BANNER CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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                 For the Nine Months Ended
                                                          September 30,                              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                 For the Nine Months Ended
                                                                 September 30,                             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                      For the Nine Months Ended
                                                                   September 30,                                  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
                                       57
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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
                                                                                                                                         Prior Year
                                              Sep 30, 2021          Dec 31, 2020          Sep 30, 2020          Prior Year End             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
                                                                                                                                                   Prior Year
                                   Amount                Percentage               Amount                Amount             Prior Year End           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.

                                       64
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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):
                                       65
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                                                               Three Months Ended September 30, 2021                              Three Months Ended September 30, 2020
                                                                            Interest and             Yield/                                    Interest and             Yield/
                                                    Average Balance          Dividends               Cost (3)          Average Balance          Dividends               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."
                                       66
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                                                              Nine months ended September 30, 2021                             Nine months ended September 30, 2020
                                                       Average             Interest and            Yield/               Average             Interest and            Yield/
                                                       Balance              Dividends             Cost (3)              Balance              Dividends             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):

                                                                                                       Minimum to be Categorized as                    Minimum to be Categorized as
                                                                      Actual                             "Adequately Capitalized"                           "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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