What changed in this filing

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Item 1A. Risk Factors

2021-02-23 compared with 2020-02-21 · 227 added, 211 removed, 240 unchanged (65% of the section changed)

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This report is qualified in its entirety by these risk factors.

Risks Related to Macroeconomic Conditions

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

The worldwide COVID-19 pandemic has caused major economic disruption and volatility in the financial markets both in the United States and globally and has negatively affected our operations and the banking and financial services we provide, primarily to businesses and individuals in the states of Washington, Oregon, California and Idaho where all of our branches are located.

In our service areas, stay-at-home orders, social distancing and travel restrictions, and similar orders imposed across the United States to restrict the spread of COVID-19, resulted in significant business and operational disruptions, including business closures, supply chain disruptions, and significant layoffs and furloughs.

While the stay-at-home orders have terminated or been phased-out along with reopening of businesses in certain markets, many localities in the western states in which we operate have resumed such orders and still apply capacity restrictions and health and safety recommendations that encourage continued social distancing and working remotely, limiting the ability of businesses to return to pre-pandemic levels of activity.

In response to the COVID-19 pandemic, we took various steps to help protect clients and staff by limiting branch activities to appointment only and use of drive-up facilities, and by encouraging the use of digital and electronic banking channels, all the while adjusting for evolving State and Federal stay-at-home guidelines.

In some of our markets, we have begun taking steps to resume more normal branch activities with specific guidelines in place to provide for the safety of our clients and personnel.

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

Despite these efforts, if the COVID-19 pandemic worsens it could limit, or disrupt, our ability to provide banking and financial services to our clients.

Currently approximately half of our employees are working remotely to enable us to continue to provide banking services to our clients.

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

Heightened cybersecurity, information security and operational risks may, however, result from these work from-home arrangements.

We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of the COVID-19 pandemic.

Further, we also rely upon our third-party vendors to conduct business and to process, record, and monitor transactions.

If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our clients.

We have business continuity plans and other safeguards in place, however, there is no assurance that such plans and safeguards will be effective.

To date, the COVID-19 pandemic has resulted in declines in loan demand and loan originations other than through government sponsored programs such as the PPP, and market interest rates and negatively impacted many of our business and consumer borrowers’ ability to make their loan payments.

Because the length of the pandemic and the efficacy of the extraordinary measures being put in place to address the economic consequences are unknown, including reductions in the targeted federal funds rate, until the pandemic subsides, we expect our net interest income and net interest margin will continue to be adversely affected in the near term, if not longer.

The impact of the pandemic is expected to continue to adversely affect us during 2021 as the ability of many of our borrowers to make loan payments has been significantly affected.

Many of our borrowers have become unemployed or may face unemployment, and certain businesses are at risk of insolvency as revenues declined precipitously, especially in businesses related to travel, hospitality, leisure, and physical personal services.

Businesses may ultimately not reopen as there is a significant level of uncertainty regarding the level of economic activity that will return to our service areas over time, the impact of governmental assistance, the speed of economic recovery, the resurgence of COVID-19 in subsequent seasons and changes to demographic and social norms that will take place.

Consistent with guidance provided by banking regulators we have modified loans by providing various loan payment deferral options to our borrowers affected by the COVID-19 pandemic.

Notwithstanding these modifications, these borrowers may not be able to resume making full payments on their loans once the COVID-19 pandemic is resolved.

If COVID-19 continues to spread or the responses to contain it are unsuccessful, it may result in increased loan delinquencies, adversely classified loans and loan charge-offs.

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

The ultimate impact of the COVID-19 pandemic on our business, results of operations and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic, including recent vaccination efforts.

Even after the COVID-19 pandemic subsides, the U.S.

economy may experience a recession, and we anticipate our business would be

materially and adversely affected by a prolonged recession.

To the extent the COVID-19 pandemic adversely affects our business, financial condition, liquidity or results of operations.

