Due | — |  |  | — |  |  | 19 |  |  | — |  |  | — |  |  | 936 |  |  | — |  |  | 955 |
90 Days + Past Due | — |  |  | 114 |  |  | 1,185 |  |  | 456 |  |  | 169 |  |  | 2,129 |  |  | — |  |  | 4,053 |
Total One- to four- family residential | $ | 106,462 |  |  | $ | 90,539 |  |  | $ | 94,738 |  |  | $ | 102,776 |  |  | $ | 60,907 |  |  | $ | 259,353 |  |  | $ | 3,164 |  |  | $ | 717,939 |

30

| December 31, 2020
| Term Loans by Year of Origination |  | Revolving Loans |  | Total Loans
By class: | 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016 |  | Prior |  |
Consumer—home equity revolving lines of credit |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Past Due Category |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current | $ | 10,522 |  |  | $ | 2,617 |  |  | $ | 2,553 |  |  | $ | 3,359 |  |  | $ | 1,372 |  |  | $ | 2,154 |  |  | $ | 466,490 |  |  | $ | 489,067 |
30-59 Days Past Due | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 50 |  |  | 409 |  |  | 459 |
60-89 Days Past Due | — |  |  | 202 |  |  | — |  |  | — |  |  | — |  |  | 237 |  |  | — |  |  | 439 |
90 Days + Past Due | — |  |  | 312 |  |  | 198 |  |  | 564 |  |  | 286 |  |  | 255 |  |  | 232 |  |  | 1,847 |
Total Consumer—home equity revolving lines of credit | $ | 10,522 |  |  | $ | 3,131 |  |  | $ | 2,751 |  |  | $ | 3,923 |  |  | $ | 1,658 |  |  | $ | 2,696 |  |  | $ | 467,131 |  |  | $ | 491,812 |
Consumer-other |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Past Due Category |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current | $ | 21,811 |  |  | $ | 13,377 |  |  | $ | 13,936 |  |  | $ | 11,433 |  |  | $ | 8,575 |  |  | $ | 18,802 |  |  | $ | 25,460 |  |  | $ | 113,394 |
30-59 Days Past Due | 48 |  |  | 35 |  |  | 15 |  |  | 22 |  |  | 46 |  |  | 26 |  |  | 44 |  |  | 236 |
60-89 Days Past Due | 242 |  |  | — |  |  | — |  |  | 33 |  |  | 21 |  |  | 14 |  |  | 18 |  |  | 328 |
90 Days + Past Due | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total Consumer-other | $ | 22,101 |  |  | $ | 13,412 |  |  | $ | 13,951 |  |  | $ | 11,488 |  |  | $ | 8,642 |  |  | $ | 18,842 |  |  | $ | 25,522 |  |  | $ | 113,958 |

31

The following tables provide the amortized cost basis of collateral-dependent loans as of September 30, 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.

| September 30, 2021 |
| Real Estate |  | Accounts Receivable |  | Equipment |  |  |  | Total |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied | $ | 3,949 |  |  | $ | — |  |  | $ | — |  |  |  |  | $ | 3,949 |  |  |  |  |  |  |
Investment properties | 7,468 |  |  | — |  |  | — |  |  |  |  | 7,468 |  |  |  |  |  |  |
Small balance CRE | 2,452 |  |  | — |  |  | — |  |  |  |  | 2,452 |  |  |  |  |  |  |
Commercial business |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial business | 107 |  |  | 659 |  |  | 56 |  |  |  |  | 822 |  |  |  |  |  |  |
Small business scored | 41 |  |  | — |  |  | 44 |  |  |  |  | 85 |  |  |  |  |  |  |
Agricultural business, including secured by farmland | 427 |  |  | — |  |  | 594 |  |  |  |  | 1,021 |  |  |  |  |  |  |
Total | $ | 14,444 |  |  | $ | 659 |  |  | $ | 694 |  |  |  |  | $ | 15,797 |  |  |  |  |  |  |

| December 31, 2020
| Real Estate |  | Accounts Receivable |  | Equipment |  |  |  | Total
Commercial real estate: |  |  |  |  |  |  |  |  |
Owner-occupied | $ | 7,506 |  |  | $ | — |  |  | $ | — |  |  |  |  | $ | 7,506 |
Investment properties | 8,979 |  |  | — |  |  | — |  |  |  |  | 8,979 |
Small balance CRE | 567 |  |  | — |  |  | — |  |  |  |  | 567 |
Land and land development | 302 |  |  | — |  |  | — |  |  |  |  | 302 |
Commercial business |  |  |  |  |  |  |  |  |
Commercial business | 557 |  |  | — |  |  | — |  |  |  |  | 557 |
Small business scored | 44 |  |  | — |  |  | 47 |  |  |  |  | 91 |
Agricultural business, including secured by farmland | 427 |  |  | — |  |  | 984 |  |  |  |  | 1,411 |
One- to four-family residential | 196 |  |  | — |  |  | — |  |  |  |  | 196 |
Total | $ | 18,578 |  |  | $ | — |  |  | $ | 1,031 |  |  |  |  | $ | 19,609 |

32

The following tables provide additional detail on the age analysis of the Company’s past due loans as of September 30, 2021 and December 31, 2020 (in thousands):

| September 30, 2021
| 30-59 Days Past Due |  | 60-89 Days Past Due |  | 90 Days or More Past Due |  | Total Past Due |  |  |  | Current |  | Total Loans |  | Non-accrual with no Allowance |  | Total Non-accrual (1) |  | Loans 90 Days or More Past Due and Accruing
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied | $ | — |  |  | $ | — |  |  | $ | 495 |  |  | $ | 495 |  |  |  |  | $ | 1,121,780 |  |  | $ | 1,122,275 |  |  | $ | 3,952 |  |  | $ | 4,535 |  |  | $ | — |
Investment properties | — |  |  | — |  |  | 5,185 |  |  | 5,185 |  |  |  |  | 1,975,099 |  |  | 1,980,284 |  |  | 7,468 |  |  | 7,620 |  |  | 3,955 |
Small balance CRE | 2 |  |  | 43 |  |  | — |  |  | 45 |  |  |  |  | 601,706 |  |  | 601,751 |  |  | 2,440 |  |  | 2,776 |  |  | — |
Multifamily real estate | — |  |  | 342 |  |  | — |  |  | 342 |  |  |  |  | 532,418 |  |  | 532,760 |  |  | — |  |  | — |  |  | — |
Construction, land and land development: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial construction | — |  |  | — |  |  | 98 |  |  | 98 |  |  |  |  | 170,107 |  |  | 170,205 |  |  | — |  |  | 98 |  |  | — |
Multifamily construction | 4,886 |  |  | — |  |  | — |  |  | 4,886 |  |  |  |  | 273,298 |  |  | 278,184 |  |  | — |  |  | — |  |  | — |
One- to four-family construction | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 571,431 |  |  | 571,431 |  |  | — |  |  | — |  |  | — |
Land and land development | — |  |  | — |  |  | 14 |  |  | 14 |  |  |  |  | 308,150 |  |  | 308,164 |  |  | — |  |  | 256 |  |  | — |
Commercial business |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial business | 117 |  |  | 167 |  |  | 847 |  |  | 1,131 |  |  |  |  | 1,345,576 |  |  | 1,346,707 |  |  | 820 |  |  | 1,326 |  |  | — |
Small business scored | 506 |  |  | 328 |  |  | 906 |  |  | 1,740 |  |  |  |  | 773,814 |  |  | 775,554 |  |  | 83 |  |  | 1,374 |  |  | 61 |
Agricultural business, including secured by farmland | — |  |  | — |  |  | 1,022 |  |  | 1,022 |  |  |  |  | 286,447 |  |  | 287,469 |  |  | 1,021 |  |  | 1,022 |  |  | — |
One- to four-family residential | 107 |  |  | 109 |  |  | 1,370 |  |  | 1,586 |  |  |  |  | 680,782 |  |  | 682,368 |  |  | — |  |  | 3,182 |  |  | 772 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consumer—home equity revolving lines of credit | 840 |  |  | 164 |  |  | 719 |  |  | 1,723 |  |  |  |  | 461,096 |  |  | 462,819 |  |  | — |  |  | 1,831 |  |  | 30 |
Consumer—other | 314 |  |  | 34 |  |  | 4 |  |  | 352 |  |  |  |  | 98,061 |  |  | 98,413 |  |  | — |  |  | 19 |  |  | 4 |
Total | $ | 6,772 |  |  | $ | 1,187 |  |  | $ | 10,660 |  |  | $ | 18,619 |  |  |  |  | $ | 9,199,765 |  |  | $ | 9,218,384 |  |  | $ | 15,784 |  |  | $ | 24,039 |  |  | $ | 4,822 |

33

| December 31, 2020
| 30-59 Days Past Due |  | 60-89 Days Past Due |  | 90 Days or More Past Due |  | Total Past Due |  |  |  | Current |  | Total Loans |  | Non-accrual with no Allowance |  | Total Non-accrual (1) |  | Loans 90 Days or More Past Due and Accruing
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied | $ | — |  |  | $ | 182 |  |  | $ | 1,447 |  |  | $ | 1,629 |  |  |  |  | $ | 1,074,838 |  |  | $ | 1,076,467 |  |  | $ | 7,509 |  |  | $ | 8,429 |  |  | $ | — |
Investment properties | — |  |  | — |  |  | 7,981 |  |  | 7,981 |  |  |  |  | 1,947,703 |  |  | 1,955,684 |  |  | 8,979 |  |  | 8,979 |  |  | — |
Small balance CRE | — |  |  | 45 |  |  | 790 |  |  | 835 |  |  |  |  | 573,014 |  |  | 573,849 |  |  | 567 |  |  | 791 |  |  | — |
Multifamily real estate | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 428,223 |  |  | 428,223 |  |  | — |  |  | — |  |  | — |
Construction, land and land development: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial construction | — |  |  | — |  |  | 98 |  |  | 98 |  |  |  |  | 228,839 |  |  | 228,937 |  |  | — |  |  | 98 |  |  | — |
Multifamily construction | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 305,527 |  |  | 305,527 |  |  | — |  |  | — |  |  | — |
One- to four-family construction | 356 |  |  | — |  |  | 331 |  |  | 687 |  |  |  |  | 507,123 |  |  | 507,810 |  |  | — |  |  | 331 |  |  | — |
Land and land development | — |  |  | — |  |  | 317 |  |  | 317 |  |  |  |  | 248,598 |  |  | 248,915 |  |  | 302 |  |  | 507 |  |  | — |
Commercial business |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial business | 3,247 |  |  | 31 |  |  | 2,088 |  |  | 5,366 |  |  |  |  | 2,173,095 |  |  | 2,178,461 |  |  | 555 |  |  | 1,988 |  |  | 889 |
Small business scored | 1,459 |  |  | 891 |  |  | 2,048 |  |  | 4,398 |  |  |  |  | 739,053 |  |  | 743,451 |  |  | 91 |  |  | 3,419 |  |  | 136 |
Agricultural business, including secured by farmland | 298 |  |  | 37 |  |  | 1,548 |  |  | 1,883 |  |  |  |  | 298,066 |  |  | 299,949 |  |  | 1,412 |  |  | 1,743 |  |  | — |
One-to four-family residential | 4,620 |  |  | 955 |  |  | 4,053 |  |  | 9,628 |  |  |  |  | 708,311 |  |  | 717,939 |  |  | 171 |  |  | 3,556 |  |  | 1,899 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consumer secured by one- to four-family | 459 |  |  | 439 |  |  | 1,847 |  |  | 2,745 |  |  |  |  | 489,067 |  |  | 491,812 |  |  | — |  |  | 2,697 |  |  | 130 |
Consumer—other | 236 |  |  | 328 |  |  | — |  |  | 564 |  |  |  |  | 113,394 |  |  | 113,958 |  |  | — |  |  | 22 |  |  | — |
Total | $ | 10,675 |  |  | $ | 2,908 |  |  | $ | 22,548 |  |  | $ | 36,131 |  |  |  |  | $ | 9,834,851 |  |  | $ | 9,870,982 |  |  | $ | 19,586 |  |  | $ | 32,560 |  |  | $ | 3,054 |

(1) The Company did not recognize any interest income on non-accrual loans during the three or nine months ended September 30, 2021 or the year ended December 31, 2020.
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The following tables provide the activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2021 and 2020 (in thousands):

| For the Three Months Ended September 30, 2021
| Commercial Real Estate |  | Multifamily Real Estate |  | Construction and Land |  | Commercial Business |  | Agricultural Business |  | One- to Four-Family Residential |  | Consumer |  | Unallocated |  | Total
Allowance for credit losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance | $ | 60,349 |  |  | $ | 5,807 |  |  | $ | 30,899 |  |  | $ | 30,830 |  |  | $ | 3,256 |  |  | $ | 9,800 |  |  | $ | 7,068 |  |  | $ | — |  |  | $ | 148,009 |
(Recapture)/provision for credit losses | (4,057) |  |  | 850 |  |  | (1,557) |  |  | (3,825) |  |  | 83 |  |  | (359) |  |  | 15 |  |  | — |  |  | (8,850) |
Recoveries | 923 |  |  | — |  |  | — |  |  | 230 |  |  | 17 |  |  | 19 |  |  | 227 |  |  | — |  |  | 1,416 |
Charge-offs | — |  |  | — |  |  | — |  |  | (362) |  |  | (179) |  |  | — |  |  | (119) |  |  | — |  |  | (660) |
Ending balance | $ | 57,215 |  |  | $ | 6,657 |  |  | $ | 29,342 |  |  | $ | 26,873 |  |  | $ | 3,177 |  |  | $ | 9,460 |  |  | $ | 7,191 |  |  | $ | — |  |  | $ | 139,915 |
| For the Nine Months Ended September 30, 2021
| Commercial Real Estate |  | Multifamily Real Estate |  | Construction and Land |  | Commercial Business |  | Agricultural Business |  | One- to Four-Family Residential |  | Consumer |  | Unallocated |  | Total
Allowance for credit losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance | $ | 57,791 |  |  | $ | 3,893 |  |  | $ | 41,295 |  |  | $ | 35,007 |  |  | $ | 4,914 |  |  | $ | 9,913 |  |  | $ | 14,466 |  |  | $ | — |  |  | $ | 167,279 |
Provision/(recapture) for credit losses | 2,096 |  |  | 2,764 |  |  | (12,053) |  |  | (8,390) |  |  | (1,581) |  |  | (605) |  |  | (7,216) |  |  | — |  |  | (24,985) |
Recoveries | 1,094 |  |  | — |  |  | 100 |  |  | 1,530 |  |  | 25 |  |  | 152 |  |  | 620 |  |  | — |  |  | 3,521 |
Charge-offs | (3,766) |  |  | — |  |  | — |  |  | (1,274) |  |  | (181) |  |  | — |  |  | (679) |  |  | — |  |  | (5,900) |
Ending balance | $ | 57,215 |  |  | $ | 6,657 |  |  | $ | 29,342 |  |  | $ | 26,873 |  |  | $ | 3,177 |  |  | $ | 9,460 |  |  | $ | 7,191 |  |  | $ | — |  |  | $ | 139,915 |

The changes in the allowance for credit losses - loans during the three and nine months ended September 30, 2021 were primarily the result of the $8.9 million recapture of provision for credit losses - loans recorded during the current quarter and the $25.0 million recapture of provision recorded during the nine months ended September 30, 2021. The change in allowance for credit losses - loans during the nine months ended September 30, 2021 was also impacted by net charge offs of $2.4 million recognized during the period. The recapture of provision for credit losses - loans for the current quarter and the nine months ended September 30, 2021 primarily reflects improvement in the forecasted economic indicators used to calculate the allowance for credit losses - loans and a decrease in adversely classified loans.
35

| For the Three Months Ended September 30, 2020
| Commercial Real Estate |  | Multifamily Real Estate |  | Construction and Land |  | Commercial Business |  | Agricultural Business |  | One- to Four-Family Residential |  | Consumer |  | Unallocated |  | Total
Allowance for credit losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance | $ | 53,166 |  |  | $ | 3,504 |  |  | $ | 36,916 |  |  | $ | 33,870 |  |  | $ | 4,517 |  |  | $ | 12,746 |  |  | $ | 11,633 |  |  | $ | — |  |  | $ | 156,352 |
Provision/(recapture) for credit losses | 6,895 |  |  | (248) |  |  | 2,561 |  |  | 2,550 |  |  | 1,026 |  |  | 100 |  |  | 757 |  |  | — |  |  | 13,641 |
Recoveries | 23 |  |  | — |  |  | — |  |  | 246 |  |  | — |  |  | 94 |  |  | 82 |  |  | — |  |  | 445 |
Charge-offs | (379) |  |  | — |  |  | — |  |  | (1,297) |  |  | (492) |  |  | (72) |  |  | (233) |  |  | — |  |  | (2,473) |
Ending balance | $ | 59,705 |  |  | $ | 3,256 |  |  | $ | 39,477 |  |  | $ | 35,369 |  |  | $ | 5,051 |  |  | $ | 12,868 |  |  | $ | 12,239 |  |  | $ | — |  |  | $ | 167,965 |
| For the Nine Months Ended September 30, 2020
| Commercial Real Estate |  | Multifamily Real Estate |  | Construction and Land |  | Commercial Business |  | Agricultural Business |  | One- to Four-Family Residential |  | Consumer |  | Unallocated |  | Total
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance | $ | 30,591 |  |  | $ | 4,754 |  |  | $ | 22,994 |  |  | $ | 23,370 |  |  | $ | 4,120 |  |  | $ | 4,136 |  |  | $ | 8,202 |  |  | $ | 2,392 |  |  | $ | 100,559 |
Impact of Adopting ASC 326 | (2,864) |  |  | (2,204) |  |  | 2,515 |  |  | 3,010 |  |  | (351) |  |  | 7,125 |  |  | 2,973 |  |  | (2,392) |  |  | 7,812 |
Provision/(recapture) for loan losses | 32,213 |  |  | 772 |  |  | 13,963 |  |  | 14,402 |  |  | 64 |  |  | 1,470 |  |  | 1,994 |  |  | — |  |  | 64,878 |
Recoveries | 244 |  |  | — |  |  | 105 |  |  | 821 |  |  | 1,772 |  |  | 273 |  |  | 238 |  |  | — |  |  | 3,453 |
Charge-offs | (479) |  |  | (66) |  |  | (100) |  |  | (6,234) |  |  | (554) |  |  | (136) |  |  | (1,168) |  |  | — |  |  | (8,737) |
Ending balance | $ | 59,705 |  |  | $ | 3,256 |  |  | $ | 39,477 |  |  | $ | 35,369 |  |  | $ | 5,051 |  |  | $ | 12,868 |  |  | $ | 12,239 |  |  | $ | — |  |  | $ | 167,965 |

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Note 5: REAL ESTATE OWNED, NET
The following table presents the changes in REO for the three and nine months ended September 30, 2021 and 2020 (in thousands):

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Balance, beginning of the period | $ | 763 |  |  | $ | 2,400 |  |  | $ | 816 |  |  | $ | 814 |
Additions from loan foreclosures | 89 |  |  | — |  |  | 512 |  |  | 1,588 |
Proceeds from dispositions of REO | — |  |  | (707) |  |  | (783) |  |  | (805) |
Gain on sale of REO | — |  |  | 120 |  |  | 307 |  |  | 216 |
Valuation adjustments in the period | — |  |  | (18) |  |  | — |  |  | (18) |
Balance, end of the period | $ | 852 |  |  | $ | 1,795 |  |  | $ | 852 |  |  | $ | 1,795 |

REO properties are recorded at the estimated fair value of the property, less expected selling costs, establishing a new cost basis. Subsequently, REO properties are carried at the lower of the new cost basis or updated fair market values, based on updated appraisals of the underlying properties, as received. Valuation allowances on the carrying value of REO may be recognized based on updated appraisals or on management’s authorization to reduce the selling price of a property. The Company had no foreclosed one- to four-family residential real estate properties held as REO at both September 30, 2021 and December 31, 2020. The Company had $609,000 of one- to four-family residential loans in the process of foreclosure at both September 30, 2021 and December 31, 2020.
Note 6: GOODWILL, OTHER INTANGIBLE ASSETS AND MORTGAGE SERVICING RIGHTS
Goodwill and Other Intangible Assets: At September 30, 2021, intangible assets are comprised of goodwill and CDI acquired in business combinations. Goodwill represents the excess of the purchase consideration paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination, and is not amortized but is reviewed at least annually for impairment. Banner has identified one reporting unit for purposes of evaluating goodwill for impairment. The Company completed an assessment of qualitative factors as of December 31, 2020 and as a result of the economic impact of the COVID-19 pandemic concluded further analysis was required. The Company completed a quantitative goodwill impairment test and concluded the fair value of Banner Bank, the reporting unit, exceeded the carrying value of the reporting unit including goodwill and therefore no impairment existed as of December 31, 2020.
CDI represents the value of transaction-related deposits and the value of the client relationships associated with the deposits. The Company amortizes CDI assets over their estimated useful lives and reviews them at least annually for events or circumstances that could impair their value.
The following table summarizes the changes in the Company’s goodwill and other intangibles for the nine months ended September 30, 2021 and the year ended December 31, 2020 (in thousands):

| Goodwill |  | CDI |  | Total
Balance, December 31, 2019 | $ | 373,121 |  |  | $ | 29,158 |  |  | $ | 402,279 |
Amortization | — |  |  | (7,732) |  |  | (7,732) |
Balance, December 31, 2020 | 373,121 |  |  | 21,426 |  |  | 394,547 |
Amortization | — |  |  | (4,997) |  |  | (4,997) |
Balance, September 30, 2021 | $ | 373,121 |  |  | $ | 16,429 |  |  | $ | 389,550 |

