What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-02-23 compared with 2020-02-21 · 582 added, 412 removed, 690 unchanged (59% of the section changed)

3 unchanged sentences

Executive Overview

Banner Corporation's successful execution of its strategic plan and operating initiatives continued in 2019 , as evidenced by our solid operating results and profitability.

We continue to maintain the Company's moderate risk profile as well as to produce consistent and sustainable earnings momentum.

Highlights for the year included continued strong asset quality, outstanding client acquisition, strong revenue generation from core operations and the AltaPacific acquisition.

Banner Corporation’s successful execution of its super community bank model and strategic initiatives has delivered solid core operating results and profitability.

Highlights of this success have included solid asset quality, client acquisition and account growth, which have resulted in increased core deposit balances and strong revenue generation while maintaining the Company’s moderate risk profile.

For the year ended December 31, 2020, our net income was $115.9 million, or $3.26 per diluted share, compared to net income of $146.3 million, or $4.18 per diluted share for the year ended December 31, 2019 and $136.5 million, or $4.15 per diluted share for the year ended December 31, 2018.

Current year results were positively impacted by growth in interest-earning assets from the full year benefit of the interest-earning assets from the Skagit acquisition and the two month benefit of the interest-earnings assets from the AltaPacific acquisition as well as organic loan growth.

Net income for both 2018 and 2017 were impacted by one-time tax adjustments primarily as a result of the enactment of the Tax Cuts and Jobs Act (2017 Tax Act) in December 2017, which reduced the marginal federal corporate income tax rate from 35% to 21%.

Our net income for the year ended December 31, 2018 , was increased by $5.5 million of tax benefit adjustments, which included the release of a $4.2 million valuation reserve previously recorded as a provisional amount related to the 2017 Tax Act.

Our net income for 2017 was reduced by $42.6 million, or $1.29 per diluted share, related to revaluation of our net deferred tax asset as a result of the 2017 Tax Act.

In 2017, our results also included a net gain of $12.2 million as a result of the Utah Branch Sale.

Our results for the years ended December 31, 2019 and 2018 were also impacted by $7.5 million and $5.6 million of acquisition-related expenses, respectively.

There were no acquisition-related expenses in 2017.

Our operating results depend primarily on our net interest income, which is the difference between interest income on interest-earning assets, consisting of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of customer deposits, FHLB advances, other borrowings 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 and interest-bearing liabilities.

Our net interest income before provision for loan losses increased 9% to $468.9 million for the year ended December 31, 2019 , compared to $431.0 million for the prior year.

This increase in net interest income is a result of growth in total loans receivable and core deposits.

During the year ended December 31, 2019 , our interest spread decreased to 4.27% from 4.40% for the prior year while our net interest margin decreased to 4.30% compared to 4.43% for the prior year.

The decrease in our net interest margin during 2019 was primarily a result of higher funding costs as well as three 25 basis point decreases by the Federal Reserve in the targeted Fed Funds Rate coupled with a longer-term decline in the 10-year treasury yield that decreased yields on interest-earning assets during the second half of 2019.

Our net interest margin was enhanced seven basis points in 2019 and ten basis points in 2018 by acquisition accounting adjustments, primarily the amortization of acquisition accounting discounts on purchased loans obtained from acquisitions, which are accreted into loan interest income.

Although our credit quality metrics continue to reflect our moderate risk profile, we recorded a $10.0 million provision for loan losses in the year ended December 31, 2019 , primarily due to the organic growth in the loan portfolio, increased non-performing loans, the renewal and migration of acquired loans out of the discounted loan portfolios and increased net charge-offs, compared to an $8.5 million provision for loan losses recorded in 2018 and $8.0 million in 2017 .

Non-performing loans increased to $39.6 million at December 31, 2019 , compared to $15.7 million a year earlier.

Net charge-offs increased to $5.9 million for the year ended December 31, 2019, compared to net charge-offs of $1.0 million for the prior year.

Our allowance for loan losses at December 31, 2019 was $100.6 million , representing 254% of non-performing loans, compared to $96.5 million , representing 616% of non-performing loans for the prior year.

(See Note 5, Loans Receivable and the Allowance for Loan Losses, of the Notes to the Consolidated Financial Statements as well as “Asset Quality” below in this Form 10-K.)

Our net income also is affected by the level of our non-interest income, including deposit fees and other service charges, results of mortgage banking operations, which includes loan origination and servicing fees and gains and losses on the sale of loans, and gains and losses on the sale securities, as well as our non-interest expense and income tax provisions.

Current year results were impacted by an increase in the provision for credit losses as a result of the COVID-19 pandemic, lower yields on earnings assets, decreased deposit fees and other service charges and increased non-interest expense these were partially offset by increased income from mortgage banking operations, growth in core deposit balances and decreased funding costs.

The decreases in the yields on interest earning assets compared to a year ago were driven by the low interest rate environment, which continues to put downward pressure on loan yields, as well as the impact of the low loan yields from the PPP loan portfolio.

The increase in the provision for credit losses for the current quarter compared to the same quarter a year ago primarily reflected expected lifetime credit losses due to the COVID-19 pandemic based upon the financial conditions and economic outlook that existed as of December 31, 2020.

Our results for the years ended December 31, 2020, 2019, and 2018 were also impacted by $2.1 million, $7.5 million, and $5.6 million of merger and acquisition-related expenses, respectively.

Our financial results for the year ended December 31, 2020 reflect the impact of the COVID-19 pandemic, which resulted in a substantial reduction in business activity or the closing of businesses in all of the states in which we operate.

We are continuing to offer payment and financial relief programs for borrowers impacted by COVID-19.

These programs include initial loan payment deferrals or interest-only payments for up to 90 days, waived late fees, and, on a more limited basis, waived interest and temporarily suspended foreclosure proceedings.

Deferred loans are re-evaluated at the end of the initial deferral period and will either return to the original loan terms or may be eligible for an additional deferral period for up to 90 days.

In addition, We have entered into payment forbearance agreements with other clients for periods of up to six months.

At December 31, 2020, we had 158 loans totaling $75.4 million still on deferral.

Of the loans still on deferral, 26 loans totaling $33.9 million have received a second deferral.

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 at December 31, 2020 pursuant to applicable accounting and regulatory guidance.

In addition, the SBA provides assistance to small businesses impacted by COVID-19 through the PPP, which was designed to provide near-term relief to help small businesses sustain operations.

The deadline for PPP loan applications to the SBA was August 8, 2020.

Under this program we funded 9,103 applications totaling $1.15 billion of loans in its service area and began processing applications for loan forgiveness in the fourth quarter of 2020.

As of December 31, 2020, we had received SBA forgiveness on 595 PPP loans totaling $112.3 million resulting in a remaining PPP loan balance of $1.04 billion.

The CAA renewed and extended the PPP until March 31, 2021 by authorizing an additional $284.5 billion for the program.

As a result, in January 2021, Banner Bank began accepting and processing loan applications under this second PPP program.

Banner Bank has begun taking steps to resume more normal branch activities with specific guidelines in place to help safeguard the safety of its clients and personnel.

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

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

These expenses, plus other expenses incurred in response to the COVID-19 pandemic, resulted in $3.5 million of related costs during the year ended December 31, 2020.

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.

Our net interest income before provision for credit losses increased 3% to $481.3 million for the year ended December 31, 2020, compared to $468.9 million for the prior year.

This increase in net interest income is a result of growth in total loans receivable and core deposits as well as decreased funding costs, partially offset by lower yields on interest-earning assets.

The growth in total loans receivable and core deposits was largely as the result of the origination of PPP loans during the second and third quarter of 2020.

During the year ended December 31, 2020, our interest spread decreased to 3.84% from 4.32% for the prior year while our net interest margin on a tax equivalent basis decreased to 3.85% compared to 4.35% for the prior year.

The decrease in net interest margin on a tax equivalent basis during 2020 primarily reflects lower yields on average interest-earning assets, partially offset by decreases in the cost of funding liabilities.

The lower yields on average interest-earning assets compared to a year earlier was largely due to the impact of decreases to the targeted Fed Funds Rate on floating rate loan yields and the low loan yields of the PPP loan portfolio and well as excess liquidity being invested in low yielding short term investments and interest bearing deposits.

The Federal Reserve reduced the targeted Fed Funds Rate by 75 basis points during the second half of 2019 and an additional 150 basis points during first quarter of 2020 to a range of 0.00% to 0.25% at December 31, 2020.

Our net interest margin was enhanced seven basis points in both 2020 and 2019 by acquisition

accounting adjustments, primarily the amortization of acquisition accounting discounts on purchased loans obtained from acquisitions, which are accreted into loan interest income.

We recorded a $64.3 million provision for credit losses - loans in the year ended December 31, 2020, primarily reflecting the expected lifetime credit losses due to the COVID-19 pandemic based upon the financial conditions and economic outlook that existed as of December 31, 2020, compared to an $10.0 million provision recorded in 2019 and a $8.5 million provision in 2018.

Non-performing loans decreased to $35.6 million at December 31, 2020, compared to $39.6 million a year earlier.

Net charge-offs decreased to $5.4 million for the year ended December 31, 2020, compared to net charge-offs of $5.9 million for the prior year.

Our allowance for credit losses - loans at December 31, 2020 was $167.3 million, representing 470% of non-performing loans compared to $100.6 million, or 254% of non-performing loans at for the prior year.

In addition to the allowance for credit losses - loans, We maintain an allowance for credit losses - unfunded loan commitments which was $13.3 million at December 31, 2020 compared to $2.7 million at December 31, 2019.

(See Note 5, Loans Receivable and the Allowance for Credit Losses, as well as “Asset Quality” below in this Form 10-K.)

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 loan 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 non-interest income was $98.6 million for the year ended December 31, 2020, compared to $81.9 million for the year ended December 31, 2019.

For the year ended December 31, 2019 , we recorded a net loss of $208,000 for fair value adjustments and $33,000 in net gains on the sale of securities.

In comparison, for the year ended December 31, 2018 , we recorded a net gain of $3.8 million for fair value adjustments and $837,000 in net losses on the sale of securities.

Our total revenues (net interest income before the provision for loan losses plus total non-interest income) for the year ended December 31, 2019 increased $35.9 million , or 7% , to $550.9 million , compared to $515.0 million for the same period a year earlier, largely as a result of increased interest income.

The increase from the prior year primarily reflects increased income from mortgage banking operations partially offset by decreased deposit fees and other service charges.

For the year ended December 31, 2020, we recorded a net loss of $656,000 for fair value adjustments and $1.0 million in net gains on the sale of securities.

In comparison, for the year ended December 31, 2019, we recorded a net loss of $208,000 for fair value adjustments and $33,000 in net gains on the sale of securities.

Our total revenues (net interest income before the provision for credit losses plus total non-interest income) for the year ended December 31, 2020 increased $29.1 million, or 5%, to $579.9 million, compared to $550.9 million for the same period a year earlier, largely as a result of increases in both net interest income and non-interest income.

Our total adjusted revenues (a non-GAAP financial measure), which excludes net gains and losses on sale of securities and fair value adjustments increased by $28.5 million, or 5%, to $579.6 million for the year ended December 31, 2020, compared to $551.0 million a year earlier.

For the year ended December 31, 2020, non-interest expense increased 4% to $373.1 million, compared to $357.7 million for the year ended December 31, 2019.

The increase was largely attributable to the inclusion of acquired Skagit operations for the full year as well as acquired AltaPacific operations in the last two months of 2019, including higher salary and employee benefits due to additional staffing related to the

acquired operations as well as normal salary and wage adjustments and $7.5 million of merger and acquisition-related expenses in 2019 , compared to $5.6 million in the prior year.

The increase was largely the result of the higher salary and employee benefits due to additional staffing related to the operations acquired from the acquisition of AltaPacific on November 1, 2019 and normal salary and wage adjustments, as well as increases in deposit insurance expenses and COVID-19 expenses.

In addition the provision for credit losses - unfunded loan commitments was $3.6 million for the year ended December 31, 2020, compared to none for the year ended December 31, 2019.

These increases were partially offset by increased capitalized loan origination costs and lower travel related expenses.

*Non-GAAP financial measures:

Non-interest income, revenues and other earnings information excluding fair value adjustments, net gains or losses on sale of securities and, in the year ended December 31, 2017, gain on the sale of branches including related loans and deposits, and non-interest expenses, excluding state/municipal business and occupational tax expense, CDI amortization, FHLB prepayment penalties, REO net gain or loss and acquisition-related costs, are non-GAAP financial measures.

Management has presented these non-GAAP financial measures in this discussion and analysis because it believes that they provide useful and comparative information to assess trends in our core operations and in understanding our capital position.

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, FHLB prepayment penalties, COVID-19 expenses, amortization of CDI, REO operations, provision credit losses - unfunded loan commitments, state/municipal business and use tax 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.

5 unchanged sentences

For the Years Ended December 31

2020 2019 2018

ADJUSTED REVENUE:

4 unchanged sentences

Exclude change in valuation of financial instruments carried at fair value 656 208 (3,775)

Exclude gain on sale of branches, including related loans and deposits

Adjusted Revenue (non-GAAP)

$ 579,561 $ 551,035 $ 512,043

ADJUSTED EARNINGS:

Net income (GAAP) $ 115,928 $ 146,278 $ 136,515

Exclude net loss (gain) on sale of securities

Exclude net (gain) loss on sale of securities (1,012) (33) 837

Exclude change in valuation of financial instruments carried at fair value 656 208 (3,775)

Exclude gain on sale of branches, including related loans and deposits

Exclude acquisition related costs

Exclude merger and acquisition-related costs 2,062 7,544 5,607

Exclude FHLB prepayment penalties — 735 —

Exclude related tax (benefit) expense

Exclude COVID-19 expenses 3,502 — —

Exclude related tax benefit (1,239) (1,741) (426)

Exclude tax adjustments related to tax reform and valuation reserves

Total adjusted earnings (non-GAAP)

$ 119,897 $ 152,991 $ 134,551

Diluted earnings per share (GAAP)

$ 3.26 $ 4.18 $ 4.15

Diluted adjusted earnings per share (non-GAAP)

$ 3.37 $ 4.38 $ 4.09

ADJUSTED EFFICIENCY RATIO:

2020 2019 2018

Non-interest expense (GAAP) $ 373,148 $ 357,728 $ 341,371

Exclude acquisition-related costs

Exclude merger and acquisition-related costs (2,062) (7,544) (5,607)

Exclude COVID-19 expenses (3,502) — —

Exclude CDI amortization

(7,732) (8,151) (6,047)

Exclude state/municipal tax expense

(4,355) (3,880) (3,284)

Exclude REO operations

190 (303) (804)

Exclude FHLB prepayment penalties

Exclude provision for credit losses - unfunded loan commitments (3,559) — —

Adjusted non-interest expense (non-GAAP) $ 352,128 $ 337,115 $ 325,629

Net interest income before provision for loan losses (GAAP)

Net interest income (GAAP) $ 481,301 $ 468,919 $ 430,988

Non-interest income (GAAP) 98,616 81,941 83,993

1 unchanged sentence

Exclude net (gain) loss on sale of securities

(1,012) (33) 837

Exclude net change in valuation of financial instruments carried at fair value

Exclude gain on sale of branches, including related loans and deposits

656 208 (3,775)

Adjusted revenue (non-GAAP) $ 579,561 $ 551,035 $ 512,043

2 unchanged sentences

Common shareholders’ tangible equity per share and the ratio of common shareholders’ tangible equity to tangible assets referred to in footnote (9) to Item 6, Selected Financial Data above are also non-GAAP financial measures.

We calculate common shareholders' tangible equity by excluding goodwill and other intangible assets from common shareholders' equity.

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 our capital position (dollars in thousands).

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).