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

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We provide banking and financial services primarily to businesses and individuals in the states of Washington, Oregon, California and Idaho.

All of our branches and most of our deposit customers are also located in these four states.

Further, as a result of a high concentration of our customer base in the Puget Sound area and eastern Washington state regions, the deterioration of businesses in these areas, or one or more businesses with a large employee base in these areas, could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

All of our branches and most of our deposit clients are also located in these four states.

Further, as a result of a high concentration of our client base in the Puget Sound area and eastern Washington state regions, the deterioration of businesses in these areas, or one or more businesses with a large employee base in these areas, could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

Weakness in the global economy has adversely affected many businesses operating in our markets that are dependent upon international trade and it is not known how changes in tariffs being imposed on international trade may also affect these businesses.

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• loan delinquencies, problem assets and foreclosures may increase;

we may increase our allowance for loan losses;

collateral for loans, especially real estate, may decline in value, in turn reducing customers’ borrowing power, reducing the value of assets and collateral associated with existing loans;

• we may increase our allowance for credit losses;

• collateral for loans, especially real estate, may decline in value, in turn reducing clients’ borrowing power, reducing the value of assets and collateral associated with existing loans;

• the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

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

Risks Related to Credit and Lending

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

In addition to first-lien one- to four -family residential real estate lending, we originate construction and land loans, commercial and multifamily mortgage loans, commercial business loans, agricultural mortgage loans and agricultural loans, and consumer loans, primarily within our market areas.

We had $8.36 billion outstanding in these types of higher risk loans at December 31, 2019 , compared to $7.71 billion at December 31, 2018 .

We had $8.11 billion outstanding in these types of higher risk loans, excluding PPP loans, at December 31, 2020, compared to $8.38 billion at December 31, 2019.

These loans typically present different risks to us for a number of reasons, including those discussed below:

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If our appraisal of the value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss.

Disagreements between borrowers and

builders and the failure of builders to pay subcontractors may also jeopardize projects.

Disagreements between borrowers and builders and the failure of builders to pay subcontractors may also jeopardize projects.

This type of lending also typically involves higher loan principal amounts and may be concentrated with a small number of builders.

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Some of the builders we deal with have more than one loan outstanding with us.

Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss.

Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater

risk of loss.

In addition, during the term of some of our construction loans, no payment from the borrower is required since the accumulated interest is added to the principal of the loan through an interest reserve.

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Our investment in construction and land loans increased by $57.1 million or 5% in 2020.

At December 31, 2019 , construction and land loans that were non-performing were $2.2 million , or 6% of our total non-performing loans.

At December 31, 2020, construction and land loans that were non-performing were $936,000, or 3% of our total non-performing loans.

• Commercial and Multifamily Real Estate Loans .

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• Commercial Business Loans.

At December 31, 2019 , commercial business loans were $1.69 billion , or 18% of our total loan portfolio.

At December 31, 2020, commercial business loans, excluding PPP loans, were $1.88 billion, or 19% of our total loan portfolio.

Our commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower.

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Most often, this collateral includes accounts receivable, inventory, equipment or real estate.

In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Other collateral securing loans may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business.

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In addition, many farms are dependent on a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm.

If the cash flow from a farming operation is diminished, the borrower's ability to repay the

loan may be impaired.

Consequently, agricultural loans may involve a greater degree of risk than other types of loans, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as farm equipment (some of which is highly specialized with a limited or no market for resale), or assets such as livestock or crops.

If the cash flow from a farming operation is diminished, the borrower’s ability to repay the loan may be impaired.

Consequently, agricultural loans may involve a greater degree of risk than other types of

loans, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as farm equipment (some of which is highly specialized with a limited or no market for resale), or assets such as livestock or crops.

In such cases, any repossessed collateral for a defaulted agricultural operating loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation or because the assessed value of the collateral exceeds the eventual realization value.