The following table presents the estimated amortization expense with respect to CDI as of September 30, 2021 for the periods indicated (in thousands):

|  | Estimated Amortization
Remainder of 2021 |  | $ | 1,574 |
2022 |  | 5,317 |
2023 |  | 3,814 |
2024 |  | 2,659 |
2025 |  | 1,575 |
Thereafter |  | 1,490 |
|  | $ | 16,429 |

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Mortgage Servicing Rights: Mortgage servicing rights are reported in other assets. Mortgage servicing rights are initially recorded 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, which is recognized in servicing fee income within mortgage banking operations on the Consolidated Statement of Operations. However, if the fair value is greater than the amortized cost, the amount above the amortized cost is not recognized in the carrying value. During the three and nine months ended September 30, 2021 and 2020, the Company did not record any impairment charges or recoveries against mortgage servicing rights. The unpaid principal balance for loans which mortgage servicing rights have been recorded totaled $2.68 billion and $2.64 billion at September 30, 2021 and December 31, 2020, respectively. Custodial accounts maintained in connection with this servicing totaled $3.1 million and $3.8 million at September 30, 2021 and December 31, 2020, respectively.
An analysis of our mortgage servicing rights for the three and nine months ended September 30, 2021 and 2020 is presented below (in thousands):

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Balance, beginning of the period | $ | 15,612 |  |  | $ | 14,424 |  |  | $ | 15,223 |  |  | $ | 14,148 |
Additions—amounts capitalized | 1,621 |  |  | 2,426 |  |  | 5,418 |  |  | 6,030 |
Additions—through purchase | 53 |  |  | 40 |  |  | 121 |  |  | 141 |
Amortization (1) | (1,533) |  |  | (2,075) |  |  | (5,009) |  |  | (5,504) |
Balance, end of the period (2) | $ | 15,753 |  |  | $ | 14,815 |  |  | $ | 15,753 |  |  | $ | 14,815 |

(1) Amortization of mortgage servicing rights is recorded as a reduction of loan servicing income within mortgage banking operations and any unamortized balance is fully amortized if the loan repays in full.
(2) There was no valuation allowance as of both September 30, 2021 and 2020.
Note 7: DEPOSITS
Deposits consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):

| September 30, 2021 |  |  |  | December 31, 2020
Non-interest-bearing accounts | $ | 6,400,864 |  |  |  |  | $ | 5,492,924 |  |  |
Interest-bearing checking | 1,799,657 |  |  |  |  | 1,569,435 |  |  |
Regular savings accounts | 2,773,995 |  |  |  |  | 2,398,482 |  |  |
Money market accounts | 2,339,107 |  |  |  |  | 2,191,135 |  |  |
Total interest-bearing transaction and saving accounts | 6,912,759 |  |  |  |  | 6,159,052 |  |  |
Certificates of deposit: |  |  |  |  |  |  |
Certificates of deposit less than or equal to $250,000 | 663,592 |  |  |  |  | 718,256 |  |  |
Certificates of deposit greater than $250,000 | 187,462 |  |  |  |  | 197,064 |  |  |
Total certificates of deposit(1) | 851,054 |  |  |  |  | 915,320 |  |  |
Total deposits | $ | 14,164,677 |  |  |  |  | $ | 12,567,296 |  |  |
Included in total deposits: |  |  |  |  |  |  |
Public fund transaction and savings accounts | $ | 354,821 |  |  |  |  | $ | 302,875 |  |  |
Public fund interest-bearing certificates | 40,851 |  |  |  |  | 59,127 |  |  |
Total public deposits | $ | 395,672 |  |  |  |  | $ | 362,002 |  |  |

(1) Certificates of deposit include $2,000 and $58,000 of acquisition discounts at September 30, 2021 and December 31, 2020, respectively.
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At September 30, 2021 and December 31, 2020, the Company had certificates of deposit of $191.5 million and $203.6 million, respectively, that were equal to or greater than $250,000.
Scheduled maturities and weighted average interest rates of certificates of deposit at September 30, 2021 are as follows (dollars in thousands):

| September 30, 2021
| Amount |  | Weighted Average Rate
Maturing in one year or less | $ | 644,909 |  |  | 0.49 | %
Maturing after one year through two years | 130,384 |  |  | 0.80 |
Maturing after two years through three years | 52,948 |  |  | 0.78 |
Maturing after three years through four years | 11,044 |  |  | 1.27 |
Maturing after four years through five years | 10,261 |  |  | 0.42 |
Maturing after five years | 1,508 |  |  | 0.88 |
Total certificates of deposit | $ | 851,054 |  |  | 0.57 | %

Note 8: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents estimated fair values of the Company’s financial instruments as of September 30, 2021 and December 31, 2020, whether or not measured at fair value in the Consolidated Statements of Financial Condition (dollars in thousands):

|  |  | September 30, 2021 |  | December 31, 2020
| Level |  | Carrying Value |  | Estimated Fair Value |  | Carrying Value |  | Estimated Fair Value
Assets: |  |  |  |  |  |  |  |  |
Cash and cash equivalents | 1 |  | $ | 2,200,582 |  |  | $ | 2,200,582 |  |  | $ | 1,234,183 |  |  | $ | 1,234,183 |
Securities—trading | 3 |  | 26,875 |  |  | 26,875 |  |  | 24,980 |  |  | 24,980 |
Securities—available-for-sale | 2 |  | 3,446,575 |  |  | 3,446,575 |  |  | 2,322,593 |  |  | 2,322,593 |
Securities—held-to-maturity | 2 |  | 445,499 |  |  | 463,913 |  |  | 410,038 |  |  | 436,882 |
Securities—held-to-maturity | 3 |  | 2,313 |  |  | 2,089 |  |  | 11,769 |  |  | 11,799 |
Securities purchased under agreements to resell | 2 |  | 300,000 |  |  | 300,000 |  |  | — |  |  | — |
Loans held for sale | 2 |  | 63,678 |  |  | 64,245 |  |  | 243,795 |  |  | 245,667 |
Loans receivable | 3 |  | 9,218,384 |  |  | 9,271,840 |  |  | 9,870,982 |  |  | 9,810,293 |
FHLB stock | 3 |  | 12,000 |  |  | 12,000 |  |  | 16,358 |  |  | 16,358 |
Bank-owned life insurance | 1 |  | 192,950 |  |  | 192,950 |  |  | 191,830 |  |  | 191,830 |
Mortgage servicing rights | 3 |  | 15,753 |  |  | 22,814 |  |  | 15,223 |  |  | 18,084 |
Derivatives: |  |  |  |  |  |  |  |  |
Interest rate swaps | 2 |  | 25,627 |  |  | 25,627 |  |  | 39,066 |  |  | 39,066 |
Interest rate lock and forward sales commitments | 2,3 |  | 2,309 |  |  | 2,309 |  |  | 5,641 |  |  | 5,641 |
Liabilities: |  |  |  |  |  |  |  |  |
Demand, interest checking and money market accounts | 2 |  | 10,539,628 |  |  | 10,539,628 |  |  | 9,253,494 |  |  | 9,253,494 |
Regular savings | 2 |  | 2,773,995 |  |  | 2,773,995 |  |  | 2,398,482 |  |  | 2,398,482 |
Certificates of deposit | 2 |  | 851,054 |  |  | 851,780 |  |  | 915,320 |  |  | 919,920 |
FHLB advances | 2 |  | 50,000 |  |  | 50,629 |  |  | 150,000 |  |  | 152,779 |
Other borrowings | 2 |  | 247,358 |  |  | 247,358 |  |  | 184,785 |  |  | 184,785 |
Subordinated notes, net | 2 |  | 98,472 |  |  | 105,875 |  |  | 98,201 |  |  | 98,201 |
Junior subordinated debentures | 3 |  | 124,853 |  |  | 124,853 |  |  | 116,974 |  |  | 116,974 |
Derivatives: |  |  |  |  |  |  |  |  |
Interest rate swaps | 2 |  | 15,550 |  |  | 15,550 |  |  | 22,336 |  |  | 22,336 |
Interest rate lock and forward sales commitments | 2 |  | 136 |  |  | 136 |  |  | 1,755 |  |  | 1,755 |

The Company measures and discloses certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (that is, not a forced liquidation or distressed sale). GAAP establishes a consistent framework for measuring fair value and disclosure requirements about fair value measurements. Among other things, the accounting standard requires the reporting entity 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
39

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.
•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.
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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 September 30, 2021 and December 31, 2020 (in thousands):

| September 30, 2021
| Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets: |  |  |  |  |  |  |
Securities—trading |  |  |  |  |  |  |
Corporate bonds (Trust Preferred Securities) | $ | — |  |  | $ | — |  |  | $ | 26,875 |  |  | $ | 26,875 |
Securities—available-for-sale |  |  |  |  |  |  |
U.S. Government and agency obligations | — |  |  | 181,052 |  |  | — |  |  | 181,052 |
Municipal bonds | — |  |  | 310,391 |  |  | — |  |  | 310,391 |
Corporate bonds | — |  |  | 164,244 |  |  | — |  |  | 164,244 |
Mortgage-backed or related securities | — |  |  | 2,584,264 |  |  | — |  |  | 2,584,264 |
Asset-backed securities | — |  |  | 206,624 |  |  | — |  |  | 206,624 |
| — |  |  | 3,446,575 |  |  | — |  |  | 3,446,575 |
Loans held for sale | — |  |  | 41,480 |  |  | — |  |  | 41,480 |
Derivatives |  |  |  |  |  |  |
Interest rate swaps | — |  |  | 25,627 |  |  | — |  |  | 25,627 |
Interest rate lock and forward sales commitments | — |  |  | 914 |  |  | 1,395 |  |  | 2,309 |
| $ | — |  |  | $ | 3,514,596 |  |  | $ | 28,270 |  |  | $ | 3,542,866 |
Liabilities: |  |  |  |  |  |  |
Junior subordinated debentures | $ | — |  |  | $ | — |  |  | $ | 124,853 |  |  | $ | 124,853 |
Derivatives |  |  |  |  |  |  |
Interest rate swaps | — |  |  | 15,550 |  |  | — |  |  | 15,550 |
Interest rate lock and forward sales commitments | — |  |  | 136 |  |  | — |  |  | 136 |
| $ | — |  |  | $ | 15,686 |  |  | $ | 124,853 |  |  | $ | 140,539 |

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| December 31, 2020
| Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets: |  |  |  |  |  |  |
Securities—trading |  |  |  |  |  |  |
Corporate bonds (Trust Preferred Securities) | $ | — |  |  | $ | — |  |  | $ | 24,980 |  |  | $ | 24,980 |
Securities—available-for-sale |  |  |  |  |  |  |
U.S. Government and agency obligations | — |  |  | 141,735 |  |  | — |  |  | 141,735 |
Municipal bonds | — |  |  | 303,518 |  |  | — |  |  | 303,518 |
Corporate bonds | — |  |  | 221,769 |  |  | — |  |  | 221,769 |
Mortgage-backed securities | — |  |  | 1,646,152 |  |  | — |  |  | 1,646,152 |
Asset-backed securities | — |  |  | 9,419 |  |  | — |  |  | 9,419 |
| — |  |  | 2,322,593 |  |  | — |  |  | 2,322,593 |
Loans held for sale | — |  |  | 133,554 |  |  | — |  |  | 133,554 |
Derivatives |  |  |  |  |  |  |
Interest rate swaps | — |  |  | 39,066 |  |  | — |  |  | 39,066 |
Interest rate lock and forward sales commitments | — |  |  | 420 |  |  | 5,221 |  |  | 5,641 |
| $ | — |  |  | $ | 2,495,633 |  |  | $ | 30,201 |  |  | $ | 2,525,834 |
Liabilities: |  |  |  |  |  |  |
Junior subordinated debentures, net of unamortized deferred issuance costs | $ | — |  |  | $ | — |  |  | $ | 116,974 |  |  | $ | 116,974 |
Derivatives |  |  |  |  |  |  |
Interest rate swaps | — |  |  | 22,336 |  |  | — |  |  | 22,336 |
Interest rate lock and forward sales commitments | — |  |  | 1,755 |  |  | — |  |  | 1,755 |
| $ | — |  |  | $ | 24,091 |  |  | $ | 116,974 |  |  | $ | 141,065 |

The following methods were used to estimate the fair value of each class of financial instruments above:
Securities: The estimated fair values of investment securities and mortgaged-backed securities are priced using current active market quotes, if available, which are considered Level 1 measurements. For most of the portfolio, matrix pricing based on the securities’ relationship to other benchmark quoted prices is used to establish the fair value. These measurements are considered Level 2. Due to the continued limited activity in the trust preferred markets that have limited the observability of market spreads for some of the Company’s TPS securities, management has classified these securities as a Level 3 fair value measure. Management periodically reviews the pricing information received from third-party pricing services and tests those prices against other sources to validate the reported fair values.
Loans Held for Sale: Fair values for residential mortgage loans held for sale are determined by comparing actual loan rates to current secondary market prices for similar loans. Fair values for multifamily loans held for sale are calculated based on discounted cash flows using as a discount rate a combination of market spreads for similar loan types added to selected index rates.
Mortgage Servicing Rights: Fair values are estimated based on an independent dealer analysis of discounted cash flows. The evaluation utilizes assumptions market participants would use in determining fair value including prepayment speeds, delinquency and foreclosure rates, the discount rate, servicing costs, and the timing of cash flows. The mortgage servicing portfolio is stratified by loan type and fair value estimates are adjusted up or down based on the serviced loan interest rates versus current rates on new loan originations since the most recent independent analysis.
Junior Subordinated Debentures: The fair value of junior subordinated debentures is estimated using an income approach technique. The significant inputs included in the estimation of fair value are the credit risk adjusted spread and three month LIBOR. The credit risk adjusted spread represents the nonperformance risk of the liability. The Company utilizes an external valuation firm to validate the reasonableness of the credit risk adjusted spread used to determine the fair value. The junior subordinated debentures are carried at fair value which represents the estimated amount that would be paid to transfer these liabilities in an orderly transaction amongst market participants. Due to inactivity in the trust preferred markets that have limited the observability of market spreads, management has classified this as a Level 3 fair value measure.
Derivatives: Derivatives include interest rate swap agreements, interest rate lock commitments to originate loans held for sale and forward sales contracts to sell loans and securities related to mortgage banking activities. Fair values for these instruments, which generally change as a result of changes in the level of market interest rates, are estimated based on dealer quotes and secondary market sources.
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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 September 30, 2021 and December 31, 2020. The factors used in the fair values 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, and qualitative information about the unobservable inputs for certain of the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring and non-recurring basis at September 30, 2021 and December 31, 2020:

|  |  |  |  |  | Weighted Average Rate / Range
Financial Instruments |  | Valuation Techniques |  | Unobservable Inputs |  | September 30, 2021 |  | December 31, 2020
Corporate bonds (TPS securities) |  | Discounted cash flows |  | Discount rate |  | 3.63 | % |  | 4.24 | %
Junior subordinated debentures |  | Discounted cash flows |  | Discount rate |  | 3.63 | % |  | 4.24 | %
Loans individually evaluated |  | Collateral valuations |  | Discount to appraised value |  | 8.5% to 20.0% |  | 0.0% to 20.0%
REO |  | Appraisals |  | Discount to appraised value |  | 60.91 | % |  | 51.86 | %
Interest rate lock commitments |  | Pricing model |  | Pull-through rate |  | 86.43 | % |  | 86.35 | %

TPS securities: Management believes that the credit risk-adjusted spread used to develop the discount rate utilized in the fair value measurement of TPS securities is indicative of the risk premium a willing market participant would require under current market conditions for instruments with similar contractual rates and terms and conditions and issuers with similar credit risk profiles and with similar expected probability of default. Management attributes the change in fair value of these instruments, compared to their par value, primarily to perceived general market adjustments to the risk premiums for these types of assets subsequent to their issuance.
Junior subordinated debentures: Similar to the TPS securities discussed above, management believes that the credit risk-adjusted spread utilized in the fair value measurement of the junior subordinated debentures is indicative of the risk premium a willing market participant would require under current market conditions for an issuer with Banner’s credit risk profile. Management attributes the change in fair value of the junior subordinated debentures, compared to their par value, primarily to perceived general market adjustments to the risk premiums for these types of liabilities subsequent to their issuance. Future contractions in the risk adjusted spread relative to the spread currently utilized to measure the Company’s junior subordinated debentures at fair value as of September 30, 2021, or the passage of time, will result in negative fair value adjustments. At September 30, 2021, the discount rate utilized was based on a credit spread of 350 basis points and three-month LIBOR of 13 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.
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The following tables provide a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and nine months ended September 30, 2021 and 2020 (in thousands):

| Three Months Ended |  | Nine Months Ended
| September 30, 2021 |  | September 30, 2021
| Level 3 Fair Value Inputs |  | Level 3 Fair Value Inputs
| TPS Securities |  | Borrowings—Junior Subordinated Debentures |  | Interest Rate Lock Commitments |  | TPS Securities |  | Borrowings— Junior Subordinated Debentures |  | Interest rate lock and forward sales commitments
Beginning balance | $ | 25,097 |  |  | $ | 117,520 |  |  | $ | 2,574 |  |  | $ | 24,980 |  |  | $ | 116,974 |  |  | $ | 5,221 |
Total gains or losses recognized |  |  |  |  |  |  |  |  |  |  |
Assets gains (losses) | 1,778 |  |  | — |  |  | (1,179) |  |  | 1,895 |  |  | — |  |  | (3,826) |
Liabilities losses | — |  |  | 7,333 |  |  | — |  |  |  |  | 7,879 |  |  | — |
Ending balance at September 30, 2021 | $ | 26,875 |  |  | $ | 124,853 |  |  | $ | 1,395 |  |  | $ | 26,875 |  |  | $ | 124,853 |  |  | $ | 1,395 |
| Three Months Ended |  | Nine Months Ended
| September 30, 2020 |  | September 30, 2020
| Level 3 Fair Value Inputs |  | Level 3 Fair Value Inputs
| TPS Securities |  | Borrowings—Junior Subordinated Debentures |  | Interest Rate Lock Commitments |  | TPS Securities |  | Borrowings— Junior Subordinated Debentures |  | Interest rate lock and forward sales commitments
Beginning balance | $ | 23,239 |  |  | $ | 109,613 |  |  | $ | 5,816 |  |  | $ | 25,636 |  |  | $ | 119,304 |  |  | $ | 791 |
Total gains or losses recognized |  |  |  |  |  |  |  |  |  |  |
Assets (losses) gains | 37 |  |  | — |  |  | 2,638 |  |  | (2,360) |  |  | — |  |  | 7,663 |
Liabilities gains | — |  |  | 208 |  |  | — |  |  | — |  |  | (9,483) |  |  | — |
Ending balance at September 30, 2020 | $ | 23,276 |  |  | $ | 109,821 |  |  | $ | 8,454 |  |  | $ | 23,276 |  |  | $ | 109,821 |  |  | $ | 8,454 |

Interest income and dividends from the TPS securities are recorded as a component of interest income. Interest expense related to the junior subordinated debentures is measured based on contractual interest rates and reported in interest expense. The change in fair value of the junior subordinated debentures, which represents changes in instrument specific credit risk, is recorded in other comprehensive income. See Note 13, Derivatives and Hedging, for detail on gains and losses on Level 3 interest rate lock commitments.
Items Measured at Fair Value on a Non-recurring Basis:
The following tables present financial assets 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 as of September 30, 2021 and December 31, 2020 (in thousands):

| September 30, 2021
| Level 1 |  | Level 2 |  | Level 3 |  | Total
Loans individually evaluated | $ | — |  |  | $ | — |  |  | $ | 3,054 |  |  | $ | 3,054 |
REO | — |  |  | — |  |  | 852 |  |  | 852 |
| December 31, 2020
| Level 1 |  | Level 2 |  | Level 3 |  | Total
Loans individually evaluated | $ | — |  |  | $ | — |  |  | $ | 3,482 |  |  | $ | 3,482 |
REO | — |  |  | — |  |  | 816 |  |  | 816 |

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The following table presents the losses resulting from non-recurring fair value adjustments for the three and nine months ended September 30, 2021 and 2020 (in thousands):

|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2021 |  | 2020 |  | 2021 |  | 2020
Loans individually evaluated |  | $ | — |  |  | $ | (492) |  |  | $ | (303) |  |  | $ | (2,492) |
REO |  | — |  |  | — |  |  | — |  |  | — |
Total loss from non-recurring measurements |  | $ | — |  |  | $ | (492) |  |  | $ | (303) |  |  | $ | (2,492) |

Loans individually evaluated: Expected credit losses for loans evaluated individually are measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or when the Bank determines that foreclosure is probable, the expected credit loss is measured based on the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. As a practical expedient, the Bank measures the expected credit loss for a loan using the fair value of the collateral, if repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the Bank’s assessment as of the reporting date. In both cases, if the fair value of the collateral is less than the amortized cost basis of the loan, the Bank will recognize an allowance as the difference between the fair value of the collateral, less costs to sell (if applicable) at the reporting date and the amortized cost basis of the loan. If the fair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis will be limited to the amount previously charged-off by the subsequent changes in the expected credit losses for loans evaluated individually are included within the provision for credit losses in the same manner in which the expected credit loss initially was recognized or as a reduction in the provision that would otherwise be reported.
REO: The Company records REO (acquired through a lending relationship) at fair value on a non-recurring basis. Fair value adjustments on REO are based on updated real estate appraisals which are based on current market conditions. All REO properties are recorded at the lower of the estimated fair value of the real estate, less expected selling costs, or the carrying amount of the defaulted loans. From time to time, non-recurring fair value adjustments to REO are recorded to reflect partial write-downs based on an observable market price or current appraised value of property. Banner considers any valuation inputs related to REO to be Level 3 inputs. The individual carrying values of these assets are reviewed for impairment at least annually and any additional impairment charges are expensed to operations.
Note 9: INCOME TAXES AND DEFERRED 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 will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’s income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period of change. A valuation allowance is recognized as a reduction to deferred tax assets when management determines it is more likely than not that deferred tax assets will not be available to offset future income tax liabilities.
Accounting standards for income taxes prescribe a recognition threshold and measurement process for financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a tax return, and also provide 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 September 30, 2021, the Company has recognized $450,000 of unrecognized tax benefits for uncertain tax positions. The Company does not anticipate that there are additional uncertain tax positions or that any uncertain tax position which has not been recognized would materially affect the effective tax rate if recognized. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits in the income tax expense. The Company files consolidated income tax returns in the U.S. federal jurisdiction and in the Oregon, California, Utah, Idaho and Montana state jurisdictions.
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.
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The following table presents the balances of the Company’s tax credit investments and related unfunded commitments at September 30, 2021 and December 31, 2020 (in thousands):

| September 30, 2021 |  | December 31, 2020
Tax credit investments | $ | 47,783 |  |  | $ | 33,528 |
Unfunded commitments—tax credit investments | 22,915 |  |  | 18,306 |