2020 2019 2018

Shareholders’ equity (GAAP) $ 1,666,264 $ 1,594,034 $ 1,478,595

Exclude goodwill and other intangible assets, net

394,547 402,279 372,078

Common shareholders’ tangible equity (non-GAAP) $ 1,271,717 $ 1,191,755 $ 1,106,517

1 unchanged sentence

Exclude goodwill and other intangible assets, net

394,547 402,279 372,078

Total tangible assets (non-GAAP) $ 14,637,076 $ 12,201,752 $ 11,499,239

2 unchanged sentences

Common shares outstanding 35,159,200 35,751,576 35,182,772

Common shareholders' equity per share (GAAP)

Common shareholders' tangible equity per share (non-GAAP)

Common shareholders’ equity (book value) per share (GAAP) $ 47.39 $ 44.59 $ 42.03

Tangible common shareholders’ equity (tangible book value) per share (non-GAAP) $ 36.17 $ 33.33 $ 31.45

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.

5 unchanged sentences

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 loan losses, (iii) the valuation of financial assets and liabilities recorded at fair value, including OTTI losses, (iv) the valuation of intangibles, such as goodwill, core deposit intangibles, 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 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.

2 unchanged sentences

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, 2018 .

There have been no significant changes in our application of accounting policies since December 31, 2019 except for the change related to the adoption of Financial Instruments - Credit Losses (ASC 326) as described below and in Notes 1 and 2 to the Consolidated Financial Statements.

For additional information concerning critical accounting policies, see Notes 1, 3, 5, 12, 16 and 17 of the Notes to the Consolidated Financial Statements and the following:

7 unchanged sentences

While less common, similar interest reversal and nonaccrual treatment is applied to investment securities if their ultimate collectability becomes questionable.

Provision and Allowance for Loan Losses:

(Notes 1 and 5) The methodology for determining the allowance for loan losses 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 loan losses.

The provision for loan losses reflects the amount required to maintain the allowance loan for losses at an appropriate level based upon management’s evaluation of the adequacy of general and specific loss reserves.

Determining the amount of the allowance for loan losses involves a high degree of judgment.

Among the material estimates required to establish the allowance for loan losses are:

overall economic conditions;

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 5) 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;

loss exposure at default;

the amount and timing of future cash flows on impaired loans;

and determination of loss factors to be applied to the various elements of the portfolio.

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.

We have established systematic methodologies for the determination of the adequacy of our allowance for loan losses.

The methodologies are set forth in a formal policy and take into consideration the need for an overall general valuation allowance as well as specific allowances that are tied to individual problem loans.

We increase our allowance for loan losses by charging provisions for probable loan losses against our income .

The allowance for loan losses is maintained at a level sufficient to provide for probable losses based on evaluating known and inherent risks in the loan portfolio and upon our continuing analysis of the factors underlying the quality of the loan portfolio.

These factors include, among others, changes in the size and composition of the loan portfolio, delinquency rates, actual loan loss experience, current and economic conditions, detailed analysis of individual loans for which full collectability may not be assured, and determination of the existence and realizable value of the collateral and guarantees securing the loans.

Realized losses related to specific assets are applied as a reduction of the carrying value of the assets and charged immediately against the allowance for loan loss reserve.

Recoveries on previously charged off loans are credited to the allowance for loan losses.

The reserve is based upon factors and trends identified by us at the time financial statements are prepared.

Although we use the best information available, future adjustments to the allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond our control.

The adequacy of general and specific reserves is based on our continuing evaluation of the pertinent factors underlying the quality of the loan portfolio as well as individual review of certain large balance loans.

Loans are considered impaired when, based on current information and events, we determine that it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement.

Factors involved in determining impairment include, but are not limited to, the financial condition of the borrower, the value of the underlying collateral less selling costs and the current status of the economy.

Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of collateral if the loan is collateral dependent.

We continue to assess the collateral of these loans and update our appraisals on large balance impaired loans on an annual basis.

To the extent the property values continue to decline, there could be additional losses on these impaired loans, which may be material.

Subsequent changes in the value of impaired loans are included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported.

Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment.

Loans that are collectively evaluated for impairment include residential real estate and consumer loans and, as appropriate, smaller balance non-homogeneous loans.

Larger balance

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

Our methodology for assessing the appropriateness of the allowance for loan losses consists of several key elements, which include specific allowances, an allocated formula allowance and an unallocated allowance.

Losses on specific loans are provided for when the losses are probable and estimable.

General loan loss reserves are established to provide for inherent loan portfolio risks not specifically provided for.

The level of general reserves is based on analysis of potential exposures existing in our loan portfolio including evaluation of historical trends, current market conditions and other relevant factors identified by us at the time the financial statements are prepared.

The formula allowance is calculated by applying loss factors to outstanding loans, excluding those loans that are subject to individual analysis for specific allowances.

Loss factors are based on our historical loss experience adjusted for significant environmental considerations, including the experience of other banking organizations, which in our judgment affect the collectability of the loan portfolio as of the evaluation date.

The unallocated allowance is based upon our evaluation of various factors that are not directly measured in the determination of the formula and specific allowances.

This methodology may result in actual losses or recoveries differing significantly from the allowance for loan losses in the Consolidated Financial Statements.

While we believe the estimates and assumptions used in our determination of the adequacy of the allowance for loan losses are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations.

In addition, the determination of the amount of the Banks’ allowance for loan losses is subject to review by bank regulators as part of the routine examination process, which may result in the adjustment of reserves based upon their judgment of information available to them at the time of their examination.

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 Banks have 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 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 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, 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 commercial real estate, commercial business, and consumer loans without risk rating segmentation, 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 unemployment, gross domestic product, real estate price indices and growth, yield curve spreads, treasury yields, the corporate yield, the market volatility index, the Dow Jones index, the consumer confidence index, and the prime rate.

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 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 Banks determine 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 Banks measure 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 Banks’ 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 Banks 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 Banks.

Some of the Banks’ loans are reported as troubled debt restructures (TDRs).

Loans are reported as TDRs when the Banks grant a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider.

Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for a transaction of similar risk.

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) 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.

Fair Value Accounting and Measurement:

9 unchanged sentences

Changes in deferred tax asset valuation allowances related to acquired tax uncertainties are recognized in net income after the measurement period.

Acquired Loans:

(Notes 3 and 5) Purchased loans, including loans acquired in business combinations, are recorded at their fair value at the acquisition date.

Credit discounts are included in the determination of fair value;

therefore, an allowance for loan losses is not recorded at the acquisition date.

Loans Acquired in Business Combinations:

(Notes 3 and 5) 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-impaired or purchased non-credit-impaired.

Purchased credit-impaired (PCI) loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments.

The accounting for PCI loans is periodically updated for changes in cash flow expectations, and reflected in interest income over the life of the loans as accretable yield.

Any subsequent decreases in expected cash flows attributable to credit deterioration are recognized by recording a provision for loan losses.

For purchased non-credit-impaired loans, the difference 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.

Any subsequent deterioration in credit quality is recognized by recording a provision for loan losses.

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 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.

(Notes 1 and 16) Goodwill represents the excess of the purchase consideration paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination and is not amortized but is reviewed annually, or more frequently as current circumstances and conditions warrant, for impairment.

The Company completes its annual review of goodwill as of December 31.

An assessment of qualitative factors is completed to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

1 unchanged sentence

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 value, including goodwill, to its carrying amount.

If the fair value exceeds the carrying amount then goodwill is not considered impaired.

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 exceeded the carrying value of the reporting unit including goodwill and therefore no impairment existed as of December 31, 2020.

Other Intangible Assets:

(Notes 1 and 16) 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 customer

relationships associated with the deposits.

Core deposit intangibles are being amortized on an accelerated basis over a weighted average estimated useful life of eight years.

16 unchanged sentences

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.

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.

3 unchanged sentences

(Note 12) 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, Idaho, Utah and Montana.

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.

1 unchanged sentence

The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company assesses 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 its evaluation.

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.

3 unchanged sentences

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.

In December 2017, the federal government enacted the 2017 Tax Act, which among other provisions, reduced the federal marginal corporate income tax rate from 35% to 21%.

As a result of the passage of the 2017 Tax Act, the Company recorded a $42.6 million charge for the revaluation of its net deferred tax to account for the future impact of the decrease in the corporate income tax rate and other provisions of the legislation.

The charge was recorded as an increase to tax expense and reduction of the net deferred asset for the year ended December 31, 2017.

The Company’s 2017 financial results reflected the income tax effects of the 2017 Tax Act for which the accounting was complete and provisional amounts for those specific income tax effects of the 2017 Tax Act for which the accounting was incomplete but a reasonable estimate could be determined.

The $42.6 million charge recorded in 2017 by the Company included $4.2 million of provisional income tax expense related to Alternative Minimum Tax (AMT) credits that are limited under Internal Revenue Code of 1986 (Code) Section 383, which resulted in a reduction in the AMT deferred tax asset.

The utilization of the limited AMT credits under the refundable AMT credit law was uncertain as of December 31, 2017.

Subsequently, in 2018 the Company determined it could use the AMT credits and reversed the previously recorded $4.2 million provisional tax expense.

Legal Contingencies:

7 unchanged sentences

Total assets increased to $15.03 billion at December 31, 2020, compared to $12.60 billion at December 31, 2019.

The increase in assets in 2019 reflects the assets acquired in the AltaPacific acquisition as well as organic loan growth.

The increase in assets in 2020 was largely the result of the origination of PPP loans and a related increase in deposits starting during the second quarter of 2020, which primarily funded the increases in interest bearing deposit balances and securities.

Net loans receivable (gross loans less deferred fees and discounts, and allowance for loan losses and excluding loans held for sale) increased $498.9 million, or 5%, to $9.70 billion at December 31, 2020, from $9.20 billion at December 31, 2019.

The increase in total loans receivable in 2019 included $ 332.4 million of portfolio loans acquired in the AltaPacific acquisition as well as $288.4 million of organic loan growth.

The increase in net loans included increases of $328.7 million in commercial real estate loans, $210.2 million in commercial business loans, $104.3 million in multifamily real estate loans and $62.1 million in construction loans.

The increase in construction loans was particularly helpful to the net interest margin as interest rates, loan fees and the velocity of turnover in this lending activity are generally higher than for most other categories of loans.

The increase in net loans receivable reflects the origination of PPP loans, which totaled $1.04 billion as of December 31, 2020, partially offset by a decrease in one- to four-family loans and lower commercial line of credit usage.

Loans held for sale increased to $243.8 million at December 31, 2020, compared to $210.4 million at December 31, 2019, principally as a result of one- to four- family loan originations exceeding one- to four- family loan sales.

Loans held for sale at December 31, 2020 included $122.0 million of multifamily loans and $121.8 million of one- to four-family loans.

Securities decreased to $1.81 billion at December 31, 2019 , from $1.90 billion at December 31, 2018 , as the Company maintained the level of its securities portfolio consistent with its liquidity needs.

The aggregate total of securities and interest-bearing deposits decreased $50.8 million , or 3% , to $1.89 billion at December 31, 2019 , compared to $1.94 billion a year earlier.

The average effective duration of Banner's securities portfolio was approximately 3.5 years at December 31, 2019 .

Securities increased to $2.77 billion at December 31, 2020, from $1.81 billion at December 31, 2019, as the Company invested excess liquidity.

The aggregate total of securities and interest-bearing deposits increased $1.80 billion, or 96%, to $3.69 billion at December 31, 2020, compared to $1.89 billion a year earlier.

The average effective duration of our securities portfolio was approximately 3.6 years at December 31, 2020.

The fair value of our trading securities was $2.2 million less than their amortized cost at December 31, 2020.

In addition, fair value adjustments for securities designated as available-for-sale reflected an increase of $33.8 million for the year ended December 31, 2019 , which was included as a component of other comprehensive income and largely occurred as a result of slightly increased market interest rates.

Periodically, we also acquire securities (primarily municipal bonds) which are designated as held-to-maturity and this portfolio increased by $1.9 million from the prior year-end balance.

In addition, fair value adjustments for securities designated as available-for-sale reflected an increase of $45.2 million for the year ended December 31, 2020, which was included net of the associated tax expense of $10.9 million as a component of other comprehensive income, and largely occurred as a result of decreased market interest rates.

We also acquire securities (primarily municipal bonds) which are designated as held-to-maturity and this portfolio increased by $185.6 million from the prior year-end balance.

(See Notes 4 and 17 of the Notes to the Consolidated Financial Statements.)

Goodwill increased $34.0 million to $373.1 million at December 31, 2019 , compared to $339.2 million at December 31, 2018 as a result of the AltaPacific acquisition.

Other intangibles decreased $3.8 million to $29.2 million at December 31, 2019 , compared to $32.9 million at December 31, 2018 , primarily due to CDI recorded in the AltaPacific acquisition, partially offset by scheduled amortization of CDI and the reclassification of the leasehold intangibles to the right of use lease asset in connection with the implementation of Lease Topic 842.

Deposits increased $571.6 million , or 6% , to $10.05 billion at December 31, 2019 , from $9.48 billion at December 31, 2018 , largely as a result of $313.4 million of deposits acquired in the AltaPacific acquisition as well as organic deposit growth.

Goodwill was $373.1 million at both December 31, 2020 and December 31, 2019.

Other intangibles decreased $7.7 million to $21.4 million at December 31, 2020, compared to $29.2 million at December 31, 2019, primarily due scheduled amortization of CDI.

Deposits increased $2.52 billion, or 25%, to $12.57 billion at December 31, 2020, from $10.05 billion at December 31, 2019, primarily due to SBA PPP loan funds deposited into client accounts and an increase in general client liquidity due to reduced business investment and consumer spending.

Core deposits were 93% of total deposits at December 31, 2020, compared to 89% of total deposits one year earlier.

Non-interest-bearing deposits increased by $287.2 million , or 8% , to $3.95 billion from $3.66 billion at December 31, 2018;

interest-bearing transaction and savings accounts increased by $484.3 million , to $4.98 billion at December 31, 2019 from $4.50 billion at December 31, 2018 ;

and certificates of deposit decreased $199.9 million , or 15% , to $1.12 billion at December 31, 2019 from $1.32 billion at December 31, 2018 .

Brokered deposits decreased to $202.9 million at December 31, 2019 , compared to $377.3 million a year earlier.

FHLB advances decreased $90.2 million , to $450.0 million at December 31, 2019 from $540.2 million at December 31, 2018 , as core deposits were used to fund the growth in the loan portfolio.

Other borrowings, consisting of retail repurchase agreements primarily related to customer cash management accounts, decreased $521,000 to $118.5 million at December 31, 2019 , compared to $119.0 million at December 31, 2018 .

Junior subordinated debentures, which are carried at fair value, increased $5.2 million to $119.3 million at December 31, 2019 from $114.1 million a year ago, primarily due to the $5.8 million of junior subordinated debentures acquired in the AltaPacific acquisition.

Non-interest-bearing deposits increased by $1.55 billion, or 39%, to $5.49 billion from $3.95 billion at December 31, 2019;

interest-bearing transaction and savings accounts increased by $1.18 billion, to $6.16 billion at December 31, 2020 from $4.98 billion at December 31, 2019;

and certificates of deposit decreased $205.1 million, or 18%, to $915.3 million at December 31, 2020 from $1.12 billion at December 31, 2019.

We had no brokered deposits at December 31, 2020, compared to $202.9 million a year earlier.

FHLB advances decreased $300.0 million, to $150.0 million at December 31, 2020 from $450.0 million at December 31, 2019, as core deposits were used to fund the growth in the loan and securities portfolios.

Other borrowings, consisting of retail repurchase agreements primarily related to client cash management accounts, increased $66.3 million to $184.8 million at December 31, 2020, compared to $118.5 million at December 31, 2019.