At December 31, 2019 , there were $661,000 of agricultural loans that were non-performing, or 2% of total non-performing loans.

At December 31, 2020, there were $1.7 million of agricultural loans that were non-performing, or 5% of total non-performing loans.

• Consumer Loans .

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A downturn in the economy or the housing market in our market areas or a rapid increase in interest rates may reduce the value of the real estate collateral securing these types of loans and increase the risk that we would incur losses if borrowers default on their loans.

Residential loans with high combined loan-to-value generally will be more sensistive to declining properly values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses.

Residential loans with high combined loan-to-value generally will be more sensitive to declining properly values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses.

In addition, if the borrowers sell their homes, the borrowers may be unable to repay their loans in full from the sale proceeds.

As a result, these loans may experience higher rates of delinquencies, defaults and losses, which will in turn adversely affect our financial condition and results of operations.

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

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

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

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• the duration of the loan.

We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, which we believe is appropriate to provide for probable losses in our loan portfolio.

We maintain an allowance for credit losses, which is a reserve established through a provision for expected losses charged to expense, which we believe is appropriate to provide for lifetime expected credit losses in our loan portfolio.

The amount of this allowance is determined by our management through periodic reviews and consideration of several factors, including, but not limited to:

our general reserve, based on our historical default and loss experience, certain macroeconomic factors, regulatory requirements and management’s expectations of future events;

our specific reserve, based on our evaluation of non-performing loans and their underlying collateral;

an unallocated reserve to provide for other credit losses inherent in our portfolio that may not have been contemplated in the other loss factors.

The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes.

If our estimates are incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in the need for increases in our allowance for loan losses through the provision for losses on loans which is recorded as charged against income.

• our collective loss reserve, for loans evaluated on a pool basis which have similar risk characteristics and is based on our life of loan historical default and loss experience, certain macroeconomic factors, reasonable and supportable forecasts, regulatory requirements, management’s expectations of future events and qualitative factors;

• our individual loss reserve, based on our evaluation of individual loans that do not share similar risk characteristics.

The individual evaluation is based on the present value of the expected future cash flows or the fair value of the underlying collateral.

The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes.

If our estimates are incorrect, the allowance for credit losses may not be sufficient to cover the expected losses in our loan portfolio, resulting in the need for increases in our allowance for credit losses through the provision for credit losses which is recorded as charged against income.

Management also recognizes that significant new growth in loan portfolios, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner and will increase the risk that our allowance may be insufficient to absorb losses without significant additional provisions.

Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses.

If current conditions in the housing and real estate markets weaken, we expect we will experience increased delinquencies and credit losses.

The FASB has adopted a new accounting standard referred to as Current Expected Credit Loss (CECL) which will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses.

This will change the current method of providing allowances for credit losses only when they have been incurred and are probable, which may require us to increase our allowance for loan losses, and may greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for credit losses.

The FASB has adopted a new accounting standard referred to as Current Expected Credit Loss (CECL) which requires financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses.

This accounting pronouncement became applicable to us on January 1, 2020.

We will recognize a onetime cumulative-effect adjustment to the allowance for loan losses as of the date of adoption.

We currently estimate that the adoption of this ASU will result in a combined increase to our allowance for credit losses and reserve for unfunded loan commitments of 10% to 20%.

For additional information on CECL and the estimated impact of the one-time cumulative-effect adjustment see Note 2, Accounting Standards Recently Issued or Adopted, of the Notes to the Consolidated Financial Statements.

The federal banking regulators, including the Federal Reserve and the FDIC, have adopted a rule that gives a banking organization the option to phase in over a three-year period the day-one adverse effects of CECL on its regulatory capital.

In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management.

If charge-offs in future periods exceed the allowance for loan losses, we may need additional provisions to increase the allowance for loan losses.

Any increases in the allowance for loan losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.

We recognized a one-time cumulative-effect adjustment to the allowance for credit losses of $14.9 million as of the date of adoption.