The following table presents other information related to the Company’s tax credit investments for the three and nine months ended September 30, 2021 and 2020 (in thousands):

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Tax credits and other tax benefits recognized | $ | 1,114 |  |  | $ | 981 |  |  | $ | 3,341 |  |  | $ | 2,943 |
Tax credit amortization expense included in provision for income taxes | 915 |  |  | 849 |  |  | 2,745 |  |  | 2,507 |

Note 10: CALCULATION OF WEIGHTED AVERAGE SHARES OUTSTANDING FOR EARNINGS PER SHARE (EPS)
The following table reconciles basic to diluted weighted average shares outstanding used to calculate earnings per share data for the three and nine months ended September 30, 2021 and 2020 (in thousands, except shares and per share data):

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Net income | $ | 49,884 |  |  | $ | 36,548 |  |  | $ | 151,121 |  |  | $ | 76,971 |
Basic weighted average shares outstanding | 34,446,510 |  |  | 35,193,109 |  |  | 34,716,914 |  |  | 35,285,567 |
Dilutive effect of unvested restricted stock | 222,982 |  |  | 123,570 |  |  | 295,314 |  |  | 239,204 |
Diluted weighted shares outstanding | 34,669,492 |  |  | 35,316,679 |  |  | 35,012,228 |  |  | 35,524,771 |
Earnings per common share |  |  |  |  |  |  |
Basic | $ | 1.45 |  |  | $ | 1.04 |  |  | $ | 4.35 |  |  | $ | 2.18 |
Diluted | $ | 1.44 |  |  | $ | 1.03 |  |  | $ | 4.32 |  |  | $ | 2.17 |

Note 11: STOCK-BASED COMPENSATION PLANS
The Company operates the following stock-based compensation plans as approved by its shareholders:
•2014 Omnibus Incentive Plan (the 2014 Plan).
•2018 Omnibus Incentive Plan (the 2018 Plan).
The purpose of these plans is to promote the success and enhance the value of the Company by providing a means for attracting and retaining highly skilled employees, officers and directors of Banner Corporation and its affiliates and linking their personal interests with those of the Company’s shareholders. Under these plans the Company currently has outstanding restricted stock share grants and restricted stock unit grants.
2014 Omnibus Incentive Plan
The 2014 Plan was approved by shareholders on April 22, 2014. The 2014 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, other stock-based awards and other cash awards, and provides for vesting requirements which may include time-based or performance-based conditions. The Company reserved 900,000 shares of its common stock for issuance under the 2014 Plan in connection with the exercise of awards. As of September 30, 2021, 302,167 restricted stock shares and 406,689 restricted stock units have been granted under the 2014 Plan of which 2,152 restricted stock shares and 113,906 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
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September 30, 2021, 481,361 restricted stock units have been granted under the 2018 Plan of which 394,416 restricted stock units are unvested.
The expense associated with all restricted stock grants (including restricted stock shares and restricted stock units) was $2.4 million and $7.0 million for the three and nine month periods ended September 30, 2021 and was $2.5 million and $6.9 million for the three and nine month periods ended September 30, 2020, respectively. Unrecognized compensation expense for these awards as of September 30, 2021 was $13.3 million and will be amortized over the next 31 months.
Note 12: COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance-Sheet Risk — The Company has financial instruments with off-balance-sheet risk generated in the normal course of business to meet the financing needs of our clients. These financial instruments include commitments to extend credit, commitments related to standby letters of credit, commitments to originate loans, commitments to sell loans, commitments to buy and 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.
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
| September 30, 2021 |  | December 31, 2020
Commitments to extend credit | $ | 3,443,004 |  |  | $ | 3,207,072 |
Standby letters of credit and financial guarantees | 20,987 |  |  | 18,415 |
Commitments to originate loans | 106,989 |  |  | 101,426 |
Risk participation agreement | 40,325 |  |  | 40,949 |
Derivatives also included in Note 13: |  |  |
Commitments to originate loans held for sale | 139,578 |  |  | 169,653 |
Commitments to sell loans secured by one- to four-family residential properties | 55,641 |  |  | 79,414 |
Commitments to sell securities related to mortgage banking activities | 142,500 |  |  | 204,000 |

In addition to the commitments disclosed in the table above, the Company is committed to funding its’ unfunded tax credit investments (see Note 9, Income Taxes). During 2019, the Company entered into an agreement to invest $10 million in a limited partnership. The Company had funded $5.5 million of the commitment, with $4.5 million of the commitment remaining to be funded at September 30, 2021, compared to $2.8 million of the commitment funded, with $7.2 million to be funded at December 31, 2020. During the first quarter of 2021, the Company entered into an agreement to invest $4.5 million in another limited partnership. At September 30, 2021 the Company had funded $555,000 of the commitment, with $3.9 million of the commitment remaining to be funded. During the third quarter of 2021, the Company entered into an agreement to invest $3.0 million in an additional limited partnership. At September 30, 2021 the Company had funded $900,000 of the commitment with $2.1 million of the commitment remaining to be funded.
Commitments to extend credit are agreements to lend to a client, as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Many of the commitments may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements. Each client’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the client. The type of collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties. The Company’s allowance for credit losses - unfunded loan commitments at September 30, 2021 and December 31, 2020 was $10.1 million and $13.3 million, respectively.
Standby letters of credit are conditional commitments issued to guarantee a client’s performance or payment to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. Banner Bank has a risk participation agreement under which Banner Bank guarantees the financial performance of a borrower on the participated portion of an interest rate swap on a loan.
Interest rates on residential one- to four-family mortgage loan applications are typically rate locked (committed) to clients during the application stage for periods ranging from 30 to 60 days, the most typical period being 45 days. Traditionally, these loan applications with rate lock commitments had the pricing for the sale of these loans locked with various qualified investors under a best-efforts delivery program at or near the time the interest rate is locked with the client. Banner Bank then attempts to deliver these loans before their rate locks expired. This arrangement generally required delivery of the loans prior to the expiration of the rate lock. Delays in funding the loans would require a lock extension. The cost of a lock extension at times was borne by the client and at times by Banner Bank. These lock extension costs have
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not had a material impact to the Company’s operations. For mandatory delivery commitments the Company enters into forward commitments at specific prices and settlement dates to deliver either: (1) residential mortgage loans for purchase by secondary market investors (i.e., Freddie Mac or Fannie Mae), or (2) mortgage-backed securities to broker/dealers. The purpose of these forward commitments is to offset the movement in interest rates between the execution of its residential mortgage rate lock commitments with borrowers and the sale of those loans to the secondary market investor. There were no counterparty default losses on forward contracts during the three and nine months ended September 30, 2021 or September 30, 2020. Market risk with respect to forward contracts arises principally from changes in the value of contractual positions due to changes in interest rates. The Company limits its exposure to market risk by monitoring differences between commitments to clients and forward contracts with market investors and securities broker/dealers. In the event the Company has forward delivery contract commitments in excess of available mortgage loans, the transaction is completed by either paying or receiving a fee to or from the investor or broker/dealer equal to the increase or decrease in the market value of the forward contract.
In the normal course of business, the Company and/or its subsidiaries have various legal proceedings and other contingent matters outstanding. These proceedings and the associated legal claims are often contested and the outcome of individual matters is not always predictable. These claims and counter-claims typically arise during the course of collection efforts on problem loans or with respect to action to enforce liens on properties in which the Bank holds a security interest. Based upon the information known to management at this time, the Company and the Bank are not a party to any legal proceedings that management believes would have a material adverse effect on the results of operations or consolidated financial position at September 30, 2021.
In connection with certain asset sales, the Bank typically makes representations and warranties about the underlying assets conforming to specified guidelines. If the underlying assets do not conform to the specifications, the Bank may have an obligation to repurchase the assets or indemnify the purchaser against any loss. The Bank believes that the potential for material loss under these arrangements is remote. Accordingly, the fair value of such obligations is not material.
NOTE 13: DERIVATIVES AND HEDGING
The Company, through its Banner Bank subsidiary, is party to various derivative instruments that are used for asset and liability management and client financing needs. Derivative instruments are contracts between two or more parties that have a notional amount and an underlying variable, require no net investment and allow for the net settlement of positions. The notional amount serves as the basis for the payment provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents a specified interest rate, index, or other component. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the market value of the derivative contract. The Company obtains dealer quotations to value its derivative contracts.
The Company’s predominant derivative and hedging activities involve interest rate swaps related to certain term loans and forward sales contracts associated with mortgage banking activities. Generally, these instruments help the Company manage exposure to market risk and meet client financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors such as market-driven interest rates and prices or other economic factors.
Derivatives Designated in Hedge Relationships
The Company’s fixed-rate loans result in exposure to losses in value or net interest income as interest rates change. The risk management objective for hedging fixed-rate loans is to effectively convert the fixed-rate received to a floating rate. The Company has hedged exposure to changes in the fair value of certain fixed-rate loans through the use of interest rate swaps. For a qualifying fair value hedge, changes in the value of the derivatives are recognized in current period earnings along with the corresponding changes in the fair value of the designated hedged item attributable to the risk being hedged.
Under a prior program, clients received fixed interest rate commercial loans and Banner Bank subsequently hedged that fixed-rate loan by entering into an interest rate swap with a dealer counterparty. Banner Bank receives fixed-rate payments from the clients on the loans and makes similar fixed-rate payments to the dealer counterparty on the swaps in exchange for variable-rate payments based on the one-month LIBOR index. Some of these interest rate swaps are designated as fair value hedges. Through application of the “short cut method of accounting,” there is an assumption that the hedges are effective. Banner Bank discontinued originating interest rate swaps under this program in 2008.
As of September 30, 2021 and December 31, 2020, the notional values or contractual amounts and fair values of the Company’s derivatives designated in hedge relationships were as follows (in thousands):

| Asset Derivatives |  | Liability Derivatives
| September 30, 2021 |  | December 31, 2020 |  | September 30, 2021 |  | December 31, 2020
| Notional/ Contract Amount |  | Fair Value (1) |  | Notional/ Contract Amount |  | Fair Value (1) |  | Notional/ Contract Amount |  | Fair Value (2) |  | Notional/ Contract Amount |  | Fair Value (2)
Interest rate swaps | $ | 63 |  |  | $ | 1 |  |  | $ | 338 |  |  | $ | 9 |  |  | $ | 63 |  |  | $ | 1 |  |  | $ | 338 |  |  | $ | 9 |

(1) Included in Loans receivable on the Consolidated Statements of Financial Condition.
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(2) Included in Accrued expenses and 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 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 standing derivative.
Mortgage Banking: The Company sells originated one- to four-family 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 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 mortgage loans or mortgage-backed securities to broker/dealers at specific prices and dates.
As of September 30, 2021 and December 31, 2020, the notional values or contractual amounts and fair values of the Company’s derivatives not designated in hedge relationships were as follows (in thousands):

| Asset Derivatives |  | Liability Derivatives
| September 30, 2021 |  | December 31, 2020 |  | September 30, 2021 |  | December 31, 2020
| Notional/ Contract Amount |  | Fair Value (1) |  | Notional/ Contract Amount |  | Fair Value (1) |  | Notional/ Contract Amount |  | Fair Value (2) |  | Notional/ Contract Amount |  | Fair Value (2)
Interest rate swaps | $ | 481,637 |  |  | $ | 25,626 |  |  | $ | 451,760 |  |  | $ | 39,057 |  |  | $ | 481,637 |  |  | $ | 15,549 |  |  | $ | 451,760 |  |  | $ | 22,327 |
Mortgage loan commitments | 109,986 |  |  | 1,395 |  |  | 140,390 |  |  | 5,221 |  |  | 50,496 |  |  | 49 |  |  | 72,511 |  |  | 199 |
Forward sales contracts | 174,141 |  |  | 914 |  |  | 79,414 |  |  | 420 |  |  | 24,000 |  |  | 87 |  |  | 204,000 |  |  | 1,556 |
| $ | 765,764 |  |  | $ | 27,935 |  |  | $ | 671,564 |  |  | $ | 44,698 |  |  | $ | 556,133 |  |  | $ | 15,685 |  |  | $ | 728,271 |  |  | $ | 24,082 |

(1)Included in Other assets on the Consolidated Statements of Financial Condition, with the exception of certain interest swaps and mortgage loan commitments (with a fair value of $177,000 at September 30, 2021 and $231,000 at December 31, 2020), which are included in Loans receivable.
(2)Included in Accrued expenses and other liabilities on the Consolidated Statements of Financial Condition.
Gains (losses) recognized in income on derivatives not designated in hedge relationships for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands):

| Location on Consolidated Statements of Operations |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2021 |  | 2020 |  | 2021 |  | 2020
Mortgage loan commitments | Mortgage banking operations |  | $ | (1,179) |  |  | $ | 2,639 |  |  | $ | (3,826) |  |  | $ | 7,664 |
Forward sales contracts | Mortgage banking operations |  | 865 |  |  | 258 |  |  | 2,004 |  |  | (779) |
|  |  | $ | (314) |  |  | $ | 2,897 |  |  | $ | (1,822) |  |  | $ | 6,885 |

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 September 30, 2021 or December 31, 2020, it could have been required to settle its obligations under the agreements at the termination value. As of September 30, 2021 and December 31, 2020, the termination value of derivatives in a net liability position related to these agreements was $29.2 million and $48.6 million, respectively. The Company generally posts collateral against derivative liabilities in
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the form of cash, government agency-issued bonds, mortgage-backed securities, or commercial mortgage-backed securities. Collateral posted against derivative liabilities was $50.8 million and $47.1 million as of September 30, 2021 and December 31, 2020, respectively.
Derivative assets and liabilities are recorded at fair value on the balance sheet. Master netting agreements allow the Company to settle all derivative contracts held with a single counterparty on a net basis and to offset net derivative positions with related collateral where applicable. In addition, some of interest rate swap derivatives between Banner Bank and the dealer counterparties are cleared through central clearing houses. These clearing houses characterize the variation margin payments as settlements of the derivative’s market exposure and not as collateral. The variation margin is treated as an adjustment to our cash collateral, as well as a corresponding adjustment to our derivative liability. As of September 30, 2021 and December 31, 2020, the variation margin adjustment was a negative adjustment of $10.3 million and $16.9 million, respectively.
The following tables present additional information related to the Company’s derivative contracts, by type of financial instrument, as of September 30, 2021 and December 31, 2020 (in thousands):

| September 30, 2021
|  |  |  |  |  |  | Gross Amounts of Financial Instruments Not Offset in the Consolidated Statements 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 | $ | 25,627 |  |  | $ | — |  |  | $ | 25,627 |  |  | $ | — |  |  | $ | — |  |  | $ | 25,627 |
| $ | 25,627 |  |  | $ | — |  |  | $ | 25,627 |  |  | $ | — |  |  | $ | — |  |  | $ | 25,627 |
Derivative liabilities |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps | $ | 15,550 |  |  | $ | — |  |  | $ | 15,550 |  |  | $ | — |  |  | $ | (12,446) |  |  | $ | 3,104 |
| $ | 15,550 |  |  | $ | — |  |  | $ | 15,550 |  |  | $ | — |  |  | $ | (12,446) |  |  | $ | 3,104 |
| December 31, 2020
|  |  |  |  |  |  | Gross Amounts of Financial Instruments Not Offset in the Consolidated Statements 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 | $ | 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 |

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NOTE 14: REVENUE FROM CONTRACTS WITH CLIENTS
Disaggregation of Revenue:
Deposit fees and other service charges for the three and nine months ended September 30, 2021 and 2020 are summarized as follows (in thousands):

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Deposit service charges | $ | 5,128 |  |  | $ | 3,904 |  |  | $ | 13,735 |  |  | $ | 12,269 |
Debit and credit card interchange fees | 6,032 |  |  | 5,207 |  |  | 17,265 |  |  | 14,762 |
Debit and credit card expense | (2,655) |  |  | (2,134) |  |  | (7,819) |  |  | (6,272) |
Merchant services income | 4,239 |  |  | 3,584 |  |  | 11,136 |  |  | 9,252 |
Merchant services expense | (3,439) |  |  | (2,839) |  |  | (8,964) |  |  | (7,378) |
Other service charges | 1,152 |  |  | 1,020 |  |  | 3,801 |  |  | 3,458 |
Total deposit fees and other service charges | $ | 10,457 |  |  | $ | 8,742 |  |  | $ | 29,154 |  |  | $ | 26,091 |

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 debit or credit 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’s cardholders’ card. Direct expenses associated with the credit and debit card are recorded as a net reduction against the interchange income.
Merchant services income
Merchant services income represents fees earned by the Bank for card payment services provided to its merchant clients. The Bank has a contract with a third party to provide card payment services to the Bank’s merchants that contract for those services. The third party provider has contracts with the Bank’s merchants to provide the card payment services. The Bank does not have a direct contractual relationship with its merchants for these services. The Bank sets the rates for the services provided by the third party. The third party provider passes the payments made by the Bank’s merchants through to the Bank. The Bank, in turn, pays the third party provider for the services it provides to the Bank’s merchants. These payments to the third party provider are recorded as expenses as a net reduction against fee income. In addition, a portion of the payment received by the Bank represents interchange fees which are passed through to the card issuing bank. Income is primarily earned based on the dollar volume and number of transactions processed. The performance obligation is satisfied and the related fee is earned when each payment is accepted by the processing network.
ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
We are a bank holding company incorporated in the State of Washington which owns one subsidiary bank, Banner Bank. Banner Bank is a Washington-chartered commercial bank that conducts business from its main office in Walla Walla, Washington and, as of September 30, 2021, it had 150 branch offices and 18 loan production offices located in Washington, Oregon, California, Idaho and Utah. Banner Corporation is subject to regulation by the Board of Governors of the Federal Reserve System (the Federal Reserve Board). Banner Bank (the Bank) is subject to regulation by the Washington State Department of Financial Institutions, Division of Banks and the Federal Deposit Insurance Corporation (the FDIC). As of September 30, 2021, we had total consolidated assets of $16.64 billion, total loans of $9.22 billion, total deposits of $14.16 billion and total shareholders’ equity of $1.67 billion.
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. The Bank’s primary business is that of traditional banking institutions, accepting deposits and originating loans in locations surrounding their offices in Washington, Oregon, California and Idaho. Banner Bank is also an
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active participant in secondary loan markets, engaging in mortgage banking operations largely through the origination and sale of one- to four-family and multifamily 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.
Banner Corporation’s successful execution of its super community bank model and strategic initiatives have delivered solid core operating results and profitability over the last several years. Banner’s longer term strategic initiatives continue to focus on originating high quality assets and client acquisition, which we believe will continue to generate strong revenue while maintaining the Company’s moderate risk profile.
Our financial results for the quarter ended September 30, 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 the lingering impacts of the COVID-19 pandemic. At September 30, 2021, we had 41 mortgage loans totaling $12.4 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. In addition, the SBA provided assistance to small businesses impacted by COVID-19 through the Paycheck Protection Program (PPP), which was designed to provide near-term relief to help small businesses sustain operations. As of September 30, 2021, Banner had provided 13,293 SBA PPP loans totaling nearly $1.61 billion and received SBA forgiveness for 10,548 SBA PPP loans totaling $1.23 billion.
For the quarter ended September 30, 2021, our net income was $49.9 million, or $1.44 per diluted share, compared to net income of $36.5 million, or $1.03 per diluted share, for the quarter ended September 30, 2020. The current quarter was positively impacted by increased interest income, decreased funding costs and the recapture of provision for credit losses, partially offset by a decrease in mortgage banking income and increased non-interest expense.
After a comprehensive review of our business, 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 customers, 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. During the third quarter of 2021, we incurred expenses of $7.6 million related to Banner Forward.
Our operating results depend primarily on our net interest income, which is the difference between interest income on interest-earning assets, consisting primarily of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of client deposits, FHLB advances, other borrowings, subordinated notes, and junior subordinated debentures. Net interest income is primarily a function of our interest rate spread, which is the difference between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, as well as a function of the average balances of interest-earning assets, interest-bearing liabilities and non-interest-bearing funding sources including non-interest-bearing deposits. Our net interest income increased $9.1 million, or 8%, to $130.1 million for the quarter ended September 30, 2021, compared to $121.0 million for the same quarter one year earlier. This increase in net interest income is primarily a result of an acceleration of deferred loan fee income due to SBA PPP loan forgiveness payments from the SBA, growth in both our interest-earning assets and core deposits as well as decreases in the cost of funding liabilities, partially offset by lower yields on total interest-earning assets due declines in market rates. The growth in core deposits was largely the result of SBA PPP loan funds deposited into client accounts 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 affected by the level of our non-interest income, including deposit fees and other service charges, results of mortgage banking operations, which includes gains and losses on the sale of loans and servicing fees, gains and losses on the sale of securities, as well as our non-interest expenses and provisions for credit losses and income taxes. In addition, our net income is affected by the net change in the value of certain financial instruments carried at fair value.
Our total revenues (net interest income plus total non-interest income) for the third quarter of 2021 increased $6.2 million, or 4%, to $155.5 million, compared to $149.2 million for the same period a year earlier, largely as a result of an increase in net interest income, partially offset by a decrease in non-interest income. Our total non-interest income, which is a component of total revenue and includes the net gain on sale of securities and changes in the value of financial instruments carried at fair value, was $25.3 million for the quarter ended September 30, 2021, compared to $28.2 million for the quarter ended September 30, 2020, primarily due to the decrease in mortgage banking income, partially offset by an increase in deposit fees and other services charges. The year-over-year decrease in mortgage banking income was primarily due to 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 multifamily held-for-sale loans as well as a reduction in the volume of one- to four-family sold.
Our non-interest expense increased in the third quarter of 2021, compared to a year earlier largely as a result of increases in professional and legal expense, primarily due to increased consultant expense, which included $5.8 million of expense related to the Banner Forward initiative, as well as $4.0 million recorded related to litigation and legal matters during the current quarter, and increased payment and card processing services expense, partially offset by decreased salary and employee benefits expense compared to the same quarter a year ago. Non-interest expense was $102.1 million for the quarter ended September 30, 2021 and $90.0 million for the same quarter a year earlier.
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We recorded an $8.6 million recapture of provision for credit losses in the quarter ended September 30, 2021, compared to a $15.2 million provision for credit losses for the quarter ended September 30, 2020. The recapture of provision for credit losses for the current quarter primarily reflects improvement in the forecasted economic indicators and a decrease in adversely classified loans. The provision for credit losses recorded in the third quarter a year ago reflected the deterioration in forecasted economic indicators as well as risk rating downgrades on loans that were considered at risk due to the COVID-19 pandemic. The allowance for credit losses - loans at September 30, 2021 was $139.9 million, representing 485% of non-performing loans compared to $167.3 million, or 470% of non-performing loans at December 31, 2020. In addition to the allowance for credit losses - loans, Banner maintains an allowance for credit losses - unfunded loan commitments which was $10.1 million at September 30, 2021 compared to $13.3 million at December 31, 2020. Non-performing loans were $28.9 million at September 30, 2021, compared to $35.6 million at December 31, 2020 and $34.8 million a year earlier. (See Note 4, Loans Receivable and the Allowance for Credit Losses, as well as “Asset Quality” below in this Form 10-Q.)
*Non-GAAP financial measures: Net income, revenues and other earnings and expense information excluding fair value adjustments, gains or losses on the sale of securities, merger and acquisition-related expenses, COVID-19 expenses, Banner Forward expenses, amortization of CDI, REO operations, state/municipal tax expense and the related tax benefit, are non-GAAP financial 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 to facilitate the comparison of our 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 Three and Nine Months Ended September 30, 2021 and 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 per share data):