On June 30, 2020, Banner issued and sold in an underwritten offering the Subordinated Notes, resulting in net proceeds, after underwriting discounts and offering expenses, of $98.1 million.

No additional junior subordinated debentures, which are carried at fair value, were issued or matured during the year ended December 31, 2020;

however, the estimated fair value of these instruments decreased by $2.3 million to $117.0 million at December 31, 2020 from $119.3 million a year ago, reflecting wider market spreads.

For more information, see Notes 9, 10 and 11 of the Notes to the Consolidated Financial Statements.

Total shareholders’ equity increased $72.2 million, to $1.67 billion at December 31, 2020, compared to $1.59 billion at December 31, 2019.

The increase in equity primarily reflects $85.2 million of common shares issued in connection with the AltaPacific acquisition and net income of $146.3 million , partially offset by the accrual of $93.5 million of dividends to common shareholders and the repurchase of $53.9 million of common stock.

In the year ended December 31, 2019 , we repurchased 1.0 million shares of our common stock at an average price of $53.90 per share.

The increase in equity primarily reflects $115.9 million of year-to-date net income, partially offset by the accrual of $44.2 million of dividends to common shareholders and the repurchase of $31.8 million of common stock.

In the year ended December 31, 2020, we repurchased 624,780 shares of our common stock at an average price of $50.84 per share.

Tangible common shareholders’ equity (a non-GAAP financial measure), which excludes goodwill and other intangible assets was $1.27 billion, or 8.69% of tangible assets at December 31, 2020, compared to $1.19 billion, or 9.77% at December 31, 2019.

3 unchanged sentences

Our investment levels may be increased or decreased depending upon yields available on investment alternatives and management’s projections as to the demand for funds to be used in our loan origination, deposit and other activities.

During the year ended December 31, 2019 , our aggregate investment in securities decreased $83.1 million , as the Company maintained the level of its securities portfolio consistent with its liquidity needs.

During the year ended December 31, 2020, our aggregate investment in securities increased $956.0 million.

Securities purchased increased as we deployed excess balance sheet liquidity and market spreads for certain securities widened and exceeded sales, paydowns and maturities during the year ended December 31, 2020.

Holdings of U.S.

Government and agency obligations decreased $60.1 million, municipal bonds decreased $10.1 million, and asset-backed securities decreased $13.8 million .

Partially offsetting these decreases was an increase mortgage-backed securities of $783,000 .

Government and agency obligations increased $52.1 million, municipal bonds increased $390.2 million, corporate debt obligations increased $216.6 million, mortgage-backed securities increased $295.9 million and asset-backed securities increased $1.3 million.

Government and Agency Obligations:

Our portfolio of U.S.

Government and agency obligations had a carrying value of $90.0 million (with an amortized cost of $90.9 million ) at December 31, 2019 , a weighted average contractual maturity of 15.6 years and a weighted average

coupon rate of 4.13% .

Government and agency obligations had a carrying value of $142.1 million (with an amortized cost of $142.0 million) at December 31, 2020, a weighted average contractual maturity of 8.9 years and a weighted average coupon rate of 1.79%.

Many of the U.S.

12 unchanged sentences

Corporate Bonds:

Our corporate bond portfolio had a carrying value of $33.4 million ( $34.9 million at amortized cost, with a net fair value adjustment of $1.6 million ) at December 31, 2019 .

Long-term adjustable-rate capital securities issued by financial institutions make up over half of our corporate bond portfolio.

Our corporate bond portfolio had a carrying value of $250.0 million ($249.5 million at amortized cost, with a net fair value adjustment of $460,000) at December 31, 2020.

The corporate bond portfolio at December 31, 2020 included $130.0 million of short term commercial paper.

(See “Critical Accounting Policies” above and Note 17 of the Notes to the Consolidated Financial Statements.) At December 31, 2020, the portfolio had a weighted average maturity of 4.7 years and a weighted average coupon rate of 1.66%.

1 unchanged sentence

At December 31, 2020, our asset-backed securities portfolio had a carrying value of $9.4 million (with an amortized cost of $9.4 million), and was comprised of securitized pools of student loans issued or guaranteed by the Student Loan Marketing Association and credit card receivables.

The weighted average coupon rate of these securities was 3.18% and the weighted average contractual maturity was 10.1 years .

At December 31, 2019 , 100% of these securities had adjustable interest rates tied to three-month LIBOR while the remaining securities have fixed interest rates.

The weighted average coupon rate of these securities was 1.31% and the weighted average

contractual maturity was 13.1 years.

At December 31, 2020, 100% of these securities had adjustable interest rates tied to three-month LIBOR.

The following tables set forth certain information regarding carrying values and percentage of total carrying values of our portfolio of securities—trading and securities—available-for-sale, both carried at estimated fair market value, and securities—held-to-maturity, carried at amortized cost as of December 31, 2020, 2019 and 2018 (dollars in thousands):

Municipal bonds

2020 2019 2018

Value Percent of

Total Carrying

Value Percent of

Total Carrying

Value Percent of

Corporate bonds $ 24,980 100.0 % $ 25,636 100.0 % $ 25,896 100.0 %

Equity securities

Total securities—trading $ 24,980 100.0 % $ 25,636 100.0 % $ 25,896 100.0 %

5 unchanged sentences

Asset-backed securities 9,419 0.4 8,126 0.5 21,933 1.4

Equity securities

Total securities—available-for-sale $ 2,322,593 100.0 % $ 1,551,557 100.0 % $ 1,636,223 100.0 %

6 unchanged sentences

Estimated market value $ 448,681 $ 237,805 $ 232,537

The following table shows the maturity or period to repricing of our consolidated portfolio of securities as of December 31, 2019 (dollars in thousands):

Securities—Maturity/Repricing and Rates

The following table shows the maturity or period to repricing of our consolidated portfolio of available-for-sale and held-to-maturity securities as of December 31, 2020 (dollars in thousands):

Securities Available-for-Sale and Held-to-Maturity —Maturity/Repricing and Rates

December 31, 2020

One Year or Less

After One to Five Years

After Five to Ten Years

After Ten to Twenty

After Twenty Years

Carrying Value

Weighted Average Yield

Carrying Value

Weighted Average Yield

Carrying Value

Weighted Average Yield

Government and agency

Adjustable-rate

One Year or Less After One to Five Years After Five to Ten Years After Ten Years Total

Carrying Value Weighted Average Yield Carrying

Value Weighted Average Yield Carrying

Value Weighted Average Yield Carrying Value Weighted Average Yield

Government and agency obligations $ — — % $ 73,431 0.82 % $ 31,679 0.67 % $ 36,965 1.25 % $ 142,075 0.90 %

Municipal bonds:

Fixed-rate taxable

Fixed-rate tax exempt

Adjustable-rate taxable

Adjustable-rate tax exempt

Taxable 3,870 1.01 34,682 2.75 7,005 3.58 41,589 2.86 87,146 2.79

Tax exempt (1)

5,370 2.70 16,238 3.19 54,051 3.40 511,711 3.23 587,370 3.24

9,240 1.99 50,920 2.89 61,056 3.42 553,300 3.20 674,516 3.18

Corporate bonds 130,370 0.30 40,898 3.61 52,050 3.99 1,672 — 224,990 2.04

Adjustable-rate

Mortgage-backed or related

Adjustable-rate

Mortgage-backed or related securities 195 2.91 146,570 3.36 520,141 1.74 1,026,494 1.98 1,693,400 2.03

Asset-backed securities — — 3,857 1.70 — — 5,562 1.22 9,419 1.42

Adjustable-rate

Equity securities

Total securities—carrying value

Total securities—estimated market value

Total securities available-for-sale and held-to-maturity—carrying value $ 139,805 0.41 $ 315,676 2.71 $ 664,926 2.02 $ 1,623,993 2.37 $ 2,744,400 2.25

Total securities available-for-sale and held-to-maturity—estimated market value $ 139,864 $ 318,486 $ 667,821 $ 1,645,103 $ 2,771,274

(1) Tax-exempt weighted average yield is calculated on a tax equivalent basis using a federal tax rate of 21% and a TEFRA allowance of 10%.

Loans and Lending.

1 unchanged sentence

We attempt to maintain a portfolio of loans in a range of 90% to 95% of total deposits to enhance our revenues, while adhering to sound underwriting practices and appropriate diversification guidelines in order to maintain a moderate risk profile.

The unprecedented level of liquidity and growth of deposits experienced during 2020 has result in our loan to deposit ratio being below our target levels.

At December 31, 2020, our net loan portfolio totaled $9.70 billion compared to $9.20 billion at December 31, 2019.

Our total loan portfolio increased $620.8 million , or 7% , during the year ended December 31, 2019 , compared to an increase of $ 1.09 billion , or 14% , during the year ended December 31, 2018 .

The increase included $ 332.4 million of portfolio loans acquired in the AltaPacific acquisition as well as organic loan growth.

While we originate a variety of loans, our ability to originate each type of loan is dependent upon the relative customer demand and competition in each market we serve.

We have implemented strategies designed to capture more market share and achieve increases in targeted loans resulting in strong loan originations in 2019 and 2018 .

Our total loan portfolio increased $565.6 million, or 6%, during the year ended December 31, 2020, compared to an increase of $620.8 million, or 7%, during the year ended December 31, 2019.

The increase in net loans receivable for the year ended December 31, 2020 primarily reflects the origination of PPP loans, primarily during the second quarter of 2020, which totaled $1.04 billion as of December 31, 2020.

The increase for the year ended December 31, 2019 included $332.4 million of portfolio loans acquired in the AltaPacific acquisition as well as organic loan growth.

While we originate a variety of loans, our ability to originate each type of loan is dependent upon the relative client demand and competition in each market we serve.

We continue to implement strategies designed to capture more market share and achieve increases in targeted loans.

Nonetheless, looking forward, new loan originations and portfolio balances will continue to be significantly affected by the course of economic activity and changes in interest rates.

Originations of loans for sale increased to $1.1 billion for the year ended December 31, 2019 from $896.5 million during 2018 and from $807.1 million during the year ended December 31, 2017 .

Originations of loans for sale increased to $1.46 billion for the year ended December 31, 2020 from $1.09 billion during 2019 and from $896.5 million during the year ended December 31, 2018.

Originations of loans for sale included $234.0 million, $340.0 million, and $372.8 million of multifamily held for sale loan production for the years ended December 31, 2020 , December 31, 2019, and December 31, 2018, respectively.

We generally sell a significant portion of our newly originated one- to four-family residential mortgage loans and multifamily loans to secondary market purchasers.

Proceeds from sales of loans for the years ended December 31, 2019 , 2018 and 2017 totaled $1.1 billion , $791.7 million and $1.05 billion , respectively.

Proceeds from sales of loans for the years ended December 31, 2020, 2019 and 2018 totaled $1.49 billion, $1.10 billion and $791.7 million, respectively.

See “Loan Servicing Portfolio” below.

3 unchanged sentences

Loan Origination

Dec 31, 2020 Dec 31, 2019 Dec 31, 2018

Commercial real estate $ 356,361 $ 428,936 $ 473,810

2 unchanged sentences

Commercial business:

Commercial business 628,981 840,237 927,850

PPP 1,176,018 — —

Agricultural business 76,096 85,663 115,096

One-to four- family residential 116,713 112,165 172,967

Consumer 423,526 350,601 326,357

Total loan originations (excluding loans held for sale) $ 4,393,125 $ 3,322,039 $ 3,495,076

1 unchanged sentence

During the years ended December 31, 2020, 2019, and 2018 we purchased $2.5 million , $9.8 million, and $33.7 million respectively, of loans.

The loan purchases in 2019 were one- to four-family and commercial loans compared to the loan purchases in 2018 which were one- to four-family loans.

The loan purchases in 2017 included both one- to four-family and commercial real estate loans.

The loan purchases in 2020 were one- to four-family and commercial real estate loans compared to the loan purchases in 2019 which included one- to four-family loans and commercial loans.

The loan purchases in 2018 included one- to four-family loans.

One- to Four-Family Residential Real Estate Lending:

3 unchanged sentences

Most of the one- to four-family loans that we originate are sold in the secondary markets with net gains on sales and loan servicing fees reflected in our revenues from mortgage banking.

Our balance of loans for one- to four-family residences decreased by $28.0 million in 2019 , compared to the prior year largely as a result of selling a greater percentage of our originations in the secondary markets.

Our balance of loans for one- to four-family residences decreased by $207.6 million in 2020, compared to the prior year.

The decrease in one-to-four family real estate loans during 2020 reflects portfolio loans being refinanced and sold as held for sale loans.

Construction and Land Lending:

Our construction loan originations have been relatively strong in recent years as builders have expanded production and experienced strong home sales in many markets where we operate.

Despite the strong originations during 2019 one-to four-family construction loans only increased by $9.6 million in 2019 to total $544.3 million at December 31, 2019 , as the velocity of one- to four-family home sales increased during the year.

During the year ended December 31, 2019 , land and land development loans (both residential and commercial) decreased by $34.8 million to $181.0 million at December 31, 2019 , At December 31, 2019 , construction, land and land development loans totaled $1.17 billion (including $544.3 million of one- to four-family construction loans, $154.7 million of residential land or land development loans, $444.3 million of commercial and multifamily real estate construction loans and $26.3 million of commercial land or land development loans), or 13% of total loans, compared to $1.11 billion , or 13% , at December 31, 2018 .

Despite the strong originations during 2020 one-to four-family construction loans decreased by $36.5 million in 2020 to total $507.8 million at December 31, 2020, as the velocity of one- to four-family home sales increased during the year.

During the year ended December 31, 2020, land and land development loans (both residential and commercial) increased by $3.4 million to $248.9 million at December 31, 2020.

At December 31, 2020, construction, land and land

development loans totaled $1.29 billion (including $507.8 million of one- to four-family construction loans, $248.9 million land and land development loans (both residential and commercial), and $534.5 million of commercial and multifamily real estate construction loans), or 13% of total loans, compared to $1.23 billion, or 13%, at December 31, 2019.

Commercial and Multifamily Real Estate Lending:

We also originate loans secured by commercial and multifamily real estate.

Commercial and multifamily real estate loans originated by us include both fixed- and adjustable-rate loans with intermediate terms of generally five to ten

Commercial and multifamily real estate loans originated by us include both fixed- and adjustable-rate loans with intermediate terms of generally five to ten years.

Our commercial real estate portfolio consists of loans on a variety of property types with no significant concentrations by property type, borrowers or locations.

1 unchanged sentence

Our portfolio of multifamily real estate loans was $428.2 million, or 4% of total loans at December 31, 2020, compared to $388.4 million, or 4%, at December 31, 2019.

The increases in commercial real estate loans and multifamily real estate loans during 2019 were due to $227.3 million of commercial and multifamily loans acquired in the AltaPacific acquisition as well as organic growth.

Commercial Business Lending:

2 unchanged sentences

At December 31, 2020, commercial business loans totaled $2.18 billion, or 22% of total loans, compared to $1.36 billion, or 15%, at December 31, 2019.

This increase in the current year was due to organic growth in the commercial business loan portfolio.

The increase reflects growth in PPP loans during 2020, offset partially by declines in commercial line of credit utilization.

In recent years our commercial lending has also included participation in certain national syndicated loans, including shared national credits, which totaled $122.2 million at December 31, 2020.

6 unchanged sentences

Consumer and Other Lending:

Consumer lending has traditionally been a modest part of our business with loans made primarily to accommodate our existing customer base.

Consumer lending has traditionally been a modest part of our business with loans made primarily to accommodate our existing client base.

At December 31, 2020, our consumer loans decreased $58.5 million to $605.8 million, or 6% of our loan portfolio, compared to $664.3 million, or 7%, at December 31, 2019.