For additional information on CECL and the one-time cumulative-effect adjustment see Note 2, Accounting Standards Recently Issued or Adopted, of the Notes to the Consolidated Financial Statements.

In addition, bank regulatory agencies periodically review our allowance for credit losses and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on judgments different than those of management.

If charge-offs in future periods exceed the allowance for credit losses, we may need additional provisions to increase the allowance for credit losses.

Any increases in the allowance for credit losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.

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

As of December 31, 2020, we hold and service a portfolio of 8,680 loans originated under the PPP with a balance of $1.04 billion.

In January 2021, Banner began accepting and processing loan applications under the second PPP program enacted in December 2020.

The PPP loans are subject to the provisions of the Coronavirus Aid, Relief, and Economic Security Act of 2020 and to complex and evolving rules and guidance issued by the SBA and other government agencies.

We expect that the great majority of our PPP borrowers will seek full or partial forgiveness of their loan obligations.

We could face additional risks in our administrative capabilities to service our PPP loans, and risk with respect to the determination of loan forgiveness, depending on the final procedures for determining loan forgiveness.

In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which we originated, funded or serviced a PPP loan, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if the SBA has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.

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

We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed and the property taken in as REO and at certain other times during the assets holding period.

Our net book value (NBV) in the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs (fair value).

A charge-off is recorded for any excess in the asset’s NBV over its fair value.

If our valuation process is incorrect, or if property values decline, the fair value of the investments in real estate may not be sufficient to recover our carrying value in such assets, resulting in the need for additional write-downs.

Significant write-downs to our investments in real estate could have a material adverse effect on our financial condition, liquidity and results of operations.

In addition, bank regulators periodically review our REO and may require us to recognize further write-downs.

Any increase in our write-downs, as required by the bank regulators, may have a material adverse effect on our financial condition, liquidity and results of operations.

Risks Related to Merger and Acquisition Strategy

We pursue a strategy of supplementing internal growth by acquiring other financial companies or their assets and liabilities that we believe will help us fulfill our strategic objectives and enhance our earnings.

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As part of our general growth strategy, we have recently expanded our business through acquisitions.

During the fourth quarter of 2019, we acquired AltaPacific, and expect system integration to be completed in the first quarter of 2020.

Although our business strategy emphasizes organic expansion, we continue, from time to time in the ordinary course of business, to engage in preliminary discussions with potential acquisition targets.

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In addition, once integrated, acquired operations may not achieve levels of profitability comparable to those achieved by Banner’s existing operations, or otherwise perform as expected.

Further, transaction-related expenses may adversely affect our earnings.

Further, transaction-

related expenses may adversely affect our earnings.

These adverse effects on our earnings and results of operations may have a negative impact on the value of Banner’s stock.

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• The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity into our company to make the transaction economically successful.

This integration process is complicated and time consuming and can also be disruptive to the customers of the acquired business.

If the integration process is not conducted successfully and with minimal adverse effect on the acquired business and its customers, we may not realize the anticipated economic benefits of particular acquisitions within the expected time frame, and we may lose customers or employees of the acquired business.

We may also experience greater than anticipated customer losses even if the integration process is successful;

This integration process is complicated and time consuming and can also be disruptive to the clients of the acquired business.

If the integration process is not conducted successfully and with minimal adverse effect on the acquired business and its clients, we may not realize the anticipated economic benefits of particular acquisitions within the expected time frame, and we may lose clients or employees of the acquired business.

We may also experience greater than anticipated client losses even if the integration process is successful;

• To finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional capital, which could dilute the interests of our existing shareholders;

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• To the extent our costs of an acquisition exceed the fair value of the net assets acquired, the acquisition will generate goodwill.

As discussed below under “-If the goodwill we have recorded in connection with acquisitions become impaired, our earnings and capital

could be reduced,” we are required to assess our goodwill for impairment at least annually, and any goodwill impairment charge could have a material adverse effect on our results of operations and financial condition.