| For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
ADJUSTED REVENUE |  |  |  |  |  |  |
Net interest income (GAAP) | $ | 130,146 |  |  | $ | 121,026 |  |  | $ | 375,361 |  |  | $ | 359,864 |
Total non-interest income | 25,334 |  |  | 28,222 |  |  | 71,942 |  |  | 75,107 |
Total GAAP revenue | 155,480 |  |  | 149,248 |  |  | 447,303 |  |  | 434,971 |
Exclude net gain on sale of securities | (56) |  |  | (644) |  |  | (618) |  |  | (815) |
Exclude change in valuation of financial instruments carried at fair value | (1,778) |  |  | (37) |  |  | (1,895) |  |  | 2,360 |
Adjusted Revenue (non-GAAP) | $ | 153,646 |  |  | $ | 148,567 |  |  | $ | 444,790 |  |  | $ | 436,516 |

| For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
ADJUSTED EARNINGS |  |  |  |  |  |  |
Net income (GAAP) | $ | 49,884 |  |  | $ | 36,548 |  |  | $ | 151,121 |  |  | $ | 76,971 |
Exclude net gain on sale of securities | (56) |  |  | (644) |  |  | (618) |  |  | (815) |
Exclude change in valuation of financial instruments carried at fair value | (1,778) |  |  | (37) |  |  | (1,895) |  |  | 2,360 |
Exclude merger and acquisition-related costs | 10 |  |  | 5 |  |  | 660 |  |  | 1,483 |
Exclude COVID-19 expenses | 44 |  |  | 778 |  |  | 309 |  |  | 3,169 |
Exclude Banner Forward expenses | 7,592 |  |  | — |  |  | 10,447 |  |  | — |
Exclude related tax (benefit) expense | (1,395) |  |  | (24) |  |  | (2,137) |  |  | (1,476) |
Total adjusted earnings (non-GAAP) | $ | 54,301 |  |  | $ | 36,626 |  |  | $ | 157,887 |  |  | $ | 81,692 |
Diluted earnings per share (GAAP) | $ | 1.44 |  |  | $ | 1.03 |  |  | $ | 4.32 |  |  | $ | 2.17 |
Diluted adjusted earnings per share (non-GAAP) | $ | 1.57 |  |  | $ | 1.04 |  |  | $ | 4.51 |  |  | $ | 2.30 |

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| For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
ADJUSTED EFFICIENCY RATIO |  |  |  |  |  |  |
Non-interest expense (GAAP) | $ | 102,145 |  |  | $ | 90,028 |  |  | $ | 288,296 |  |  | $ | 274,033 |
Exclude merger and acquisition-related costs | (10) |  |  | (5) |  |  | (660) |  |  | (1,483) |
Exclude COVID-19 expenses | (44) |  |  | (778) |  |  | (309) |  |  | (3,169) |
Exclude Banner forward expenses | (7,592) |  |  | — |  |  | (10,447) |  |  | — |
Exclude CDI amortization | (1,575) |  |  | (1,864) |  |  | (4,997) |  |  | (5,867) |
Exclude state/municipal tax expense | (1,219) |  |  | (1,196) |  |  | (3,367) |  |  | (3,284) |
Exclude REO operations | (53) |  |  | 11 |  |  | 71 |  |  | (93) |
Adjusted non-interest expense (non-GAAP) | $ | 91,652 |  |  | $ | 86,196 |  |  | $ | 268,587 |  |  | $ | 260,137 |
Net interest income (GAAP) | $ | 130,146 |  |  | $ | 121,026 |  |  | $ | 375,361 |  |  | $ | 359,864 |
Non-interest income (GAAP) | 25,334 |  |  | 28,222 |  |  | 71,942 |  |  | 75,107 |
Total revenue | 155,480 |  |  | 149,248 |  |  | 447,303 |  |  | 434,971 |
Exclude net gain on sale of securities | (56) |  |  | (644) |  |  | (618) |  |  | (815) |
Exclude net change in valuation of financial instruments carried at fair value | (1,778) |  |  | (37) |  |  | (1,895) |  |  | 2,360 |
Adjusted revenue (non-GAAP) | $ | 153,646 |  |  | $ | 148,567 |  |  | $ | 444,790 |  |  | $ | 436,516 |
Efficiency ratio (GAAP) | 65.70 | % |  | 60.32 | % |  | 64.45 | % |  | 63.00 | %
Adjusted efficiency ratio (non-GAAP) | 59.65 | % |  | 58.02 | % |  | 60.39 | % |  | 59.59 | %

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The ratio of tangible common shareholders’ equity to tangible assets is also a non-GAAP financial measure. We calculate tangible common equity by excluding 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 this non-GAAP financial measure provides information to investors that is useful in understanding the basis of our capital position (dollars in thousands except per share data).

TANGIBLE COMMON SHAREHOLDERS’ EQUITY TO TANGIBLE ASSETS |  |  |  |  |
September 30, 2021 |  | December 31, 2020 |  | September 30, 2020
Shareholders’ equity (GAAP) | $ | 1,667,119 |  |  | $ | 1,666,264 |  |  | $ | 1,646,529 |
Exclude goodwill and other intangible assets, net | 389,550 |  |  | 394,547 |  |  | 396,412 |
Tangible common shareholders’ equity (non-GAAP) | $ | 1,277,569 |  |  | $ | 1,271,717 |  |  | $ | 1,250,117 |
Total assets (GAAP) | $ | 16,637,879 |  |  | $ | 15,031,623 |  |  | $ | 14,642,075 |
Exclude goodwill and other intangible assets, net | 389,550 |  |  | 394,547 |  |  | 396,412 |
Total tangible assets (non-GAAP) | $ | 16,248,329 |  |  | $ | 14,637,076 |  |  | $ | 14,245,663 |
Common shareholders’ equity to total assets (GAAP) | 10.02 | % |  | 11.09 | % |  | 11.25 | %
Tangible common shareholders’ equity to tangible assets (non-GAAP) | 7.86 | % |  | 8.69 | % |  | 8.78 | %
TANGIBLE COMMON SHAREHOLDERS’ EQUITY PER SHARE |  |  |  |  |
Tangible common shareholders’ equity (non-GAAP) | $ | 1,277,569 |  |  | $ | 1,271,717 |  |  | $ | 1,250,117 |
Common shares outstanding at end of period | 34,251,991 |  |  | 35,159,200 |  |  | 35,158,568 |
Common shareholders’ equity (book value) per share (GAAP) | $ | 48.67 |  |  | $ | 47.39 |  |  | $ | 46.83 |
Tangible common shareholders’ equity (tangible book value) per share (non-GAAP) | $ | 37.30 |  |  | $ | 36.17 |  |  | $ | 35.56 |

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Selected Notes to the Consolidated Financial Statements contained in Item 1 of this Form 10-Q.
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 several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our financial statements. These policies relate to (i) the methodology for the recognition of interest income, (ii) determination of the provision and allowance for credit losses, (iii) the valuation of financial assets and liabilities recorded at fair value, (iv) the valuation of intangibles, such as goodwill, core deposit intangibles and mortgage servicing rights, (v) the valuation of real estate held for sale, (vi) the valuation of assets and liabilities acquired in business combinations and subsequent recognition of related income and expense, and (vii) the valuation of or recognition of deferred tax assets and liabilities. These policies and judgments, estimates and assumptions are described in greater detail below. 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, 2020. For additional information concerning critical accounting policies, see the Selected Notes to the Consolidated Financial Statements and the following:
Interest Income: (Notes 3 and 4) 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
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the loans are then placed on nonaccrual status. All previously accrued but uncollected interest is deducted from interest income upon transfer to nonaccrual status. For any future payments collected, interest income is recognized only upon management’s assessment that there is a strong likelihood that the full amount of a loan will be repaid or recovered. Management’s assessment of the likelihood of full repayment involves judgment including determining the fair value of the underlying collateral which can be impacted by the economic environment. A loan may be put on nonaccrual status sooner than this policy would dictate if, in management’s judgment, the amounts owed, principal or interest, may be uncollectable. While less common, similar interest reversal and nonaccrual treatment is applied to investment securities if their ultimate collectability becomes questionable. Loans modified due to the COVID-19 pandemic are considered current if they are less than 30 days past due on the contractual payments at the time the loan modification program was put in place and therefore continue to accrue interest unless the interest is being waived.
Provision and Allowance for Credit Losses - Loans: (Note 4) 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 is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. The Bank has elected to exclude accrued interest receivable from the amortized cost basis in their estimate of the allowance for credit losses. The provision for credit losses reflects the amount required to maintain the allowance for credit losses at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves. The Company has established systematic methodologies for the determination of the adequacy of the Company’s allowance for credit losses. The methodologies are set forth in a formal policy and take into consideration the need for a valuation allowance for loans evaluated on a collective (pool) basis which have similar risk characteristics as well as allowances that are tied to individual loans that do not share risk characteristics. The Company increases its allowance for credit losses by charging provisions for credit losses on its consolidated statement of operations. Losses related to specific assets are applied as a reduction of the carrying value of the assets and charged against the allowance for credit loss reserve when management believes the uncollectibility of a loan balance is confirmed. Recoveries on previously charged off loans are credited to the allowance for credit losses.
Management estimates the allowance for credit losses - loans using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio. These factors include, among others, changes in the size and composition of the loan portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic conditions.
The allowance for credit losses - loans is measured on a collective (pool) basis when similar risk characteristics exist. In estimating the component of the allowance for credit losses for loans that share common risk characteristics, loans are pooled based on loan type and areas of risk concentration. For loans evaluated collectively, the allowance for credit losses is calculated using life of loan historical losses adjusted for economic forecasts and current conditions.
For commercial real estate, multifamily real estate, construction and land, commercial business and agricultural loans with risk rating segmentation, historical credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and risk rating. For one- to four- family residential loans, consumer loans, home equity lines of credit, small business loans, and small balance commercial real estate loans, historical credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and delinquency status. These models calculate an expected life-of-loan loss percentage for each loan category by calculating the probability of default, based on the migration of loans from performing to loss by risk rating or delinquency categories using historical life-of-loan analysis and the severity of loss, based on the aggregate net lifetime losses incurred for each loan pool. For credit cards, historical credit loss assumptions are estimated using a model that calculates an expected life-of-loan loss percentage for each loan category by considering the historical cumulative losses based on the aggregate net lifetime losses incurred for each loan pool. The model captures historical loss data 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 considers various economic scenarios and forecasts when evaluating the economic indicators and probability weights the various scenarios to arrive at the forecast that most reflects management’s expectations of future conditions. The allowance for credit losses is then adjusted for the period in which those forecasts are considered to be reasonable and supportable. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, the adjustments discontinue to be applied so that the model reverts back to the historical loss rates using a straight line reversion method. Management selected an initial reasonable and supportable forecast period of 12 months with a reversion period of 12 months. Both the reasonable and supportable forecast period and the reversion period are periodically reviewed by management.
Further, for loans evaluated collectively, management also considers qualitative and environmental factors for each loan category to adjust for differences between the historical periods used to calculate historical loss rates and expected conditions over the remaining lives of the loans in the portfolio. In determining the aggregate adjustment needed management considers the financial condition of the borrowers, the nature
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and volume of the loans, the remaining terms and the extent of prepayments on the loans, the volume and severity of past due and classified loans as well as the value of the underlying collateral on loans in which the collateral dependent practical expedient has not been used. Management also considers the Company’s lending policies, the quality of the Company’s credit review system, the quality of the Company’s management and lending staff, and the regulatory and economic environments in the areas in which the Company’s lending activities are concentrated.
Loans that do not share risk characteristics with other loans in the portfolio are individually evaluated for impairment and are not included in the collective evaluation. Factors involved in determining whether a loan should be individually evaluated include, but are not limited to, the financial condition of the borrower and the value of the underlying collateral. Expected credit losses for loans evaluated individually are measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or when the Bank determines that foreclosure is probable, the expected credit loss is measured based on the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. As a practical expedient, the Bank measures the expected credit loss for a loan using the fair value of the collateral, if repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the Bank’s assessment as of the reporting date.
In both cases, if the fair value of the collateral is less than the amortized cost basis of the loan, the Bank will recognize an allowance as the difference between the fair value of the collateral, less costs to sell (if applicable) at the reporting date and the amortized cost basis of the loan. If the fair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis will be limited to the amount previously charged-off. Subsequent changes in the expected credit losses for loans evaluated individually are included within the provision for credit losses in the same manner in which the expected credit loss initially was recognized or as a reduction in the provision that would otherwise be reported.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Bank.
Some of the Bank’s loans are reported as troubled debt restructures (TDRs). Loans are reported as TDRs when the Bank grants a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for a transaction of similar risk. The allowance for credit losses on a TDR is determined using the same method as all other loans held for investment, except when the value of the concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method the allowance for credit losses is determined by discounting the expected future cash flows at the original interest rate of the loan. The Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) and the Consolidated Appropriations Act, 2021 (CAA) provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and regulatory guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. The CAA extends relief offered under the CARES Act related to TDRs as a result of COVID-19 through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever is earlier.
Fair Value Accounting and Measurement: (Note 8) We use fair value measurements to record fair value adjustments to certain financial assets and liabilities and to determine fair value disclosures. We include in the Notes to the Consolidated Financial Statements information about the extent to which fair value is used to measure financial assets and liabilities, the valuation methodologies used and the impact on our results of operations and financial condition. Additionally, for financial instruments not recorded at fair value we disclose, where required, our estimate of their fair value.
Loans Acquired in Business Combinations: (Notes 2 and 4) Loans acquired in business combinations are recorded at their fair value at the acquisition date. Establishing the fair value of acquired loans involves a significant amount of judgment, including determining the credit discount based upon historical data adjusted for current economic conditions and other factors. If any of these assumptions are inaccurate actual credit losses could vary significantly from the credit discount used to calculate the fair value of the acquired loans. Acquired loans are evaluated upon acquisition and classified as either purchased credit-deteriorated or purchased non-credit-deteriorated. Purchased credit-deteriorated (PCD) loans have experienced more than insignificant credit deterioration since origination. For PCD loans, an allowance for credit losses is determined at the acquisition date using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The loan’s fair value grossed up for the allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through a provision for credit losses.
For purchased non-credit-deteriorated loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income over the life of the loans. While credit discounts are included in the determination of the fair value for non-credit-deteriorated loans, since these discounts are expected to be accreted over the life of the loans, they cannot be used to offset the allowance for credit losses that must be recorded at the acquisition date. As a result, an allowance for credit losses is determined at
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the acquisition date using the same methodology as other loans held for investment and is recognized as a provision for credit losses. Any subsequent deterioration (improvement) in credit quality is recognized by recording (recapturing) a provision for credit losses.
Goodwill: (Note 6) 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. If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed. The quantitative goodwill impairment test is used to identify the existence of impairment and the amount of impairment loss and compares the reporting unit’s estimated fair values, including goodwill, to its carrying amount. If the fair value exceeds the 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. The Company completed an assessment of qualitative factors as of December 31, 2020 and as a result of the economic impact of the COVID-19 pandemic concluded further analysis was required. The Company completed a quantitative goodwill impairment test and concluded the fair value of the reporting unit, Banner Bank, exceeded the carrying value of the reporting unit including goodwill and therefore no impairment existed as of December 31, 2020. Changes in the economic environment, operations of the reporting unit or other adverse events could result in future impairment charges which could have a material adverse impact on the Company’s operating results.
Other Intangible Assets: (Note 6) Other intangible assets consists primarily of core deposit intangibles (CDI), which are amounts recorded in business combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the client relationships associated with the deposits. Core deposit intangibles are being amortized on an accelerated basis over a weighted average estimated useful life of eight years. The determination of the estimated useful life of the core deposit intangible involves judgment by management. The actual life of the core deposit intangible could vary significantly from the estimated life. These assets are reviewed at least annually for events or circumstances that could impact their recoverability. These events could include loss of the underlying core deposits, increased competition or adverse changes in the economy. To the extent other identifiable intangible assets are deemed unrecoverable, impairment losses are recorded in other non-interest expense to reduce the carrying amount of the assets.
Mortgage Servicing Rights: (Note 6) Mortgage servicing rights (MSRs) are recognized as separate assets when rights are acquired through purchase or through sale of loans. Generally, purchased MSRs are capitalized at the cost to acquire the rights. For sales of mortgage loans, the value of the MSR is estimated and capitalized. Fair value is based on market prices for comparable mortgage servicing contracts. The fair value of the MSRs includes an estimate of the life of the underlying loans which is affected by estimated prepayment speeds. The estimate of prepayment speeds is based on current market conditions. Actual market conditions could vary significantly from current conditions which could result in the estimated life of the underlying loans being different which would change the fair value of the MSR. Capitalized MSRs are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.
Real Estate Owned Held for Sale: (Note 5) Property acquired by foreclosure or deed in lieu of foreclosure is recorded at the estimated fair value of the property, less expected selling costs. Development and improvement costs relating to the property may be capitalized, while other holding costs are expensed. The carrying value of the property is periodically evaluated by management. Property values are influenced by current economic and market conditions, changes in economic conditions could result in a decline in property value. To the extent that property values decline, allowances are established to reduce the carrying value to net realizable value. Gains or losses at the time the property is sold are charged or credited to operations in the period in which they are realized. The amounts the Bank will ultimately recover from real estate held for sale may differ substantially from the carrying value of the assets because of market factors beyond the Bank’s control or because of changes in the Bank’s strategies for recovering the investment.
Income Taxes and Deferred Taxes: (Note 9) 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 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. 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 more likely than 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. 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 the normal 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
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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 best estimate within the range or the low end of the range if no estimate within the range is better than another.
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Comparison of Financial Condition at September 30, 2021 and December 31, 2020
General: Total assets increased $1.61 billion, to $16.64 billion at September 30, 2021, from $15.03 billion at December 31, 2020. The increase was largely the result of excess liquidity from increases in retail deposits being invested in short term investments, including interest bearing deposits and securities, partially offset by a decrease in total loans receivable due to SBA PPP loan forgiveness during the first nine months of 2021.
Loans and lending: Loans are our most significant and generally highest yielding earning assets. We attempt to maintain a portfolio of loans to total deposits ratio at a level designed to enhance our revenues, while adhering to sound underwriting practices and appropriate diversification guidelines in order to maintain a moderate risk profile. Our loan to deposit ratio at September 30, 2021 was 66%, 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 We offer a wide range of loan products to meet the demands of our clients. Our lending activities are primarily directed toward the origination of real estate and commercial loans. Total loans receivable decreased $652.6 million during the nine months ended September 30, 2021, primarily reflecting decreased commercial business loan balances due to SBA PPP loan forgiveness repayments, as well as decreased commercial construction, multifamily construction, one-to-four family residential, consumer, and agricultural business loan balances, partially offset by increased commercial real estate, multifamily real estate, one- to four-family construction, and land and land development loan balances. Excluding SBA PPP loans, total loans receivable increased $81.7 million during the nine months ended September 30, 2021. At September 30, 2021, our loans receivable totaled $9.22 billion compared to $9.87 billion at December 31, 2020 and $10.16 billion at September 30, 2020.
The following table sets forth the composition of the Company’s loans receivable by type of loan as of the dates indicated (dollars in thousands):

|  |  |  |  |  |  | Percentage Change
| Sep 30, 2021 |  | Dec 31, 2020 |  | Sep 30, 2020 |  | Prior Year End |  | Prior Year
Commercial real estate: |  |  |  |  |  |  |  |  |
Owner-occupied | $ | 1,122,275 |  |  | $ | 1,076,467 |  |  | $ | 1,049,877 |  |  | 4.3 | % |  | 6.9 | %
Investment properties | 1,980,284 |  |  | 1,955,684 |  |  | 1,991,258 |  |  | 1.3 |  |  | (0.6) |
Small balance CRE | 601,751 |  |  | 573,849 |  |  | 597,971 |  |  | 4.9 |  |  | 0.6 |
Multifamily real estate | 532,760 |  |  | 428,223 |  |  | 426,659 |  |  | 24.4 |  |  | 24.9 |
Construction, land and land development: |  |  |  |  |  |  |  |  |
Commercial construction | 170,205 |  |  | 228,937 |  |  | 220,285 |  |  | (25.7) |  |  | (22.7) |
Multifamily construction | 278,184 |  |  | 305,527 |  |  | 291,105 |  |  | (8.9) |  |  | (4.4) |
One- to four-family construction | 571,431 |  |  | 507,810 |  |  | 518,085 |  |  | 12.5 |  |  | 10.3 |
Land and land development | 308,164 |  |  | 248,915 |  |  | 240,803 |  |  | 23.8 |  |  | 28.0 |
Commercial business: |  |  |  |  |  |  |  |  |
Commercial business | 1,039,731 |  |  | 1,133,989 |  |  | 1,193,651 |  |  | (8.3) |  |  | (12.9) |
SBA PPP | 306,976 |  |  | 1,044,472 |  |  | 1,149,968 |  |  | (70.6) |  |  | (73.3) |
Small business scored | 775,554 |  |  | 743,451 |  |  | 763,824 |  |  | 4.3 |  |  | 1.5 |
Agricultural business, including secured by farmland: |  |  |  |  |  |  |  |  |
Agricultural business, including secured by farmland | 284,255 |  |  | 299,949 |  |  | 326,169 |  |  | (5.2) |  |  | (12.9) |
SBA PPP | 3,214 |  |  | — |  |  | — |  |  | nm |  | nm
One- to four-family residential | 682,368 |  |  | 717,939 |  |  | 771,431 |  |  | (5.0) |  |  | (11.5) |
Consumer: |  |  |  |  |  |  |  |  |
Consumer—home equity revolving lines of credit | 462,819 |  |  | 491,812 |  |  | 504,523 |  |  | (5.9) |  |  | (8.3) |
Consumer—other | 98,413 |  |  | 113,958 |  |  | 118,308 |  |  | (13.6) |  |  | (16.8) |
Total loans receivable | $ | 9,218,384 |  |  | $ | 9,870,982 |  |  | $ | 10,163,917 |  |  | (6.6) | % |  | (9.3) | %