5 unchanged sentences

The portfolio included loans secured by property located primarily in the states of Washington, Oregon, Idaho and California.

For the year ended December 31, 2019 , we recognized $1.8 million of loan servicing fees in our results of operations, which was net of $5.1 million of amortization for MSRs and included no impairment charges or reversals for a valuation adjustment to MSRs.

For the years ended December 31, 2020 and 2019, we recognized $7.4 million and $6.9 million of loan servicing income in our results of operations, respectively.

For the years ended December 31, 2020 and 2019 we recognized $7.7 million and $5.1 million of amortization for MSRs, respectively, and no impairment charges or reversals for a valuation adjustment to MSRs.

Mortgage Servicing Rights:

5 unchanged sentences

Loan Portfolio Analysis

Percent of Total

As a result of the adoption of Financial Instruments - Credit Losses (ASC 326), effective January 1, 2020, the Company changed the segmentation of its loan portfolio based on the common risk characteristics used to measure the allowance for credit losses.

The following table presents the loans receivable at December 31, 2020, 2019 and 2018 by class (dollars in thousands).

The presentation of loans receivable at December 31, 2019 and 2018 have been updated to conform to the loan portfolio segmentation that became effective on January 1, 2020.

December 31, 2020 December 31, 2019 December 31, 2018

Amount Percent of Total Amount Percent of Total Amount Percent of Total

Commercial real estate:

1 unchanged sentence

Investment properties 1,955,684 19.8 2,024,988 21.8 1,849,386 21.3

Small balance CRE 573,849 5.8 613,484 6.6 617,116 7.1

Multifamily real estate 428,223 4.4 388,388 4.2 284,823 3.3

Construction, land and land development:

Commercial construction 228,937 2.3 210,668 2.3 171,769 2.0

3 unchanged sentences

Commercial business:

Commercial business (1)

2,178,461 22.1 1,364,650 14.7 1,146,015 13.2

Small business scored 743,451 7.5 772,657 8.3 752,769 8.7

Agricultural business, including secured by farmland

One- to four-family real estate

Consumer secured by one- to four-family real estate

299,949 3.0 337,271 3.6 371,987 4.3

One- to four-family residential 717,939 7.3 925,531 9.9 948,140 10.9

Consumer—home equity revolving lines of credit

491,812 5.0 519,336 5.6 537,110 6.2

Consumer—other 113,958 1.2 144,915 1.6 166,162 1.9

Total loans outstanding

Less allowance for loan losses

Total loans 9,870,982 100.0 % 9,305,357 100.0 % 8,684,595 100.0 %

Less allowance for credit losses - loans (167,279) (100,559) (96,485)

Net loans $ 9,703,703 $ 9,204,798 $ 8,588,110

(1) Includes $1.04 billion of PPP loans as of December 31, 2020.

The following table sets forth the Company’s loans by geographic concentration at December 31, 2020, 2019 and 2018 (dollars in thousands):

Loans by Geographic Concentration

December 31, 2019

December 31, 2018

December 31, 2017

December 31, 2020 December 31, 2019 December 31, 2018

Amount Percent Amount Percent Amount Percent

Washington $ 4,647,553 47.0 % $ 4,364,764 46.9 % $ 4,324,588 49.8 %

California 2,279,749 23.1 2,129,789 22.9 1,596,604 18.4

Oregon 1,792,156 18.2 1,650,704 17.7 1,636,152 18.8

Idaho 537,996 5.5 530,016 5.7 521,026 6.0

Utah 80,704 0.8 60,958 0.7 57,318 0.7

Other 532,824 5.4 569,126 6.1 548,907 6.3

Total $ 9,870,982 100.0 % $ 9,305,357 100.0 % $ 8,684,595 100.0 %

The following table sets forth certain information at December 31, 2020 regarding the dollar amount of loans maturing in our portfolio based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments.

Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.

Loan balances are net of unamortized premiums and discounts, and exclude loans held for sale and the allowance for loan losses (in thousands):

Loan balances are net of unamortized premiums and discounts, and exclude loans held for sale and the allowance for credit losses (in thousands):

Loans by Maturity

Maturing in One Year or Less

Maturing After One to Three Years

Maturing After Three to Five Years

Maturing After Five to Ten Years

Maturing After Ten Years

Maturing in One Year or Less Maturing After One to Five Years Maturing After Five to Fifteen Years Maturing After Fifteen Years Total

Commercial real estate:

1 unchanged sentence

Investment properties 113,443 414,077 1,052,987 375,177 1,955,684

Small balance CRE 25,185 183,176 355,278 10,210 573,849

Multifamily real estate 19,517 63,934 244,817 99,955 428,223

Construction, land and land development:

Commercial construction 144,143 31,642 43,861 9,291 228,937

3 unchanged sentences

Commercial business:

Commercial business 366,388 265,719 382,604 119,278 1,133,989

PPP — 1,044,472 — — 1,044,472

Small business scored 61,359 250,506 226,018 205,568 743,451

Agricultural business, including secured by farmland 84,715 69,999 143,662 1,573 299,949

One- to four-family real estate

Consumer secured by one- to four-family real estate

One- to four-family residential 3,918 24,151 80,394 609,476 717,939

Consumer—home equity revolving lines of credit 4,956 9,605 16,097 461,154 491,812

Consumer—other 33,228 35,164 27,346 18,220 113,958

Total loans $ 1,634,725 $ 2,813,186 $ 3,447,053 $ 1,976,018 $ 9,870,982

Contractual maturities of loans do not necessarily reflect the actual life of such assets.

4 unchanged sentences

Loans Maturing after One Year

Floating or Adjustable Rates

Fixed Rates Floating or Adjustable Rates Total

Commercial real estate:

1 unchanged sentence

Investment properties 491,665 1,350,576 1,842,241

Small balance CRE 116,559 432,105 548,664

Multifamily real estate 291,274 117,432 408,706

Construction, land and land development:

Commercial construction 29,816 54,978 84,794

3 unchanged sentences

Commercial business:

Commercial business 479,650 287,951 767,601

PPP 1,044,472 — 1,044,472

Small business scored 211,898 470,194 682,092

Agricultural business, including secured by farmland 84,168 131,066 215,234

One- to four-family real estate

Consumer secured by one- to four-family real estate

One- to four-family residential 517,928 196,093 714,021

Consumer—home equity revolving lines of credit 805 486,051 486,856

Consumer—other 74,860 5,870 80,730

1 unchanged sentence

We compete with other financial institutions and financial intermediaries in attracting deposits and we generally attract deposits within our primary market areas.

Much of the focus of our expansion and current marketing efforts have been directed toward attracting additional deposit customer relationships and balances.

Much of the focus of our expansion and current marketing efforts have been directed toward attracting additional deposit client relationships and balances.

This effort has been particularly directed towards increasing transaction and savings accounts which has contributed to us being very successful in increasing these core deposit balances.

3 unchanged sentences

This strategy continues to help control our cost of funds and increase the opportunity for deposit fee revenues, while stabilizing our funding base.

Total deposits increased $571.6 million , or 6% , to $10.05 billion at December 31, 2019 from $9.48 billion at December 31, 2018 .

Deposit growth for 2019 included $313.4 million of deposits acquired in the AltaPacific acquisition as well as organic deposit growth.

Non-interest-bearing deposits increased by $287.2 million , or 8% , to $3.95 billion at year end from $3.66 billion at December 31, 2018 .

Interest-bearing transaction and savings accounts increased by $484.3 million , to $4.98 billion at December 31, 2019 compared to $4.50 billion a year earlier.

Certificates of deposit decreased $199.9 million , or 15% , to $1.12 billion at December 31, 2019 from $1.32 billion at December 31, 2018 .

The decrease in certificates of deposit balances in 2019 was largely due to the $174.5 million decrease in brokered deposits to $202.9 million at December 31, 2019 .

Total deposits increased $2.52 billion, or 25%, to $12.57 billion at December 31, 2020 from $10.05 billion at December 31, 2019.

The increase in total deposits from year end was due primarily to PPP loan funds deposited into client accounts and an increase in general client liquidity due to reduced business investment and consumer spending.

Non-interest-bearing deposits increased by $1.55 billion, or 39%, to $5.49 billion at year end from $3.95 billion at December 31, 2019.

Interest-bearing transaction and savings accounts increased by $1.18 billion, to $6.16 billion at December 31, 2020 compared to $4.98 billion a year earlier.

Certificates of deposit decreased $205.1 million, or 18%, to $915.3 million at December 31, 2020 from $1.12 billion at December 31, 2019.

The decrease in certificates of deposit balances in 2020 was largely due to the $202.9 million decrease in brokered deposits.

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

Percent of Total

Increase (Decrease)

Percent of Total

Increase (Decrease)

Percent of Total

2020 2019 2018

Amount Percent of Total Increase (Decrease) Amount Percent of Total Increase (Decrease) Amount Percent of Total

Non-interest-bearing checking $ 5,492,924 43.7 % $ 1,547,924 $ 3,945,000 39.3 % $ 287,183 $ 3,657,817 38.6 %

1 unchanged sentence

Regular savings 2,398,482 19.1 464,441 1,934,041 19.3 91,460 1,842,581 19.4

Money market 2,191,135 17.4 421,941 1,769,194 17.6 303,825 1,465,369 15.5

Total interest-bearing transaction and savings accounts 6,159,052 49.0 1,175,814 4,983,238 49.6 484,272 4,498,966 47.5

11 unchanged sentences

Total brokered deposits $ — — % $ (202,884) $ 202,884 2.0 % $ (174,463) $ 377,347 4.0 %

The following table indicates the amount of the Banks’ certificates of deposit with balances equal to or greater than $100,000 by time remaining until maturity as of December 31, 2019 (in thousands):

Maturity Period—$100,000 or greater CDs

Total deposits in excess of the FDIC insurance limit $ 4,407,935 35.1 % $ 1,579,962 $ 2,827,973 28.1 % $ 494,225 $ 2,333,748 24.6 %

The following table indicates the amount of the Banks’ certificates of deposit with balances in excess of the FDIC insurance limit by time remaining until maturity as of December 31, 2020 (in thousands):

Maturity Period— CDs in excess of the FDIC insurance limit

Certificates of

Deposit $100,000

Deposit in Excess of FDIC Insurance Limit

Maturing in three months or less $ 58,715

2 unchanged sentences

Maturing after twelve months 36,408

Total $ 197,064

The following table provides additional detail on geographic concentrations of our deposits at December 31, 2020, 2019, and 2018 (in thousands):

Geographic Concentration of Deposits

December 31, 2019

December 31, 2018

December 31, 2017

December 31, 2020 December 31, 2019 December 31, 2018

Amount Percent Amount Percent Amount Percent

Washington $ 7,058,404 56.2 % $ 5,861,809 58.3 % $ 5,674,328 59.9 %

Oregon 2,604,908 20.7 2,006,163 20.0 1,891,145 20.0

California 2,237,949 17.8 1,698,289 16.9 1,434,033 15.1

Idaho 666,035 5.3 482,380 4.8 477,542 5.0

Total deposits $ 12,567,296 100.0 % $ 10,048,641 100.0 % $ 9,477,048 100.0 %

1 unchanged sentence

To access funds, we are required to own a sufficient level of capital stock in the FHLB-Des Moines and may apply for advances on the security of such stock and certain of our mortgage loans and securities provided that certain creditworthiness standards have been met.

At December 31, 2019 , we had $450.0 million of FHLB advances outstanding at a weighted average rate of 2.09% , a decrease of $90.2 million compared to a year earlier.

At December 31, 2020, we had $150.0 million of FHLB advances outstanding at a weighted average rate of 2.58%, a decrease of $300.0 million compared to a year earlier, as core deposits were used to fund a larger portion of the balance sheet.

Also, at December 31, 2020, we had an investment of $16.4 million in FHLB capital stock.

At that date, Banner Bank was authorized by the FHLB-Des Moines to borrow up to $5.31 billion under a blanket floating lien security agreement, while Islanders Bank was approved to borrow up to $132.7 million under a similar agreement.

At that date, based on pledged collateral, Banner Bank had $2.28 billion of available credit capacity and Islanders Bank $32.5 million of available credit capacity with the FHLB-Des Moines.

The following table provides additional detail on our FHLB advances as of December 31, 2020 and 2019 (dollars in thousands):

FHLB Advances Outstanding

Weighted Average Rate

2020 2019 2018

Amount Weighted Average Rate Amount Weighted Average Rate Amount Weighted Average Rate

Maturing in one year or less $ 100,000 2.51 % $ 300,000 1.84 % $ 540,000 2.64 %

5 unchanged sentences

The Federal Reserve Bank provides credit based upon acceptable loan collateral, which includes certain loan types not eligible for pledging to the FHLB-Des Moines.

At December 31, 2019 , based upon our available unencumbered collateral, Banner Bank was eligible to borrow $1.19 billion from the Federal Reserve Bank;

however, at that date we had no funds borrowed under this arrangement.

We also issue retail repurchase agreements to customers that are primarily related to customer cash management accounts and in the past have borrowed funds through the use of secured wholesale repurchase agreements with securities brokers.

At December 31, 2020, based upon our available unencumbered collateral, Banner Bank was eligible to borrow $958.7 million from the Federal Reserve Bank, however, at that date we had no funds borrowed under this arrangement.

We also issue retail repurchase agreements to clients that are primarily related to client cash management accounts and in the past have borrowed funds through the use of secured wholesale repurchase agreements with securities brokers.

In each case, the repurchase agreements are generally due within 90 days.

At December 31, 2020, retail repurchase agreements totaled $184.8 million, had a weighted average rate of 0.22%, and were secured by pledges of certain mortgage-backed securities and agency securities.

Retail repurchase agreement balances, which are primarily associated with customer sweep account arrangements, decreased $521,000 , from the 2018 year-end balance.

Retail repurchase agreement balances,

which are primarily associated with client sweep account arrangements, increased $66.3 million, from the 2019 year-end balance.

We had no borrowings under wholesale repurchase agreements at December 31, 2020 or December 31, 2019.

At December 31, 2019, we had an aggregate of $143.5 million , net of repayments, of TPS.

At December 31, 2020, we had an aggregate of $143.5 million, net of repayments, of Trust Preferred Securities (TPS).

This includes $120.0 million issued by us and $23.5 million acquired in our bank acquisitions.

2 unchanged sentences

At December 31, 2020, the TPS had a weighted average rate of 2.35%.

See Note 11, Junior Subordinated Debentures and Mandatorily Redeemable Trust Preferred Securities, of the Notes to the Consolidated Financial Statements for additional information with respect to the TPS.

In addition, on June 30, 2020, Banner issued and sold in an underwritten offer $100.0 million of Subordinated Notes, resulting in net proceeds, after underwriting discounts and offering expenses, of $98.1 million.

At December 31, 2020, the Subordinated Notes had a weighted average interest rate of 5.00%.

The Subordinated Notes qualify as Tier 2 capital for regulatory capital purposes.

See Note 11, Subordinated Debt and Mandatorily Redeemable Trust Preferred Securities, of the Notes to the Consolidated Financial Statements for additional information with respect to the TPS and Subordinated Notes.

Asset Quality.

Achieving and 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.

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.

During 2020, we continued to be actively engaged with our borrowers in resolving remaining problem assets and with the effective management of real estate owned as a result of foreclosures.

Non-performing assets increased to $40.5 million , or 0.32% of total assets, at December 31, 2019 , from $18.9 million , or 0.16% of total assets, at December 31, 2018 , and from $27.5 million , or 0.28% of total assets, at December 31, 2017 .

At December 31, 2019 , our allowance for loan losses was $100.6 million , or 254% of non-performing loans, compared to $96.5 million , or 616% of non-performing loans at December 31, 2018 .

The increase in non-performing loans during 2019 was largely due to one commercial banking relationship moving to nonaccrual.