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

Under GAAP, we are required to record loans acquired through acquisitions, including purchase credit impaired loans, at fair value.

As discussed below under “-If the goodwill we have recorded in connection with acquisitions become impaired, our earnings and capital could be reduced,” we are required to assess our goodwill for impairment at least annually, and any goodwill impairment charge could have a material adverse effect on our results of operations and financial condition.

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

Under GAAP, we are required to record loans acquired through acquisitions at fair value.

Estimating the fair value of such loans requires management to make estimates based on available information and facts and circumstances as of the acquisition date.

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This could result in higher net interest margins and interest income in current periods and lower net interest rate margins and lower interest income in future periods.

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

Severe weather, natural disasters, widespread disease or pandemics, acts of war or terrorism or other adverse external events could have a significant impact on our ability to conduct business.

In addition, such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans and leases, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue or cause us to incur additional expenses.

The occurrence of any of these events in the future could have a material adverse effect on our business, financial condition or results of operations.

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

We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations.

We may at some point, however, need to raise additional capital to support continued growth or be required by our regulators to increase our capital resources.

Any capital we obtain may result in the dilution of the interests of existing holders of our common stock.

Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance.

Accordingly, we cannot make assurances that we will be able to raise additional capital if needed on terms that are acceptable to us, or at all.

If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected.

In addition, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action.

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

Our net book value (NBV) in the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs (fair value).

A charge-off is recorded for any excess in the asset’s NBV over its fair value.

Significant write-downs to our investments in real estate could have a material adverse effect on our financial condition, liquidity and results of operations.

In addition, bank regulators periodically review our REO and may require us to recognize further write-downs.

Any increase in our write-downs, as required by the bank regulators, may have a material adverse effect on our financial condition, liquidity and results of operations.

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

Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings.

Fluctuations in market value may be caused by changes in market interest rates, rating agency actions in respect of the securities, defaults by the issuer or with respect to the underlying securities, lower market prices for securities and limited investor demand.

Our securities portfolio is evaluated for other-than-temporary impairment.

If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, a potential loss to earnings may occur.

Changes in interest rates can also have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates.

We increase or decrease our shareholders' equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes.

There can be no assurance that the declines in market value will not result in other-than-temporary impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.

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

Our mortgage banking operations provide a significant portion of our non-interest income.

We generate mortgage banking revenues primarily from gains on the sale of one- to four-family and multifamily mortgage loans.

The one- to four-family mortgage loans are sold pursuant to programs currently offered by Fannie Mae, Freddie Mac, Ginnie Mae and non-Government Sponsored Enterprise (GSE) investors.

These entities account for a substantial portion of the secondary market in residential one- to four-family mortgage loans.

Multifamily mortgage loans are sold primarily to non-GSE investors.

Any future changes in the one- to four-family programs, our eligibility to participate in these programs, the criteria for loans to be accepted or laws that significantly affect the activity of such entities, or a reduction in the size of the secondary market for multifamily loans could, in turn, materially adversely affect our results of operations.

Mortgage banking is generally considered a volatile source of income because it depends largely on the level of loan volume which, in turn, depends largely on prevailing market interest rates.

In a rising or higher interest rate environment, our originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold to investors.

This would result in a decrease in mortgage banking revenues and a corresponding decrease in non-interest income.

In addition, our results of operations are affected by the amount of non-interest expense associated with mortgage banking activities, such as salaries and employee benefits, occupancy, equipment and data processing expense and other operating costs.

During periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in loan originations.

In addition, although we sell loans into the secondary market without recourse, we are required to give customary representations and warranties about the loans to the buyers.

If we breach those representations and warranties, the buyers may require us to repurchase the loans and we may incur a loss on the repurchase.

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

We use derivative instruments to economically hedge mortgage servicing rights, mortgage loans held for sale and interest rate lock commitments to offset changes in fair value resulting from changing interest rate environments.