Our commercial real estate loans for owner-occupied, investment properties, and small balance CRE totaled $3.70 billion, or 40% of our loan portfolio at September 30, 2021. In addition, multifamily residential real estate loans totaled $532.8 million and comprised 6% of our loan portfolio. Commercial real estate loans increased by $98.3 million during the first nine months of 2021 while multifamily real estate loans increased by $104.5 million.
We also originate commercial, multifamily, and one- to four-family construction, land and land development loans, which totaled $1.33 billion, or 14% of our loan portfolio at September 30, 2021, compared to $1.29 billion at December 31, 2020 and $1.27 billion at
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September 30, 2020. One- to four-family construction balances increased $63.6 million, or 13%, to $571.4 million at September 30, 2021 compared to $507.8 million at December 31, 2020 and increased $53.3 million, or 10%, compared to $518.1 million at September 30, 2020. We also originate one- to four-family construction loans for owner occupants, although construction balances for these loans are modest as the loans convert to one- to four-family residential loans upon completion of the homes and are often sold in the secondary market. One- to four-family construction loans represented approximately 6% of our total loan portfolio at September 30, 2021.
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. Our commercial business lending, to a lesser extent, includes participation in certain syndicated loans, including shared national credits, which totaled $152.6 million at September 30, 2021. Our commercial and agricultural business loans decreased $812.1 million to $2.41 billion at September 30, 2021, compared to $3.22 billion at December 31, 2020, and decreased $1.02 billion, or 30%, compared to $3.43 billion at September 30, 2020. The decrease reflects SBA PPP loan repayments from SBA loan forgiveness during the first nine months of 2021 and to a lesser extent lower line of credit usage due to decreased business activity and seasonal decreases in agricultural loan balances. SBA PPP loans decreased 70% to $310.2 million at September 30, 2021, compared to $1.04 billion at December 31, 2020, and decreased 73% when compared to $1.15 billion at September 30, 2020. Commercial and agricultural business loans represented approximately 26% of our portfolio at September 30, 2021.
Our one- to four-family residential loan originations have been strong, as interest rates have declined during the last 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. Most of the one- to four-family residential loans that we originate are sold in secondary markets with net gains on sales and loan servicing fees reflected in our revenues from mortgage banking. At September 30, 2021, our outstanding balance of one- to four-family residential loans retained in our portfolio decreased $35.6 million, to $682.4 million, compared to $717.9 million at December 31, 2020, and decreased $89.1 million, or 12%, compared to $771.4 million at September 30, 2020. The decrease in one-to-four family residential loans since September 30, 2020 primarily reflects portfolio loans being refinanced and sold as held for sale loans. One- to four-family residential loans represented 7% of our loan portfolio at September 30, 2021.
Our consumer loan activity is primarily directed at meeting demand from our existing deposit clients. At September 30, 2021, consumer loans, including home equity revolving lines of credit, decreased $44.5 million to $561.2 million, compared to $605.8 million at December 31, 2020, and decreased $61.6 million compared to $622.8 million at September 30, 2020.
The following table shows the commitment amount for loan origination (excluding loans held for sale) activity for the three and nine months ended September 30, 2021 and September 30, 2020 (in thousands):

| Three Months Ended |  | Nine months ended
| Sep 30, 2021 |  | Sep 30, 2020 |  | Sep 30, 2021 |  | Sep 30, 2020
Commercial real estate | $ | 174,827 |  |  | $ | 74,400 |  |  | $ | 369,459 |  |  | $ | 262,524 |
Multifamily real estate | 26,155 |  |  | 2,664 |  |  | 84,707 |  |  | 19,219 |
Construction and land | 496,386 |  |  | 412,463 |  |  | 1,453,583 |  |  | 1,073,031 |
Commercial business: |  |  |  |  |  |  |
Commercial business | 229,859 |  |  | 128,729 |  |  | 527,766 |  |  | 495,869 |
SBA PPP | 907 |  |  | 24,848 |  |  | 485,077 |  |  | 1,176,018 |
Agricultural business | 9,223 |  |  | 16,990 |  |  | 48,936 |  |  | 64,544 |
One-to four- family residential | 49,594 |  |  | 32,733 |  |  | 154,411 |  |  | 88,311 |
Consumer | 145,102 |  |  | 132,100 |  |  | 363,848 |  |  | 326,110 |
Total commitment amount for loan originations (excluding loans held for sale) | $ | 1,132,053 |  |  | $ | 824,927 |  |  | $ | 3,487,787 |  |  | $ | 3,505,626 |

The origination table above includes loan participations and loan purchases. There were $4.3 million of loan purchases during the nine months ended September 30, 2021 and $18,000 of loan purchases during the nine months ended September 30, 2020.
Loans held for sale decreased to $63.7 million at September 30, 2021, compared to $243.8 million at December 31, 2020, as the sales of held-for-sale loans exceeded originations of held-for-sale loans during the nine months ended September 30, 2021. Loans held for sale were $185.9 million at September 30, 2020. Originations of loans held for sale decreased to $912.5 million for the nine months ended September 30, 2021 compared to $1.03 billion for the same period last year, primarily due to decreased refinance activity for one- to four-family residential mortgage loans. The volume of one- to four-family residential mortgage loans sold was $799.3 million during the nine months ended September 30, 2021, compared to $824.0 million in the same period a year ago. During the nine months ended September 30, 2021, we sold $287.7 million in multifamily loans compared to $231.4 million for the same period last year. Loans held for sale at September 30, 2021 included $9.7 million of multifamily loans and $54.0 million of one- to four-family residential mortgage loans compared to $60.8 million of multifamily loans and $125.2 million of one- to four-family residential mortgage loans at September 30, 2020.
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The following table presents loans by geographic concentration at September 30, 2021, December 31, 2020 and September 30, 2020 (dollars in thousands):

| Sep 30, 2021 |  | Dec 31, 2020 |  | Sep 30, 2020 |  | Percentage Change
| Amount |  | Percentage |  | Amount |  | Amount |  | Prior Year End |  | Prior Year Qtr
Washington | $ | 4,319,008 |  |  | 46.9 | % |  | $ | 4,647,553 |  |  | $ | 4,767,113 |  |  | (7.1) | % |  | (9.4) | %
California | 2,160,280 |  |  | 23.4 |  |  | 2,279,749 |  |  | 2,316,739 |  |  | (5.2) |  |  | (6.8) |
Oregon | 1,679,452 |  |  | 18.2 |  |  | 1,792,156 |  |  | 1,858,465 |  |  | (6.3) |  |  | (9.6) |
Idaho | 536,128 |  |  | 5.8 |  |  | 537,996 |  |  | 576,983 |  |  | (0.3) |  |  | (7.1) |
Utah | 89,620 |  |  | 1.0 |  |  | 80,704 |  |  | 76,314 |  |  | 11.0 |  |  | 17.4 |
Other | 433,896 |  |  | 4.7 |  |  | 532,824 |  |  | 568,303 |  |  | (18.6) |  |  | (23.7) |
Total loans receivable | $ | 9,218,384 |  |  | 100.0 | % |  | $ | 9,870,982 |  |  | $ | 10,163,917 |  |  | (6.6) | % |  | (9.3) | %

Investment Securities: Our total investment in securities increased $1.15 billion to $3.92 billion at September 30, 2021 from December 31, 2020. Securities purchased increased during the nine-month period ended September 30, 2021, as we deployed excess balance sheet liquidity. Purchases were primarily in securities issued by government-sponsored entities. The average effective duration of Banner’s securities portfolio was approximately 4.4 years at September 30, 2021. Net fair value adjustments to the portfolio of securities held for trading, which were included in net income, were an increase of $1.9 million in the nine months ended September 30, 2021. In addition, fair value adjustments for securities designated as available-for-sale reflected a decrease of $62.7 million for the nine months ended September 30, 2021, which was included net of the associated tax benefit of $15.1 million as a component of other comprehensive income, and largely occurred as a result of decreased market yields and spreads on certain types of securities. (See Note 3 of the Selected Notes to the Consolidated Financial Statements in this Form 10-Q.) The Company held $300.0 million of securities purchased under resell agreements at September 30, 2021 compared to none at December 31, 2020.
Deposits: Deposits, client retail repurchase agreements and loan repayments are the major sources of our funds for lending and other investment purposes. We compete with other financial institutions and financial intermediaries in attracting deposits and we generally attract deposits within our primary market areas. Increasing core deposits (non-interest-bearing and interest-bearing transaction and savings accounts) is a fundamental element of our business strategy. Much of the focus of our branch strategy and current marketing efforts have been directed toward attracting additional deposit client relationships and balances. This effort has been particularly directed towards emphasizing core deposit activity in non-interest-bearing and other transaction and savings accounts. The long-term success of our deposit gathering activities is reflected not only in the growth of core deposit balances, but also in the level of deposit fees, service charges and other payment processing revenues compared to prior periods.
The following table sets forth the Company’s deposits by type of deposit account as of the dates indicated (dollars in thousands):

|  |  |  |  |  |  | Percentage Change
| Sep 30, 2021 |  | Dec 31, 2020 |  | Sep 30, 2020 |  | Prior Year End |  | Prior Year Quarter
Non-interest-bearing | $ | 6,400,864 |  |  | $ | 5,492,924 |  |  | $ | 5,412,570 |  |  | 16.5 | % |  | 18.3 | %
Interest-bearing checking | 1,799,657 |  |  | 1,569,435 |  |  | 1,434,224 |  |  | 14.7 |  |  | 25.5 |
Regular savings accounts | 2,773,995 |  |  | 2,398,482 |  |  | 2,332,287 |  |  | 15.7 |  |  | 18.9 |
Money market accounts | 2,339,107 |  |  | 2,191,135 |  |  | 2,120,908 |  |  | 6.8 |  |  | 10.3 |
Interest-bearing transaction & savings accounts | 6,912,759 |  |  | 6,159,052 |  |  | 5,887,419 |  |  | 12.2 |  |  | 17.4 |
Total core deposits | 13,313,623 |  |  | 11,651,976 |  |  | 11,299,989 |  |  | 14.3 |  |  | 17.8 |
Interest-bearing certificates | 851,054 |  |  | 915,320 |  |  | 915,352 |  |  | (7.0) |  |  | (7.0) |
Total deposits | $ | 14,164,677 |  |  | $ | 12,567,296 |  |  | $ | 12,215,341 |  |  | 12.7 | % |  | 16.0 | %

Total deposits were $14.16 billion at September 30, 2021, compared to $12.57 billion at December 31, 2020 and $12.22 billion a year ago. The $1.60 billion increase in total deposits compared to December 31, 2020 reflects a $1.66 billion increase in core deposits. The increase in total deposits from year end was due primarily to SBA PPP loan funds deposited into client accounts, fiscal stimulus payments, and an increase in client deposit accounts due to reduced business investment and changes in consumer spending habits during the COVID-19 pandemic. Non-interest-bearing account balances increased 17% to $6.40 billion at September 30, 2021, compared to $5.49 billion at December 31, 2020, and increased 18% compared to $5.41 billion a year ago. Interest-bearing transaction and savings accounts increased 12% to $6.91 billion at September 30, 2021, compared to $6.16 billion at December 31, 2020, and increased 17% compared to $5.89 billion a
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year ago. Certificates of deposit decreased 7% to $851.1 million at September 30, 2021, compared to $915.3 million at December 31, 2020 and decreased 7% compared to $915.4 million a year ago. We had no brokered deposits at September 30, 2021, December 31, 2020, or September 30, 2020. Core deposits represented 94% of total deposits at September 30, 2021, compared to 93% at December 31, 2020.
The following table presents deposits by geographic concentration at September 30, 2021, December 31, 2020 and September 30, 2020 (dollars in thousands):

| Sep 30, 2021 |  | Dec 31, 2020 |  | Sep 30, 2020 |  | Percentage Change
| Amount |  | Percentage |  | Amount |  | Amount |  | Prior Year End |  | Prior Year Quarter
Washington | $ | 7,877,919 |  |  | 55.6 | % |  | $ | 7,058,404 |  |  | $ | 6,820,329 |  |  | 11.6 | % |  | 15.5 | %
Oregon | 3,030,109 |  |  | 21.4 |  |  | 2,604,908 |  |  | 2,486,760 |  |  | 16.3 |  |  | 21.8 |
California | 2,501,521 |  |  | 17.7 |  |  | 2,237,949 |  |  | 2,254,681 |  |  | 11.8 |  |  | 10.9 |
Idaho | 755,128 |  |  | 5.3 |  |  | 666,035 |  |  | 653,571 |  |  | 13.4 |  |  | 15.5 |
Total deposits | $ | 14,164,677 |  |  | 100.0 | % |  | $ | 12,567,296 |  |  | $ | 12,215,341 |  |  | 12.7 | % |  | 16.0 | %