Non-performing assets decreased to $36.5 million, or 0.24% of total assets, at December 31, 2020, from $40.5 million, or 0.32% of total assets, at December 31, 2019, and increased from $18.9 million, or 0.16% of total assets, at December 31, 2018.

At December 31, 2020, our allowance for credit losses was $167.3 million, or 470% of non-performing loans, compared to $100.6 million, or 254% of non-performing loans at December 31, 2019.

In addition to the allowance for credit losses - loans, the Company maintains an allowance for credit losses - unfunded loan commitments which was $13.3 million at December 31, 2020 compared to $2.7 million at December 31, 2019.

We continue to believe our level of non-performing loans and assets is manageable and further believe that we have sufficient capital and human resources to manage the collection of our non-performing assets in an orderly fashion.

Loans are reported as restructured when we grant concessions to a borrower experiencing financial difficulties that we would not otherwise consider.

As a result of these concessions, restructured loans, referred to as troubled debt restructures (TDRs), are considered impaired as the Banks will not collect all amounts of principal and interest due in accordance with the terms of the original loan agreement.

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(s) would be reclassified as nonaccrual.

Loans are reported as troubled debit restructures (TDRs) when we grant concessions to a borrower experiencing financial difficulties that we would not otherwise consider.

If anyTDR 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 December 31, 2020, we had $6.7 million of TDR loans currently performing under their restructured terms.

The loans acquired in Banner's merger transactions that are determined to have deteriorated credit quality for which it is probable that all contractual payments will not be collected are accounted for as purchased credit-impaired pools.

We are continuing to offer payment and financial relief programs for borrowers impacted by COVID-19.

Deferred loans are re-evaluated at the end of the initial deferral period and will either return to the original loan terms or may be eligible for an additional deferral period for up to 90 days.

In addition, we have entered into payment forbearance agreements with other clients for periods of up to six months.

At December 31, 2020, we had 158 loans totaling $75.4 million still on deferral.

Of the loans still on deferral, 26 loans totaling $33.9 million have received a second deferral.

Prior to the implementation of Financial Instruments—Credit Losses (ASC 326) on January 1, 2020, loans acquired in merger transactions with deteriorated credit quality were accounted for as purchased credit-impaired pools.

Typically, this would include loans that were considered non-performing or restructured as of the acquisition date.

Accordingly, subsequent to acquisition, loans included in the purchased credit-impaired pools are not reported as non-performing loans based upon their individual performance status, so the categories of nonaccrual, impaired and 90 day past due and accruing do not include any purchased credit-impaired loans.

Purchased credit-impaired loans were $15.9 million at December 31, 2019 , compared to $14.4 million at December 31, 2018 .

Accordingly, subsequent to acquisition, loans included in the purchased credit-impaired pools were not reported as non-performing loans based upon their individual performance status, so the loan categories of nonaccrual, impaired and 90 days past due and accruing did not include any purchased credit-impaired loans.

Purchased credit-impaired loans were $15.9 million at December 31, 2019.

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

Non-Performing Assets

2020 2019 2018

Nonaccrual loans:

Secured by real estate:

Commercial $ 18,199 $ 5,952 $ 4,088

Multifamily — 85 —

Construction/land 936 1,905 3,188

2 unchanged sentences

Agricultural business, including secured by farmland 1,743 661 1,751

Consumer 2,719 2,473 1,241

32,560 37,501 14,748

Loans more than 90 days delinquent, still on accrual:

Secured by real estate:

Commercial — 89 —

Construction/land — 332 —

1 unchanged sentence

Commercial business 1,025 401 1

Consumer 130 398 247

3,054 2,097 906

Total non-performing loans 35,614 39,598 15,654

REO assets held for sale, net (2)

816 814 2,611

Other repossessed assets held for sale, net 51 122 592

Total non-performing assets $ 36,481 $ 40,534 $ 18,857

Total non-performing loans to net loans before allowance for loan losses

Total non-performing loans to net loans before allowance for credit losses/allowance for loan losses 0.36 % 0.43 % 0.18 %

Total non-performing loans to total assets 0.24 % 0.31 % 0.13 %

Total non-performing assets to total assets 0.24 % 0.32 % 0.16 %

Total nonaccrual loans to net loans before allowance for credit losses 0.33 % 0.40 % 0.17 %

TDR loans (3)

$ 6,673 $ 6,466 $ 13,422

Loans 30-89 days past due and on accrual (4)

$ 12,291 $ 20,178 $ 25,108

(1) Includes $1.22 million of nonaccrual TDR loans as of December 31, 2020.

For the year ended December 31, 2019 , interest income was reduced by $1.7 million as a result of nonaccrual loan activity, which includes the reversal of accrued interest as of the date the loan was placed on nonaccrual.

For the year ended December 31, 2020, interest income was reduced by $1.5 million as a result of nonaccrual loan activity, which includes the reversal of $846,000 of accrued interest as of the date the loan was placed on nonaccrual.

There was no interest income recognized on nonaccrual loans during the year ended December 31, 2020.

4 unchanged sentences

(3) These loans were performing under their restructured terms.

In addition to the non-performing loans noted in Table 12 and purchased credit-impaired loans as of December 31, 2019 and 2018 , we had other classified loans with an aggregate outstanding balance of $61.7 million and $68.6 million , respectively, 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.

(4) PCI loans are included at December 31, 2019 and December 31, 2018.

In addition to the non-performing loans as of December 31, 2020, we had other classified loans with an aggregate outstanding balance of $305.2 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.

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):

Loans by Grade

For the years ended December 31,

2020 2019 2018

Pass $ 9,494,147 $ 9,130,662 $ 8,557,839

Special Mention 36,598 61,189 31,162

Substandard 340,237 113,448 95,507

Doubtful — 58 87

Total $ 9,870,982 $ 9,305,357 $ 8,684,595

The increase in substandard loans during the year ended December 31, 2020 primarily reflects Banner Bank proactively downgrading loans in industries the most at risk due to COVID-19.

The following table presents the REO activity for the years ended December 31, 2020, 2019 and 2018 (in thousands):

For the years ended December 31,

2020 2019 2018

Balance, beginning of the period $ 814 $ 2,611 $ 360

Additions from loan foreclosures

1,588 109 641

Additions from acquisitions

Additions from capitalized costs

Proceeds from dispositions of REO

(2,360) (2,588) (838)

Gain on sale of REO

1 unchanged sentence

Balance, end of period $ 816 $ 814 $ 2,611

REO decreased $1.8 million , to $814,000 at December 31, 2019 compared to $2.6 million at December 31, 2018 and increased compared to $360,000 at December 31, 2017 .

The decrease in 2019 primarily reflects the sale of REO properties acquired in the Skagit acquisition and the increase during 2018 primarily reflects the addition of REO properties acquired in the Skagit acquisition.

From time to time, non-recurring fair value adjustments to REO are recorded to reflect partial write-downs based on an observable market price or current appraised value of property.

REO increased $2,000, to $816,000 at December 31, 2020 compared to $814,000 at December 31, 2019 and decreased compared to $2.6 million at December 31, 2018.

The decrease during 2019 primarily reflects the sale of REO properties acquired in the Skagit Bank acquisition.

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.

1 unchanged sentence

Our net income for the year ended December 31, 2019 was positively impacted by growth in interest-earning assets from the full year benefit of the earning assets from the Skagit acquisition and the two month benefit of the interest-earnings assets from the AltaPacific acquisition as well as organic loan growth, partially offset by increases in both interest expense and non-interest expense.

Our results for the years ended December 31, 2019 and 2018 included $7.5 million and $5.6 million , respectively, of acquisition-related expenses.

Our operating results depend largely on our net interest income which increased by $37.9 million to $468.9 million , primarily reflecting growth in the loan portfolio, partially offset by increased funding costs primarily due to an increase in interest rates paid.

Our operating results for the year ended December 31, 2019 also reflected a $2.1 million decrease in non-interest income primarily as a result of a reduction in the fair value of financial instruments carried at fair value in 2019 of $208,000 , compared to an increase in the fair value of financial instruments carried at fair value in 2018 of $3.8 million as well as a $1.4 million decrease in deposit fees and other service charges.

The decrease in deposit fees and other service charges is a result of Banner becoming subject to the Durbin Amendment on July 1, 2019, which reduced interchange fee income by approximately $7 million during the second half of 2019.

The increase in net interest income contributed to an increase of $35.9 million , or 7% , in revenue to $550.9 million for the year ended December 31, 2019 , compared to $515.0 million for the year ended December 31, 2018 .

Non-interest expense increased to $357.7 million for the year ended December 31, 2019 compared with $341.4 million for the year ended December 31, 2018 , largely as a result of higher salary and employee benefits due to additional staffing related to the operations acquired from the inclusion of the acquired Skagit operations for a full year and the AltaPacific operations for the last two months of 2019 and normal salary and wage adjustments, acquisition-related expenses, and smaller increases in other operational expenses associated with operating the branches acquired in the Skagit and AltaPacific acquisitions partially offset by increases in capitalized loan origination costs and reduced professional and legal expenses.

Current year results were impacted by an increase in the provision for credit losses as a result of the COVID-19 pandemic, lower yields on earnings assets, decreased deposit fees and other service charges and increased non-interest expense these were partially offset by increased volume and gain on sale spreads on one- to four-family held for sale loans, growth in interest-earnings assets, driven by increases in core deposits and decreased funding costs.

Our net income for the year ended December 31, 2020 included a provision for credit losses of $64.3 million, increased non-interest expense, including $3.5 million of COVID-19 related expenses and $2.1 million of merger and acquisition-related expenses, partially offset by increased non-interest income, including $51.6 million of mortgage banking income.

Our results for the year ended December 31, 2019 included $7.5 million of merger and acquisition-related expenses.

The results for year ended December 31, 2020 also included the operations acquired in the AltaPacific acquisition which closed in the fourth quarter of 2019 and reflect the impact of the COVID-19 pandemic resulting in a substantial reduction in business activity or the closing of businesses in all the western states Banner Bank operates.

Our operating results depend largely on our net interest income which increased by $12.4 million to $481.3 million, primarily reflecting an increase in the average balance of interest-earning assets, due to the origination of PPP loans and organic growth, as well as the AltaPacific acquisition, and a decrease in funding costs, partially offset by lower yields on interest-earning assets.

The increase in net interest income contributed to an increase of $29.1 million, or 5%, in revenue to $579.9 million for the year ended December 31, 2020, compared to $550.9

million for the year ended December 31, 2019.

Our operating results for the year ended December 31, 2020 also reflected a $16.7 million increase in non-interest income primarily as a result of increased mortgage banking revenues due to increased volume and gain on sale spreads on one- to four-family held for sale loans.

The decrease in deposit fees and other service charges is a result of our becoming subject to the Durbin Amendment on July 1, 2019, which reduced interchange fee income during the second half of 2019 compared to the full year of 2020 as well as fee waivers and reduced transaction deposit account activity since the start of the COVID-19 pandemic.

Non-interest expense increased to $373.1 million for the year ended December 31, 2020 compared with $357.7 million for the year ended December 31, 2019, largely as a result of an increase in the provision for credit losses - unfunded commitments, higher salary and employee benefits due to additional staffing related to the operations acquired from the inclusion of the acquired AltaPacific operations for a full year and normal salary and wage adjustments, increased deposit insurance expense due to the receipt of an FDIC credit of $2.7 million during 2019 for previously paid deposit insurance premiums, and COVID-19 expenses, partially offset by increases in capitalized loan origination costs, decreased travel expenses and reduced merger and acquisition-related expenses.

Net Interest Income.

Net interest income before provision for loan losses increased by $37.9 million , or 9% , to $468.9 million for the year ended December 31, 2019 , compared to $431.0 million one year earlier, largely reflecting growth in average interest-earning assets which was the result of recognizing the full year benefit of the earning assets from the Skagit acquisition and the two month benefit of the interest-earning assets from the AltaPacific acquisition as well as organic loan growth.

Our net interest margin was enhanced by the amortization of acquisition accounting discounts on purchased loans acquired from bank acquisitions, which are accreted into loan interest income.

The net interest margin of 4.30% for the year ended December 31, 2019 was 13 basis points lower than the prior year and included seven basis points from acquisition accounting adjustments compared to ten basis points from acquisition accounting adjustments in 2018 .

The average yield on interest-earning assets of 4.82% for the year ended December 31, 2019 increased 6 basis points compared to the prior year due to higher contractual yields on loans and securities.

Funding costs were higher, as the average cost of funding liabilities increased by 19 basis points to 0.55% as compared to the prior year.

Net interest income before provision for credit losses increased by $12.4 million, or 3%, to $481.3 million for the year ended December 31, 2020, compared to $468.9 million one year earlier, as an increase in the average balance of interest-earning assets produced growth for this key source of revenue.

The growth in the average balance of interest-earning assets reflects the origination of PPP loans and organic growth, as well as the AltaPacific acquisition.

The net interest margin on a tax equivalent basis of 3.85% for the year ended December 31, 2020 was 50 basis points lower than the prior year.

The net interest margin included seven basis points from acquisition accounting adjustments for both the years ended December 31, 2020 and 2019.

The decrease in net interest margin compared to a year earlier primarily reflects lower yields on average interest-earning assets, partially offset by decreases in the cost of funding liabilities.

The average yield on interest-earning assets of 4.15% for the year ended December 31, 2020 decreased 72 basis points compared to the prior year, largely due to the impact of decreases to the targeted Fed Funds Rate on floating rate loan yields indexed to prime and LIBOR rates and low loan yields on the PPP loan portfolio as well as excess deposit liquidity being invested in low yielding short term investments and interest bearing deposits.

Funding costs were also lower, as the average cost of funding liabilities increased by 24 basis points to 0.31% as compared to the prior year.

The decreases in the costs of funding liabilities compared to a year earlier were also largely due to the impact of decreases to the targeted Fed Funds Rate, although the pace of decline in the cost of funding liabilities typically lags the effect on the yield earned on interest-earning assets primarily because offer rates on interest bearing deposit accounts reprice more slowly than loans for a given change in market rates.

As a result, the net interest spread decreased to 3.84% for the year ended December 31, 2020 compared to 4.32% for the prior year.

The effect of recent changes in the targeted Fed Funds rate on the cost of funding liabilities typically lags the effect on the yield earned

on interest-earning assets because rates on many deposit accounts are decision-based, not tied to a specific market-based index, and are based on competition for deposits while most interest-earning assets adjust earlier because they are tied to a specific market-based index.

Interest Income.

Interest income for the year ended December 31, 2019 was $525.7 million , compared to $463.6 million for the prior year, an increase of $62.0 million , or 13% .

The increase in interest income occurred as a result of increases in both the average balances and yields of total interest-earning assets.

Interest income for the year ended December 31, 2020 was $519.1 million, compared to $525.7 million for the prior year, a decrease of $6.5 million, or 1%.

The decrease in interest income occurred as a result of the decrease in the yield on interest-earning assets, partially offset by increases in the average balance of both loans and investment securities.

The average balance of total interest-earning assets was $12.70 billion for the year ended December 31, 2020, an increase of $1.79 billion, or 16%, compared to $10.91 billion one year earlier.

The yield on average interest-earning assets was 4.15% for the year ended December 31, 2020, compared to 4.87% for the year ended December 31, 2019.

The increased yield on interest-earning assets reflects improvement in yields on loans and securities.

Average loan yields increased three basis points to 5.24% for the year ended December 31, 2019 compared to 5.21% in the preceding year, reflecting the positive impact of higher index interest rates, over the first half of 2019 on adjustable-rate and recently originated loans, partially offset by a four basis point decrease in acquisition accounting loan discount accretion to 9 basis points in 2019 from 13 basis points in 2018 .