Our hedging strategies are susceptible to prepayment risk, basis risk, market volatility and changes in the shape of the yield curve, among other factors.

In addition, hedging strategies rely on assumptions and projections regarding assets and general market factors.

If these assumptions and projections prove to be incorrect or our hedging strategies do not adequately mitigate the impact of changes in interest rates, we may incur losses that would adversely impact earnings.

If the goodwill we have recorded in connection with acquisitions become impaired, our earnings and capital could be reduced.

In accordance with GAAP, we record assets acquired and liabilities assumed at their fair value with the excess of the purchase consideration over the net assets acquired resulting in the recognition of goodwill.

As a result, acquisitions typically result in recording goodwill.

We perform a goodwill evaluation at least annually to test for goodwill impairment.

As part of our testing, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

If we determine the fair value of a reporting unit is less than its carrying amount using these qualitative factors, we then compare the fair value of goodwill with its carrying amount and measure impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill.

If adverse economic conditions or the decrease in our stock price and market capitalization as a result of the pandemic were to worsen, it may significantly affect the fair value of our goodwill and may trigger impairment charges.

Any impairment charge could have a material adverse effect on our results of operations and financial condition.

Risks Related to Market and Interest Rate Changes

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

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Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve.

In an attempt to help the overall economy, the Federal Reserve kept interest rates low through its targeted Fed Funds rate for a number of years, however, the Federal Reserve steadily increased the targeted Fed Funds rate in 2018 and 2017.

Beginning in August 2019 the Federal Reserve has reduced the targeted Fed Funds rate 25 basis points three times to a range of 1.50% to 1.75% at December 31, 2019 in response to some recent weaknesses in economic data and indicated possible further decreases, subject to economic conditions.

If the Federal Reserve decreases the targeted federal funds rates further, overall interest rates will likely decline, which may negatively impact our net interest income.

If the Federal Reserve increases the targeted federal funds rates, overall interest rates will likely rise, which will positively impact our net interest income but may negatively impact both the housing market by reducing refinancing activity and new home purchases and the U.S.

In addition, deflationary pressures, while possibly lowering our operational costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of collateral securing loans which could negatively affect our financial performance.

In response to the COVID-19 pandemic the Federal Reserve reduced the targeted Fed Funds rate 150 basis points to a range of 0.00% to 0.25%.

The reduction in the targeted Fed Funds rate has resulted in a decline in overall interest rates which has negatively impacted our net interest income.

If the Federal Reserve continues to hold the targeted federal funds rates at the current level, overall interest rates will likely decline, which may additionally negatively impact our net interest income.

If the Federal Reserve increases the targeted federal funds rates, overall interest rates could rise, which will positively impact our net interest income but may negatively impact both the housing market by reducing refinancing activity and new home purchases and the U.S.

We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities.

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Quantitative and Qualitative Disclosures About Market Risk” for additional information about our interest rate risk management.

Uncertainty relating to the London Interbank Offered Rate (LIBOR) calculation process and potential phasing out of LIBOR may adversely affect our results of operations.

On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority (FCA), which regulates LIBOR, announced that the FCA intends to stop persuading or compelling banks to submit rates for the calibration of LIBOR to the administrator of LIBOR after 2021.

The announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021.

It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere.

At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans, subordinated debentures, or other securities or financial arrangements, given LIBOR's role in determining market interest rates globally.

The Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S.

financial institutions, selected a new index calculated by short-term repurchase agreements, backed by Treasury securities (SOFR) to replace LIBOR.

SOFR is observed and backward looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members.

Given that SOFR is a secured rate backed government securities, it will be a rate that does not take into account bank credit risk (which is different for LIBOR).

SOFR is therefore likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions.

Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question, although some transactions using SOFR have been completed in 2019, and the future of LIBOR remains uncertain at this time.

Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans, and to a lesser extent, securities in our portfolio, and may impact the availability and cost of hedging instruments and borrowings, including the rates we pay on our subordinated debentures and trust preferred securities.

If LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under our loan agreements with our borrowers or our existing borrowings, we may incur significant expenses in effecting the transition, and may be subject to disputes or litigation with customers and creditors over the appropriateness or comparability to LIBOR of the substitute indices, which could have an adverse effect on our results of operations.

Reductions in interchange income could further negatively impact our earnings.

Effective July 1, 2019, Banner Bank and Islanders Bank were affected by the Durbin Amendment to the Dodd-Frank Act regarding limits on debit card interchange fees.

The Durbin Amendment gave the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion or more at year end and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.

Banner and Banner Bank exceeded $10 billion in assets as of December 31, 2018 and therefore Banner Bank and Islanders Bank were subject to the Durbin Amendment interchange fee limitation effective July 1, 2019.

The Federal Reserve has adopted rules under this provision that limit the swipe fees that a debit card issuer can charge a merchant for a transaction to the sum of 21 cents and five basis points times the value of the transaction, plus up to one cent for fraud prevention costs.

During the year ended December 31, 2019 we earned $19.2 million of interchange fees on card transactions, compared to $23.2 million during the year ended December 31, 2018.

Debit card related fee income during 2019 was reduced by

approximately $7 million as a result of the application of the Durbin Amendment to Banner Bank and Islanders Bank beginning July 1, 2019.

Debit card related fee income is expected to be further reduced in 2020 as the full year will be subject to Durbin Amendment interchange fee limitation.

Interchange income is derived from fees paid by merchants to the interchange network in exchange for the use of the network's infrastructure and payment facilitation.

These fees are paid to card issuers to compensate them for the costs associated with issuance and operation.

Merchants have attempted to negotiate lower interchange rates, and the Durbin Amendment to the Dodd-Frank Act, which we have been subject to since July 1, 2019, limits the amount of interchange fees that may be charged for certain debit card transactions.

As the financial services industry evolves, consumers may find debit financial services to be less attractive than traditional or other financial services.

Consumers might not use debit card financial services for any number of reasons, including the general perception of our industry.

If consumers do not continue or increase their usage of debit cards, including making changes in the way debit cards are loaded, our operating revenues and debit card deposits may remain at current levels or decline.

Any projected growth for the industry may not occur or may occur more slowly than estimated.

If consumer acceptance of debit financial services does not continue to develop or develops more slowly than expected or if there is a shift in the mix of payment forms, such as cash, credit cards, traditional debit cards and debit cards, away from our products and services, it could have a material adverse effect on our financial position and results of operations.

Merchants may also continue to pursue alternative payment platforms, such as Apple Pay, to lower their processing costs.

Any such new payment system may reduce our interchange income.

Our failure to comply with the operating regulations set forth by payment card networks, which may change, could subject us to penalties, fees or the termination of our license to use the networks.

Any of these scenarios could have a material impact on our business, financial condition and results of operations.

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

Legal proceedings could result in judgments, significant time and attention from our management, or other adverse effects on our business and financial results.

We establish estimated liabilities for legal claims when payments associated with claims become probable and the amount of loss can be reasonably estimated.

We may still incur losses for a matter even if we have not established an estimated liability.

In addition, the actual cost of resolving a legal claim may be substantially higher than any amounts accrued for that matter.

The ultimate resolution of any legal proceeding, depending on the remedy sought and granted, could materially adversely affect our results of operations and financial condition.

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

Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings.

Our available-for-sale debt securities in an unrealized loss position are evaluated to determine whether the decline in fair value has resulted from credit losses or other factors.

If a credit loss exists, an allowance for credit losses is recorded for the credit loss, resulting in a charge against earnings.

We increase or decrease our shareholders’ equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes.

There can be no assurance that the declines

in market value will not result in expected credit losses, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.