Borrowings: FHLB advances decreased to $50.0 million at September 30, 2021 from $150.0 million at December 31, 2020 as increased core deposits were sufficient to fund our asset growth, primarily growth in the securities portfolio. Other borrowings, consisting of retail repurchase agreements primarily related to client cash management accounts, increased $62.6 million, or 34%, to $247.4 million at September 30, 2021, compared to $184.8 million at December 31, 2020. 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 were issued or matured during the nine months ended September 30, 2021; however, the estimated fair value of these instruments increased by $7.9 million, reflecting tighter market spreads. Junior subordinated debentures totaled $124.9 million at September 30, 2021 compared to $117.0 million at December 31, 2020.
Shareholders’ Equity: Total shareholders’ equity increased $855,000 to $1.67 billion at September 30, 2021. The increase in shareholders’ equity is primarily due to the $151.1 million of year-to-date net income, partially offset by the $54.1 million decrease in accumulated other comprehensive income, primarily representing the decrease in the fair value of securities available-for-sale, net of tax, the accrual of $43.4 million of cash dividends to common shareholders and the repurchase of 1,050,000 shares of common stock at a total cost of $56.5 million. During the nine months ended September 30, 2021, no shares of restricted stock were forfeited and 59,550 shares were surrendered by employees to satisfy tax withholding obligations upon the vesting of restricted stock grants. (See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” in this Form 10-Q.) Tangible common shareholders’ equity, which excludes goodwill and other intangible assets, increased $5.9 million to $1.28 billion, or 7.86% of tangible assets at September 30, 2021, compared to $1.27 billion, or 8.69% of tangible assets at December 31, 2020. The decrease in tangible common shareholders’ equity as a percentage of tangible assets was primarily due to the increase in tangible assets, due to an increase in excess liquidity primarily in the form of interest bearing deposits and securities.
Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2021 and 2020
For the quarter ended September 30, 2021, our net income was $49.9 million, or $1.44 per diluted share, compared to $36.5 million, or $1.03 per diluted share, for the quarter ended September 30, 2020. For the nine months ended September 30, 2021 our net income was $151.1 million, or $4.32 per diluted share, compared to net income of $77.0 million, or $2.17 per diluted share for the same period a year earlier. Our net income for the current quarter was positively impacted by increased net interest income and a recapture of provision for credit losses, partially offset by a decrease in mortgage banking income and increased non-interest expense. Our net income for the nine months ended September 30, 2021 included a recapture of provision for credit losses of $28.1 million and decreased funding costs, partially offset by decreased mortgage banking income and reduced interest income due to lower yields on total interest earning assets. Our results for the nine months ended September 30, 2021 included $309,000 of COVID-19 related expenses and $660,000 of acquisition-related expenses. This compares to $3.2 million of COVID-19 related expenses and $1.5 million of acquisition-related expenses for the nine months ended September 30, 2020.
An acceleration of deferred loan fee income due to SBA PPP loan repayments from SBA loan forgiveness coupled with growth in the balance of average interest-earning assets and decreased funding costs, partially offset by the decline in the average yield on interest-earning assets, produced increased net interest income for the quarter and nine months ended September 30, 2021 compared to the same periods a year earlier. The increase in net interest income, partially offset by decreased mortgage banking income, resulted in revenues increasing for the quarter and nine months ended September 30, 2021, compared to the same periods a year earlier. Banner recorded an $8.6 million recapture of provision for credit losses for the quarter ended September 30, 2021, compared to a $15.2 million provision for credit losses in the same quarter a year ago. The recapture of provision for credit losses for the current quarter primarily reflects an improvement in forecasted economic conditions and a decrease in adversely classified loans. Non-interest expenses increased in the quarter and nine months ended September 30, 2021 compared to the same periods a year ago. The increase in non-interest expense for the quarter and nine months ended September 30, 2021, compared to the same periods a year earlier was primarily due to increases in professional and legal expenses, primarily due to increased consultant expense related to Banner Forward, expenses for litigation matters as well as increased payment and card processing services expense.
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Our adjusted earnings, which excludes net gain or loss on sales of securities, changes in the valuation of financial instruments carried at fair value, merger and acquisition-related expenses, COVID-19 expenses, Banner Forward expenses and related tax expenses or benefits, were $54.3 million, or $1.57 per diluted share, for the quarter ended September 30, 2021, compared to $36.6 million, or $1.04 per diluted share, for the quarter ended September 30, 2020. For the nine months ended September 30, 2021, our adjusted earnings were $157.9 million, or $4.51 per diluted share, compared with $81.7 million, or $2.30 per diluted share, for the same period a year earlier.
Net Interest Income. Net interest income increased by $9.1 million, or 8%, to $130.1 million for the quarter ended September 30, 2021, compared to $121.0 million for the same quarter one year earlier, due to an acceleration of deferred loan fee income due to SBA PPP loan repayments from SBA loan forgiveness resulting in an increase in average loan yields, decreases in the cost of funding liabilities and an increase of $1.93 billion 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 3.47% for the quarter ended September 30, 2021 was enhanced by three basis points as a result of acquisition accounting adjustments. This compares to a net interest margin on a tax equivalent basis of 3.72% for the quarter ended September 30, 2020, which included seven basis points from acquisition accounting adjustments. The decrease in net interest margin compared to a year earlier primarily reflects lower yields on average interest-earning assets and a larger percentage of interest-earnings assets being invested in short term investments, partially offset by decreases in the cost of funding liabilities. The lower yields on average interest-earning assets compared to a year earlier were largely due to the impact of decreases to the targeted Fed Funds Rate during the first quarter of 2020, resulting in a prolonged low rate environment which resulted in the yields on adjustable rate loan repricing lower and the yields on new loan originations and security purchases being lower than the existing portfolios as well as a higher percentage of assets being invested in low yielding short term investments. The decrease in interest-earnings asset yields were partially offset by decreases in the costs of funding liabilities compared to a year earlier which were also largely due to the prolonged low rate environment.
Net interest income for the nine months ended September 30, 2021 increased by $15.5 million, or 4%, to $375.4 million compared to $359.9 million for the same period one year earlier, as a result of a $2.27 billion increase in average interest-earning assets and the decreases in the cost of funding liabilities. The net interest margin on a tax equivalent basis decreased to 3.48% for the nine months ended September 30, 2021 compared to 3.93% for the same period in the prior year, as a result of lower yields on interest-earning assets. The net interest margin included three basis points of accretion acquisition accounting adjustments for the nine months ended September 30, 2021 and eight basis points of accretion acquisition accounting adjustments for the nine months ended September 30, 2020.
Interest Income. Interest income for the quarter ended September 30, 2021 was $135.9 million, compared to $129.6 million for the same quarter in the prior year, an increase of $6.3 million, or 5%. 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, increases in the average balances of investment securities, partially offset by the decrease in the yield on total interest-earning assets. The average balance of interest-earning assets was $15.13 billion for the quarter ended September 30, 2021, compared to $13.21 billion for the same period a year earlier. The average yield on total interest-earning assets was 3.62% for the quarter ended September 30, 2021, compared to 3.98% for the same quarter one year earlier. This decrease in average yield between periods reflects a 58 basis-point decrease in the average yield on investment securities, as a larger percentage of interest earning assets were invested in low yielding short term investments partially offset by a 41 basis-point increase in the average yield on loans due to the previously mentioned acceleration of deferred loan fee income. Average loans receivable for the quarter ended September 30, 2021 decreased $920.8 million, or 9%, to $9.58 billion, compared to $10.50 billion for the same quarter in the prior year reflecting the forgiveness of SBA PPP loans. Interest income on loans decreased by $229,000 to $116.5 million for the current quarter from $116.7 million for the quarter ended September 30, 2020, reflecting the impact of the previously mentioned decrease in the average balance of loans receivable. The increase in average loan yields reflects the yield on SBA PPP loans increasing to 10.80% for the quarter ended September 30, 2021, compared to 2.73% for the same quarter in the prior year, as a result of an acceleration of deferred loan fee income due to SBA PPP loan repayments from SBA loan forgiveness during the current quarter. The acquisition accounting loan discount accretion and the related balance sheet impact added five basis points to the current quarter’s average loan yield, compared to nine basis points for the same quarter one year earlier.
The combined average balance of mortgage-backed securities, other investment securities, equity securities, interest-bearing deposits and FHLB stock (total investment securities or combined portfolio) increased to $5.55 billion for the quarter ended September 30, 2021 (excluding the effect of fair value adjustments), compared to $2.70 billion for the quarter ended September 30, 2020; and the interest and dividend income from those investments increased by $6.5 million compared to the same quarter in the prior year. The average yield on the combined portfolio decreased to 1.46% for the quarter ended September 30, 2021, from 2.04% for the same quarter one year earlier. The decrease in average yield reflects the overall decline in market interest rates as well as the investment of excess liquidity in short term investments.
Interest income for the nine months ended September 30, 2021 was $394.0 million, compared to $390.0 million for the same period in the prior year, an increase of $4.0 million. The nine months results primarily reflect increases in the average balances of investment securities, partially offset by a decrease in the average yield on interest-earning assets.
Interest Expense. Interest expense for the quarter ended September 30, 2021 was $5.7 million, compared to $8.6 million for the same quarter in the prior year. The interest expense decrease between periods reflects an 11 basis-point decrease in the average cost of all funding liabilities, partially offset by a $1.91 billion, or 15%, increase in the average balance of funding liabilities.
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Interest expense for the nine months ended September 30, 2021 was $18.6 million, compared to $30.1 million for the same period in the prior year. As with the quarterly results, the nine month results reflect a 16 basis-point decrease in the average cost of all funding liabilities, partially offset by a $2.25 billion or 19%, increase in the average balance of funding liabilities.
Deposit interest expense decreased $2.4 million, or 47%, to $2.7 million for the quarter ended September 30, 2021, compared to $5.2 million for the same quarter in the prior year, primarily as a result of a decrease in the cost of deposits, partially offset by an increase in the average balances. The average rate paid on total deposits decreased to 0.08% in the third quarter of 2021 from 0.17% for the quarter ended September 30, 2020, primarily reflecting decreases in the costs of interest-bearing checking, money market, savings, and certificates of deposit accounts, as well as an increase in the percentage of non-interest bearing deposits. The cost of interest-bearing deposits decreased by 17 basis points to 0.14% for the quarter ended September 30, 2021 compared to 0.31% in the same quarter a year earlier. Average deposit balances increased to $13.95 billion for the quarter ended September 30, 2021, from $12.07 billion for the quarter ended September 30, 2020.
Deposit interest expense decreased $11.2 million or 54%, to $9.4 million for the nine months ended September 30, 2021, compared to $20.6 million for the same period in the prior year. Average deposit balances increased to $13.50 billion for the nine months ended September 30, 2021, from $11.23 billion for the same period a year earlier, while the average rate paid on deposits decreased to 0.09% in the nine months ended September 30, 2021 from 0.25% in the nine months ended September 30, 2020. The cost of interest-bearing deposits decreased by 25 basis points to 0.17% for the nine months ended September 30, 2021 compared to 0.42% in the same period a year earlier.
The decrease in the cost of interest-bearing deposits between the periods was driven by market and competitive factors in response to the decreases in the target Fed Funds Rate last year as changes in market yields typically lag changes in the Fed Funds Rate.
Interest expense on total borrowings decreased to $3.0 million for the quarter ended September 30, 2021 from $3.4 million for the quarter ended September 30, 2020. The decrease was primarily due to decreases in the average rate paid on total borrowings and in the average balance of FHLB advances. The average rate paid on total borrowings for the quarter ended September 30, 2021 decreased to 1.97% from 2.33% for the same quarter one year earlier. Average total borrowings were $599.0 million for the quarter ended September 30, 2021, compared to $575.6 million for the same quarter one year earlier.
Interest expense on total borrowings decreased to $9.2 million for the nine months ended September 30, 2021 from $9.5 million for the nine months ended September 30, 2020. Average total borrowings were $594.2 million for the nine months ended September 30, 2021, compared to $614.8 million for the same period a year earlier and the average rate paid on total borrowings was 2.07% for both the nine months ended September 30, 2021 and September 30, 2020.
Analysis of Net Interest Spread. The following tables present 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 with additional comparative data on our operating performance (dollars in thousands):
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| Three Months Ended September 30, 2021 |  | Three Months Ended September 30, 2020
| Average Balance |  | Interest and Dividends |  | Yield/ Cost (3) |  | Average Balance |  | Interest and Dividends |  | Yield/ Cost (3)
Interest-earning assets: |  |  |  |  |  |  |  |  |  |  |
Held for sale loans | $ | 114,938 |  |  | $ | 996 |  |  | 3.44 | % |  | $ | 161,385 |  |  | $ | 1,535 |  |  | 3.78 | %
Mortgage loans | 7,245,962 |  |  | 83,803 |  |  | 4.59 |  |  | 7,339,181 |  |  | 88,011 |  |  | 4.77 |
Commercial/agricultural loans | 1,534,978 |  |  | 15,776 |  |  | 4.08 |  |  | 1,721,186 |  |  | 18,553 |  |  | 4.29 |
SBA PPP loans | 566,515 |  |  | 15,421 |  |  | 10.80 |  |  | 1,141,105 |  |  | 7,843 |  |  | 2.73 |
Consumer and other loans | 120,112 |  |  | 1,774 |  |  | 5.86 |  |  | 140,493 |  |  | 2,195 |  |  | 6.22 |
Total loans(1)(3) | 9,582,505 |  |  | 117,770 |  |  | 4.88 |  |  | 10,503,350 |  |  | 118,137 |  |  | 4.47 |
Mortgage-backed securities | 2,560,027 |  |  | 11,820 |  |  | 1.83 |  |  | 1,250,759 |  |  | 7,333 |  |  | 2.33 |
Other securities | 1,491,035 |  |  | 7,873 |  |  | 2.09 |  |  | 884,916 |  |  | 6,036 |  |  | 2.71 |
Equity securities | — |  |  | — |  |  | — |  |  | 379,483 |  |  | 186 |  |  | 0.19 |
Interest-bearing deposits with banks | 1,486,839 |  |  | 586 |  |  | 0.16 |  |  | 171,894 |  |  | 123 |  |  | 0.28 |
FHLB stock | 13,957 |  |  | 135 |  |  | 3.84 |  |  | 16,363 |  |  | 163 |  |  | 3.96 |
Total investment securities (3) | 5,551,858 |  |  | 20,414 |  |  | 1.46 |  |  | 2,703,415 |  |  | 13,841 |  |  | 2.04 |
Total interest-earning assets | 15,134,363 |  |  | 138,184 |  |  | 3.62 |  |  | 13,206,765 |  |  | 131,978 |  |  | 3.98 |
Non-interest-earning assets | 1,301,383 |  |  |  |  |  |  | 1,259,816 |  |  |  |  |
Total assets | $ | 16,435,746 |  |  |  |  |  |  | $ | 14,466,581 |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |  |  |  |
Interest-bearing checking accounts | $ | 1,771,869 |  |  | 282 |  |  | 0.06 |  |  | $ | 1,413,085 |  |  | 321 |  |  | 0.09 |
Savings accounts | 2,721,028 |  |  | 458 |  |  | 0.07 |  |  | 2,251,294 |  |  | 813 |  |  | 0.14 |
Money market accounts | 2,322,453 |  |  | 668 |  |  | 0.11 |  |  | 2,096,037 |  |  | 1,224 |  |  | 0.23 |
Certificates of deposit | 863,971 |  |  | 1,341 |  |  | 0.62 |  |  | 966,028 |  |  | 2,821 |  |  | 1.16 |
Total interest-bearing deposits | 7,679,321 |  |  | 2,749 |  |  | 0.14 |  |  | 6,726,444 |  |  | 5,179 |  |  | 0.31 |
Non-interest-bearing deposits | 6,275,634 |  |  | — |  |  | — |  |  | 5,340,688 |  |  | — |  |  | — |
Total deposits | 13,954,955 |  |  | 2,749 |  |  | 0.08 |  |  | 12,067,132 |  |  | 5,179 |  |  | 0.17 |
Other interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |
FHLB advances | 98,370 |  |  | 655 |  |  | 2.64 |  |  | 150,000 |  |  | 988 |  |  | 2.62 |
Other borrowings | 252,720 |  |  | 125 |  |  | 0.20 |  |  | 177,628 |  |  | 128 |  |  | 0.29 |
Subordinated debt | 247,944 |  |  | 2,193 |  |  | 3.51 |  |  | 247,944 |  |  | 2,260 |  |  | 3.63 |
Total borrowings | 599,034 |  |  | 2,973 |  |  | 1.97 |  |  | 575,572 |  |  | 3,376 |  |  | 2.33 |
Total funding liabilities | 14,553,989 |  |  | 5,722 |  |  | 0.16 |  |  | 12,642,704 |  |  | 8,555 |  |  | 0.27 |
Other non-interest-bearing liabilities (2) | 202,918 |  |  |  |  |  |  | 193,256 |  |  |  |  |
Total liabilities | 14,756,907 |  |  |  |  |  |  | 12,835,960 |  |  |  |  |
Shareholders’ equity | 1,678,839 |  |  |  |  |  |  | 1,630,621 |  |  |  |  |
Total liabilities and shareholders’ equity | $ | 16,435,746 |  |  |  |  |  |  | $ | 14,466,581 |  |  |  |  |
Net interest income/rate spread (tax equivalent) |  |  | $ | 132,462 |  |  | 3.46 | % |  |  |  | $ | 123,423 |  |  | 3.71 | %
Net interest margin (tax equivalent) |  |  |  |  | 3.47 | % |  |  |  |  |  | 3.72 | %
Reconciliation to reported net interest income: |  |  |  |  |  |  |  |  |  |  |
Adjustments for taxable equivalent basis |  |  | (2,316) |  |  |  |  |  |  | (2,397) |  |  |
Net interest income and margin |  |  | $ | 130,146 |  |  | 3.41 | % |  |  |  | $ | 121,026 |  |  | 3.65 | %
Additional Key Financial Ratios: |  |  |  |  |  |  |  |  |  |  |
Return on average assets |  |  |  |  | 1.20 | % |  |  |  |  |  | 1.01 | %
Return on average equity |  |  |  |  | 11.79 |  |  |  |  |  |  | 8.92 |
Average equity / average assets |  |  |  |  | 10.21 |  |  |  |  |  |  | 11.27 |
Average interest-earning assets / average interest-bearing liabilities |  |  |  |  | 182.82 |  |  |  |  |  |  | 180.86 |
Average interest-earning assets / average funding liabilities |  |  |  |  | 103.99 |  |  |  |  |  |  | 104.46 |
Non-interest income / average assets |  |  |  |  | 0.61 |  |  |  |  |  |  | 0.78 |
Non-interest expense / average assets |  |  |  |  | 2.47 |  |  |  |  |  |  | 2.48 |
Efficiency ratio (4) |  |  |  |  | 65.70 |  |  |  |  |  |  | 60.32 |
Adjusted efficiency ratio (5) |  |  |  |  | 59.65 |  |  |  |  |  |  | 58.02 |

(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 $1.3 million for the three months ended September 30, 2021 and $1.4 million for the three months ended September 30, 2020. The tax equivalent yield adjustment to interest earned on tax exempt securities was $1.0 million and $976,000 for the three months ended September 30, 2021 and September 30, 2020, respectively.
(4)Non-interest expense divided by the total of net interest income and non-interest income.
(5)Adjusted non-interest expense divided by adjusted revenue. These represent non-GAAP financial measures. See the non-GAAP reconciliation tables above under “Executive Overview—Non-GAAP Financial Measures.”
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| Nine months ended September 30, 2021 |  | Nine months ended September 30, 2020
| Average Balance |  | Interest and Dividends |  | Yield/ Cost (3) |  | Average Balance |  | Interest and Dividends |  | Yield/ Cost (3)
Interest-earning assets: |  |  |  |  |  |  |  |  |  |  |
Held for sale loans | $ | 101,380 |  |  | $ | 2,465 |  |  | 3.25 | % |  | $ | 155,571 |  |  | $ | 4,506 |  |  | 3.87 | %
Mortgage loans | 7,179,859 |  |  | 245,056 |  |  | 4.56 |  |  | 7,321,206 |  |  | 268,244 |  |  | 4.89 |
Commercial/agricultural loans | 1,511,723 |  |  | 47,513 |  |  | 4.20 |  |  | 1,811,854 |  |  | 61,424 |  |  | 4.53 |
SBA PPP loans | 958,848 |  |  | 44,009 |  |  | 6.14 |  |  | 638,380 |  |  | 13,131 |  |  | 2.75 |
Consumer and other loans | 123,483 |  |  | 5,549 |  |  | 6.01 |  |  | 151,968 |  |  | 7,151 |  |  | 6.29 |
Total loans(1)(3) | 9,875,293 |  |  | 344,592 |  |  | 4.67 |  |  | 10,078,979 |  |  | 354,456 |  |  | 4.70 |
Mortgage-backed securities | 2,320,474 |  |  | 32,855 |  |  | 1.89 |  |  | 1,297,020 |  |  | 24,652 |  |  | 2.54 |
Other securities | 1,265,056 |  |  | 21,648 |  |  | 2.29 |  |  | 710,967 |  |  | 15,205 |  |  | 2.86 |
Equity securities | 574 |  |  | — |  |  | — |  |  | 165,395 |  |  | 309 |  |  | 0.25 |
Interest-bearing deposits with banks | 1,221,241 |  |  | 1,224 |  |  | 0.13 |  |  | 159,065 |  |  | 688 |  |  | 0.58 |
FHLB stock | 14,629 |  |  | 457 |  |  | 4.18 |  |  | 19,822 |  |  | 785 |  |  | 5.29 |
Total investment securities (3) | 4,821,974 |  |  | 56,184 |  |  | 1.56 |  |  | 2,352,269 |  |  | 41,639 |  |  | 2.36 |
Total interest-earning assets | 14,697,267 |  |  | 400,776 |  |  | 3.65 |  |  | 12,431,248 |  |  | 396,095 |  |  | 4.26 |
Non-interest-earning assets | 1,255,512 |  |  |  |  |  |  | 1,232,997 |  |  |  |  |
Total assets | $ | 15,952,779 |  |  |  |  |  |  | $ | 13,664,245 |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |  |  |  |
Interest-bearing checking accounts | $ | 1,714,920 |  |  | 899 |  |  | 0.07 |  |  | $ | 1,352,369 |  |  | 1,164 |  |  | 0.11 |
Savings accounts | 2,611,046 |  |  | 1,433 |  |  | 0.07 |  |  | 2,133,780 |  |  | 3,566 |  |  | 0.22 |
Money market accounts | 2,284,904 |  |  | 2,111 |  |  | 0.12 |  |  | 1,940,096 |  |  | 5,228 |  |  | 0.36 |
Certificates of deposit | 888,502 |  |  | 4,943 |  |  | 0.74 |  |  | 1,069,145 |  |  | 10,665 |  |  | 1.33 |
Total interest-bearing deposits | 7,499,372 |  |  | 9,386 |  |  | 0.17 |  |  | 6,495,390 |  |  | 20,623 |  |  | 0.42 |
Non-interest-bearing deposits | 6,001,354 |  |  | — |  |  | — |  |  | 4,738,559 |  |  | — |  |  | — |
Total deposits | 13,500,726 |  |  | 9,386 |  |  | 0.09 |  |  | 11,233,949 |  |  | 20,623 |  |  | 0.25 |
Other interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |
FHLB advances | 114,103 |  |  | 2,244 |  |  | 2.63 |  |  | 236,949 |  |  | 4,036 |  |  | 2.28 |
Other borrowings | 232,142 |  |  | 358 |  |  | 0.21 |  |  | 195,977 |  |  | 482 |  |  | 0.33 |
Junior subordinated debentures and subordinated notes | 247,944 |  |  | 6,605 |  |  | 3.56 |  |  | 181,886 |  |  | 4,988 |  |  | 3.66 |
Total borrowings | 594,189 |  |  | 9,207 |  |  | 2.07 |  |  | 614,812 |  |  | 9,506 |  |  | 2.07 |
Total funding liabilities | 14,094,915 |  |  | 18,593 |  |  | 0.18 |  |  | 11,848,761 |  |  | 30,129 |  |  | 0.34 |
Other non-interest-bearing liabilities (2) | 203,349 |  |  |  |  |  |  | 197,912 |  |  |  |  |
Total liabilities | 14,298,264 |  |  |  |  |  |  | 12,046,673 |  |  |  |  |
Shareholders’ equity | 1,654,515 |  |  |  |  |  |  | 1,617,572 |  |  |  |  |
Total liabilities and shareholders’ equity | $ | 15,952,779 |  |  |  |  |  |  | $ | 13,664,245 |  |  |  |  |
Net interest income/rate spread (tax equivalent) |  |  | $ | 382,183 |  |  | 3.47 | % |  |  |  | $ | 365,966 |  |  | 3.92 | %
Net interest margin (tax equivalent) |  |  |  |  | 3.48 | % |  |  |  |  |  | 3.93 | %
Reconciliation to reported net interest income: |  |  |  |  |  |  |  |  |  |  |
Adjustments for taxable equivalent basis |  |  | (6,822) |  |  |  |  |  |  | (6,102) |  |  |
Net interest income and margin |  |  | $ | 375,361 |  |  | 3.41 | % |  |  |  | $ | 359,864 |  |  | 3.87 | %
Additional Key Financial Ratios: |  |  |  |  |  |  |  |  |  |  |
Return on average assets |  |  |  |  | 1.27 | % |  |  |  |  |  | 0.75 | %
Return on average equity |  |  |  |  | 12.21 |  |  |  |  |  |  | 6.36 |
Average equity / average assets |  |  |  |  | 10.37 |  |  |  |  |  |  | 11.84 |
Average interest-earning assets / average interest-bearing liabilities |  |  |  |  | 181.59 |  |  |  |  |  |  | 174.84 |
Average interest-earning assets / average funding liabilities |  |  |  |  | 104.27 |  |  |  |  |  |  | 104.92 |
Non-interest income / average assets |  |  |  |  | 0.60 |  |  |  |  |  |  | 0.73 |
Non-interest expense / average assets |  |  |  |  | 2.42 |  |  |  |  |  |  | 2.68 |
Efficiency ratio (4) |  |  |  |  | 64.45 |  |  |  |  |  |  | 63.00 |
Adjusted efficiency ratio (5) |  |  |  |  | 60.39 |  |  |  |  |  |  | 59.59 |

(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 $3.8 million for the nine months ended September 30, 2021 and $3.6 million for the nine months ended September 30, 2020. The tax equivalent yield adjustment to interest earned on tax exempt securities was $3.0 million and $2.5 million for the nine months ended September 30, 2021 and September 30, 2020, respectively.
(4)Non-interest expense divided by the total of net interest income and non-interest income.
(5)Adjusted non-interest expense divided by adjusted revenue. These represent non-GAAP financial measures. See the non-GAAP reconciliation tables above under “Executive Overview—Non-GAAP Financial Measures.”
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Provision and Allowance for Credit Losses. Management estimates the allowance for credit losses using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio. 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 following table sets forth an analysis of our allowance for credit losses - loans for the periods indicated (dollars in thousands):

ADDITIONAL FINANCIAL INFORMATION |  |  |  |  |  |  |  |  |  |
(dollars in thousands) |  |  |  |  |  |  |  |  |  |
|  | Quarters Ended |  |
CHANGE IN THE |  | Sep 30, 2021 |  | June 30, 2021 |  | Sep 30, 2020 |  |  |  |
ALLOWANCE FOR CREDIT LOSSES - LOANS |  |  |  |  |  |  |  |  |  |
Balance, beginning of period |  | $ | 148,009 |  |  | $ | 156,054 |  |  | $ | 156,352 |  |  |  |  |
(Recapture)/provision for credit losses – loans |  | (8,850) |  |  | (8,100) |  |  | 13,641 |  |  |  |  |
Recoveries of loans previously charged off: |  |  |  |  |  |  |  |  |  |
Commercial real estate |  | 923 |  |  | 147 |  |  | 23 |  |  |  |  |
One- to four-family residential |  | 19 |  |  | 20 |  |  | 94 |  |  |  |  |
Commercial business |  | 230 |  |  | 321 |  |  | 246 |  |  |  |  |
Agricultural business, including secured by farmland |  | 17 |  |  | 8 |  |  | — |  |  |  |  |
Consumer |  | 227 |  |  | 97 |  |  | 82 |  |  |  |  |
|  | 1,416 |  |  | 593 |  |  | 445 |  |  |  |  |
Loans charged off: |  |  |  |  |  |  |  |  |  |
Commercial real estate |  | — |  |  | (3) |  |  | (379) |  |  |  |  |
One- to four-family residential |  | — |  |  | — |  |  | (72) |  |  |  |  |
Commercial business |  | (362) |  |  | (123) |  |  | (1,297) |  |  |  |  |
Agricultural business, including secured by farmland |  | (179) |  |  | (2) |  |  | (492) |  |  |  |  |
Consumer |  | (119) |  |  | (410) |  |  | (233) |  |  |  |  |
|  | (660) |  |  | (538) |  |  | (2,473) |  |  |  |  |
Net recoveries (charge-offs) |  | 756 |  |  | 55 |  |  | (2,028) |  |  |  |  |
Balance, end of period |  | $ | 139,915 |  |  | $ | 148,009 |  |  | $ | 167,965 |  |  |  |  |
Net recoveries (charge-offs) / Average loans receivable |  | 0.008 | % |  | 0.001 | % |  | (0.019) | % |  |  |  |

The provision for credit losses - loans reflects the amount required to maintain the allowance for credit losses - loans at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves. During the three months ended September 30, 2021, we recorded a recapture of provision for credit losses - loans of $8.9 million, compared to a recapture of provision for credit losses - loans of $8.1 million during the prior quarter and a provision for credit losses - loans of $13.6 million during the quarter a year ago. The recapture of provision for credit losses - loans for the current quarter and prior quarter primarily reflects improvement in the forecasted economic indicators and a decrease in adversely classified loans. In addition, management has updated its assessment of qualitative factors including assessing the current conditions within the specific markets we serve compared to the nationally forecasted economic indicators. The provision for credit losses recorded in the third quarter a year ago reflected the deterioration in forecasted economic indicators, including higher forecasted unemployment rates and lower gross domestic product as a result of the COVID-19 pandemic as well as risk rating downgrades on loans that were considered at heightened risk due to the COVID-19 pandemic. Future assessments of the expected credit losses will not only be impacted by changes to the reasonable and supportable forecast, but will also include an updated assessment of qualitative factors, as well as consideration of any required changes in the reasonable and supportable forecast reversion period. No allowance for credit losses-loans was recorded on the $310.2 million balance of SBA PPP loans at September 30, 2021 as these loans are fully guaranteed by the SBA.
Net loan recoveries were $756,000 for the quarter ended September 30, 2021 compared to net loan charge-offs of $2.0 million for the same quarter in the prior year. The allowance for credit losses - loans was $139.9 million at September 30, 2021 compared to $148.0 million at June 30, 2021 and $168.0 million at September 30, 2020. The allowance for credit losses - loans as a percentage of total loans (loans receivable excluding allowance for credit losses) was 1.52% at September 30, 2021 as compared to 1.53% at June 30, 2021 and 1.65% at September 30, 2020. The decrease in the allowance for credit losses - loans as a percentage of loans at September 30, 2021 compared to September 30, 2020 reflects the recapture of provision for credit losses - loans recorded during 2021, primarily as the result of the improvement in the forecasted economic indicators as well as the decrease in adversely classified loans.
The provision for credit losses - unfunded loan commitments reflects the amount required to maintain the allowance for credit losses - unfunded loan commitments at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves. The following table sets forth an analysis of our allowance for credit losses - unfunded loan commitments for the periods indicated (dollars in thousands):
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|  | Quarters Ended |  | Nine Months Ended
CHANGE IN THE |  | Sep 30, 2021 |  |  |  | Sep 30, 2020 |  | Sep 30, 2021 |  | Sep 30, 2020
ALLOWANCE FOR CREDIT LOSSES - UNFUNDED LOAN COMMITMENTS |  |  |  |  |  |  |  |  |  |
Balance, beginning of period |  | $ | 9,909 |  |  |  |  | $ | 10,555 |  |  | $ | 13,297 |  |  | $ | 2,716 |
Beginning balance adjustment for adoption of ASC 326 |  | — |  |  |  |  | — |  |  | — |  |  | 7,022 |
Provision/(recapture) for credit losses - unfunded loan commitments |  | 218 |  |  |  |  | 1,539 |  |  | (3,170) |  |  | 2,356 |
Balance, end of period |  | $ | 10,127 |  |  |  |  | $ | 12,094 |  |  | $ | 10,127 |  |  | $ | 12,094 |

The allowance for credit losses - unfunded loan commitments was $10.1 million at September 30, 2021 compared to $12.1 million at September 30, 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 the nine months ended September 30, 2021. During the quarter ended September 30, 2021, we recorded a provision for credit losses - unfunded loan commitments of $218,000, compared to a $1.5 million provision for loan losses - unfunded loan commitments during the comparable quarter a year ago. During the nine months ended September 30, 2021, we recorded a recapture of provision for credit losses - unfunded loan commitments of $3.2 million, compared to a provision for loan losses - unfunded loan commitments of $2.4 million during the same period a year earlier. The recapture of provision for credit losses - unfunded loan commitments for the nine months ended September 30, 2021 was primarily the result of an improvement in the forecasted economic indicators.
Non-interest Income. The following table presents the key components of non-interest income for the three and nine months ended September 30, 2021 and 2020 (dollars in thousands):

| Three months ended September 30, |  | Nine months ended September 30,
| 2021 |  | 2020 |  | Change Amount |  | Change Percent |  | 2021 |  | 2020 |  | Change Amount |  | Change Percent
Deposit fees and other service charges | $ | 10,457 |  |  | $ | 8,742 |  |  | $ | 1,715 |  |  | 19.6 | % |  | $ | 29,154 |  |  | $ | 26,091 |  |  | $ | 3,063 |  |  | 11.7 | %
Mortgage banking operations | 9,752 |  |  | 16,562 |  |  | (6,810) |  |  | (41.1) |  |  | 28,670 |  |  | 40,891 |  |  | (12,221) |  |  | (29.9) |
Bank owned life insurance | 1,245 |  |  | 1,286 |  |  | (41) |  |  | (3.2) |  |  | 3,797 |  |  | 4,653 |  |  | (856) |  |  | (18.4) |
Miscellaneous | 2,046 |  |  | 951 |  |  | 1,095 |  |  | 115.1 |  |  | 7,808 |  |  | 5,017 |  |  | 2,791 |  |  | 55.6 |
| 23,500 |  |  | 27,541 |  |  | (4,041) |  |  | (14.7) |  |  | 69,429 |  |  | 76,652 |  |  | (7,223) |  |  | (9.4) |
Net gain on sale of securities | 56 |  |  | 644 |  |  | (588) |  |  | (91.3) |  |  | 618 |  |  | 815 |  |  | (197) |  |  | (24.2) |
Net change in valuation of financial instruments carried at fair value | 1,778 |  |  | 37 |  |  | 1,741 |  |  | nm |  | 1,895 |  |  | (2,360) |  |  | 4,255 |  |  | (180.3) |
Total non-interest income | $ | 25,334 |  |  | $ | 28,222 |  |  | $ | (2,888) |  |  | (10.2) |  |  | $ | 71,942 |  |  | $ | 75,107 |  |  | $ | (3,165) |  |  | (4.2) |

Non-interest income was $25.3 million for the quarter ended September 30, 2021, compared to $28.2 million for the same quarter in the prior year and $71.9 million for the nine months ended September 30, 2021, compared to $75.1 million for the same period in the prior year. Our non-interest income for the quarter ended September 30, 2021 included a $1.8 million net gain for fair value adjustments and a net gain of $56,000 on sales of securities. For the quarter ended September 30, 2020, fair value adjustments resulted in a net gain of $37,000 and we had a net gain of $644,000 on sale of securities. Our non-interest income for the nine months ended September 30, 2021 included a net gain of $1.9 million for fair value adjustments and a $618,000 net gain on sale of securities. During the nine months ended September 30, 2020, fair value adjustments resulted in a net loss of $2.4 million and we had a $815,000 net gain on sale of securities. For a more detailed discussion of our fair value adjustments, please refer to Note 8 in the Selected Notes to the Consolidated Financial Statements in this Form 10-Q.
Deposit fees and other service charges increased by $1.7 million, or 20%, for the quarter ended September 30, 2021 and increased $3.1 million, or 12%, for the nine months ended September 30, 2021, compared to the same periods a year ago. The increase in deposit fees and other service charges for the quarter and nine months ended September 30, 2021 compared to the same periods a year ago is primarily a result of increased transaction deposit account activity and higher fees on certain transactions. Mortgage banking revenues, including gains on one- to four-family and multifamily loan sales and loan servicing fees, decreased $6.8 million for the quarter ended September 30, 2021 and $12.2 million for the nine months ended September 30, 2021, compared to the same periods a year ago. Gains on sales of multifamily loans in the current quarter resulted in income of $2.4 million for the quarter ended September 30, 2021, compared to $1.1 million for the same period a year ago, and $5.8 million for the nine months ended September 30, 2021, compared to $1.4 million for the same period a year ago. Gains on sales of one- to four-family loans in the current quarter resulted in income of $6.9 million for the quarter ended September 30, 2021, compared to $15.7 million in the same period a year ago, and $22.3 million for the nine months ended September 30, 2021, compared to $39.6 million for the same period a year ago. The lower mortgage banking revenue reflected a decrease in the gain on sale margin on one- to four-family held-for-sale loans, as well as a reduction in the volume of one- to four-family loans sold, reflecting a decrease in refinance activity, partially offset by higher gains on the sale of multifamily held-for-sale loans. Home purchase activity accounted for 68% of one- to four-family mortgage banking loan originations during the quarter ended September 30, 2021, compared to 56% during the quarter ended September 30, 2020. The decrease in bank owned life insurance income for quarter and nine months ended September 30, 2021 compared to the same periods a year ago was due to death benefit proceeds received in the second quarter of 2020. The increase in miscellaneous income for the quarter and nine months ended September 30, 2021 compared to the same periods a year ago was a result of higher gains on sales of
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SBA loans during the current quarter. The increase in miscellaneous income for the nine months ended September 30, 2021 was also impacted by higher gains related to the disposition of closed branch locations.
Non-interest Expense. The following table represents key elements of non-interest expense for the three and nine months ended September 30, 2021 and 2020 (dollars in thousands):

| Three months ended September 30, |  | Nine months ended September 30,
| 2021 |  | 2020 |  | Change Amount |  | Change Percent |  | 2021 |  | 2020 |  | Change Amount |  | Change Percent
Salaries and employee benefits | $ | 59,799 |  |  | $ | 61,171 |  |  | $ | (1,372) |  |  | (2.2) | % |  | $ | 186,553 |  |  | $ | 184,494 |  |  | $ | 2,059 |  |  | 1.1 | %
Less capitalized loan origination costs | (8,290) |  |  | (8,517) |  |  | 227 |  |  | (2.7) |  |  | (26,754) |  |  | (25,433) |  |  | (1,321) |  |  | 5.2 |
Occupancy and equipment | 13,153 |  |  | 13,022 |  |  | 131 |  |  | 1.0 |  |  | 38,965 |  |  | 39,114 |  |  | (149) |  |  | (0.4) |
Information/computer data services | 6,110 |  |  | 6,090 |  |  | 20 |  |  | 0.3 |  |  | 17,915 |  |  | 17,984 |  |  | (69) |  |  | (0.4) |
Payment and card processing expenses | 6,181 |  |  | 4,044 |  |  | 2,137 |  |  | 52.8 |  |  | 15,482 |  |  | 12,135 |  |  | 3,347 |  |  | 27.6 |
Professional and legal expenses | 12,324 |  |  | 2,368 |  |  | 9,956 |  |  | 420.4 |  |  | 20,023 |  |  | 6,450 |  |  | 13,573 |  |  | 210.4 |
Advertising and marketing | 1,521 |  |  | 1,105 |  |  | 416 |  |  | 37.6 |  |  | 3,965 |  |  | 3,584 |  |  | 381 |  |  | 10.6 |
Deposit insurance expense | 1,469 |  |  | 1,628 |  |  | (159) |  |  | (9.8) |  |  | 4,243 |  |  | 4,968 |  |  | (725) |  |  | (14.6) |
State/municipal business and use taxes | 1,219 |  |  | 1,196 |  |  | 23 |  |  | 1.9 |  |  | 3,367 |  |  | 3,284 |  |  | 83 |  |  | 2.5 |
REO operations | 53 |  |  | (11) |  |  | 64 |  |  | (581.8) |  |  | (71) |  |  | 93 |  |  | (164) |  |  | (176.3) |
Amortization of core deposit intangibles | 1,575 |  |  | 1,864 |  |  | (289) |  |  | (15.5) |  |  | 4,997 |  |  | 5,867 |  |  | (870) |  |  | (14.8) |
Miscellaneous | 6,977 |  |  | 5,285 |  |  | 1,692 |  |  | 32.0 |  |  | 18,642 |  |  | 16,841 |  |  | 1,801 |  |  | 10.7 |
| 102,091 |  |  | 89,245 |  |  | 12,846 |  |  | 14.4 |  |  | 287,327 |  |  | 269,381 |  |  | 17,946 |  |  | 6.7 |
COVID-19 expenses | 44 |  |  | 778 |  |  | (734) |  |  | (94.3) |  |  | 309 |  |  | 3,169 |  |  | (2,860) |  |  | (90.2) |
Merger and acquisition-related expenses | 10 |  |  | 5 |  |  | 5 |  |  | 100.0 |  |  | 660 |  |  | 1,483 |  |  | (823) |  |  | (55.5) |
Total non-interest expense | $ | 102,145 |  |  | $ | 90,028 |  |  | $ | 12,117 |  |  | 13.5 | % |  | $ | 288,296 |  |  | $ | 274,033 |  |  | $ | 14,263 |  |  | 5.2 | %

Non-interest expenses were $102.1 million for the quarter ended September 30, 2021, compared to $90.0 million for the quarter ended September 30, 2020. For the nine months ended September 30, 2021, non-interest expense increased by $14.3 million, to $288.3 million, compared to $274.0 million for the same period last year. The current quarter non-interest expense includes increased professional and legal expenses, payment and card processing services expenses, and miscellaneous non-interest expenses, partially offset by decreased salary and employee benefits. In addition, the quarter ended September 30, 2021 included $44,000 of COVID-19 expenses, compared to $778,000 for the quarter ended September 30, 2020. The increase in non-interest expenses for the nine months ended September 30, 2021 reflects increases in professional and legal expenses, payment and card processing services expenses, salary and employee benefits expenses, and miscellaneous expenses, partially offset by increased capitalized loan origination costs. The nine months ended September 30, 2021 included $309,000 of COVID-19 expenses, compared to $3.2 million for the same period last year.
Salary and employee benefits expenses decreased $1.4 million to $59.8 million for the quarter ended September 30, 2021, compared to $61.2 million for the quarter ended September 30, 2020, primarily reflecting a reduction in staffing. Salary and employee benefits expenses increased to $186.6 million for the nine months ended September 30, 2021, compared to $184.5 million for the nine months ended September 30, 2020, primarily reflecting $1.3 million of severance expense related to a reduction in staffing as well as a $1.2 million adjustment recorded in the first quarter of 2021 to increase the liability related to deferred compensation plans and normal salary and wage adjustments. Capitalized loan origination costs increased $1.3 million for the nine months ended September 30, 2021, compared to the same period in the prior year, primarily related to the origination of SBA PPP loans during the first quarter of 2021. Professional and legal expenses increased $10.0 million for the quarter ended September 30, 2021 and $13.6 million for the nine months ended September 30, 2021, compared to the same periods in the prior year, primarily due to an increase in consulting expenses, which included $5.8 million of expense related to Banner Forward for the quarter ended September 30, 2021 and $8.3 million of expense related to the Banner Forward initiative for the nine months ended September 30, 2021, as well as a $4.0 million accrual recorded related to pending litigation during the current quarter. Miscellaneous expenses increased $1.7 million for the quarter ended September 30, 2021 and $1.8 million for the nine months ended September 30, 2021, compared to the same periods in the prior year, primarily reflecting increased loan related expenses.
Banner’s efficiency ratio was 65.70% for the current quarter, compared to 60.32% in the year ago quarter. Banner’s adjusted efficiency ratio was 59.65% for the current quarter, compared to 58.02% in the year ago quarter. See the discussion and reconciliation of non-GAAP financial information in the Executive Overview section of Management’s Discussion and Analysis of Financial Condition and Results of Operation in this Form 10-Q for more detailed information with respect to the efficiency ratio.
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Income Taxes. For the quarter ended September 30, 2021, we recognized $12.1 million in income tax expense for an effective tax rate of 19.5%, which reflects our normal statutory tax rate reduced by the effect of tax-exempt income, certain tax credits, and tax benefits related to restricted stock vesting. Our statutory income tax rate is 23.7%, representing a blend of the statutory federal income tax rate of 21.0% and apportioned effects of the state income tax rates. For the quarter ended September 30, 2020, we recognized $7.5 million in income tax expense for an effective tax rate of 17.0%. For the nine months ended September 30, 2021, we recognized $36.0 million in income tax expense for an effective tax rate of 19.3%, compared to $16.7 million in income tax expense for an effective tax rate of 17.8% for the nine months ended September 30, 2020. For more discussion on our income taxes, please refer to Note 9 in the Selected Notes to the Consolidated Financial Statements in this report on Form 10-Q.
Asset Quality
Maintaining a moderate risk profile by employing appropriate underwriting standards, avoiding excessive asset concentrations and aggressively managing troubled assets has been and will continue to be a primary focus for us. We actively engage our borrowers to resolve classified loans, problem assets and effectively manage REO as a result of foreclosures.
Non-Performing Assets: Non-performing assets decreased to $29.7 million, or 0.18% of total assets, at September 30, 2021, from $36.5 million, or 0.24% of total assets, at December 31, 2020, and decreased compared to $36.7 million, or 0.25% of total assets, at September 30, 2020. Our allowance for credit losses - loans was $139.9 million, or 485% of non-performing loans at September 30, 2021 compared to $167.3 million, or 470% of non-performing loans at December 31, 2020 and $168.0 million, or 482% of non-performing loans at September 30, 2020. In addition to the allowance for credit losses - loans, the Company maintains an allowance for credit losses - unfunded loan commitments which was $10.1 million at September 30, 2021, compared to $13.3 million at December 31, 2020 and $12.1 million at September 30, 2020. We believe our level of non-performing loans and assets continues to be manageable at September 30, 2021. The primary components of the $29.7 million in non-performing assets were $24.0 million in nonaccrual loans, $4.8 million in loans more than 90 days delinquent and still accruing interest, and $869,000 in REO and other repossessed assets.
Loans are reported as TDRs when we grant concessions to a borrower experiencing financial difficulties that we would not otherwise consider. If any TDR loan becomes delinquent or other matters call into question the borrower’s ability to repay full interest and principal in accordance with the restructured terms, the TDR loan would be reclassified as nonaccrual. At September 30, 2021, we had $5.3 million of restructured loans performing under their restructured repayment terms.
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The following table sets forth information with respect to our non-performing assets and restructured loans at the dates indicated (dollars in thousands):

| September 30, 2021 |  | December 31, 2020 |  | September 30, 2020
Nonaccrual Loans: (1) |  |  |  |  |
Secured by real estate: |  |  |  |  |
Commercial | $ | 14,931 |  |  | $ | 18,199 |  |  | $ | 7,824 |
Construction and land | 354 |  |  | 936 |  |  | 937 |
One- to four-family | 3,182 |  |  | 3,556 |  |  | 2,978 |
Commercial business | 2,700 |  |  | 5,407 |  |  | 14,867 |
Agricultural business, including secured by farmland | 1,022 |  |  | 1,743 |  |  | 2,066 |
Consumer | 1,850 |  |  | 2,719 |  |  | 2,896 |
| 24,039 |  |  | 32,560 |  |  | 31,568 |
Loans more than 90 days delinquent, still on accrual: |  |  |  |  |
Secured by real estate: |  |  |  |  |
Commercial | 3,955 |  |  | — |  |  | — |
One- to four-family | 772 |  |  | 1,899 |  |  | 2,649 |
Commercial business | 61 |  |  | 1,025 |  |  | 425 |
Consumer | 34 |  |  | 130 |  |  | 181 |
| 4,822 |  |  | 3,054 |  |  | 3,255 |
Total non-performing loans | 28,861 |  |  | 35,614 |  |  | 34,823 |
REO, net (2) | 852 |  |  | 816 |  |  | 1,795 |
Other repossessed assets held for sale | 17 |  |  | 51 |  |  | 37 |
Total non-performing assets | $ | 29,730 |  |  | $ | 36,481 |  |  | $ | 36,655 |
Total non-performing loans to loans before allowance for credit losses | 0.31 | % |  | 0.36 | % |  | 0.34 | %
Total non-performing loans to total assets | 0.17 | % |  | 0.24 | % |  | 0.24 | %
Total non-performing assets to total assets | 0.18 | % |  | 0.24 | % |  | 0.25 | %
Total nonaccrual loans to loans before allowance for credit losses | 0.26 | % |  | 0.33 | % |  | 0.31 | %
Restructured loans performing under their restructured terms (3) | $ | 5,273 |  |  | $ | 6,673 |  |  | $ | 5,790 |
Loans 30-89 days past due and on accrual | $ | 6,911 |  |  | $ | 12,291 |  |  | $ | 18,158 |