Average loans receivable for the year ended December 31, 2019 increased $1.06 billion , or 13% , to $9.00 billion , compared to $7.94 billion for the prior year.

Interest income on loans increased by $58.1 million , or 14% , to $471.5 million for the year ended December 31, 2019 , from $413.4 million for the prior year, reflecting the impact of the $1.06 billion increase in average loan balances and the three basis point increase in the average yield on total loans.

The combined average balance of mortgage-backed securities, other investment securities, daily interest-bearing deposits and FHLB stock increased to $1.91 billion for the year ended December 31, 2019 (excluding the effect of fair value adjustments), compared to $1.80 billion for the year ended December 31, 2018 , contributing to the $3.9 million increase in interest and dividend income compared to the prior year.

The average yield on the combined portfolio increased to 2.83% for the year ended December 31, 2019 , from 2.80% for the prior year.

For the year ended December 31, 2019 , the average yield on mortgage-backed securities increased one basis points to 2.82% compared to the prior year, while the yield on other securities decreased two basis points to 2.83% compared to the prior year.

The decreased yield on interest-earning assets reflects decreases in the average yields on loans and securities and excess liquidity being invested in short term investments and interest bearing deposits.

Average loan yields decreased 63 basis points to 4.66% for the year ended December 31, 2020 compared to 5.29% in the preceding year, reflecting the impact of lower interest rates over the last year as well as the impact of the low loan yields for the PPP loan portfolio.

The acquisition accounting loan discount accretion and related balance sheet impact added ten basis points to the loan yield for the year ended December 31, 2020, compared to nine basis points for the year ended December 31, 2019.

Average loans receivable for the year ended December 31, 2020 increased $1.12 billion, or 12%, to $10.12 billion, compared to $9.00 billion for the prior year, principally as a result of the PPP loan program and AltaPacific acquisition.

Interest income on loans decreased by $5.1 million, or 1%, to $466.4 million for the year ended December 31, 2020, from $471.5 million for the prior year, reflecting the impact of the 63 basis point decrease in the average yield on total loans, partially offset by the $1.12 billion increase in average loan balances.

The combined average balance of mortgage-backed securities, other investment securities, equity securities, daily interest-bearing deposits and FHLB stock increased to $2.58 billion for the year ended December 31, 2020 (excluding the effect of fair value adjustments), compared to $1.91 billion for the year ended December 31, 2019, contributing to the $455,000 increase in interest and dividend income compared to the prior year.

The average yield on the combined portfolio decreased to 2.18% for the year ended December 31, 2020, from 2.92% for the prior year.

For the year ended December 31, 2020, the average yield on mortgage-backed securities decreased 41 basis points to 2.42% compared to the prior year, while the yield on other securities decreased 34 basis points to 2.81% compared to the prior year.

The decrease in yield reflects the overall decline in market interest rates as well as the investment of excess liquidity in a short term investments and interest bearing deposits.

Interest Expense.

Interest expense for the year ended December 31, 2020 was $37.8 million, compared to $56.8 million for the prior year, an increase of $18.9 million, or 33%.

The increase in interest expense occurred as a result of a $1.11 billion , or 12% , increase in average funding liabilities and a 19 basis point increase in the average cost of all funding liabilities to 0.55% for the year ended December 31, 2019 , compared to 0.36% for the year ended December 31, 2018 .

This increase in average funding liabilities reflects increases in core deposits, including non-interest-bearing deposits and interest-bearing transaction and savings accounts, as well as increases in FHLB advances.

Deposit interest expense increased $17.0 million , or 82% , to $37.6 million for the year ended December 31, 2019 compared to $20.6 million for the prior year as a result of an $868.5 million , or 10% , increase in the average balance of deposits and a 15 basis point increase in the average cost of deposits.

Average deposit balances increased to $9.54 billion for the year ended December 31, 2019 , from $8.67 billion for the year ended December 31, 2018 , while the average rate paid on deposit balances increased to 0.39% in the current year from 0.24% for the prior year.

The cost of interest-bearing deposits increased by 26 basis points to 0.65% for the year ended December 31, 2019 compared to 0.39% in the prior year.

The $340.9 million increase in the average balance of non-interest-bearing accounts during 2019 reduced the increase in total deposit costs.

The increase in the cost of interest-bearing deposits between the periods was driven by market and competitive factors as a result of increases in the target Fed Funds Rate during 2018.

Deposit costs are significantly affected by changes in the level of market interest rates;

however, changes in the average rate paid for interest-bearing deposits frequently tend to lag changes in market interest rates.

As a result, the decreases in the target Fed Funds Rate during the second half of 2019 had limited benefit on our 2019 deposit costs.

Average total borrowings increased to $741.6 million for the year end December 31, 2019 , compared to $502.6 million for the prior year.

The increase in average total borrowings was largely due to a $224.1 million increase in average FHLB advances.

The average rate paid on total borrowings increased 19 basis points to 2.58% from 2.39% reflecting the 27 basis point increase in the average cost for our junior subordinated debentures (which reprice every three months based on changes in the three-month LIBOR index) and a 34 basis point increase in the average cost of FHLB advances reflecting increases to the Fed Funds target rate in 2018.

The increase in the average cost of total borrowings was the primary reason for the $7.1 million increase in the related interest expense to $19.1 million for the year ended December 31, 2019 , from $12.0 million in the prior year.

The decrease in interest expense occurred as a result of a 24 basis point decrease in the average cost of all funding liabilities to 0.31% for the year ended December 31, 2020, compared to 0.55% for the year ended December 31, 2019, partially offset by a $1.86 billion, or 18%, increase in average funding liabilities.

The increase in average funding liabilities reflects increases in low costing core deposits, including non-interest-bearing deposits and interest-bearing transaction and savings accounts.

Deposit interest expense decreased $12.6 million, or 34%, to $25.0 million for the year ended December 31, 2020 compared to $37.6 million for the prior year as a result of a 17 basis point decrease in the average cost of deposits, partially offset by an $1.99 billion, or 21%, increase in the average balance of deposits.

Average deposit balances increased to $11.54 billion for the year ended December 31, 2020, from $9.54 billion for the year ended December 31, 2019, while the average rate paid on deposit balances decreased to 0.22% in the current year from

0.39% for the prior year.

The cost of interest-bearing deposits decreased by 27 basis points to 0.38% for the year ended December 31, 2020 compared to 0.65% in the prior year.

The $1.18 billion increase in the average balance of non-interest-bearing accounts also contributed to the decrease in total deposit costs.

The decrease in the cost of interest-bearing deposits between the periods was driven by market and competitive factors following decreases in the target Fed Funds Rate over the last year as well as a higher percentage of our interest-bearing deposits being lower costing core deposits.

Average total borrowings decreased to $607.4 million for the year end December 31, 2020, compared to $741.6 million for the prior year.

The decrease in average total borrowings was largely due to a $262.7 million decrease in average FHLB advances.

The decrease in average FHLB advances was partially offset by the previously mentioned issuance of the Subordinated Notes and an increase in average other borrowings due to increases in retail repurchase agreements primarily related to client cash management accounts.

The average rate paid on total borrowings decreased 47 basis points to 2.11% from 2.58% reflecting the 102 basis point decrease in the average cost for our subordinated debt due to a decrease in the average cost of our junior subordinated debentures (which reprice every three months based on changes in the three-month LIBOR index) partially offset by the higher average cost of our Subordinated Notes and a 22 basis point decrease in the average cost of FHLB advances.

The decrease in the average cost of total borrowings was the primary reason for the $6.3 million decrease in the related interest expense to $12.8 million for the year ended December 31, 2020, from $19.1 million in the prior year.

Table 15, Analysis of Net Interest Spread, presents, for the periods indicated, our condensed average balance sheet information, together with interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities.

3 unchanged sentences

Analysis of Net Interest Spread

Year Ended December 31, 2019

Year Ended December 31, 2018

Year Ended December 31, 2017

Interest and Dividends

Year Ended December 31, 2020 Year Ended December 31, 2019 Year Ended December 31, 2018

Balance Interest and Dividends Yield/

Balance Interest and

Dividends Yield/

Balance Interest and Dividends Yield/

Interest-earning assets:

4 unchanged sentences

Total loans (1)(3)

10,121,808 471,268 4.66 8,997,994 475,729 5.29 7,939,207 415,980 5.24

Mortgage-backed securities 1,330,355 32,188 2.42 1,368,927 38,809 2.83 1,247,758 35,076 2.81

Other securities 777,378 21,839 2.81 441,402 13,926 3.15 468,416 14,747 3.15

Equity securities 182,846 373 0.20 169 8 4.73 441 15 3.40

Interest-bearing deposits with banks 272,725 907 0.33 72,579 1,649 2.27 59,031 1,080 1.83

FHLB stock 18,952 947 5.00 29,509 1,407 4.77 20,496 774 3.78

Total investment securities (3)

2,582,256 56,254 2.18 1,912,586 55,799 2.92 1,796,142 51,692 2.88

Total interest-earning assets 12,704,064 527,522 4.15 10,910,580 531,528 4.87 9,735,349 467,672 4.80

Non-interest-earning assets 1,262,170 1,078,108 827,743

Total assets $ 13,966,234 $ 11,988,688 $ 10,563,092

Interest-bearing checking accounts $ 1,385,252 $ 1,479 0.11 $ 1,188,985 $ 2,224 0.19 $ 1,048,327 $ 1,200 0.11

8 unchanged sentences

Other borrowings 193,862 603 0.31 122,343 330 0.27 108,730 245 0.23

Junior subordinated debentures

Subordinated debt 198,490 7,204 3.63 141,504 6,574 4.65 140,212 6,136 4.38

Total borrowings 607,445 12,830 2.11 741,643 19,138 2.58 502,603 12,017 2.39

1 unchanged sentence

Other non-interest-bearing liabilities (2)

197,422 164,318 79,901

Total liabilities 12,341,897 10,448,142 9,256,222

1 unchanged sentence

Total liabilities and shareholders’ equity $ 13,966,234 $ 11,988,688 $ 10,563,092

Net interest income/rate spread

Net interest margin

Net interest income/rate spread (tax equivalent) $ 489,677 3.84 % $ 474,760 4.32 % $ 435,013 4.44 %

Net interest margin (tax equivalent) 3.85 % 4.35 % 4.47 %

Reconciliation to reported net interest income:

Adjustments for taxable equivalent basis (8,376) (5,841) (4,025)

Net interest income and margin, as reported $ 481,301 3.79 % $ 468,919 4.30 % $ 430,988 4.43 %

Average interest-earning assets / average interest-bearing liabilities 176.09 % 167.03 % 168.86 %

3 unchanged sentences

Amortization of net deferred loan fees/costs is included with interest on loans.

Average other non-interest-bearing liabilities include fair value adjustments related to FHLB advances and junior subordinated debentures.

Yields and costs have not been adjusted for the effect of tax-exempt interest.

(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 $4.9 million, $4.3 million, and $2.6 million for the years ended December 31, 2020, December 31, 2019, and December 31, 2018, respectively.

The tax equivalent yield adjustment to interest earned on tax exempt securities was $3.5 million, $1.6 million, and $1.4 million for the years ended December 31, 2020, December 31, 2019, and December 31, 2018, respectively.

The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown (in thousands).

12 unchanged sentences

Income/Expense Due to

Rate Volume Net Rate Volume Net

Interest-earning assets:

4 unchanged sentences

Total loans (1)(2)

(46,207) 41,746 (4,461) 4,232 55,517 59,749

Mortgage-backed securities (5,480) (1,141) (6,621) 237 3,496 3,733

Other securities (1,312) 9,225 7,913 8 (829) (821)

Equity securities — 365 365 12 (19) (7)

Interest-bearing deposits with banks

336 (1,078) (742) 291 278 569

FHLB stock 72 (532) (460) 237 396 633

Total investment securities (2)

(6,384) 6,839 455 785 3,322 4,107

Total net change in interest income on interest-earning assets

(52,591) 48,585 (4,006) 5,017 58,839 63,856

Interest-bearing liabilities:

6 unchanged sentences

Other borrowings 55 218 273 52 33 85

Junior subordinated debentures

Subordinated debt (748) 1,378 630 387 51 438

Total borrowings (1,666) (4,642) (6,308) 1,408 5,713 7,121

Total net change in interest expense on interest-bearing liabilities

Net change in net interest income

(20,012) 1,089 (18,923) 16,800 7,309 24,109

Net change in net interest income (tax equivalent) $ (32,579) $ 47,496 $ 14,917 $ (11,783) $ 51,530 $ 39,747

(1) Includes loans accounted for on a nonaccrual basis and loans 90 days or more past due.

Amortization of net deferred loan fees/costs is included with interest on loans.

Provision and Allowance for Loan Losses .

Although our credit quality metrics continue to reflect strong performance and our moderate risk profile, we recorded an $10.0 million provision for loan losses in the year ended December 31, 2019 , primarily due to the organic growth in the loan portfolio, the increase in non-performing loans, the maturity, subsequent renewal and migration of acquired loans out of the discounted loan portfolios and increased net charge-offs, compared to the $8.5 million provision for loan losses recorded in 2018 .

As discussed in the “Summary of Critical Accounting Policies” section above and in Note 1 of the Notes to the Consolidated Financial Statements, the provision and allowance for loan losses is one of the most critical accounting estimates included in our Consolidated Financial Statements.

The provision for loan losses reflects the amount required to maintain the allowance for losses at an appropriate level based upon management’s evaluation of the adequacy of general and specific loss reserves, trends in delinquencies, net charge-offs and current economic conditions.

We continue to maintain a strong allowance for loan losses at December 31, 2019 .

In accordance with acquisition accounting, loans acquired from acquisitions were recorded at their estimated fair value, which resulted in a net discount to the contractual amounts of the loans, of which a portion reflects a discount for possible credit losses.

Credit discounts are included in the determination of fair value and as a result no allowance for loan and lease losses is recorded for acquired loans at the acquisition date.

Although the discount recorded on the acquired loans is not reflected in the allowance for loan losses, or related allowance coverage ratios, we believe it should be considered when comparing the current ratios to similar ratios in periods prior to the acquisitions.

The discount on acquired loans was $25.0 million at December 31, 2019 compared to $25.7 million at December 31, 2018 .

(2) Tax-exempt income is calculated on a tax equivalent basis.

Provision and Allowance for Credit Losses .

We recorded a $64.3 million provision for credit losses - loans in the year ended December 31, 2020, compared to a $10.0 million provision recorded in 2019.

As discussed in the “Summary of Critical Accounting Policies” section above and in Note 1 of the Notes to the Consolidated Financial Statements, the provision and allowance for credit losses is one of the most critical accounting estimates included in our Consolidated Financial Statements.

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.

The increased provisions for loan credit losses for the current year primarily reflects expected lifetime credit losses based upon current economic conditions, as well as the impact of COVID-19 on the economic indicators included in our reasonable and supportable forecast as of December 31, 2020.

In addition, the current year provision for credit losses also reflects risk rating downgrades on loans that are considered at heightened risk due to the COVID-19 pandemic.

In addition, the change for the year ended December 31, 2020 included a $7.8 million increase related to the adoption of CECL.

Future assessments of the expected credit losses will not only be impacted by changes to the reasonable and supportable forecast, but will also include an updated assessment of qualitative factors, as well as consideration of any required changes in the reasonable and supportable forecast reversion period.

No allowance for credit losses-loans was recorded on the $1.04 billion balance of PPP loans at December 31, 2020 as these loans are fully guaranteed by the SBA.

We recorded net charge-offs of $5.4 million for the year ended December 31, 2020, compared to net charge-offs of $5.9 million for the prior year.

Non-performing loans increased by $23.9 million during the year to $39.6 million at December 31, 2019 , compared to $15.7 million at December 31, 2018 .