(1)Includes $355,000 of nonaccrual TDR loans at September 30, 2021. For the nine months ended September 30, 2021, interest income was reduced by $740,000 as a result of nonaccrual loan activity, which includes the reversal of $116,000 of accrued interest as of the date the loan was placed on nonaccrual. There was no interest income recognized on nonaccrual loans for the nine months ended September 30, 2021.
(2)Real estate acquired by us as a result of foreclosure or by deed-in-lieu of foreclosure is classified as REO until it is sold. When property is acquired, it is recorded at the estimated fair value of the property, less expected selling costs. Subsequent to foreclosure, the property is carried at the lower of the foreclosed amount or net realizable value. Upon receipt of a new appraisal and market analysis, the carrying value is written down through the establishment of a specific reserve to the anticipated sales price, less selling and holding costs.
(3)These loans were performing under their restructured repayment terms at the dates indicated.
In addition to the non-performing loans as of September 30, 2021, we had other classified loans with an aggregate outstanding balance of $197.4 million that are not on nonaccrual status, with respect to which known information concerning possible credit problems with the borrowers or the cash flows of the properties securing the respective loans has caused management to be concerned about the ability of the borrowers to comply with present loan repayment terms. This may result in the future inclusion of such loans in the nonaccrual loan category.
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The following table presents the Company’s portfolio of risk-rated loans and non-risk-rated loans by grade at the dates indicated (in thousands):

| September 30, 2021 |  | December 31, 2020 |  | September 30, 2020
Pass | $ | 8,956,604 |  |  | $ | 9,494,147 |  |  | $ | 9,699,098 |
Special Mention | 36,001 |  |  | 36,598 |  |  | 41,575 |
Substandard | 225,779 |  |  | 340,237 |  |  | 423,244 |
Total | $ | 9,218,384 |  |  | $ | 9,870,982 |  |  | $ | 10,163,917 |

The decrease in substandard loans during the nine months ended September 30, 2021 primarily reflects the payoff of substandard loans as well as risk rating upgrades as certain industries impacted by the COVID-19 pandemic have begun to stabilize.
REO: REO was $852,000 at September 30, 2021 compared to $816,000 at December 31, 2020. The following table shows REO activity for the three and nine months ended September 30, 2021 and September 30, 2020 (in thousands):

| Three Months Ended |  | Nine months ended
| Sep 30, 2021 |  | Sep 30, 2020 |  | Sep 30, 2021 |  | Sep 30, 2020
Balance, beginning of period | $ | 763 |  |  | $ | 2,400 |  |  | $ | 816 |  |  | $ | 814 |
Additions from loan foreclosures | 89 |  |  | — |  |  | 512 |  |  | 1,588 |
Proceeds from dispositions of REO | — |  |  | (707) |  |  | (783) |  |  | (805) |
Gain on sale of REO | — |  |  | 120 |  |  | 307 |  |  | 216 |
Valuation adjustments in the period | — |  |  | (18) |  |  | — |  |  | (18) |
Balance, end of period | $ | 852 |  |  | $ | 1,795 |  |  | $ | 852 |  |  | $ | 1,795 |

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.
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 of loans and, in certain periods, the purchase of securities or loans. During the nine months ended September 30, 2021 and September 30, 2020, our loan originations, including originations of loans held for sale, exceeded our loan repayments by $252.5 million and $1.89 billion, respectively. There were $4.3 million of loan purchases during the nine months ended September 30, 2021 and $18,000 of loan purchases during the nine months ended September 30, 2020. This activity was funded primarily by increased core deposits and the sale of loans in 2021. During the nine months ended September 30, 2021 and September 30, 2020, we received proceeds of $1.15 billion and $1.10 billion, respectively, from the sale of loans. Securities purchased during the nine months ended September 30, 2021 and September 30, 2020 totaled $2.44 billion and $824.0 million, respectively, and securities repayments, maturities and sales in those periods were $1.22 billion and $461.4 million, respectively.
Our primary financing activity is gathering deposits. Total deposits increased by $1.60 billion during the first nine months of 2021, as core deposits increased by $1.66 billion, partially offset by a $64.3 million decrease in certificates of deposits. The increase in total deposits during the first nine months of 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 client’s maintaining a higher level of liquidity during the COVID-19 pandemic. Certificates of deposit are generally more vulnerable to competition and more price sensitive than other retail deposits and our pricing of those deposits varies significantly based upon our liquidity management strategies at any point in time. At September 30, 2021, certificates of deposit totaled $851.1 million, or 6% of our total deposits, including $644.9 million which were scheduled to mature within one year. While no assurance can be given as to future periods, historically, we have been able to retain a significant amount of our certificates of deposit as they mature.
FHLB advances decreased $100.0 million during the first nine months of 2021 to $50.0 million at September 30, 2021. Other borrowings increased $62.6 million to $247.4 million at September 30, 2021 from $184.8 million at December 31, 2020.
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 nine months ended
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September 30, 2021 and 2020, we used our sources of funds primarily to fund loan commitments and purchase securities. At September 30, 2021, we had outstanding loan commitments totaling $3.75 billion, primarily relating to undisbursed loans in process and unused credit lines. While representing potential growth in the loan portfolio and lending activities, this level of commitments is proportionally consistent with our historical experience and does not represent a departure from normal operations.
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. We maintain credit facilities with the FHLB-Des Moines, which provided for advances that in the aggregate would equal the lesser of 45% of Banner Bank’s assets or adjusted qualifying collateral (subject to a sufficient level of ownership of FHLB stock). At September 30, 2021, under these credit facilities based on pledged collateral, Banner Bank had $2.24 billion of available credit capacity. Advances under these credit facilities totaled $50.0 million at September 30, 2021. In addition, Banner Bank has been approved for participation in the Borrower-In-Custody (BIC) program by the Federal Reserve Bank of San Francisco (FRBSF). Under this program, based on pledged collateral, Banner Bank had available lines of credit of approximately $813.2 million as of September 30, 2021. We had no funds borrowed from the FRBSF at September 30, 2021 or December 31, 2020.
Banner Corporation is a separate legal entity from the Bank and, on a stand-alone level, must provide for its own liquidity and pay its own operating expenses and cash dividends. Banner Corporation’s primary sources of funds consist of capital raised through dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. At September 30, 2021, the Company on an unconsolidated basis had liquid assets of $103.8 million. On June 30, 2020, Banner issued and sold in an underwritten offer of subordinated notes, resulting in net proceeds, after underwriting discounts and offering expenses, of $98.1 million. The subordinated notes qualify as Tier 2 capital for regulatory capital purposes.
As noted below, Banner Corporation and its subsidiary bank continued to maintain capital levels significantly in excess of the requirements to be categorized as “Well-Capitalized” under applicable regulatory standards. During the nine months ended September 30, 2021, total shareholders’ equity increased $855,000, to $1.67 billion. At September 30, 2021, tangible common shareholders’ equity, which excludes goodwill and other intangible assets, was $1.28 billion, or 7.86% of tangible assets. See the discussion and reconciliation of non-GAAP financial information in the Executive Overview section of Management’s Discussion and Analysis of Financial Condition and Results of Operation in this Form 10-Q 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, as state-chartered, federally insured commercial bank, is subject to the capital requirements established by the FDIC.
The capital adequacy requirements are quantitative measures established by regulation that require Banner Corporation and the Bank to maintain minimum amounts and ratios of capital. The Federal Reserve requires Banner Corporation to maintain capital adequacy that generally parallels the FDIC requirements. The FDIC requires the Bank to maintain minimum ratios of Total Capital, Tier 1 Capital, and Common Equity Tier 1 Capital to risk-weighted assets as well as Tier 1 Leverage Capital to average assets. In addition to the minimum capital ratios, both Banner Corporation and the Bank are required to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital of more than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. At September 30, 2021, Banner Corporation and the Bank each exceeded all regulatory capital requirements. (See Item 1, “Business–Regulation,” and Note 15 of the Notes to the Consolidated Financial Statements included in the 2020 Form 10-K for additional information regarding regulatory capital requirements for Banner Corporation and the Bank.)
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The actual regulatory capital ratios calculated for Banner Corporation and Banner Bank as of September 30, 2021, along with the minimum capital amounts and ratios, were as follows (dollars in thousands):

|  | Actual |  | Minimum to be Categorized as “Adequately Capitalized” |  | Minimum to be Categorized as “Well-Capitalized”
|  | Amount |  | Ratio |  | Amount |  | Ratio |  | Amount |  | Amount
Banner Corporation—consolidated |  |  |  |  |  |  |  |  |  |  |  |
Total capital to risk-weighted assets |  | $ | 1,635,458 |  |  | 14.71 | % |  | $ | 889,533 |  |  | 8.00 | % |  | $ | 1,111,916 |  |  | 10.00 | %
Tier 1 capital to risk-weighted assets |  | 1,407,993 |  |  | 12.66 |  |  | 667,149 |  |  | 6.00 |  |  | 667,149 |  |  | 6.00 |
Tier 1 leverage capital to average assets |  | 1,407,993 |  |  | 8.79 |  |  | 640,528 |  |  | 4.00 |  |  | n/a |  | n/a
Common equity tier 1 capital |  | 1,264,493 |  |  | 11.37 |  |  | 500,362 |  |  | 4.50 |  |  | n/a |  | n/a
Banner Bank |  |  |  |  |  |  |  |  |  |  |  |
Total capital to risk-weighted assets |  | 1,524,897 |  |  | 13.72 |  |  | 889,034 |  |  | 8.00 |  |  | 1,111,292 |  |  | 10.00 |
Tier 1 capital to risk-weighted assets |  | 1,397,432 |  |  | 12.57 |  |  | 666,775 |  |  | 6.00 |  |  | 889,034 |  |  | 8.00 |
Tier 1 leverage capital to average assets |  | 1,397,432 |  |  | 8.73 |  |  | 640,385 |  |  | 4.00 |  |  | 800,482 |  |  | 5.00 |
Common equity tier 1 capital |  | 1,397,432 |  |  | 12.57 |  |  | 500,081 |  |  | 4.50 |  |  | 722,340 |  |  | 6.50 |

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ITEM 3 – Quantitative and Qualitative Disclosures About Market Risk
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 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 clients than to us. An exception to this generalization is the beneficial effect of interest rate floors on a portion of our performing floating-rate loans, which help us maintain higher loan yields in periods when market interest rates decline significantly. 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 oversight by 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 September 30, 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):

|  | 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 |  | $ | 87,175 |  |  | 18.7 | % |  | $ | 204,162 |  |  | 22.1 | % |  | $ | (256,477) |  |  | (10.7) | %
+300 |  | 75,127 |  |  | 16.1 |  |  | 176,495 |  |  | 19.1 |  |  | (173,602) |  |  | (7.2) |
+200 |  | 56,016 |  |  | 12.0 |  |  | 132,671 |  |  | 14.3 |  |  | (80,481) |  |  | (3.4) |
+100 |  | 30,740 |  |  | 6.6 |  |  | 73,833 |  |  | 8.0 |  |  | 4,991 |  |  | 0.2 |
0 |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
-25 |  | (5,892) |  |  | (1.3) |  |  | (14,677) |  |  | (1.6) |  |  | (30,725) |  |  | (1.3) |

(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 targeted Federal Funds Rate was between 0.00% and 0.25% at September 30, 2021.
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 adjustable-rate mortgage 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.
The following table presents our interest sensitivity gap between interest-earning assets and interest-bearing liabilities at September 30, 2021 (dollars in thousands). The 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 September 30, 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 $5.38 billion, representing a one-year cumulative gap to total assets ratio of 32.34%. 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 September 30, 2021 are within our internal policy guidelines and management considers that our current level of interest rate risk is reasonable.
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| 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 | $ | 784,648 |  |  | $ | 59,360 |  |  | $ | 114,830 |  |  | $ | 28,353 |  |  | $ | 13,380 |  |  | $ | 1,003 |  |  | $ | 1,001,574 |
Fixed-rate mortgage loans | 375,542 |  |  | 270,857 |  |  | 789,520 |  |  | 446,125 |  |  | 400,857 |  |  | 19,207 |  |  | 2,302,108 |
Adjustable-rate mortgage loans | 1,184,707 |  |  | 363,898 |  |  | 1,078,868 |  |  | 817,080 |  |  | 172,314 |  |  | 1,830 |  |  | 3,618,697 |
Fixed-rate mortgage-backed securities | 192,802 |  |  | 173,608 |  |  | 538,576 |  |  | 404,216 |  |  | 749,163 |  |  | 374,014 |  |  | 2,432,379 |
Adjustable-rate mortgage-backed securities | 398,775 |  |  | 66,051 |  |  | 21,698 |  |  | 2,607 |  |  | 7,136 |  |  | — |  |  | 496,267 |
Fixed-rate commercial/agricultural loans | 125,785 |  |  | 158,801 |  |  | 334,445 |  |  | 209,729 |  |  | 117,345 |  |  | 38,641 |  |  | 984,746 |
Adjustable-rate commercial/agricultural loans | 649,515 |  |  | 32,818 |  |  | 73,414 |  |  | 35,628 |  |  | 9,625 |  |  | — |  |  | 801,000 |
Consumer and other loans | 442,104 |  |  | 29,499 |  |  | 40,083 |  |  | 14,827 |  |  | 16,236 |  |  | 33,268 |  |  | 576,017 |
Investment securities and interest-earning deposits | 2,258,787 |  |  | 17,995 |  |  | 91,235 |  |  | 143,224 |  |  | 377,641 |  |  | 153,921 |  |  | 3,042,803 |
Total rate sensitive assets | 6,412,665 |  |  | 1,172,887 |  |  | 3,082,669 |  |  | 2,101,789 |  |  | 1,863,697 |  |  | 621,884 |  |  | 15,255,591 |
Interest-bearing liabilities: (2) |  |  |  |  |  |  |  |  |  |  |  |  |
Regular savings | 272,979 |  |  | 175,140 |  |  | 582,937 |  |  | 432,955 |  |  | 660,351 |  |  | 649,633 |  |  | 2,773,995 |
Interest checking accounts | 178,653 |  |  | 72,695 |  |  | 254,751 |  |  | 208,930 |  |  | 382,201 |  |  | 702,427 |  |  | 1,799,657 |
Money market deposit accounts | 272,734 |  |  | 141,936 |  |  | 473,504 |  |  | 354,977 |  |  | 551,040 |  |  | 544,915 |  |  | 2,339,106 |
Certificates of deposit | 387,542 |  |  | 257,369 |  |  | 183,333 |  |  | 21,305 |  |  | 1,508 |  |  | — |  |  | 851,057 |
FHLB advances | 50,000 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 50,000 |
Subordinated notes | — |  |  | — |  |  | — |  |  | 100,000 |  |  | — |  |  | — |  |  | 100,000 |
Junior subordinated debentures | 147,944 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 147,944 |
Retail repurchase agreements | 247,358 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 247,358 |
Total rate sensitive liabilities | 1,557,210 |  |  | 647,140 |  |  | 1,494,525 |  |  | 1,118,167 |  |  | 1,595,100 |  |  | 1,896,975 |  |  | 8,309,117 |
Excess (deficiency) of interest-sensitive assets over interest-sensitive liabilities | $ | 4,855,455 |  |  | $ | 525,747 |  |  | $ | 1,588,144 |  |  | $ | 983,622 |  |  | $ | 268,597 |  |  | $ | (1,275,091) |  |  | $ | 6,946,474 |
Cumulative excess of interest-sensitive assets | $ | 4,855,455 |  |  | $ | 5,381,202 |  |  | $ | 6,969,346 |  |  | $ | 7,952,968 |  |  | $ | 8,221,565 |  |  | $ | 6,946,474 |  |  | $ | 6,946,474 |
Cumulative ratio of interest-earning assets to interest-bearing liabilities | 411.80 | % |  | 344.12 | % |  | 288.42 | % |  | 265.10 | % |  | 228.22 | % |  | 183.60 | % |  | 183.60 | %
Interest sensitivity gap to total assets | 29.18 |  |  | 3.16 |  |  | 9.55 |  |  | 5.91 |  |  | 1.61 |  |  | (7.66) |  |  | 41.75 |
Ratio of cumulative gap to total assets | 29.18 |  |  | 32.34 |  |  | 41.89 |  |  | 47.80 |  |  | 49.41 |  |  | 41.75 |  |  | 41.75 |

(Footnotes on following page)
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Footnotes for Table of Interest Sensitivity Gap
(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 credit losses and non-performing loans. Mortgage loans, mortgage-backed securities, other loans and investment securities are not adjusted for deferred fees, 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 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 $(417.4) million, or (2.51)% of total assets at September 30, 2021. Interest-bearing liabilities for this table exclude certain non-interest-bearing deposits which are included in the average balance calculations in the table contained in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2021 and 2020” of this report on Form 10-Q.
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ITEM 4 – 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 September 30, 2021, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports it files or submits 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: In the quarter ended September 30, 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.
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PART II – OTHER INFORMATION
ITEM 1 – Legal Proceedings
In the normal course of our business, we have various legal proceedings and other contingent matters 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 claims typically arise during the course of collection efforts on problem loans or with respect to actions to enforce liens on properties in which we hold a security 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 September 30, 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 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 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 1A – Risk Factors
There have been no material changes in the risk factors previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 2 – Unregistered Sales of Equity Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) The following table provides information about repurchases of common stock by the Company during the quarter ended September 30, 2021:

Period |  | Total Number of Common Shares Purchased |  | Average Price Paid per Common Share |  | Total Number of Shares Purchased as Part of Publicly Announced authorization |  | Maximum Number of Remaining Shares that May be Purchased as Part of Publicly Announced Authorization
July 1, 2021 - July 31, 2021 |  | 407 |  |  | $ | 52.53 |  |  | — |  |  | 1,007,781 |
August 1, 2021 - August 31, 2021 |  | 300,000 |  |  | 55.50 |  |  | 300,000 |  |  | 707,781 |
September 1, 2021 - September 30, 2021 |  | — |  |  | — |  |  | — |  |  | 707,781 |
Total for quarter |  | 300,407 |  |  | 55.49 |  |  | 300,000 |  |  | 707,781 |

Employees surrendered 407 shares to satisfy tax withholding obligations upon the vesting of restricted stock grants during the three months ended September 30, 2021.
On December 21, 2020, the Company announced that its Board of Directors had renewed its authorization to repurchase up to 5% of the Company’s common stock, or 1,757,781 of the Company’s outstanding shares. Under the authorization, shares may be repurchased by the
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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 quarter ended September 30, 2021, the Company repurchased 300,000 shares under the repurchase authorization, leaving 707,781 available for future repurchase.
ITEM 3 – Defaults upon Senior Securities
Not Applicable.
ITEM 4 – Mine Safety Disclosures
Not Applicable.
ITEM 5 – Other Information
Not Applicable.
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ITEM 6 – Exhibits

Exhibit | Index of Exhibits
3{a} | Amended and Restated Articles of Incorporation of Registrant [incorporated by reference to the Registrant’s Current Report on Form 8-K filed on April 29, 2010 (File No. 000-26584)].
3{b} | Articles of Amendment of Registrant (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on June 1, 2011 (File No. 000-26584)).
3{c} | Articles of Amendment to Amended and Restated Articles of Incorporation of Registrant for non-voting common stock [incorporated by reference to the Registrant’s Current Report on Form 8-K filed on March 18, 2015 (File No. 000-26584)]
3{d} | Amended and Restated Bylaws of Registrant [incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on October 29, 2020 (File No. 000-26584)].
10{a} | Amended and Restated Employment Agreement, with Mark J. Grescovich [incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on June 4, 2013 (File No. 000-26584].
10{b} | Form of Supplemental Executive Retirement Program Agreement with Gary Sirmon, Michael K. Larsen, Lloyd W. Baker, Cynthia D. Purcell and Richard B. Barton [incorporated by reference to exhibits filed with the Annual Report on Form 10-K for the year ended December 31, 2001 and the exhibits filed with the Form 8-K on May 6, 2008 (File No. 000-26584)].
10{c} | Form of Employment Contract entered into with Peter J. Conner, Cynthia D. Purcell and Judith A. Steiner [incorporated by reference to exhibits filed with the Form 8-K on June 25, 2014 (File No. 000-26584)].
10{d} | 2005 Executive Officer and Director Stock Account Deferred Compensation Plan [incorporated by reference to exhibits filed with the Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 000-26584)].
10{e} | Entry into an Indemnification Agreement with each of the Registrant’s Directors [incorporated by reference to exhibits filed with the Form 8-K on January 29, 2010 (File No. 000-26584)].
10{f} | 2014 Omnibus Incentive Plan [incorporated by reference as Appendix C to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on March 24, 2014 (File No. 000-26584)] and amendments [incorporated by reference to the Form 8-K filed on March 25, 2015 (File No. 000-26584)].
10{g} | 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)].
10{h} | 2018 Omnibus Incentive Plan [incorporated by reference as Appendix D to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on March 23, 2018 (File No. 000-26584)]
10{i} | 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)]
10{j} | Amended and Restated Executive Severance and Change in Control Plan and Summary Plan Description (Amended and Restated effective as of October 1, 2021)
31.1 | Certification of Chief Executive Officer pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 | Certification of Chief Financial Officer pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 | Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS | Inline XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the XBRL document

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Exhibit | Index of Exhibits
101.SCH | Inline XBRL Taxonomy Extension Schema Document
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL (included in Exhibit 101)

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SIGNATURES
Pursuant to the requirements 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 |
November 4, 2021 | /s/ Mark J. Grescovich |
| Mark J. Grescovich |
| President and Chief Executive Officer (Principal Executive Officer) |
November 4, 2021 | /s/ Peter J. Conner |
| Peter J. Conner |
| Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) |

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