The increase in non-performing loans during the quarter was largely due to one commercial banking relationship moving to nonaccrual.

A comparison of the allowance for loan losses at December 31, 2019 and 2018 reflects an increase of $4.1 million , or 4% , to $100.6 million at December 31, 2019 , from $96.5 million at December 31, 2018 .

Included in our allowance at December 31, 2019 was an unallocated portion of $2.4 million , which was based upon our evaluation of various factors that were not directly measured in the determination of the formula and specific allowances.

The allowance for loan losses as a percentage of total loans (loans receivable excluding allowance for losses) decreased to 1.08% at December 31, 2019 , compared to 1.11% at December 31, 2018 .

We believe that the allowance for loan losses was adequate to absorb the known and inherent risks of loss in the loan portfolio as of December 31, 2019 .

While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, there can be no assurance that these estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations.

In addition, the determination of the amount of the allowance for loan losses is subject to review by bank regulators as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of information available to them at the time of their examination.

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

Changes in Allowance for Loan Losses

Non-performing loans decreased by $4.0 million during the year to $35.6 million at December 31, 2020, compared to $39.6 million at December 31, 2019.

A comparison of the allowance for credit losses - loans at December 31, 2020 and 2019 reflects an increase of $66.7 million, or 66%, to $167.3 million at December 31, 2020, from $100.6 million at December 31, 2019.

The allowance for credit losses - loans as a percentage of total loans (loans receivable excluding allowance for credit losses) increased to 1.69% at December 31, 2020, compared to 1.08% at December 31, 2019.

The increase in the allowance for credit losses - loans as a percentage of loans reflects the adoption of Financial Instruments - Credit Losses (ASC 326) as well as the increased provision for credit losses - loans recorded during the year ended December 31 31, 2020, primarily as the result of forecasted credit deterioration due to the COVID-19 pandemic.

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

Changes in Allowance for Credit Losses - Loans

Years Ended December 31

2020 2019 2018

Balance, beginning of period $ 100,559 $ 96,485 $ 89,028

Beginning balance adjustment for adoption of ASC 326 7,812 — —

Provision 64,285 10,000 8,500

Recoveries of loans previously charged off:

Commercial real estate 275 476 1,646

Multifamily real estate

Construction and land 105 208 213

One- to four-family real estate 467 561 750

Commercial business 3,265 625 1,049

Agricultural business, including secured by farmland 1,823 47 64

One- to four-family real estate

Consumer 328 548 366

6,263 2,465 4,088

Loans charged off:

1 unchanged sentence

Construction and land (100) (45) (479)

One- to four-family real estate (136) (86) (43)

Commercial business (7,253) (4,171) (2,051)

Agricultural business, including secured by farmland (591) (911) (756)

One- to four-family real estate

Net (charge-offs) recoveries

Consumer (1,640) (2,040) (1,401)

(11,640) (8,391) (5,131)

Net charge-offs (5,377) (5,926) (1,043)

Balance, end of period $ 167,279 $ 100,559 $ 96,485

Allowance for loan losses as a percent of total loans

Net loan (charge-offs) recoveries as a percent of average outstanding loans during the period

Allowance for loan losses as a percent of non-performing loans

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

Allocation of Allowance for Loan Losses

Specific or allocated loss allowances (1) :

Allowance for credit losses - loans as a percent of total loans 1.69 % 1.08 % 1.11 %

Net loan charge-offs as a percent of average outstanding loans during the period (0.05) % (0.07) % (0.01) %

Allowance for credit losses - loans as a percent of non-performing loans 470 % 254 % 616 %

Allowance for credit losses - loans as a percent of nonaccrual loans 514 % 268 % 654 %

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

Allocation of Allowance for Credit Losses - Loans

2020 2019 2018

Amount Percent

Loans Amount Percent

Allowance for credit losses - loans:

Commercial real estate $ 57,791 36.5 % $ 30,591 41.8 % $ 27,132 41.0 %

1 unchanged sentence

Construction and land 41,295 13.0 22,994 12.6 24,442 12.8

One-to-four-family real estate 9,913 7.3 4,136 10.1 4,714 11.2

Commercial business

35,007 29.6 23,370 18.2 19,438 17.1

Agricultural business, including secured by farmland 4,914 3.0 4,120 4.0 3,778 4.7

One-to-four-family real estate

Consumer 14,466 6.2 8,202 8.2 7,972 9.0

Total allocated 167,279 98,167 91,294

Unallocated (1)

Total allowance for loan losses

We establish specific loss allowances when individual loans are identified that present a possibility of loss (i.e., that full collectability is not reasonably assured).

The remainder of the allocated and unallocated allowance for loan losses is established for the purpose of providing for estimated losses which are inherent in the loan portfolio.

Unallocated — n/a 2,392 n/a 5,191 n/a

Total allowance for credit losses - loans $ 167,279 100.0 % $ 100,559 100.0 % $ 96,485 100.0 %

The allowance for credit losses - unfunded loan commitments was $13.3 million at December 31, 2020 compared to $2.7 million at December 31, 2019.

The increase in the allowance for credit losses - unfunded loan commitments reflects the adoption of Financial Instruments - Credit Losses (ASC 326) as well as the increased provision for credit losses - unfunded loan commitments recorded during year ended December 31, 2020.

During the year ended December 31, 2020, we recorded a provision for credit losses - unfunded loan commitments of $3.6 million, compared to no provision for loan losses - unfunded loan commitments during the prior year.

The provision for loan credit losses - unfunded loan commitments for the year ended December 31, 2020 was primarily due to the economic impacts of COVID-19 as well as forecasted changes to economic indicators in our reasonable and supportable forecast.

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

Changes in Allowance for Credit Losses - Unfunded Loan Commitments

Years Ended, December 31,

2020 2019 2018

Balance, beginning of period $ 2,716 $ 2,599 $ 2,449

Beginning balance adjustment for adoption of ASC 326 7,022 — —

Provision/recapture for credit losses - unfunded loan commitments 3,559 — —

Additions through acquisitions — 117 150

Balance, end of period $ 13,297 $ 2,716 $ 2,599

Non-interest Income.

1 unchanged sentence

Non-interest Income

2019 compared to 2018

2018 compared to 2017

Change Amount

Change Percent

Change Amount

Change Percent

2020 compared to 2019 2019 compared to 2018

2020 2019 Change Amount Change Percent 2019 2018 Change Amount Change Percent

Deposit fees and other service charges $ 34,384 $ 46,632 $ (12,248) (26.3) % $ 46,632 $ 48,074 $ (1,442) (3.0) %

2 unchanged sentences

Miscellaneous 6,323 8,624 (2,301) (26.7) % 8,624 7,133 1,491 20.9 %

Net gain (loss) on sale of securities

98,260 82,116 16,144 19.7 % 82,116 81,055 1,061 1.3 %

Net gain (loss) on sale of securities 1,012 33 979 nm 33 (837) 870 (103.9) %

Net change in valuation of financial instruments carried at fair value (656) (208) (448) 215.4 % (208) 3,775 (3,983) (105.5) %

Gain on sale of branches, including related loans and deposits

Total non-interest income $ 98,616 $ 81,941 $ 16,675 20.4 % $ 81,941 $ 83,993 $ (2,052) (2.4) %

Non-interest income , which includes deposit fees and other service charges, mortgage banking operations, bank owned life insurance as well as changes in the valuation of financial instruments carried at fair value, decreased $2.1 million , or 2% , to $81.9 million for the year ended December 31, 2019 , compared to $84.0 million for the year ended December 31, 2018 .

This decrease was primarily due to the decrease in deposit fees and other service charges as well as the reduction in the fair value of financial instruments carried at fair value, partially offset by the increase in miscellaneous income.

Income from deposit fees and other service charges decreased by $1.4 million , or 3% , to $46.6 million for the year ended December 31, 2019 , compared to $48.1 million for the prior year as a result of Banner becoming subject to the Durbin Amendment on July 1, 2019, which reduced interchange fee income by approximately $7 million during the second half of 2019.

Mortgage banking revenues, including gains on one- to four-family and multifamily loan sales and loan servicing fees, increased by $872,000 to $22.2 million for the year ended December 31, 2019 , compared to $21.3 million in the prior year.

Non-interest income increased $16.7 million, or 20%, to $98.6 million for the year ended December 31, 2020, compared to $81.9 million for the year ended December 31, 2019.

This increase was primarily due an increase in income from mortgage banking operations, partially offset a decrease in deposit fees and other service charges and miscellaneous income.

Income from deposit fees and other service charges decreased by $12.2 million, or 26%, to $34.4 million for the year ended December 31, 2020, compared to $46.6 million for the prior year as a result of reduced transaction deposit account activity since the start of the COVID-19 pandemic as well as fee waivers in response to the COVID-19 pandemic primarily in the second quarter of 2020.

In addition, interchange fee income decreased as we were subject to the Durbin Amendment for the full year 2020 compared to only the second half of 2019.

Mortgage banking income, including gains on one- to four-family and multifamily loan sales and loan servicing fees, increased by $29.4 million to $51.6 million for the year ended December 31, 2020, compared to $22.2 million in the prior year.

Sales of one- to four-family loans held for sale for the year ended December 31, 2020 resulted in gains of $50.1 million, compared to $18.0 million for the year ended December 31, 2019.

In addition, for the year ended December 31, 2019 , mortgage banking revenues included $2.4 million of gains on the sale of multifamily loans, compared to $3.8 million for the year ended December 31, 2018 .

The $1.5 million increase in miscellaneous income was primarily driven by higher gains on the sales of Small Business Administration loans as well as an increase in interest rate swap income, partially offset by an increase in losses related to the disposition of assets.

Securities sales for the year ended December 31, 2019 resulted in a gain of $33,000 compared to an $837,000 loss for securities sold for the year ended December 31, 2018 .

For the year ended December 31, 2019 , we recorded a net loss of $208,000 for changes in the valuation of financial instruments carried at fair value, compared to a net gain of $3.8 million for the year ended December 31, 2018 .

The adjustments in 2018 primarily reflected changes in the valuation of certain corporate bonds largely as a result of a combination of both increased market interest rates and increased spreads.

Following the adoption of new accounting guidance, beginning in the first quarter of 2018, Banner no longer reflects changes in the fair value of its junior subordinated debentures related to instrument-specific credit risk in the Consolidated Statements of Operations, but rather reports such changes in the Consolidated Statements of Comprehensive Income and includes them in total shareholders’ equity in the Consolidated Statements of Financial Condition.

In addition, for the year ended December 31, 2020, mortgage banking income included $1.8 million of gains on the sale of multifamily loans, compared to $2.4 million for the year ended December 31, 2019.

The higher mortgage banking income reflected increased loan production of one- to four-family held-for-sale loans primarily related to refinance activity as well as an increase in the gain on sale spreads on one- to four-family held for sale loans during the current year.

The increase in bank owned life insurance income for year ended December 31, 2020 compared to the prior year was due to a death benefit payment.

The $2.3 million decrease in miscellaneous income was primarily driven by lower gains on the sales of SBA loans as well as an increase in losses related to the disposition of assets related to branch consolidation activity.

Securities sales for the year ended December 31, 2020 resulted in a gain of $1.0 million, primarily as a result of the gain recognized on the sale of Visa Class B shares held by us, compared to a $33,000 gain for securities sold for the year ended December 31, 2019.

For the year ended December 31, 2020, we recorded a net loss of $656,000 for changes in the valuation of financial instruments carried at fair value, compared to a net loss of $208,000 for the year ended December 31, 2019.

Non-interest Expense.

1 unchanged sentence

Non-interest Expense

2019 compared to 2018

2018 compared to 2017

Change Amount

Change Percent

Change Amount

Change Percent

2020 compared to 2019 2019 compared to 2018

2020 2019 Change Amount Change Percent 2019 2018 Change Amount Change Percent

Salary and employee benefits $ 245,400 $ 226,409 $ 18,991 8.4 % $ 226,409 $ 202,613 $ 23,796 11.7 %

9 unchanged sentences

Amortization of core deposit intangibles 7,732 8,151 (419) (5.1) % 8,151 6,047 2,104 34.8 %

Provision for credit losses -

unfunded loan commitments 3,559 — 3,559 nm — — — nm

Miscellaneous 22,712 28,122 (5,410) (19.2) % 28,122 26,754 1,368 5.1 %

Acquisition-related costs

$ 367,584 $ 350,184 $ 17,400 5.0 % $ 350,184 $ 335,764 $ 14,420 4.3 %

COVID-19 expenses 3,502 — 3,502 nm — — — nm

Merger and acquisition-related costs 2,062 7,544 (5,482) (72.7) % 7,544 5,607 1,937 34.5 %

Total non-interest expense $ 373,148 $ 357,728 $ 15,420 4.3 % $ 357,728 $ 341,371 $ 16,357 4.8 %

Non-interest expense for the year ended December 31, 2020 was $373.1 million, an increase of $15.4 million, or 4%, as compared to the same period in 2019.

The increase was largely attributable to the inclusion of acquired Skagit operations for the full year of 2019, as well as the AltaPacific operations for the last two months of 2019, higher salary and employee benefits and expenses related primarily to the operations acquired in the Skagit acquisition, partially offset by increases in capitalized loan origination costs as well as lower professional and legal expenses.

Salary and employee benefits expenses increased $23.8 million to $226.4 million for the year ended December 31, 2019 from $202.6 million for the year ended December 31, 2018 , primarily reflecting additional staffing related to the operations acquired from the acquisition of Skagit on November 1, 2018, normal salary and wage adjustments and a $1.6 million expense recognized in the third quarter of 2019 as a result of decreasing the discount rate the Company uses to calculate its liability associated with deferred compensation plans.

Capitalized loan origination costs increased $11.0 million for the year ended December 31, 2019 , compared to the same periods in the prior year, reflecting the increase in held-for-sale loan originations and loan renewals as well as higher deferred costs on a per loan basis related to the annual update of our deferred loan cost models.

Occupancy and equipment expenses increased $3.2 million , or 6% , to $52.4 million in 2019 , compared to $49.2 million in 2018 , primarily reflecting the operations acquired from the Skagit acquisition.

The increase was primarily due to increases in salaries and employee benefits expenses, deposit insurance expenses, and provision for credit losses – unfunded loan commitments, partially offset by increases in capitalized loan origination costs and decreases in merger and acquisition-related costs.

In addition, the year ended December 31, 2020 included $3.5 million of COVID-19 expenses.

We expect to see COVID-19 expenses continue throughout the duration of the current pandemic.

Salary and employee benefits expenses increased $19.0 million to $245.4 million for the year ended December 31, 2020 from $226.4 million for the year ended December 31, 2019, primarily reflecting additional staffing related to the operations acquired from the acquisition of AltaPacific on November 1, 2019, as well as normal salary and wage adjustments.

Capitalized loan origination costs increased $5.9 million for the year ended December 31, 2020, compared to the prior year, reflecting the increase in loan originations, primarily PPP loans.

Occupancy and equipment expenses increased $1.0 million, or 2%, to $53.4 million in 2020, compared to $52.4 million in 2019, primarily reflecting the operations acquired from the AltaPacific acquisition.

Information and computer data services expense increased $1.9 million, or 9%, to $24.4 million in the current year, compared to $22.5 million in the prior year, reflecting incremental costs as the Company continued to grow.

Professional and legal expense decreased $8.2 million to $9.7 million for the year ended December 31, 2019 from $17.9 million for the year ended December 31, 2018 .

The decrease in professional and legal expenses was primarily driven by the completion of projects associated with the build-out of compliance and risk management infrastructure during 2018 as well as a $4.0 million accrual for pending litigation recorded in the fourth quarter of 2018.

Deposit insurance expense decreased $1.6 million for the year ended December 31, 2019 , compared to the same period in 2018 as the result of a credit of $2.7 million recognized in the third quarter of 2019 for previously paid deposit insurance premiums.

REO operations for the year ended December 31, 2019 resulted in expense of $303,000 , compared to expense of $804,000 in the prior year.

The amortization of core deposit intangibles for the year ended December 31, 2019 increased $2.1 million , compared to the same period in 2018 as a result of the core deposit intangible acquired from the Skagit acquisition.

There were $7.5 million of acquisition-related costs added to non-interest expense in the current year, compared to $5.6 million in the year ended December 31, 2018 .

Professional and legal expense increased $2.4 million to $12.1 million for the year ended December 31, 2020 from $9.7 million for the year ended December 31, 2019 due to a $2.5 million accrual related to pending litigation.

Advertising and marketing expenses decreased $1.4 million to $6.4 million for the year ended December 31, 2020 from $7.8 million for the year ended December 31, 2019, reflecting curtailment of direct mail and marketing campaigns in response to the COVID-19 pandemic.

The provision for credit losses - unfunded loan commitments increased $3.6 million for the year ended December 31, 2019, compared to the prior year, primarily due to the economic impacts of COVID-19.

Deposit insurance expense increased $3.7 million for the year ended December 31, 2020, compared to the same period in 2019 as the result of a credit of $2.7 million recognized in 2019 for previously paid deposit insurance premiums.

REO operations for the year ended December 31, 2020 resulted in $190,000 of benefit, compared to $303,000 of expense in the prior year as we realized gains on the sale of REO.

There were $2.1 million of merger and acquisition-related costs added to non-interest expense in the

current year, compared to $7.5 million in the year ended December 31, 2019.

Miscellaneous expenses decreased $5.4 million for the year ended December 31, 2020, compared to the prior year, reflecting a reduction in employee travel, conferences and training expenses.

Income Taxes.

For the year ended December 31, 2019 , we recognized $36.9 million in income tax expense for an effective rate of 20.1% , which reflects the new lower federal corporate income tax rate effective beginning in 2018, as well as the benefits from tax exempt income sources.

For the year ended December 31, 2020, we recognized $26.5 million in income tax expense for an effective rate of 18.6%, which reflects our statutory tax rate reduced by the effect of tax-exempt income, certain tax credits, and tax benefits related to restricted stock vesting.

Our blended federal and state 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 and local jurisdictions where we do business.

For the year ended December 31, 2018 , we recognized $28.6 million in income tax expense for an effective tax rate of 17.3% , which included $5.5 million of tax benefit adjustments primarily due to the release of a $4.2 million valuation reserve previously recorded in the fourth quarter of 2017 as a provisional amount related to the enactment of the 2017 Tax Act.

For the year ended December 31, 2019, we recognized $36.9 million in income tax expense for an effective tax rate of 20.1%.

For more information on income taxes and deferred taxes, see Note 12 of the Notes to the Consolidated Financial Statements.

11 unchanged sentences

This mismatch or gap is generally characterized by a substantially shorter maturity structure for interest-bearing liabilities than interest-earning assets, although our floating-rate assets tend to be more immediately responsive to changes in market rates than most funding deposit liabilities.

Additional interest rate risk results from mismatched repricing indices and formula (basis risk and yield curve risk), and product caps and floors and early repayment or withdrawal provisions (option risk), which may be contractual or market driven, that are generally more favorable to customers than to us.

An exception to this generalization is the beneficial effect of interest rate floors on a substantial portion of our performing floating-rate loans, which help us maintain higher loan yields in periods when market interest rates decline significantly.

1 unchanged sentence

As of December 31, 2020, our loans with interest rate floors totaled approximately $3.10 billion and had a weighted average floor rate of 4.40% compared to a current average note rate of 4.61%.

The Company actively manages its exposure to interest rate risk through on-going adjustments to the mix of interest earning assets and funding sources that affect the repricing speeds of loans, investments, interest-bearing deposits and borrowings.

The principal objectives of asset/liability management are:

12 unchanged sentences

The interest rate sensitivity analysis performed by us incorporates beginning-of-the-period rate, balance and maturity data, using various levels of aggregation of that data, as well as certain assumptions concerning the maturity, repricing, amortization and prepayment characteristics of loans and other interest-earning assets and the repricing and withdrawal of deposits and other interest-bearing liabilities into an asset/liability computer simulation model.

We update and prepare simulation modeling at least quarterly for review by senior management and the directors.

We update and prepare simulation modeling at least quarterly for review by senior management

and the directors.

We believe the data and assumptions are realistic representations of our portfolio and possible outcomes under the various interest rate scenarios.

6 unchanged sentences

Net Interest Income

Next 12 Months

Net Interest Income

Next 24 Months

Economic Value of Equity

Next 12 Months Net Interest Income

Next 24 Months Economic Value of Equity

+400 $ 46,775 9.9 % $ 127,122 13.6 % $ (61,585) (2.9) %

+300 44,065 9.3 118,584 12.7 10,878 0.5

+200 35,082 7.4 94,784 10.2 84,030 4.0

+100 20,355 4.3 55,467 6.0 99,728 4.7

0 — — — — — —

-25 (4,307) (0.9) (12,334) (1.3) (43,328) (2.0)

(1) Assumes an instantaneous and sustained uniform change in market interest rates at all maturities;

23 unchanged sentences

December 31, 2020

Within 1 Year

Within 3 Years

After 3 Years

After 5 Years

Within 10 Years

6 Months After 6

Within 1 Year After 1 Year

Within 3 Years After 3 Years

Years After 5 Years

Within 10 Years Over

10 Years Total

Interest-earning assets:

15 unchanged sentences

FHLB advances 50,000 50,000 50,000 — — — 150,000

Trust preferred securities

Subordinated notes — — — 100,000 — — 100,000

Junior subordinated debentures 147,944 — — — — — 147,944

Retail repurchase agreements 184,785 — — — — — 184,785

1 unchanged sentence

Excess (deficiency) of interest-sensitive assets over interest-sensitive liabilities

$ 4,104,986 $ 733,568 $ 2,000,570 $ 524,788 $ (62,774) $ (1,250,853) $ 6,050,285

Cumulative excess of interest-sensitive assets $ 4,104,986 $ 4,838,554 $ 6,839,124 $ 7,363,912 $ 7,301,138 $ 6,050,285 $ 6,050,285

9 unchanged sentences

For the purpose of the gap analysis, these accounts have been assigned decay rates to reflect their longer effective maturities.

If all of these accounts had been assumed to be short-term, the one-year cumulative gap of interest-sensitive assets would have been $(1.07) billion, or (8.48)% of total assets at December 31, 2019 .

If all of these accounts had been assumed to be short-term, the one-year cumulative gap of interest-sensitive assets would have been $(279,661), or (1.86)% of total assets at December 31, 2020.

Interest-bearing liabilities for this table exclude certain non-interest-bearing deposits that are included in the average balance calculations reflected in Table 15, Analysis of Net Interest Spread .

5 unchanged sentences

During those periods we purchased loans of $2.5 million, $9.8 million and $33.7 million, respectively.

This activity was funded primarily by proceeds from the sale of loans, increased core deposits, principal repayment and maturities of securities, and additional borrowings in 2018.

During the years ended December 31, 2019 , 2018 and 2017 , we sold $1.10 billion , $791.7 million , and $1.05 billion , respectively, of loans.

Securities purchased during the years ended December 31, 2019 , 2018 and 2017 totaled $332.4 million , $923.6 million , and $844.7 million , respectively, and securities repayments, maturities and sales in those periods were $458.6 million , $421.3 million , and $724.6 million , respectively.

This activity was funded primarily by increased core deposits and the sale of loans in 2020 and by principal repayment and maturities of securities in 2019.

During the years ended December 31, 2020, 2019 and 2018, we sold $1.49 billion, $1.10 billion, and $791.7 million, respectively, of loans.

Securities purchased during the years ended December 31, 2020, 2019 and 2018 totaled $1.58 billion, $332.4 million, and $923.6 million, respectively, and securities repayments, maturities and sales in those periods were $659.1 million, $458.6 million, and $421.3 million, respectively.

Our primary financing activity is gathering deposits.

Largely as a result of $313.4 million of deposits acquired in the AltaPacific acquisition as well as organic growth in deposits, our deposits increased by $571.6 million during the year ended December 31, 2019 .

Deposits increased by $1.29 billion during the year ended December 31, 2018 , largely as a result of $810.2 million of deposits acquired in the Skagit acquisition as well as organic growth in deposits.

Our core deposits have continued to increase as a result of our marketing focus on retail deposits.

In addition, core deposits were positively impacted during 2019 by the acquisition of AltaPacific.

At December 31, 2019 , core deposits amounted to $8.93 billion , or 89% of total deposits, compared with $8.16 billion , or 86% of total deposits at December 31, 2018 , and $7.22 billion , or 88% of total deposits at December 31, 2017 .

Our deposits increased by $2.52 billion during the year ended December 31, 2020, as core deposits increased by $2.72 billion and certificates of deposits, primarily brokered deposits, decreased by $205.1 million.

The increase in total deposits during 2020 was due primarily to PPP loan funds deposited into client accounts, fiscal stimulus payments, and an increase in average deposit account balances due to an increase in general client liquidity due to reduced business investment and consumer spending.

At December 31, 2020, core deposits totaled $11.65 billion, or 93% of total deposits, compared with $8.93 billion, or 89% of total deposits at December 31, 2019, and $8.16 billion, or 86% of total deposits at December 31, 2018.

Certificates of deposit are generally more price sensitive than other retail deposits and our pricing of those deposits varies significantly based upon our liquidity management strategies at any point in time.

At December 31, 2019 , certificates of deposit amounted to $1.12 billion , or 11% of our total deposits, including $846.9 million which were scheduled to mature within one year.

Certificates of deposit decreased from 14% of our total deposits at December 31, 2018 , due to a decrease in brokered certificates of deposit and were 12% of total deposits at December 31,2017.

At December 31, 2020, certificates of deposit amounted to $915.3 million, or 7% of our total deposits, including $701.5 million which were scheduled to mature within one year.

Certificates of deposit decreased from 11% of our total deposits at December 31, 2019, due to the decrease in brokered certificates of deposit and were 14% of total deposits at December 31, 2018.

While no assurance can be given as to future periods, historically, we have been able to retain a significant amount of our deposits as they mature.

FHLB advances (excluding fair value adjustments) decreased $90.2 million for the year ended December 31, 2019 , after increasing $540.0 million for the year ended December 31, 2018 .

Other borrowings at December 31, 2019 decreased $521,000 to $118.5 million following an increase of $23.1 million in 2018 .

FHLB advances (excluding fair value adjustments) decreased $300.0 million for the year ended December 31, 2020, after decreasing $90.2 million for the year ended December 31, 2019.

Other borrowings at December 31, 2020 increased $66.3 million to $184.8 million following a decrease of $521,000 in 2019.

We must maintain an adequate level of liquidity to ensure the availability of sufficient funds to accommodate deposit withdrawals, to support loan growth, to satisfy financial commitments and to take advantage of investment opportunities.

During the years ended December 31, 2019 , 2018 and 2017 , we used our sources of funds primarily to fund loan commitments.

During the years ended December 31, 2020, 2019 and 2018, we used our sources of funds primarily to fund loan commitments and purchase securities.

At December 31, 2020, we had outstanding commitments to extend credit, originate loans and for letters of credit totaling $3.54 billion.

2 unchanged sentences

however, our primary liquidity management practice to supplement deposits is to increase or decrease short-term borrowings, including FHLB advances and Federal Reserve Bank of San Francisco (FRBSF) borrowings.

We maintain credit facilities with the FHLB–Des Moines, that at December 31, 2019 provided for advances that in the aggregate may equal the lesser of 45% of Banner Bank’s assets or adjusted qualifying collateral (subject to a sufficient level of ownership of FHLB stock), up to a total possible credit line of $5.31 billion , and 45% of Islanders Bank’s assets or adjusted qualifying collateral, up to a total possible credit line of $132.7 million .

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) and 45% of Islanders Bank’s assets or adjusted qualifying collateral.

At December 31, 2020, under these credit facilities based on pledged collateral, Banner Bank had $2.28 billion of available credit capacity and Islanders Bank $32.5 million of available credit capacity.

Advances under these credit facilities (excluding fair value adjustments) totaled $150.0 million at December 31, 2020.

In addition, Banner Bank has been approved for participation in the FRBSF’s Borrower-In-Custody (BIC) program.

Under this program Banner Bank had available lines of credit of approximately $1.19 billion as of December 31, 2019 , subject to certain collateral requirements, namely the collateral type and risk rating of eligible pledged loans.

Under this program, based on pledged collateral, Banner Bank had available lines of credit of approximately $958.7 million as of December 31, 2020, subject to certain collateral requirements, namely the collateral type and risk rating of eligible pledged loans.

We had no funds borrowed from the FRBSF at December 31, 2020 or 2019.

At December 31, 2019 , Banner Bank also had uncommitted federal funds line of credit agreements with other financial institutions totaling $110.0 million , while Islanders Bank had an uncommitted federal funds line of credit agreement with another financial institution totaling $5.0 million .

At December 31, 2020, Banner Bank also had uncommitted federal funds line of credit agreements with other financial institutions totaling $125.0 million, while Islanders Bank had an uncommitted federal funds line of credit agreement with another

financial institution totaling $5.0 million.

No balances were outstanding under these agreements as of December 31, 2020.

Availability of lines

is subject to federal funds balances available for loan and continued borrower eligibility.

Availability of lines is subject to federal funds balances available for loan and continued borrower eligibility.

These lines are intended to support short-term liquidity needs and the agreements may restrict consecutive day usage.

Management believes it has adequate resources and funding potential to meet our foreseeable liquidity requirements.

Additionally, the Federal Reserve recently established the Paycheck Protection Program Liquidity Facility (PPPLF) to bolster the effectiveness of the PPP.

As of December 31, 2020, Banner Bank was approved to utilize the PPPLF.

Banner Bank may utilize the PPPLF pursuant to which it will pledge PPP loans at face value as collateral to obtain FRB non-recourse advances.

Banner Bank utilized and repaid outstanding advances from the PPPLF during the year ended December 31, 2020.

There were no borrowings outstanding under this program during the quarter ended December 31, 2020.

Banner Corporation is a separate legal entity from the Banks and, on a stand-alone level, must provide for its own liquidity and pay its own operating expenses and cash dividends.

1 unchanged sentence

At December 31, 2020, Banner Corporation (on an unconsolidated basis) had liquid assets of $131.6 million.

On June 30, 2020, Banner issued and sold in an underwritten offering of the 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 banks continued to maintain capital levels in excess of the requirements to be categorized as “Well-Capitalized” under applicable regulatory standards.

14 unchanged sentences

Regulatory Capital Ratios

Capital Ratios

Banner Corporation

Islanders Bank

Capital Ratios Banner Corporation Banner Bank Islanders Bank

Total capital to risk-weighted assets 14.73 % 13.39 % 15.65 %

12 unchanged sentences

Contractual Obligations

One Year or Less

After One to Three Years

After Three to Five Years

After Five Years

One Year or Less After One to Three Years After Three to Five Years After Five Years Total

Advances from Federal Home Loan Bank $ 100,000 $ 50,000 $ — $ — $ 150,000

Subordinated notes — — — 100,000 100,000

Junior subordinated debentures — — — 147,944 147,944

3 unchanged sentences

Purchase obligation 28,553 25,612 4,660 123 58,948

Total $ 1,030,831 $ 287,147 $ 42,088 $ 262,292 $ 1,622,358

In addition, we have contracts with various vendors to provide services, including information processing, for periods generally ranging from one to five years, for which our financial obligations are dependent upon acceptable performance by the vendor.

8 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis