What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2021-02-23 compared with 2020-02-21 · 998 added, 774 removed, 1529 unchanged (54% of the section changed)

10 unchanged sentences

Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2020, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

The scope of management’s assessment of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2019 includes all of the Company’s consolidated operations except for those disclosure controls and procedures of AltaPacific that are subsumed by internal control over financial reporting.

(b) Changes in Internal Controls Over Financial Reporting:

For the year ended December 31, 2019 , there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

For the year ended December 31, 2020, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting other than the adoption of internal controls over financial reporting due to the implementation of FASB ASU 2016-13, Financial Instruments:

Credit Losses (ASC 326):

Measurement of Credit Losses on Financial Instruments, as amended and commonly referred to as CECL.

Management’s Annual Report on Internal Control over Financial Reporting:

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we included a report of management’s assessment of the effectiveness of its internal controls as part of this Annual Report on Form 10-K for the year ended December 31, 2020.

We are in the process of evaluating the existing controls and procedures of AltaPacific and integrating AltaPacific into our internal control over financial reporting.

In accordance with SEC Staff guidance permitting a company to exclude an acquired business from management’s assessment of the effectiveness of internal control over financial reporting for the year in which the acquisition is completed, we have elected to exclude the non-integrated branches, systems, operations and related loans and deposits of AltaPacific, and AltaPacific Bank, from management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2019.

The loans and deposits of AltaPacific and AltaPacific Bank represented $334.3 million, or 4%, and $292.6 million, or 3%, respectively, of the Company’s total loans and deposits as reported in our consolidated financial statements as of December 31, 2019.

Our assessment of the internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of the non-integrated branches, systems, operations and related loans and deposits that were formerly part of AltaPacific and AltaPacific Bank.

ITEM 9B – Other Information

9 unchanged sentences

The Code of Ethics and Business Conduct requires our officers, directors, and employees to maintain the highest standards of professional conduct.

A copy of the Code of Ethics and Business Conduct in substantially its current form was filed as an exhibit with Form 8-K on July 20, 2018, and is available without charge, upon request to Investor Relations, Banner Corporation, P.O.

A copy of the Code of Ethics and Business Conduct in substantially its current form was filed as an exhibit with Form 8-K on September 1, 2020 and is available without charge, upon request to Investor Relations, Banner Corporation, P.O.

Box 907, Walla Walla, WA 99362.

1 unchanged sentence

Whistleblower Program and Protections

We subscribe to the Ethicspoint reporting system and encourage employees, customers, and vendors to call the Ethicspoint hotline at 1-866-ETHICSP (384-4277) or visit its website at www.Ethicspoint.com to report any concerns regarding financial statement disclosures, accounting, internal controls, or auditing matters.

We subscribe to the Ethicspoint reporting system and encourage employees, clients, and vendors to call the Ethicspoint hotline at 1-866-ETHICSP (384-4277) or visit its website at www.Ethicspoint.com to report any concerns regarding financial statement disclosures, accounting, internal controls, or auditing matters.

We will not retaliate against any of our officers or employees who raise legitimate concerns or questions about an ethics matter or a suspected accounting, internal control, financial reporting, or auditing discrepancy or otherwise assists in investigations regarding conduct that the employee reasonably believes to be a violation of Federal Securities Laws or any rule or regulation of the SEC, federal securities laws relating to fraud against shareholders or violations of applicable banking laws.

10 unchanged sentences

(d) Equity Compensation Plan Information

The following table sets forth information about equity compensation plans that provide for the award of securities or the grant of options to purchase securities to employees and directors of Banner and its subsidiaries that were in effect at December 31, 2019 :

Plan category

Number of securities to be issued upon exercise of outstanding options or vesting of outstanding restricted stock and unit grants

Weighted average exercise price of outstanding options and rights

Number of securities remaining available for future issuance under equity compensation plans excluding securities reflected in column (A)

The following table sets forth information about equity compensation plans that provide for the award of securities or the grant of options to purchase securities to employees and directors of Banner Corporation and its subsidiaries that were in effect at December 31, 2020:

Plan category Number of securities to be issued upon exercise of outstanding options or vesting of outstanding restricted stock and unit grants Weighted average exercise price of outstanding options and rights Number of securities remaining available for future issuance under equity compensation plans excluding securities reflected in column (A)

Equity compensation plans approved by security holders

2012 Restricted Stock and Incentive Bonus Plan

2014 Omnibus Incentive Plan

2018 Omnibus Incentive Plan

2012 Restricted Stock and Incentive Bonus Plan — n/a 30,189

2014 Omnibus Incentive Plan 225,592 n/a 198,323

2018 Omnibus Incentive Plan 352,544 n/a 547,456

578,136 775,968

Equity compensation plans not approved by security holders — —

Total 578,136 775,968

ITEM 13 – Certain Relationships and Related Transactions, and Director Independence

3 unchanged sentences

ITEM 15 – Exhibits and Financial Statement Schedules

Financial Statements

(a) (1) Financial Statements

See Index to Consolidated Financial Statements on page 88 .

4 unchanged sentences

Item 16 - Form 10-K Summary.

Electronic Signatures

Please note that electronic signatures are now allowed due to the November 2020 amendments to Rule 302(b) of Regulation S-T.

Rule 302(b) of Regulation S-T, as amended, permits a signatory to an electronic filing to electronically sign the document, provided that the signatory follows certain procedures and the electronic signature meets certain requirements specified in the EDGAR Filer Manual.

Pursuant to the amended EDGAR Filer Manual, the process by which a signatory sign an authentication document using an electronic signature must meet, at a minimum, the following:

• Require the signatory to present a physical, logical, or digital credential authenticating their individual identity;

• Reasonably provide a method for the non-repudiation of the signature;

• Require that the signature be attached, affixed, or otherwise logically associated with the signature page or document being signed;

• Provide a time stamp of the date and time of the signature to ensure it occurred before or at the time of the electronic filing.

The amendments also include a new Rule 302(b)(2) that requires a signatory—before using an electronic signature on an authentication document—to manually sign an attestation indicating his or her agreement that the use of an electronic signature on an authentication document is legally equal to a manual signature.

This manually signed attestation must be maintained by the filer for the period of time that the signatory uses an electronic signature to sign an authentication document and for seven years after the most recently dated electronically signed authentication document.

Regarding the initial electronic signature authentication document, we believe the following language is sufficient to satisfy the requirements of Rule 302(b), as amended:

The undersigned signatory attests and agrees that the use of an electronic signature in any authentication document that includes the undersigned signatory’s typed, conformed signature, and that is filed with or furnished to the Securities and Exchange Commission by or on behalf of the undersigned signatory, Banner Corporation or any of its affiliates, constitutes the legal equivalent of the undersigned signatory’s manual signature for purposes of authenticating the undersigned signatory’s signature to any filing or submission for which it is provided.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Banner Corporation

February 21, 2020

February 23, 2021 /s/ Mark J.

President and Chief Executive Officer

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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Grescovich /s/ Peter J.

Grescovich Peter J.

President and Chief Executive Officer;

Executive Vice President and Chief Financial Officer

(Principal Executive Officer)

(Principal Financial and Accounting Officer)

February 21, 2020

Director Executive Vice President and Chief Financial Officer

(Principal Executive Officer) (Principal Financial and Accounting Officer)

February 23, 2021 Date:

February 23, 2021

Layman /s/ David I.

Layman David I.

Director Director

February 23, 2021 Date:

February 23, 2021

/s/ Connie R.

Collingsworth

/s/ Merline Saintil

Collingsworth

Merline Saintil

February 21, 2020

Chairman of the Board

February 21, 2020

Collingsworth /s/ Merline Saintil

Collingsworth Merline Saintil

Director Director

February 23, 2021 Date:

February 23, 2021

/s/ Cheryl R.

Orrico /s/ David A.

Orrico David A.

Chairman of the Board Director

February 23, 2021 Date:

February 23, 2021

/s/ Terry Schwakopf /s/ Kevin F.

Terry Schwakopf Kevin F.

Director Director

February 23, 2021 Date:

February 23, 2021

/s/ Roberto R.

/s/ Terry Schwakopf

Terry Schwakopf

February 23, 2021

February 21, 2020

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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Based on this assessment and those criteria, management believes that, as of December 31, 2020, the Company maintained effective internal control over financial reporting.

On November 1, 2019, the Company completed its acquisition of AltaPacific Bancorp, (AltaPacific) and its subsidiary, AltaPacific Bank.

AltaPacific Bank was merged into Banner Bank, a wholly owned subsidiary of the Company, on November 1, 2019.

As of December 31, 2019 , the majority of the acquired systems and operations of AltaPacific and AltaPacific Bank, including the branches, loans, deposits and core operating system, had not been converted to the Company’s systems or integrated into its operations.

As permitted by the Securities and Exchange Commission, management elected to exclude the non-integrated branches, systems, operations and related loans and deposits of AltaPacific, and AltaPacific Bank, from management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2019 .

The Company’s independent registered public accounting firm has audited the Company’s consolidated financial statements that are included in this annual report and the effectiveness of our internal control over financial reporting as of December 31, 2020 and issued their Report of Independent Registered Public Accounting Firm, appearing under Item 8.

3 unchanged sentences

Banner Corporation and Subsidiaries

Opinions on the Financial Statements and Internal Control over Financial Reporting

Opinions on the Consolidated Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated statements of financial condition of Banner Corporation and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”).

2 unchanged sentences

Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, on January 1, 2020 , the Company adopted ASU 2016 -13 “Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments,” applicable to financial assets measured at amortized cost including loan receivables and held to maturity debt securities.

Basis for Opinions

11 unchanged sentences

We believe that our audits provide a reasonable basis for our opinions.

As discussed in the accompanying Management Report on Internal Control Over Financial Reporting, on November 1, 2019, the Company acquired AltaPacific Bancorp, Inc.

and its subsidiary, AltaPacific Bank (“AltaPacific”).

For the purposes of assessing internal control over financial reporting, management excluded the non-integrated branches, systems, operations and related loans and deposits of AltaPacific.

The loans and deposits of AltaPacific represented $334.3 million, or 4%, and $292.6 million, or 3%, respectively, of the Company’s consolidated total loans and deposits as reported in the consolidated financial statements as of December 31, 2019.

Accordingly, our audit did not include the internal control over financial reporting of the non-integrated branches, systems, operations and related loans and deposits of AltaPacific.

Definition and Limitations of Internal Control Over Financial Reporting

4 unchanged sentences

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any

evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses

As described in Notes 1 and 5 to the consolidated financial statements, the Company’s consolidated allowance for loan losses balance was $100.6 million at December 31, 2019.

The allowance for loan losses is maintained to provide for estimated inherent losses based on evaluating risks in the loan portfolio and is based upon the Company’s 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 economic conditions, 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.

We identified management’s risk ratings of loans and the estimation of qualitative and environmental factors, both of which are used in the allowance for loan losses calculation, as a critical audit matter.

The Company uses credit quality indicators, including internally determined risk ratings, to classify loans into pools and to estimate inherent loss rates for each of the loan pools, which are used in the calculation of the allowance for loan losses.

Determination of the risk rating involves significant management judgement.

The qualitative and environmental factors are used to estimate losses related to factors that are not captured in the historical loss rates, and are based on management’s evaluation of available internal and external data and involves significant management judgement.

Auditing management’s judgments regarding the determination of risk ratings and qualitative and environmental factors applied to the allowance for loan losses involved a high degree of subjectivity.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

As described in Notes 1 and 5 to the consolidated financial statements, the balance of the Company’s consolidated allowance for credit losses – loans was $167.3 million at December 31, 2020.

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of financial assets to present the net carrying value at the amount expected to be collected on such financial assets.

The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets.

The allowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio.

These factors include, among others, changes in the size and composition of the loan portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic conditions.

Management also considers qualitative, forecasted economic conditions and environmental factors for each loan category to adjust for differences between the historical periods used to calculate historical loss rates and expected conditions over the remaining lives of the loans in the portfolio.

We identified the estimation and application of forecasted economic conditions used in the allowance for credit losses – loans as a critical audit matter.

The economic forecast component of the allowance for credit losses is used to compare the conditions that existed during the historical period to current conditions and future expectations, and to make adjustments to the historical data accordingly.

Auditing management’s judgments regarding the estimation of forecasted economic conditions and the method by which management applied these forecasts to the allowance for credit losses involved a high degree of subjectivity and complexity.

The primary procedures we performed to address this critical audit matter included:

Testing the design, implementation, and operating effectiveness of controls relating to management’s calculation of the allowance for loan losses, including controls over the accuracy of risk ratings of loans and the determination of the qualitative and environmental factors used.

• Testing the design, implementation, and operating effectiveness of controls relating to management’s calculation of the allowance for credit losses, including controls over the determination of the forecasted economic conditions used.

• Obtaining management’s analysis and supporting documentation related to the forecasted economic conditions, and testing whether the forecasts used in the calculation of the allowance for credit losses are reasonable and supportable based on the analysis provided by management.

• Testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for credit losses, and testing completeness and accuracy of the data used in the calculation, application of the forecasted economic conditions determined by management and used in the calculation, and recalculation of the allowance for credit losses balance.

We identified the estimation of qualitative and environmental factors used in the allowance for credit losses – loans as a critical audit matter.

The qualitative and environmental factors are used to estimate credit losses related to matters that are not captured in the historical loss rates and are based on management’s evaluation of available internal and external data.

Auditing management’s judgments regarding the qualitative and environmental factors applied to the allowance for credit losses involved a high degree of subjectivity.

The primary procedures we performed to address this critical audit matter included:

• Obtaining management’s analysis and supporting documentation related to the qualitative and environmental factors, and testing whether the environmental and qualitative factors used in the calculation of the allowance for credit losses are supported by the analysis provided by management.

• Testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for credit losses, and testing completeness and accuracy of the data used in the calculation, application of the environmental and qualitative factors determined by management and used in the calculation, and recalculation of the allowance for credit losses balance.

We identified management’s risk ratings of loans which are used in the allowance for credit losses – loans as a critical audit matter.

The Company uses internally determined risk ratings as credit indicators to classify loans into pools and to estimate expected loss rates for each of the loan pools.

Those loan pools are then included in the calculation of the allowance for credit losses.

Auditing management’s judgments regarding risk ratings of loans involved a high degree of subjectivity.

The primary procedures we performed to address this critical audit matter included:

• Testing the design, implementation, and operating effectiveness of controls over the accuracy of risk ratings of loans.

• Testing a risk-based targeted selection of loans to gain substantive evidence that the Company is appropriately rating these loans in accordance with its policies, and that the risk ratings for the loans are reasonable.

Obtaining management’s analysis and supporting documentation related to the qualitative and environmental factors, and testing whether the environmental and qualitative factors used in the calculation of the allowance for loan losses are supported by the analysis provided by management.

Testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for loan losses, and testing the calculation itself, including completeness and accuracy of the data used in the calculation, application of the loan risk ratings determined by management and used in the calculation, application of the environmental and qualitative factors determined by management and used in the calculation, and recalculation of the allowance for loan losses balance.

Performing an independent sensitivity analysis to evaluate the reasonableness of the qualitative and environmental factors used by management to account for inherent losses that are not captured in the calculation of the allowance for loan losses based on historical loss rates alone.

/s/ Moss Adams LLP

• Testing the completeness and accuracy of the loan data used in the allowance for credit losses calculation, including application of the loan risk ratings determined by management and used in the calculation, and recalculation of the allowance for credit losses balance.

Spokane, Washington

5 unchanged sentences

December 31, 2020 and 2019

ASSETS December 31,

2020 December 31,

Cash and due from banks $ 311,899 $ 234,359

3 unchanged sentences

Securities—available-for-sale, amortized cost $ 2,256,189 and $ 1,529,946 , respectively

Securities—held-to-maturity, fair value $237,805 and $232,537, respectively

2,322,593 1,551,557

Securities—held-to-maturity, net of allowance for credit losses of $ 94 and none , respectively, fair value $ 448,681 and $ 237,805 , respectively

421,713 236,094

Total securities 2,769,286 1,813,287

Federal Home Loan Bank (FHLB) stock 16,358 28,342

Loans held for sale (includes $199.4 million and $164.8 million, respectively, at fair value)

Loans held for sale (includes $ 133.6 million and $ 199.4 million, at fair value, respectively)

243,795 210,447

Loans receivable 9,870,982 9,305,357

Allowance for loan losses

Allowance for credit losses - loans ( 167,279 ) ( 100,559 )

Net loans receivable

9,703,703 9,204,798

Accrued interest receivable 46,617 37,962

1 unchanged sentence

Property and equipment, net 164,556 178,008

Other intangible assets, net

Goodwill 373,121 373,121

Other intangibles, net 21,426 29,158

Bank-owned life insurance (BOLI) 191,830 192,088

Deferred tax assets, net 65,742 59,639

Other assets 200,190 168,632

$ 15,031,623 $ 12,604,031

Non-interest-bearing $ 5,492,924 $ 3,945,000

2 unchanged sentences

Total deposits

12,567,296 10,048,641

Advances from FHLB 150,000 450,000

Other borrowings 184,785 118,474

Subordinated notes, net 98,201 —

Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities) 116,974 119,304

2 unchanged sentences

Total liabilities

13,365,359 11,009,997

COMMITMENTS AND CONTINGENCIES (Note 22)

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Preferred stock - $ 0.01 par value per share, 500,000 shares authorized;

no shares issued and outstanding at December 31, 2019 and December 31, 2018

Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized, 35,712,384 shares issued and outstanding at December 31, 2019;

no shares outstanding at December 31, 2020 and December 31, 2019

Common stock and paid in capital - $ 0.01 par value per share, 50,000,000 shares authorized;

35,159,200 shares issued and outstanding at December 31, 2020;

Common stock (non-voting) and paid in capital - $0.01 par value per share, 5,000,000 shares authorized;

35,712,384 shares issued and outstanding at December 31, 2019

1,349,879 1,373,198

Common stock (non-voting) and paid in capital - $ 0.01 par value per share, 5,000,000 shares authorized;

no shares issued and outstanding at December 31, 2020;

39,192 shares issued and outstanding at December 31, 2019

Retained earnings 247,316 186,838

Carrying value of shares held in trust for stock-based compensation plans ( 7,636 ) ( 7,507 )

Liability for common stock issued to stock related compensation plans 7,636 7,507

Accumulated other comprehensive income 69,069 33,256

Carrying value of shares held in trust for stock related compensation plans

Liability for common stock issued for stock related compensation plans

Total shareholders’ equity 1,666,264 1,594,034

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For the Years Ended December 31, 2020, 2019 and 2018

2020 2019 2018

INTEREST INCOME:

3 unchanged sentences

Total interest income

519,146 525,687 463,647

INTEREST EXPENSE:

Deposits 25,015 37,630 20,642

FHLB advances 5,023 12,234 5,636

Other borrowings 603 330 245

Junior subordinated debentures

Subordinated debt 7,204 6,574 6,136

Total interest expense

Net interest income before provision for loan losses

PROVISION FOR LOAN LOSSES

37,845 56,768 32,659

Net interest income before provision for credit losses 481,301 468,919 430,988

PROVISION FOR CREDIT LOSSES 64,316 10,000 8,500

Net interest income 416,985 458,919 422,488

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Mortgage banking operations 51,581 22,215 21,343

BOLI 5,972 4,645 4,505

Miscellaneous 6,323 8,624 7,133

98,260 82,116 81,055

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

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

Gain on sale of branches, including related loans and deposits

Total non-interest income

98,616 81,941 83,993

NON-INTEREST EXPENSE:

10 unchanged sentences

Amortization of core deposit intangibles 7,732 8,151 6,047

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

Miscellaneous 22,712 28,122 26,754

Acquisition related costs

367,584 350,184 335,764

COVID-19 expenses 3,502 — —

Merger and acquisition related costs 2,062 7,544 5,607

Total non-interest expense

373,148 357,728 341,371

Income before provision for income taxes 142,453 183,132 165,110

PROVISION FOR INCOME TAXES 26,525 36,854 28,595

NET INCOME $ 115,928 $ 146,278 $ 136,515

Earnings per common share

Basic $ 3.29 $ 4.20 $ 4.16

Diluted $ 3.26 $ 4.18 $ 4.15

Cumulative dividends declared per common share $ 1.23 $ 2.64 $ 1.96

Weighted average number of common shares outstanding:

Basic 35,264,252 34,868,434 32,784,724

Diluted 35,528,848 34,967,684 32,894,425

See notes to the consolidated financial statements

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For the Years Ended December 31, 2020, 2019 and 2018

OTHER COMPREHENSIVE LOSS, NET OF INCOME TAXES:

2020 2019 2018

NET INCOME $ 115,928 $ 146,278 $ 136,515

OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:

Unrealized holding gain (loss) on securities—available-for-sale arising during the period

45,247 33,843 ( 6,547 )

Income tax (expense) benefit related to securities—available-for-sale unrealized holding losses ( 10,860 ) ( 8,122 ) 1,538

Reclassification for net (gain) loss on securities—available-for-sale realized in earnings

( 454 ) ( 34 ) 839

Income tax expense (benefit) related to securities—available-for-sale realized (gains) losses 109 8 ( 201 )

Changes in fair value of junior subordinated debentures related to instrument specific credit risk

Income tax (expense) benefit related to other comprehensive income (loss)

2,330 601 ( 15,384 )

Income tax (expense) benefit related to junior subordinated debentures ( 559 ) ( 144 ) 3,691

Other comprehensive income (loss) 35,813 26,152 ( 16,064 )

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For the Years Ended December 31, 2020, 2019 and 2018

and Paid in Capital

Retained Earnings

Accumulated Other Comprehensive

(Loss) Income

Shareholders' Equity

and Paid in Capital Retained Earnings Accumulated Other Comprehensive

(Loss) Income Shareholders’ Equity

Shares Amount

Balance, January 1, 2018 32,726,485 $ 1,187,127 $ 90,535 $ ( 5,036 ) $ 1,272,626

Cumulative effect of reclassification of the instrument-specific credit risk portion of junior subordinated debentures fair value adjustments and reclassification of equity securities from available-for-sale ( 28,204 ) 28,204 —

Net income 136,515 136,515

Other comprehensive loss

Reclassification of stranded tax effects from accumulated other comprehensive loss to retained earnings

( 16,064 ) ( 16,064 )

Accrual of dividends on common stock ($ 1.96 /share-cumulative)

( 64,791 ) ( 64,791 )

Repurchase of common stock

( 594,711 ) ( 34,401 ) ( 34,401 )

Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered

( 57,073 ) 5,001 5,001

Issuance of shares for acquisition

3,108,071 179,709 179,709

Balance, December 31, 2018 35,182,772 $ 1,337,436 $ 134,055 $ 7,104 $ 1,478,595

Balance, January 1, 2019 35,182,772 $ 1,337,436 $ 134,055 $ 7,104 $ 1,478,595

Other comprehensive loss

Net income 146,278 146,278

Other comprehensive income

26,152 26,152

Accrual of dividends on common stock ($ 2.64 /share-cumulative)

( 93,495 ) ( 93,495 )

Repurchase of common stock

( 1,000,000 ) ( 53,922 ) ( 53,922 )

Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered

( 9,547 ) 5,226 5,226

Issuance of shares for acquisition

1,578,351 85,200 85,200

Balance, December 31, 2019 35,751,576 $ 1,373,940 $ 186,838 $ 33,256 $ 1,594,034

4 unchanged sentences

For the Years Ended December 31, 2020, 2019 and 2018

and Paid in Capital

Retained Earnings

Accumulated Other Comprehensive

Shareholders' Equity

and Paid in Capital Retained Earnings Accumulated Other Comprehensive

Income Shareholders’ Equity

Shares Amount

Balance, January 1, 2020 35,751,576 $ 1,373,940 $ 186,838 $ 33,256 $ 1,594,034

New credit standard (ASC 326) - impact in year of adoption, net of tax ( 11,215 ) ( 11,215 )

Net income 115,928 115,928

Other comprehensive income

35,813 35,813

Accrual of dividends on common stock ($ 1.23 /share-cumulative)

( 44,235 ) ( 44,235 )

Repurchase of common stock

( 624,780 ) ( 31,775 ) ( 31,775 )

Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered

Issuance of shares for acquisition

32,404 7,714 7,714

Balance, December 31, 2020 35,159,200 $ 1,349,879 $ 247,316 $ 69,069 $ 1,666,264

4 unchanged sentences

For the Years Ended December 31, 2020, 2019 and 2018

2020 2019 2018

OPERATING ACTIVITIES:

Adjustments to reconcile net income to net cash provided from (used by) operating activities:

Deferred income and expense, net of amortization

Net income $ 115,928 $ 146,278 $ 136,515

Adjustments to reconcile net income to net cash provided from operating activities:

Depreciation 18,130 17,282 15,232

Deferred income/expense and capitalized servicing rights, net of amortization ( 15,934 ) ( 881 ) ( 6,571 )

Amortization of core deposit intangibles 7,732 8,151 6,047

1 unchanged sentence

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

Proceeds from sales of securities—trading

Reinvested dividends – equity securities ( 353 ) — —

Principal repayments and maturities of securities—trading — — 100

Gain on sale of branches, including related loans and deposits

Decrease (increase) in deferred taxes

Increase (decrease) in current taxes payable

Equity-based compensation

Increase in cash surrender value of BOLI

Gain on sale of loans, net of capitalized servicing rights

Loss (gain) on disposal of real estate held for sale and property and equipment

Provision for loan loss

Provision for real estate held for sale

(Increase) decrease in deferred taxes ( 2,654 ) 15,548 ( 3,498 )

(Decrease) increase in current taxes payable ( 2,193 ) 607 3,938

Stock-based compensation 9,168 7,142 6,554

Net change in cash surrender value of BOLI ( 5,030 ) ( 4,246 ) ( 4,471 )

Gain on sale of loans, excluding capitalized servicing rights ( 43,304 ) ( 15,993 ) ( 15,066 )

Loss (gain) on disposal of real estate held for sale and property and equipment, net 859 1,075 ( 833 )

Provision for credit losses 64,316 10,000 8,500

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

Provision for losses on real estate held for sale 45 — 387

Origination of loans held for sale ( 1,461,872 ) ( 1,094,237 ) ( 896,461 )

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Net change in:

Other assets ( 38,868 ) ( 18,429 ) ( 15,861 )

Other liabilities 4,385 5,588 17,322

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Proceeds from sales of securities — available-for-sale

150,374 86,083 214,609

Purchases of securities — held-to-maturity

( 222,094 ) ( 54,850 ) ( 9,612 )

Principal repayments and maturities of securities — held-to-maturity

Loan originations, net of repayments

33,848 50,962 33,152

Purchases of equity securities ( 1,060,000 ) — —

Proceeds from sales of equity securities 1,060,695 — —

Loan originations, net of principal repayments ( 561,338 ) ( 304,191 ) ( 416,218 )

Purchases of loans and participating interest in loans ( 2,510 ) ( 9,798 ) ( 33,680 )

Proceeds from sales of other loans 19,469 27,560 9,853

Net cash (paid) received from acquisitions and branch divestitures

Net cash received (paid) related to branch divestitures — 26,944 ( 1,574 )

Purchases of property and equipment ( 12,803 ) ( 24,700 ) ( 23,094 )

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Purchase of FHLB stock ( 40,185 ) ( 170,380 ) ( 163,683 )

Other 5,114 1,436 3,583

Net cash used by investing activities ( 1,454,624 ) ( 143,114 ) ( 976,218 )

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For the Years Ended December 31, 2020, 2019 and 2018

2020 2019 2018

FINANCING ACTIVITIES:

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Repayment of long term FHLB borrowing — ( 280,415 ) ( 10 )

Advances, net of (repayments) of overnight and short-term FHLB borrowings

(Decrease) increase in other borrowings, net

(Repayments) advances of overnight and short-term FHLB borrowings, net ( 300,000 ) ( 300,000 ) 540,000

Increase (decrease) in other borrowings, net 66,311 ( 520 ) 7,870

Net proceeds from issuance of subordinated notes 98,027 — —

Cash dividends paid ( 94,078 ) ( 56,074 ) ( 59,280 )

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CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,234,183 $ 307,735 $ 272,196

2020 2019 2018

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

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Loans, net of discounts, specific loss allowances and unearned income, transferred to real estate owned and other repossessed assets

1,602 303 1,645

Dividends accrued but not paid until after period end 1,357 51,199 13,778

ACQUISITIONS (DISPOSITIONS):

Assets acquired (disposed)

Liabilities assumed (transferred)

Assets acquired — 426,609 915,821

Liabilities assumed — 373,016 832,278

See notes to consolidated financial statements

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Banner Corporation (Banner or the Company) is a bank holding company incorporated in the State of Washington.

The Company is primarily engaged in the business of planning, directing and coordinating the business activities of two wholly-owned subsidiaries, Banner Bank and Islanders Bank.

The Company is primarily engaged in the business of planning, directing and coordinating the business activities of two wholly-owned subsidiaries, Banner Bank and, at December 31, 2020, Islanders Bank.

Subsequent to December 31, 2020, Islanders Bank was merged into Banner Bank.

Banner Bank is a Washington-chartered commercial bank that conducts business from its headquarters in Walla Walla, Washington and, as of December 31, 2020, its 152 branch offices located in Washington, Oregon, California and Idaho.

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Banner Bank and Islanders Bank (the Banks) are subject to regulation by the Washington State Department of Financial Institutions, Division of Banks (DFI) and the Federal Deposit Insurance Corporation (the FDIC).

The Company’s operating results depend primarily on its net interest income, which is the difference between interest income on interest-earning assets, consisting of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of customer deposits, FHLB advances, other borrowings and junior subordinated debentures.

The Company’s operating results depend primarily on its net interest income, which is the difference between interest income on interest-earning assets, consisting of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of client deposits, FHLB advances, other borrowings, subordinated notes and junior subordinated debentures.

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

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

A transaction between common controlled entities is not considered a business combination and the receiving entity records the net assets received in the transaction at their historical carrying amounts, as reflected in the parent’s financial statements.

Use of Estimates:

In the opinion of management, the accompanying Consolidated Statements of Financial Condition and related Consolidated Statements of Operations, Comprehensive Income, Changes in Shareholders’ Equity and Cash Flows reflect all adjustments (which include reclassification and normal recurring adjustments) that are necessary for a fair presentation in conformity with GAAP.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements.

Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments.

In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of Banner’s consolidated financial statements.

These policies relate to (i) the methodology for the recognition of interest income, (ii) determination of the provision and allowance for loan and lease losses, (iii) the valuation of financial assets and liabilities measured at fair value, including other-than-temporary impairment (OTTI) losses, (iv) the valuation of intangible assets, such as goodwill, core deposit intangibles (CDI) and mortgage servicing rights, (v) the valuation of real estate held for sale, (vi) the valuation or recognition of deferred tax assets and liabilities and (vii) the valuation of assets and liabilities acquired in business combinations and subsequent recognition of related income and expense.

These policies 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 measured at fair value, (iv) the valuation of intangible assets, such as goodwill, core deposit intangibles (CDI) and mortgage servicing rights, (v) the valuation of real estate held for sale, (vi) the valuation or recognition of deferred tax assets and liabilities and (vii) the valuation of assets and liabilities acquired in business combinations and subsequent recognition of related income and expense.

These policies and judgments, estimates and assumptions are described in greater detail in subsequent Notes to the Consolidated Financial Statements.

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However, given the sensitivity of the consolidated financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in the Company’s results of operations or financial condition.

Further, subsequent changes in economic or market conditions could have a material impact on these estimates and the Company’s financial condition and operating results in future periods.

Further, subsequent changes in

economic or market conditions could have a material impact on these estimates and the Company’s financial condition and operating results in future periods.

Debt securities are classified as held-to-maturity when the Company has the ability and positive intent to hold them to maturity.

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Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

Debt securities classified as held-to-maturity are carried at cost,

adjusted for amortization of premiums to the earliest callable date and accretion of discounts to the maturity date and, if appropriate, any other-than-temporary impairment losses.

Debt securities classified as held-to-maturity are carried at cost, net of the allowance for credit losses- securities, adjusted for amortization of premiums to the earliest callable date and accretion of discounts to maturity.

Debt securities classified as available-for-sale are measured at fair value.

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Unrealized holding gains and losses on securities classified as trading are included in earnings.

(See Note 17 for a more complete discussion of accounting for the fair value of financial instruments.) Declines in the fair value of debt securities below their cost that are deemed to be other-than-temporary are recognized in earnings as realized losses.

Realized gains and losses on sale are computed on the specific identification method and are included in earnings on the trade date sold.

Beginning January 1, 2018, equity securities were required to be measured at fair value with changes in the fair value recognized through net income.

Prior to January 1, 2018 the Company had classified its equity securities as available-for-sale, subsequent to this date equity securities are reported in other assets.

The Company reviews investment securities on an ongoing basis for the presence of OTTI or permanent impairment, taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether the Company intends to sell a security or if it is more likely than not that it will be required to sell the security before recovery of the amortized cost basis of the investment, which may be maturity, and other factors.

For debt securities, if the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI.

If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security but the Company does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings.

The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected.

Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI.

(See Note 17 for a more complete discussion of accounting for the fair value of financial instruments.) Realized gains and losses on sale are computed on the specific identification method and are included in earnings on the trade date sold.

Equity securities are measured at fair value with changes in the fair value recognized through net income.

Allowance for Credit Losses - Securities:

Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type.

The Company’s held-to maturity portfolio contains mortgage-backed securities issued by U.S.

government entities and agencies.

These securities are either explicitly or implicitly guaranteed by the U.S.

government, are highly rated by major rating agencies and have a long history of no credit losses.

The Company’s held-to-maturity portfolio also contains municipal bonds that are typically rated by major rating agencies as Aa or better.

The Company has never incurred a loss on a municipal bond, therefore the expectation of credit losses on these securities is insignificant.

The Company uses industry historical credit loss information adjusted for current conditions to establish the allowance for credit losses on the municipal bond portfolio.

Less than 2% of the Company’s held-to-maturity portfolio are community development bonds representing pools of one- to four-family loans.

The expected credit losses on these bonds is similar to Banner’s one- to four-family residential loan portfolio.

Therefore, the Company uses the one- to four-family residential loan portfolio loss rates to establish the allowance for credit losses on these bonds.

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or is more likely than not that it will be required to sell the security before recovery of its amortized cost basis.

If the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings.

If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.

In making this assessment, management considers the extent to which fair value is less than amortized costs, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.

Projected cash flows are discounted by the current effective interest rate.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to AOCI.

Impairment losses related to all other factors are presented as separate categories within AOCI.

For debt securities transferred from held-to-maturity to available-for-sale, unrealized gains or losses from the time of transfer are accreted or amortized over the remaining life of the debt security based on the amount and timing of future estimated cash flows.

The accretion or amortization of the amount recorded in AOCI increases the carrying value of the investment and does not affect earnings.

Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense.

Losses are charged against the allowance when management believes the non-collectability of an available-for-sale or held-to-maturity security is confirmed or when either of the criteria regarding intent of requirement to sell is met.

Investment in FHLB Stock:

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FHLB stock does not have a readily determinable fair value.

The Banks' investments in FHLB stock is carried at cost or par value ( $ 100 per share) adjusted for observable changes in market prices minus impairment.

The Banks’ investments in FHLB stock is carried at cost or par value ($ 100 per share) and evaluated for impairment based on the Banks' expectations of the ultimate recoverability of the stock's par value.

Ownership of FHLB stock is restricted to the FHLB and member institutions and can only be purchased and redeemed at par, therefore there has been no observable changes in market prices.

2 unchanged sentences

Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value.

The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB.

The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the client base of the FHLB, and (4) the liquidity position of the FHLB.

The Company has determined there is no impairment on the FHLB stock investment as of December 31, 2020 and 2019.

2 unchanged sentences

The Banks also originate construction and land development, commercial real estate, commercial business, agricultural and consumer loans for portfolio investment.

Loans receivable not designated as held for sale are recorded at the principal amount outstanding, net of allowance for loan losses, deferred fees, discounts and premiums.

Loans receivable not designated as held for sale are recorded at amortized cost, net of the allowance for credit losses.

Amortized cost is the principal amount outstanding, net of deferred fees, discounts and

Accrued interest on loans is reported in accrued interest receivable on the consolidated statements of financial condition.

Premiums, discounts and deferred loan fees are amortized to maturity using the level-yield methodology.

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

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

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

As a result of these concessions, loans identified as TDRs are impaired as the Banks will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement.

TDRs are accounted for in accordance with the Banks’ impaired loan accounting policies.

Loans Held for Sale:

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Residential one- to four-family loans under best effort delivery commitments are carried at the lower of aggregate cost or estimated market value.

Residential one- to four-family loans under mandatory delivery commitments are carried at fair value in order to match changes in the value of the loans with the value of the economic hedges on the loans.

Residential one- to four-family loans expected to be delivered under mandatory commitments are carried at fair value in order to match changes in the value of the loans with the value of the related economic hedges on the loans.

Fair values for residential mortgage loans held for sale are determined by comparing actual loan rates to current secondary market prices for similar loans.

The Company elected

fair value accounting on multifamily held-for-sale loans in order to match changes in the value of the loans with the value of the economic hedges on the loans.

The multifamily held for sale loans originated prior to April 1, 2020 are carried at fair value in order to match changes in the value of the loans with the value of the related economic hedges on the loans.

Fair values for multifamily loans held for sale are calculated based on discounted cash flows using a discount rate that is a combination of market spreads for similar loan types added to selected index rates.

The multifamily held for sale loans originated subsequent to March 31, 2020 are carried at the lower of cost or market.

Net unrealized losses on loans held for sale that are carried at lower of cost or market are recognized through the valuation allowance by charges to income.

Non-refundable fees and direct loan origination costs related to loans held for sale carried at the lower of aggregate cost or estimated market value are recognized as part of the cost basis of the loan.

Gains and losses on sales of loans held for sale are determined using the specific identification method and are recorded in the mortgage banking operations component of non-interest income .

Acquired Loans:

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 and lease losses is not recorded at the acquisition date.

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 excess of the cash flows expected to be collected over a PCI pool's carrying value is considered to be the accretable yield and is recognized as interest income over the estimated life of the pool using the effective yield method.

The excess of the undiscounted contractual balances due over the cash flows expected to be collected is considered to be the nonaccretable difference.

The nonaccretable difference represents the Company's estimate of the credit losses expected to occur and was considered in determining the fair value of the loans as of the acquisition date.

Subsequent to the acquisition date, any increases in expected cash flows over those expected at the purchase date are adjusted through a change to the accretable yield on a prospective basis.

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

Income Recognition on Nonaccrual and Impaired Loans and Securities:

Non-refundable fees and direct loan origination costs related to loans held for sale carried at the lower of cost or market are recognized as part of the cost basis of the loan.

Gains and losses on sales of loans held for sale are determined using the aggregate method and are recorded in the mortgage banking operations component of non-interest income.

For the years ended December 31, 2020 and 2019, we recorded net gains on loans sold of $51.9 million and $20.4 million, respectively.

Loans Acquired in Business Combinations :

Loans acquired in business combinations are recorded at their fair value at the acquisition date.

Acquired loans are evaluated upon acquisition and classified as either purchased credit-deteriorated 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 measurement 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 is 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 or fully amortized into interest income when the loan is paid off.

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 loan or fully amortized into interest income when the loan is paid off.

While credit discounts are included in the determination of the fair value for non-credit-deteriorated loans, since these discounts are expected to be accreted over the life of the loans, they cannot be used to offset the allowance for credit losses that must be recorded at the acquisition date.

As a result, an allowance for credit losses is determined at the acquisition date using the same methodology as other loans held for investment and is recognized as a provision for credit losses in the consolidated statement of operations.

Any subsequent deterioration (improvement) in credit quality is recognized by recording (recapturing) a provision for credit losses.

Income Recognition on Nonaccrual Loans and Securities :

Interest on loans and securities is accrued as earned unless management doubts the collectability of the asset or the unpaid interest.

Interest accruals on loans are generally discontinued when loans become 90 days past due for payment of interest or principal and the loans are then placed on nonaccrual status.

All previously accrued but uncollected interest is deducted from interest income upon transfer to nonaccrual status.

Loans are reported as past due when installment payments, interest payments, or maturity payments are past due based on contractual terms.

All previously accrued but uncollected interest is written off by reversing interest income upon transfer to nonaccrual status.

For any future payments collected, interest income is recognized only upon management’s assessment that there is a strong likelihood that the full amount of a loan will be repaid or recovered.

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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:

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

The Company maintains an allowance for loan losses consistent in all material respects with GAAP.

The Company has established systematic methodologies for the determination of the adequacy of the Company’s allowance for loan losses.

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

The Company increases its allowance for loan losses by charging provisions for probable loan losses against its income and values impaired loans consistent with accounting guidelines.

The allowance for loan losses is maintained at a level sufficient to provide for estimated losses based on evaluating known and inherent risks in the loan portfolio and upon the Company’s continuing 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 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 Banner at the time financial statements are prepared.

Although the Company uses the best information available, future adjustments to the allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control.

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

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.

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

Factors involved in determining impairment include, but are not limited to, the financial condition of the borrower and the value of the underlying collateral.

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 if the loan is collateral dependent, at the fair value of collateral less selling costs.

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.

The Company’s 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 the 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 the Company’s historical loss experience adjusted for significant environmental considerations, including the experience of other banking organizations, which in the judgment of management affects the collectability of the loan portfolio as of the evaluation date.

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

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

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

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 was put in place and therefore continue to accrue interest unless the interest is being waived.

Provision and Allowance for Credit Losses - Loans :

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 non-collectability 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 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 beginning with the first quarter of 2008.

For loans evaluated collectively, management uses economic indicators to adjust the historical loss rates so that they better reflect management’s expectations of future conditions over the remaining lives of the loans in the portfolio based on reasonable and supportable forecasts.

These economic indicators are selected based on correlation to the Company’s historical credit loss experience and are evaluated for each loan category.

The economic indicators evaluated include 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 that are individually evaluated for impairment 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.

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 effective interest rate of the loan.

The Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act) and the Consolidated Appropriations Act 2021 (the CAA) provided guidance around the modification of loans as a result of the COVID-19 pandemic, which provides, 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.

To qualify as an eligible loan under the CARES Act, a loan modification must be (1) related to COVID-19;

(2) involve a loan that was not more than 30 days past due as of December 31, 2019;

and (3) occur between March 1, 2020, and the earlier of (a) 60 days after the date of termination of the national emergency by the President or (b) December 31, 2020.

The CAA extended the relief offered under the CARES Act related to TDRs as a result of COVID-19 through January 1, 2022 or 60 days after the end of the end of the national emergency declared by the President, whichever is earlier.

Loan Origination and Commitment Fees:

Loan origination fees, net of certain specifically defined direct loan origination costs, are deferred and recognized as an adjustment of the loans’ interest yield using the level-yield method over the contractual term of each loan adjusted for actual loan prepayment experience.

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

Loan commitment fees are deferred until the expiration of the commitment period unless management believes there is a remote likelihood that the underlying commitment will be exercised, in which case the fees are amortized to fee income using the straight-line method over the commitment period.

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Deferred commitment fees associated with expired commitments are recognized as fee income.

Reserve for Unfunded Commitments:

A reserve for unfunded commitments is maintained at a level that, in the opinion of management, is adequate to absorb probable losses associated with the Banks' commitments to lend funds under existing agreements such as letters or lines of credit.

Management determines the adequacy of the reserve for unfunded commitments based upon reviews of individual credit facilities, current economic conditions, the risk characteristics of the various categories of commitments and other relevant factors.

The reserve is based on estimates and ultimate losses may vary from the current estimates.

These estimates are evaluated on a regular basis and, as adjustments become necessary, they are reported in earnings in the periods in which they become known.

Draws on unfunded commitments that are considered uncollectible at the time funds are advanced are charged to the allowance for loan losses.

Provisions for unfunded commitment losses are recognized in non-interest expense and added to the reserve for unfunded commitments, which is included in other liabilities.

Real Estate Owned:

Allowance for Credit Losses - unfunded loan commitments:

An allowance for credit losses - unfunded loan commitments is maintained at a level that, in the opinion of management, is adequate to absorb expected credit losses associated with the contractual life of the Banks’ commitments to lend funds under existing agreements such as letters or lines of credit.

The Banks use a methodology for determining the allowance for credit losses - unfunded loan commitments that applies the same segmentation and loss rate to each pool as the funded exposure adjusted for probability of funding.

Draws on unfunded loan commitments that are considered uncollectible at the time funds are advanced are charged to the allowance for credit losses on off-balance sheet exposures.

Provisions for credit losses - unfunded loan commitments are recognized in non-interest expense and added to the allowance for credit losses - unfunded loan commitments, which is included in other liabilities in the consolidated statements of financial condition.

Real Estate Owned, Held for Sale:

Property acquired by foreclosure or deed in lieu of foreclosure is initially recorded at the estimated fair value of the property, less expected selling costs.

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The amounts the Banks will ultimately recover from real estate held for sale may differ substantially from the carrying value of the assets because of market factors beyond the Banks’ control or because of changes in the Banks’ strategies for recovering the investment.

Property is classified as held for sale when the Company commits to a plan to sell the property and is actively marketing the property for sale.

Held for sale property is recorded at the lower of the estimated fair value of the property, less expected selling costs, or the book value at the date the property is transferred to held for sale.

Depreciation is not recorded on held for sale property.

Property and Equipment:

Property and equipment is carried at cost less accumulated depreciation.

D epreciation is based upon the straight-line method applied to individual assets and groups of assets acquired in the same year over the lesser of their estimated useful lives or the related lease terms of the assets:

Buildings and leased improvements

Furniture and equipment

Depreciation is based upon the straight-line method applied to individual assets and groups of assets acquired in the same year over the lesser of their estimated useful lives or the related lease terms of the assets:

Buildings and leased improvements 10 – 39 years

Furniture and equipment 3 – 10 years

Routine maintenance, repairs and replacement costs are expensed as incurred.

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If identified, an impairment loss is recognized through a charge to earnings based on the fair value of the property.

Property is classified as held for sale when the Company commits to a plan to sell the property and is actively marketing the property for sale.

Held for sale property is recorded at the lower of the estimated fair value of the property, less expected selling costs, or the book value at the date the property is transferred to held for sale.

Depreciation is not recorded on held for sale property.

Right of Use Lease Asset & Lease Liability:

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Accordingly, ROU assets are reduced by tenant improvement allowances from landlords plus any prepaid rent.

We do not separate

lease and non-lease components of contracts.

We do not separate lease and non-lease components of contracts.

As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date.

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Other Intangible Assets:

Other intangible assets consist primarily of core deposit intangibles (CDI), which are amounts recorded in business combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the customer relationships associated with the deposits.

CDI is being amortized on an accelerated basis over a weighted average estimated useful life of three years to ten years .

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Derivatives include “off-balance-sheet” financial products, the value of which is dependent on the value of underlying financial assets, such as stock, bonds, foreign currency, or a reference rate or index.

Such derivatives include “forwards,” “futures,” “options” or “swaps.” Banner Bank is a party to $ 3.6 million (all of which is designated in a hedge relationship) in notional amounts of interest rate swaps at December 31, 2019 .

Such derivatives include “forwards,” “futures,” “options” or “swaps.” Banner Bank is a party to $ 338,000 (all of which is designated in a hedge relationship) in notional amounts of interest rate swaps at December 31, 2020.

Some of these swaps serve as hedges to an equal amount of fixed rate loans which include market value prepayment penalties that mirror the provision of the specifically matched interest rate swaps.

In addition, Banner Bank uses an interest rate swap program for commercial loan customers that provides the customer with a variable rate loan and enters into an interest rate swap allowing them to effectively fix their loan interest rates.

These customer swaps are matched with third party swaps with qualified broker/dealer or banks to offset the risk.

At December 31, 2019 , Banner Bank had $ 372.0 million in notional amounts of these customer interest rate swaps outstanding, with an equal amount of offsetting third party swaps also in place.

In addition, Banner Bank uses an interest rate swap program for commercial loan clients that provides the client with a variable rate loan and enters into an interest rate swap allowing them to effectively fix their loan interest rates.

These client swaps are matched with third party swaps with qualified broker/dealer or banks to offset the risk.

At December 31, 2020, Banner Bank had $ 451.8 million in notional amounts of these client interest rate swaps outstanding, with an equal amount of offsetting third party swaps also in place.

The fair value adjustments for these swaps are reflected in other assets or other liabilities as appropriate.

Further, as a part of its mortgage banking activities, the Company issues “rate lock” commitments to one- to four-family loan borrowers and obtains offsetting “best efforts” delivery commitments from purchasers of loans.

The Company uses forward contracts for the sale of mortgage-backed securities and mandatory delivery commitments for the sale of loans to hedge one- to four-family loan "rate lock" commitments and one-

to four-family loans held for sale.

The Company also uses forward contracts for the sale of mortgage backed securities to hedge multifamily loans held for sale.

The Company uses forward contracts for the sale of mortgage-backed securities and mandatory delivery commitments for the sale of loans to hedge one- to four-family loan “rate lock” commitments and one- to four-family loans held for sale.

The commitments to originate mortgage loans held for sale and the related delivery contracts are considered derivatives.

The Company recognizes all derivatives as either assets or liabilities in the balance sheet and requires measurement of those instruments at fair value through adjustments to current earnings.

The Company recognizes all derivatives as either assets or liabilities in the balance sheet and requires

measurement of those instruments at fair value through adjustments to current earnings.

None of these residential mortgage loan related derivatives are designated as hedging instruments for accounting purposes.

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Transfers of financial assets are accounted for as sales when control over the assets has been surrendered.

Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Banks, (2) the transferee obtains the right to pledge or exchange the transferred assets, and (3) the Banks do not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Banks, (2) the transferee has the right to pledge or exchange the transferred assets, and (3) the Banks do not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Advertising Expenses:

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The Banks’ primary business is that of a traditional banking institution, gathering deposits and originating loans for portfolio in its respective primary market areas.

The Banks offer a wide variety of deposit products to their consumer and commercial customers.

The Banks offer a wide variety of deposit products to their consumer and commercial clients.

Lending activities include the origination of real estate, commercial/agriculture business and consumer loans.

Banner Bank is also an active participant in the secondary market, originating residential loans for sale on both a servicing released and servicing retained

Banner Bank is also an active participant in the secondary market, originating residential loans for sale on both a servicing released

and servicing retained basis.

In addition to interest income on loans and investment securities, the Banks receive other income from deposit service charges, loan servicing fees and from the sale of loans and investments.

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ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED

Leases (Topic 842)

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2016-02, Leases (Topic 842) .

The amendments in this ASU require lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date;

a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis;

and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

In July 2018, FASB issued ASU No.

2018-11, Targeted Improvements .

The amendments in this ASU provide entities with an additional (and optional) transition method to adopt the new leases standard.

The Company adopted the requirements of Topic 842 effective January 1, 2019.

The Company elected the transition option provided in ASU No.

2018-11 and applied the modified retrospective approach for leases that existed as of January 1, 2019, or were entered into thereafter.

The Company elected certain relief options for practical expedients:

the option to not separate lease and non-lease components and instead to account for them as a single lease component, and the option to not recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e.

lease terms of twelve months or less).

In addition, the Company elected the package of practical expedients in transition, which permitted us to not reassess our prior conclusions pertaining to lease identification, lease classification, and initial direct costs on leases that commenced prior to our adoption of the new standard.

In connection with the adoption of this ASU, as of January 1, 2019, the Company recorded a $ 56 million right-of-use asset and a $ 59 million lease liability on its Consolidated Statements of Financial Condition.

Derivatives and Hedging (Topic 815)

In August 2017, FASB issued ASU No.

2017-12, Targeted Improvements to Accounting for Hedging Activities .

The amendments in this ASU are intended to provide investors better insight into an entity's risk management hedging strategies by permitting a company to recognize the economic results of its hedging strategies in its financial statements.

The amendments in this ASU permit hedge accounting for hedging relationships involving non-financial risk and interest rate risk by removing certain limitations in cash flow and fair value hedging relationships.

In addition, the ASU requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported.

The Company adopted this ASU effective January 1, 2019.

The adoption of this ASU did not have a material impact on the Company's Consolidated Financial Statements.

Financial Instruments—Credit Losses (Topic 326)

In June 2016, FASB issued ASU No.

2016-13, Measurement of Credit Losses on Financial Instruments .

Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred.

Financial Instruments—Credit Losses (ASC 326)

On January 1, 2020, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, as amended, which replaced the incurred loss methodology that delays recognition until it is probable a loss has been incurred with an expected loss methodology that is referred to as CECL.

The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

The ASU affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial asset not excluded from the scope that have the contractual right to receive cash.

The ASU replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

The ASU replaced the incurred loss impairment methodology in previous GAAP with CECL, a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

This ASU requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset.

The measurement of expected credit losses will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

This ASU broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually.

The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements.

The Company adopted this ASU effective January 1, 2020.

The Company has formed an internal committee to oversee the project, engaged a third-party vendor to assist with the project and has completed its gap analysis phase of the project.

In addition, the Company has selected a second third-party vendor to assist with building and developing the required models and has completed the initial build out of the required models.

The Company has also selected a different third-party vendor to provide various economic forecast scenarios.

The Company has developed a reasonable and supportable forecast based upon these economic forecast scenarios and has incorporated the reasonable and supportable forecast into the models.

The Company has also developed a qualitative factor methodology and incorporated the qualitative factors into the models.

The Company is in the process of finalizing its review of the model results related to the adoption of this ASU.

Based on current model results Banner estimates

the adoption of this ASU will result in a combined increase to its Allowance for Credit Loss and Reserve for Unfunded Loan Commitments of 10% to 20%.

The increase is primarily the result of an increased allowance for credit losses on one- to four-family and other homogeneous loans, as well as an increase in the reserve for unfunded loan commitments.

The increase will be recorded as an adjustment to equity as of the adoption date.

In addition to the increase in the allowance for credit losses upon adoption, the Company expects more variability in its quarterly provision for credit losses going forward due to the model sensitivity to changes in the economic forecast and other factors.

Based on the credit quality of our held-to-maturity debt security portfolio, the allowance for credit losses recorded at adoption on this portfolio is expected to be nominal.

In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities available-for-sale will be replaced with an allowance approach, no allowance for credit losses is expected to be recorded at adoption on this portfolio.

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

In March 2017, FASB issued ASU No.

2017-08, Premium Amortization on Purchased Callable Debt Securities .

The amendments in this ASU shorten the premium amortization period for callable debt securities purchased at a premium.

Specifically, the amendments require the premium to be amortized to the earliest call date.

Under current GAAP, premiums and discounts on callable debt securities generally are amortized to the maturity date.

The amendments do not require an accounting change for securities held at a discount;

the discount continues to be amortized to the maturity date.

The amendments in this ASU more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities.

The Company adopted this ASU effective January 1, 2019.

The adoption of this ASU did not have a material impact on the Company’s Consolidated Financial Statements.

Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40)

In August 2018, FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract .

The amendments in this ASU broaden the scope of ASC Subtopic 350-40 to include costs incurred to implement a hosting arrangement that is a service contract.

The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

The costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred, consistent with the accounting for costs for internal-use software.

The amendments in this ASU result in consistent capitalization of implementation costs of a hosting arrangement that is a service contract and implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU.

This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.

The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.

The Company adopted this ASU effective January 1, 2020 and is not expected to have a material impact on the Company’s Consolidated Financial Statements.

Fair Value Measurement (Topic 820)

In August 2018, FASB issued ASU 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement .

The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement.

The ASU removes, modifies and adds disclosure requirements in Topic 820.

The following disclosure requirements were removed:

1) the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2) the policy for timing of transfers between levels, and 3) the valuation processes for Level 3 fair value measurements.

This ASU modified disclosure requirements by requiring:

that the measurement uncertainty disclosure communicates information about the uncertainty in measurement as of the reporting date.

The following disclosure requirements were added:

1) changes in unrealized gains and losses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period, and 2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date.

The Company adopted this ASU effective January 1, 2020.

Adoption of ASU 2018-13 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

The following table illustrates the pre-tax impact of the adoption of this ASU (in thousands):

January 1, 2020 As Reported Under ASC 326 January 1, 2020 Pre-ASC 326 Adoption Impact of ASC 326 Adoption

Held-to-maturity debt securities

Government and agency obligations $ — $ — $ —

Municipal bonds 28 — 28

Corporate bonds 35 — 35

Mortgage-backed or related securities — — —

Allowance for credit losses on held-to-maturity debt securities $ 63 $ — $ 63

Commercial real estate $ 27,727 $ 30,591 $ ( 2,864 )

Multifamily real estate 2,550 4,754 ( 2,204 )

Construction and land 25,509 22,994 2,515

Commercial business 26,380 23,370 3,010

Agricultural business 3,769 4,120 ( 351 )

One-to four-family residential 11,261 4,136 7,125

Consumer 11,175 8,202 2,973

Unallocated — 2,392 ( 2,392 )

Allowance for credit losses on loans $ 108,371 $ 100,559 $ 7,812

Allowance for credit losses on unfunded loan commitments $ 9,738 $ 2,716 $ 7,022

Total $ 14,897

The $ 14.9 million total increase was recorded net of tax as an $ 11.2 million reduction to shareholders’ equity as of the adoption date.

In addition to the increase in the allowance for credit losses upon adoption, the Company expects more variability in its quarterly provision for credit losses going forward due to the CECL model’s sensitivity to changes in the economic forecast and other factors.

The Company has updated its accounting policies based on the adoption of this ASU.

See Note 1 of the Notes to the Consolidated Financial Statements for additional information.

BUSINESS COMBINATIONS

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Pursuant to the previously announced terms of the acquisition, AltaPacific shareholders received 0.2712 shares of Banner common stock in exchange for each share of AltaPacific common stock, plus cash in lieu of any fractional shares and to buy out AltaPacific stock options.

The merged banks will operate as Banner Bank post system conversion.

The merged banks operate as Banner Bank.

The primary reason for the acquisition was to expand the Company’s presence in California by adding density within our existing geographic footprint.

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The acquired CDI has been determined to have a useful life of approximately ten years and will be amortized on an accelerated basis.

Goodwill is not amortized but will be evaluated for impairment on an annual basis or more often if circumstances dictate to determine if the carrying value

remains appropriate.

Goodwill is not amortized but will be evaluated for impairment on an annual basis or more often if circumstances dictate to determine if the carrying value remains appropriate.

Goodwill will not be deductible for income tax purposes as the acquisition is accounted for as a tax-free exchange for tax purposes.

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Consideration to AltaPacific equity holders:

Cash paid $ 2,360

Fair value of common shares issued 85,200

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Cash and cash equivalents 39,686

Securities 20,348

Federal Home Loan Bank stock 2,005

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Deferred tax asset 166

Other assets 10,150

Total assets acquired 425,669

Fair value of liabilities assumed:

Deposits 313,374

Advances from FHLB 40,226

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Net assets acquired 53,593

Goodwill $ 33,967

Acquired goodwill represents the premium the Company paid over the fair value of the net tangible and intangible assets acquired.

The Company paid this premium for a number of reasons, including growing the Company's customer base, acquiring assembled workforces, and expanding its presence in existing markets.

The Company paid this premium for a number of reasons, including growing the Company’s client base, acquiring assembled work forces, and expanding its presence in existing markets.

See Note 16, Goodwill, Other Intangible Assets and Mortgage Servicing Rights for the accounting for goodwill and other intangible assets.

Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available.

Additional adjustments to the acquisition accounting that may be required would most likely involve loans, property and equipment, or the deferred tax asset.

As of November 1, 2019, the unpaid principal balance on purchased non-credit-impaired loans was $ 333.5 million.

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This discount is being accreted into income over the life of the loans on an effective yield basis.

The following table presents the acquired AltaPacific PCI loans as of the acquisition date (in thousands):

The following table presents the acquired AltaPacific purchased credit-impaired (PCI) loans as of the acquisition date (in thousands):

November 1, 2019

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The pro forma impact of the AltaPacific acquisition to the historical financial results was determined to not be significant.

Acquisition of Skagit Bancorp, Inc.

Effective as of the close of business on November 1, 2018 , the Company acquired 100% of the outstanding common shares of Skagit Bancorp, Inc.

(“Skagit”) and its wholly-owned subsidiary, Skagit Bank, a Washington state chartered commercial bank headquartered in Burlington, Washington, with 11 branches serving markets along the I-5 corridor from Seattle to the Canadian border.

On that date, Skagit merged with and into Banner and Skagit Bank merged with and into Banner Bank.

Pursuant to the terms of the merger, the equity holders of Skagit received an aggregate of 3.1 million shares of Banner voting common stock, plus cash in lieu of fractional shares and cash to buyout Skagit stock options for total consideration paid of $ 180.0 million .

The acquisition provided $ 915.8 million in assets, $ 810.2 million in deposits and $ 632.4 million in loans to Banner.

The application of the acquisition method of accounting resulted in recognition of a CDI asset of $ 16.4 million and goodwill of $ 96.5 million .

The acquired CDI has been determined to have a useful life of approximately nine years and will be amortized on an accelerated basis.

Goodwill is not amortized but will be evaluated for impairment on an annual basis or more often if circumstances dictate to determine if the carrying value remains appropriate.

Goodwill will not be deductible for income tax purposes as the acquisition is accounted for as a tax-free exchange for tax purposes.

The following table presents a summary of the consideration paid and the estimated fair values as of the acquisition date for each major class of assets acquired and liabilities assumed (in thousands):

November 1, 2018

Consideration to Skagit equity holders:

Fair value of common shares issued

Total consideration

Fair value of assets acquired:

Cash and cash equivalents

Loans receivable (contractual amount of $645.6 million)

Real estate owned held for sale

Property and equipment

Core deposit intangible

Deferred tax asset

Total assets acquired

Fair value of liabilities assumed:

Other liabilities

Total liabilities assumed

Net assets acquired

Acquired goodwill represents the premium the Company paid over the fair value of the net tangible and intangible assets acquired.

The primary reason for the acquisition was to expand the Company’s presence and density in the North Sound region of the Pacific Northwest along the I-5 corridor.

The Company paid this premium for a number of reasons, including growing the Company's customer base, acquiring assembled workforces, and expanding its presence in existing markets.

See Note 16, Goodwill, Other Intangible Assets and Mortgage Servicing Rights for the accounting for goodwill and other intangible assets.

As of November 1, 2018, the unpaid principal balance on purchased non-credit-impaired loans was $ 637.4 million .

The fair value of the purchased non-credit-impaired loans was $ 625.2 million , resulting in a discount of $ 12.2 million recorded on these loans, which includes $ 7.9 million of a credit related discount.

This discount is being accreted into income over the life of the loans on an effective yield basis.

The following table presents the acquired Skagit PCI loans as of the acquisition date (in thousands):

November 1, 2018

Acquired PCI loans:

Contractually required principal and interest payments

Nonaccretable difference

Cash flows expected to be collected

Accretable yield

Fair value of PCI loans

The financial results of the Company include the revenues and expenses produced by the acquired assets and assumed liabilities of Skagit since November 1, 2018.

Disclosure of the amount of Skagit’s revenue and net income (excluding integration costs) included in the Company’s Consolidated Statements of Operations is impracticable due to the integration of the operations and accounting for this acquisition.

The pro forma impact of the Skagit acquisition to the historical financial results was determined to not be significant.

The amortized cost, gross unrealized gains and losses and estimated fair value of securities at December 31, 2019 and 2018 are summarized as follows (in thousands):

The amortized cost, gross unrealized gains and losses and estimated fair value of securities at December 31, 2020 and December 31, 2019 are summarized as follows (in thousands):

December 31, 2020

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Amortized Cost Fair

Corporate bonds $ 27,203 $ 24,980

$ 27,203 $ 24,980

December 31, 2020

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Fair

Available-for-Sale:

4 unchanged sentences

Asset-backed securities 9,405 77 ( 63 ) — 9,419

$ 2,256,189 $ 68,543 $ ( 2,139 ) $ — $ 2,322,593

December 31, 2020

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair

Value Allowance for Credit Losses

Held-to-Maturity:

3 unchanged sentences

Mortgage-backed or related securities 47,247 2,843 — 50,090 —

$ 421,807 $ 26,980 $ ( 106 ) $ 448,681 $ ( 94 )

December 31, 2019

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

Corporate bonds $ 27,203 $ 25,636

5 unchanged sentences

Asset-backed securities 8,195 — ( 69 ) 8,126

$ 1,529,946 $ 25,858 $ ( 4,247 ) $ 1,551,557

Held-to-Maturity:

3 unchanged sentences

Mortgage-backed or related securities 55,148 921 ( 723 ) 55,346

At December 31, 2019 and 2018 , the gross unrealized losses and the fair value for securities available-for-sale and held-to-maturity aggregated by the length of time that individual securities have been in a continuous unrealized loss position was as follows (in thousands):

$ 236,094 $ 4,658 $ ( 2,947 ) $ 237,805

Accrued interest receivable on held-to-maturity debt securities was $ 3.0 million and $ 1.1 million as of December 31, 2020 and December 31, 2019, respectively, and was $ 6.9 million and $ 4.8 million on available-for-sale debt securities as of December 31, 2020 and December 31, 2019, respectively.

Accrued interest receivable on securities is reported in accrued interest receivable on the consolidated statements of financial condition and is excluded from the calculation of the allowance for credit losses.

At December 31, 2020, the gross unrealized losses and the fair value for securities available-for-sale aggregated by the length of time that individual securities have been in a continuous unrealized loss position were as follows (in thousands):

December 31, 2020

Less Than 12 Months

12 Months or More

Less Than 12 Months 12 Months or More Total

Fair Value Unrealized

Losses Fair Value Unrealized

Available-for-Sale:

4 unchanged sentences

Asset-backed securities — — 5,676 ( 63 ) 5,676 ( 63 )

Held-to-Maturity:

Government and agency obligations

Municipal bonds

Corporate bonds

Mortgage-backed or related securities

$ 189,078 $ ( 1,135 ) $ 58,616 $ ( 1,004 ) $ 247,694 $ ( 2,139 )

At December 31, 2019, the gross unrealized losses and the fair value for securities available-for-sale and held-to-maturity aggregated by the length of time that individual securities have been in a continuous unrealized loss position were as follows (in thousands):

December 31, 2019

Less Than 12 Months

12 Months or More

Less Than 12 Months 12 Months or More Total

Fair Value Unrealized

Losses Fair Value Unrealized

Available-for-Sale:

4 unchanged sentences

Asset-backed securities 1,204 ( 17 ) 5,989 ( 52 ) 7,193 ( 69 )

$ 307,299 $ ( 2,872 ) $ 100,822 $ ( 1,375 ) $ 408,121 $ ( 4,247 )

Held-to-Maturity:

3 unchanged sentences

Mortgage-backed or related securities 11,117 ( 723 ) — — 11,117 ( 723 )

$ 55,722 $ ( 2,612 ) $ 19,506 $ ( 335 ) $ 75,228 $ ( 2,947 )

At December 31, 2020, there were 54 securities—available-for-sale with unrealized losses, compared to 90 at December 31, 2019.

At December 31, 2019 , there were 17 securities—held-to-maturity with unrealized losses, compared to 90 at December 31, 2018 .

Management does not believe that any individual unrealized loss as of December 31, 2019 or 2018 represented OTTI.

The decline in fair market value of these securities was generally due to changes in interest rates.

There were no sales of securities—trading for the year ended December 31, 2019 .

There were no sales of securities—trading for the year ended December 31, 2018 .

Sales of securities—trading for the year ended December 31, 2017 totaled $ 1.3 million with a resulting net gain of $ 28,000 .

There were no securities—trading in a nonaccrual status at both December 31, 2019 and 2018 .

Net unrealized holding losses of $ 208,000 and gains of $ 3.8 million were recognized in 2019 and 2018 , respectively.

At December 31, 2020, there were two securities—held-to-maturity with unrealized losses, compared to 17 at December 31, 2019.

Management does not believe that any individual unrealized loss as of December 31, 2020 resulted from credit loss or that any individual unrealized loss represented other-than-temporary impairment (OTTI) as of December 31, 2019.

The decline in fair market value of these securities was generally due to changes in interest rates and changes in market-desired spreads subsequent to their purchase.

There were no sales of securities—trading for the years ended December 31, 2020, 2019 or 2018.

There were no securities—trading in a nonaccrual status at December 31, 2020 or December 31, 2019.

Net unrealized holding losses of $ 656,000 and $ 208,000 were recognized in 2020 and 2019, respectively.

Sales of securities—available-for-sale totaled $ 150.4 million with a resulting net gain of $ 464,000 for the year ended December 31, 2020.

In addition, partial calls of securities resulted in a net loss of $ 12,000 for the year ended December 31, 2019 .

Sales of securities—available-for-sale totaled $ 66.3 million with a resulting net gain of $ 46,000 for the year ended December 31, 2019.

In addition, partial calls of securities resulted in net losses of $ 10,000 and $ 12,000 for the years ended December 31, 2020 and December 31, 2019, respectively.

Sales of securities—available-for-sale totaled $ 214.6 million with a resulting net loss of $ 839,000 for the year ended December 31, 2018.

Sales of securities—available-for-sale totaled $ 522.6 million with a resulting net loss of $ 2.1 million for the year ended December 31, 2017 .

There were no securities—available-for-sale in a nonaccrual status at December 31, 2020 and 2019.

There were no sales of securities—held-to-maturity during the years ended December 31, 2019 , 2018 or 2017 although there were partial calls of securities that resulted in a net loss of $ 1,000 for the year ended December 31, 2019 and a net gain of $ 2,000 for the year ended December 31, 2018 .

There were no sales of securities—held-to-maturity during the years ended December 31, 2020, 2019 or 2018 although there were partial calls of securities that resulted in a net gain of $ 216 ,000 for the year ended December 31, 2020, a net loss of $ 1 ,000 for the year ended December 31, 2019 and a net gain of $2,000 for the year ended December 31, 2018.

There were no securities—held-to-maturity in a nonaccrual status at December 31, 2020 and 2019.

There were two sales of equity securities totaling $1.06 billion for the year ended December 31, 2020 with a resulting net loss of $177,000 and no sales of equity securities for the years ended December 31, 2019 or 2018.

The Company also sold Visa Class B stock during the year ended December 31, 2020, with a net gain of $519,000.

The stock was previously carried at a zero-cost basis due to transfer restrictions and uncertainty of litigation.

The amortized cost and estimated fair value of securities at December 31, 2020, by contractual maturity, are shown below (in thousands).

1 unchanged sentence

December 31, 2020

Available-for-Sale

Held-to-Maturity

Amortized Cost

Trading Available-for-Sale Held-to-Maturity

Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value

Maturing in one year or less $ — $ — $ 135,129 $ 135,161 $ 4,644 $ 4,704

3 unchanged sentences

Maturing after twenty years — — 994,590 1,021,079 183,985 198,355

$ 27,203 $ 24,980 $ 2,256,189 $ 2,322,593 $ 421,807 $ 448,681

The following table presents, as of December 31, 2020, investment securities which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law (in thousands):

Carrying Value

Amortized Cost

Carrying Value Amortized Cost Fair Value

Purpose or beneficiary:

2 unchanged sentences

Repurchase transaction accounts 207,586 200,195 207,586

Other 2,609 2,608 2,686

Total pledged securities $ 423,761 $ 414,783 $ 437,558

LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES

Loans receivable at December 31, 2019 and 2018 are summarized as follows (dollars in thousands):

The Company monitors the credit quality of held-to-maturity debt securities through the use of credit rating.

Credit ratings are reviewed and updated quarterly.

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

December 31, 2020

Government and agency obligations Municipal bonds Corporate bonds Mortgage-backed or related securities Total

AAA/AA/A $ — $ 349,123 $ 500 $ — $ 349,623

Not Rated 340 21,875 2,722 47,247 72,184

$ 340 $ 370,998 $ 3,222 $ 47,247 $ 421,807

The following table presents the activity in the allowance for credit losses for held-to-maturity debt securities by major type for the year ended December 31, 2020 (in thousands):

For the Year Ended December 31, 2020

Government and agency obligations Municipal bonds Corporate bonds Mortgage-backed or related securities Total

Allowance for credit losses - securities

Beginning Balance $ — $ — $ — $ — $ —

Impact of adopting ASC 326 — 28 35 — 63

Provision for credit losses — 31 — — 31

Ending Balance $ — $ 59 $ 35 $ — $ 94

LOANS RECEIVABLE AND THE ALLOWANCE FOR CREDIT LOSSES

As a result of the adoption of Financial Instruments - Credit Losses (Topic 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 and 2019 by class (dollars in thousands).

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

December 31, 2020 December 31, 2019

Amount Percent of Total Amount Percent of Total

Commercial real estate:

Owner-occupied $ 1,076,467 10.9 % $ 980,021 10.5 %

Investment properties 1,955,684 19.8 2,024,988 21.8

Small balance CRE 573,849 5.8 613,484 6.6

Multifamily real estate 428,223 4.4 388,388 4.2

Construction, land and land development:

Commercial construction 228,937 2.3 210,668 2.3

Multifamily construction 305,527 3.1 233,610 2.5

One- to four-family construction 507,810 5.1 544,308 5.8

Land and land development 248,915 2.5 245,530 2.6

Commercial business:

Commercial business (1)

2,178,461 22.1 1,364,650 14.7

Small business scored 743,451 7.5 772,657 8.3

Agricultural business, including secured by farmland

299,949 3.0 337,271 3.6

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

Consumer—home equity revolving lines of credit

491,812 5.0 519,336 5.6

Consumer—other 113,958 1.2 144,915 1.6

Total loans 9,870,982 100.0 % 9,305,357 100.0 %

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

Net loans $ 9,703,703 $ 9,204,798

(1) Includes $1.04 billion of PPP loans as of December 31, 2020 and none as of December 31, 2019.

The presentation of loans receivable at December 31, 2019 in the table below is based on loan segmentation as presented in the 2019 Form 10-K.

December 31, 2019

Percent of Total

Amount Percent of Total

Commercial real estate:

6 unchanged sentences

Land and land development:

Residential 154,688 1.7

Commercial 26,290 0.3

Commercial business 1,693,824 18.2

3 unchanged sentences

Consumer—other 211,815 2.3

Total loans outstanding

Total loans 9,305,357 100.0 %

Less allowance for loan losses ( 100,559 )

Loan amounts are net of unearned loan fees in excess of unamortized costs of $ 438,000 and $ 1.4 million as of December 31, 2019 and 2018 , respectively.

Net loans $ 9,204,798

Loan amounts are net of unearned loan fees in excess of unamortized costs of $ 25.6 million as of December 31, 2020 and $ 438,000 as of December 31, 2019.

Net loans include net discounts on acquired loans of $ 16.1 million and $ 25.0 million as of December 31, 2020 and 2019, respectively.

Net loans does not include accrued interest receivable.

Accrued interest receivable on loans was $36.6 million as of December 31, 2020 and $31.8 million as of December 31, 2019 and was reported in accrued interest receivable on the Consolidated Statements of Financial Condition.

The Company’s loans to directors, executive officers and related entities are on substantially the same terms and underwriting as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectability.

Such loans had balances of $ 1.5 million and $ 3.3 million at December 31, 2020 and 2019, respectively.

Purchased credit-impaired loans:

The outstanding contractual unpaid principal balance of PCI loans, excluding acquisition accounting adjustments, was $ 23.5 million at December 31, 2019 and $ 22.0 million at December 31, 2018 .

The carrying balance of PCI loans was $ 15.9 million at December 31, 2019 and $ 14.4 million at December 31, 2018 .

The following table presents the changes in the accretable yield for PCI loans for the years ended December 31, 2019 and 2018 (in thousands):

Years Ended December 31

Purchased credit-deteriorated and purchased non-credit-deteriorated loans.

Loans acquired in business combinations are recorded at their fair value at the acquisition date.

Acquired loans are evaluated upon acquisition and classified as either purchased credit-deteriorated (PCD) or purchased non-credit-deteriorated.

There were no PCD loans acquired for the year ended December 31, 2020.

Purchased credit-impaired loans and purchased non-credit-impaired loans.

Prior to the implementation of Financial Instruments—Credit Losses (Topic 326) on January 1, 2020, acquired loans were evaluated upon acquisition and classified as either PCI or purchased non-credit-impaired.

PCI loans reflected credit deterioration since origination such that it was probable at acquisition that the Company would be unable to collect all contractually required payments.

The outstanding contractual unpaid principal balance of PCI loans, excluding acquisition accounting adjustments, was $ 23.5 million at December 31, 2019.

The carrying balance of PCI loans was $ 15.9 million at December 31, 2019.

These loans were converted to PCD loans on January 1, 2020.

The following table presents the changes in the accretable yield for PCI loans for the year ended December 31, 2019 (in thousands):

Year Ended December 31,

Balance, beginning of period $ 5,216

Additions 683

Accretion to interest income ( 1,891 )

Disposals and other

Reclassifications from non-accretable difference 510

Balance, end of period $ 4,518

As of December 31, 2019 and December 31, 2018 , the non-accretable difference between the contractually required payments and cash flows expected to be collected was $ 7.4 million and $ 7.1 million , respectively.

As of December 31, 2019, the non-accretable difference between the contractually required payments and cash flows expected to be collected was $ 7.4 million.

Impaired Loans and the Allowance for Loan Losses.

A loan is considered impaired when, based on current information and circumstances, the Company determines it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments.

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

Impaired loans are comprised of loans on nonaccrual, TDRs, and loans that are 90 days or more past due, but are still on accrual.

Purchased credit-impaired loans are considered performing within the scope of the PCI accounting guidance and are not included in the impaired loan tables.

The following tables provide additional information on impaired loans, excluding PCI loans, with and without specific allowance reserves at December 31, 2019 and 2018 .

Prior to the implementation of Financial Instruments—Credit Losses (Topic 326) on January 1, 2020, a loan was considered impaired when, based on current information and circumstances, the Company determines it was probable that it would be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments.

Factors involved in determining impairment included, but were not limited to, the financial condition of the borrower, the value of the underlying collateral and the status of the economy.

Impaired loans were comprised of loans on nonaccrual, TDRs that were performing under their restructured terms, and loans that were 90 days or more past due, but were still on accrual.

PCI loans were considered performing within the scope of the purchased credit-impaired accounting guidance and were not included in the impaired loan tables.

The following tables provide additional information on impaired loans, excluding PCI loans, with and without specific allowance reserves at December 31, 2019.

Recorded investment includes the unpaid principal balance or the carrying amount of loans less charge-offs and net deferred loan fees (in thousands):

December 31, 2019

Unpaid Principal Balance

Recorded Investment

Related Allowance

Unpaid Principal Balance Recorded Investment Related Allowance

Without Allowance (1)

7 unchanged sentences

Land and land development:

Commercial business

Agricultural business/farmland

One- to four-family residential

Consumer secured by one- to four-family

Consumer—other

December 31, 2018

Unpaid Principal Balance

Recorded Investment

Related Allowance

Without Allowance (1)

With Allowance (2)

Commercial real estate:

Owner-occupied

Investment properties

Multifamily construction

One- to four-family construction

Land and land development:

Residential 676 340 — —

Commercial business 25,117 4,614 19,330 4,128

3 unchanged sentences

Consumer—other 222 159 52 1

Includes loans without an allowance reserve that have been individually evaluated for impairment and that evaluation concluded that no reserve was needed, and $13.5 million and $9.0 million of homogeneous and small balance loans as of December 31, 2019 and December 31, 2018 , respectively, that are collectively evaluated for impairment for which a general reserve has been established.

Loans with a specific allowance reserve have been individually evaluated for impairment using either a discounted cash flow analysis or, for collateral dependent loans, current appraisals less costs to sell to establish realizable value.

$ 49,605 $ 21,780 $ 24,284 $ 4,374

(1) Includes loans without an allowance reserve that had been individually evaluated for impairment and that evaluation concluded that no reserve was needed, and $13.5 million of homogeneous and small balance loans, as of December 31, 2019, that were collectively evaluated for impairment for which a general reserve was established.

(2) Loans with a specific allowance reserve were individually evaluated for impairment using either a discounted cash flow analysis or, for collateral dependent loans, current appraisals less costs to sell to establish realizable value.

The following table summarizes our average recorded investment and interest income recognized on impaired loans by loan class for the years ended December 31, 2019 and 2018 (in thousands):

Year Ended December 31, 2019

Year Ended December 31, 2018

Year Ended December 31, 2017

Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized

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

Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized

Commercial real estate:

5 unchanged sentences

Land and land development:

Commercial business

Agricultural business/farmland

One- to four-family residential

Consumer secured by one- to four-family

Consumer—other

The following table presents TDRs by accrual and nonaccrual status at December 31, 2019 and 2018 (in thousands):

December 31, 2019

December 31, 2018

Commercial real estate:

Owner-occupied

Investment properties

Residential 657 — 994 10

Commercial — — 4 —

Commercial business 5,510 26 3,443 21

3 unchanged sentences

Consumer—other 355 4 142 4

As of December 31, 2019 and 2018 , the Company had no commitments to advance funds up to an additional amount related to TDRs.

$ 29,262 $ 550 $ 32,033 $ 787

Troubled Debt Restructurings.

Loans are reported as TDRs when the bank grants one or more concessions to a borrower experiencing financial difficulties that it would not otherwise consider.

The Company’s TDRs have generally not involved forgiveness of amounts due, but almost always include a modification of multiple factors;

the most common combination includes interest rate, payment amount and maturity date.

As of December 31, 2020 and 2019, the Company had TDRs of $ 7.9 million and $ 8.0 million, respectively.

The Company had no commitments to advance additional funds related to TDRs as of both December 31, 2020 and 2019.

The following tables present new TDRs that occurred during the years ended December 31, 2020 and 2019.

No new TDRs occurred during the year ended December 31, 2018 (dollars in thousands):

Pre-modification Outstanding Recorded Investment

Post-modification Outstanding Recorded Investment

Contracts Pre-modification Outstanding Recorded Investment Post-modification Outstanding Recorded Investment

Year Ended December 31, 2020

Recorded Investment (1) (2)

Commercial real estate:

Investment properties

Commercial business 3 $ 5,532 $ 5,532

Agricultural business/farmland 1 $ 169 $ 169

Total 4 $ 5,701 $ 5,701

Year Ended December 31, 2019

2 unchanged sentences

Investment properties 1 $ 1,090 $ 1,090

Since most loans were already considered classified and/or on non-accrual status prior to restructuring, the modifications did not have a material effect on the Company’s determination of the allowance for loan losses.

Commercial business 1 $ 160 $ 160

Agricultural business/farmland 1 $ 596 $ 596

Total 3 $ 1,846 $ 1,846

(1) Since most loans were already considered classified and/or on non-accrual status prior to restructuring, the modifications did not have a material effect on the Company’s determination of the allowance for credit losses.

(2) Generally, these modifications do not fit into one separate type, such as rate, term, amount, interest-only or payment, but instead are a combination of multiple types of modifications;

therefore, they are disclosed in aggregate.

There were no TDRs which incurred a payment default within the years ended December 31, 2019 and December 31, 2018 for which the payment default occurred within twelve months of the restructure date.

There were no TDRs which incurred a payment default within the years ended December 31, 2020 and 2019 for which the payment default occurred within twelve months of the restructure date.

A default on a restructured loan results in a transfer to nonaccrual status, a charge-off or a combination of both.

2 unchanged sentences

The system is a tool to evaluate portfolio asset quality throughout each applicable loan’s life as an asset of the Company.

Generally, loans and leases are risk rated on an aggregate borrower/relationship basis with individual loans sharing similar ratings.

Generally, loans are risk rated on an aggregate borrower/relationship basis with individual loans sharing similar ratings.

There are some instances when specific situations relating to individual loans will provide the basis for different risk ratings within the aggregate relationship.

5 unchanged sentences

Consideration for the final rating is centered in the borrower’s ability to repay, in a timely fashion, both principal and interest.

There were no material changes in the risk-rating or loan grading system in 2019 .

Risk Rating 1:

A credit supported by exceptional financial strength, stability, and liquidity.

The risk rating of 1 is reserved for the Company’s top quality loans, generally reserved for investment grade credits underwritten to the standards of institutional credit providers.

Risk Rating 2:

A credit supported by excellent financial strength, stability and liquidity.

The risk rating of 2 is reserved for very strong and highly stable customers with ready access to alternative financing sources.

Risk Rating 3:

A credit supported by good overall financial strength and stability.

Collateral margins are strong, cash flow is stable although susceptible to cyclical market changes.

Risk Rating 4:

A credit supported by the borrower’s adequate financial strength and stability.

Assets and cash flow are reasonably sound and provide for orderly debt reduction.

Access to alternative financing sources will be more difficult to obtain.

Risk Rating 5:

A credit with the characteristics of an acceptable credit but one which requires more than the normal level of supervision and warrants formal quarterly management reporting.

Credits in this category are not yet criticized or classified, but due to adverse events or aspects of underwriting require closer than normal supervision.

Generally, credits should be watch credits in most cases for six months or less as the impact of stress factors are analyzed.

The Company’s risk-rating and loan grading policies are reviewed and approved annually.

There were no material changes in the risk-rating or loan grading system for the periods presented.

Risk Ratings 1-5:

Credits with risk ratings of 1 to 5 meet the definition of a pass risk rating.

The strength of credits vary within the pass risk ratings, ranging from a risk rated 1 being an exceptional credit to a risk rated 5 being an acceptable credit that requires a more than normal level of supervision.

Risk Rating 6:

13 unchanged sentences

however, the weaknesses are elevated to the point that based upon current information, collection or liquidation in full is improbable.

While some loss on doubtful credits is expected, pending events may strengthen a credit making the amount and timing of any loss indeterminate.

In these situations taking the loss is inappropriate until it is clear that the pending event has failed to strengthen the credit and improve the capacity to repay debt.

While some loss on doubtful credits is expected, pending events may make the amount and timing of any loss indeterminable.

In these situations taking the loss is inappropriate until the outcome of the pending event is clear.

Risk Rating 9:

A credit that is considered to be currently uncollectible or of such little value that it is no longer a viable bank asset is risk rated 9.

Losses are taken in the accounting period in which the credit is determined to be uncollectible.

Losses should be taken in the accounting period in which the credit is determined to be uncollectible.

Taking a loss does not mean that a credit has absolutely no recovery or salvage value but, rather, it is not practical or desirable to defer writing off the credit, even though partial recovery may occur in the future.

The following tables show Banner’s portfolio of risk-rated loans and non-risk-rated loans by grade or other characteristic as of December 31, 2019 and 2018 (in thousands):

The following tables present the Company’s portfolio of risk-rated loans by grade as of December 31, 2020 (in thousands).

Revolving loans that are converted to term loans are treated as new originations in the table below and are presented by year of origination.

December 31, 2020

Pass (Risk Ratings 1-5) (1)

Term Loans by Year of Origination Revolving Loans Total Loans

2020 2019 2018 2017 2016 Prior

Commercial real estate - owner occupied

Pass $ 243,100 $ 156,838 $ 156,817 $ 122,484 $ 92,312 $ 212,792 $ 3,379 $ 987,722

Special Mention — 4,560 — 2,251 — 1,869 149 8,829

Commercial real estate:

Owner-occupied

Investment properties

Substandard 7,923 26,914 3,040 2,516 11,731 27,792 — 79,916

Doubtful — — — — — — — —

Loss — — — — — — — —

Total Commercial real estate - owner occupied $ 251,023 $ 188,312 $ 159,857 $ 127,251 $ 104,043 $ 242,453 $ 3,528 $ 1,076,467

Commercial real estate - investment properties

Pass $ 237,553 $ 262,543 $ 299,452 $ 218,018 $ 278,348 $ 502,914 $ 20,062 $ 1,818,890

Special Mention — 2,712 — — 2,730 1,856 — 7,298

Substandard 19,812 11,418 20,352 36,310 23,027 18,577 — 129,496

Doubtful — — — — — — — —

Loss — — — — — — — —

Total Commercial real estate - investment properties $ 257,365 $ 276,673 $ 319,804 $ 254,328 $ 304,105 $ 523,347 $ 20,062 $ 1,955,684

Multifamily real estate

Pass $ 78,632 $ 69,825 $ 39,343 $ 93,442 $ 44,395 $ 96,863 $ 1,983 $ 424,483

Special Mention — — — — — — — —

Substandard 2,312 1,428 — — — — — 3,740

Doubtful — — — — — — — —

Loss — — — — — — — —

Total Multifamily real estate $ 80,944 $ 71,253 $ 39,343 $ 93,442 $ 44,395 $ 96,863 $ 1,983 $ 428,223

December 31, 2020

Term Loans by Year of Origination Revolving Loans Total Loans

2020 2019 2018 2017 2016 Prior

Commercial construction

Pass $ 83,506 $ 67,152 $ 41,299 $ 6,038 $ 2,158 $ 1,129 $ — $ 201,282

Special Mention — 5,963 — — — — — 5,963

Substandard 12,913 3,808 4,873 — 98 — — 21,692

Doubtful — — — — — — — —

Loss — — — — — — — —

Total Commercial construction $ 96,419 $ 76,923 $ 46,172 $ 6,038 $ 2,256 $ 1,129 $ — $ 228,937

Multifamily construction

Pass $ 79,710 $ 151,141 $ 59,744 $ 14,932 $ — $ — $ — $ 305,527

Special Mention — — — — — — — —

Substandard — — — — — — — —

Doubtful — — — — — — — —

Loss — — — — — — — —

Total Multifamily construction $ 79,710 $ 151,141 $ 59,744 $ 14,932 $ — $ — $ — $ 305,527

One- to four- family construction

Pass $ 461,294 $ 35,910 $ — $ — $ — $ — $ 7,581 $ 504,785

Special Mention 1,563 — — — — — 630 2,193

Substandard 501 331 — — — — — 832

Doubtful — — — — — — — —

Loss — — — — — — — —

Total One- to four- family construction $ 463,358 $ 36,241 $ — $ — $ — $ — $ 8,211 $ 507,810

December 31, 2020

Term Loans by Year of Origination Revolving Loans Total Loans

2020 2019 2018 2017 2016 Prior

Land and land development

Pass $ 156,450 $ 37,397 $ 16,560 $ 6,801 $ 6,264 $ 4,840 $ 17,020 $ 245,332

Special Mention — — — — — — — —

Substandard 14 30 3,047 190 — 302 — 3,583

Doubtful — — — — — — — —

Loss — — — — — — — —

Total Land and land development $ 156,464 $ 37,427 $ 19,607 $ 6,991 $ 6,264 $ 5,142 $ 17,020 $ 248,915

Commercial business

Pass $ 1,243,276 $ 230,845 $ 203,051 $ 65,524 $ 38,757 $ 66,206 $ 264,741 $ 2,112,400

Special Mention 103 412 — 829 — 115 9,507 10,966

Substandard 6,624 14,413 18,569 5,224 1,320 453 8,492 55,095

Doubtful — — — — — — — —

Loss — — — — — — — —

Total Commercial business $ 1,250,003 $ 245,670 $ 221,620 $ 71,577 $ 40,077 $ 66,774 $ 282,740 $ 2,178,461

Agricultural business including secured by farmland

Pass $ 32,032 $ 62,058 $ 31,381 $ 22,635 $ 22,394 $ 24,950 $ 91,660 $ 287,110

Special Mention — — — 810 — 537 — 1,347

Substandard 1,542 2,652 1,076 163 675 3,049 2,335 11,492

Doubtful — — — — — — — —

Loss — — — — — — — —

Total Agricultural business including secured by farmland $ 33,574 $ 64,710 $ 32,457 $ 23,608 $ 23,069 $ 28,536 $ 93,995 $ 299,949

The following table presents the Company’s portfolio of non-risk-rated loans by delinquency status as of December 31, 2020 (in thousands).

Revolving loans that are converted to term loans are treated as new originations in the table below and are presented by year of origination.

December 31, 2020

Term Loans by Year of Origination Revolving Loans Total Loans

2020 2019 2018 2017 2016 Prior

Small balance CRE

Past Due Category

Current $ 56,544 $ 80,090 $ 84,749 $ 77,637 $ 68,791 $ 202,653 $ 2,550 $ 573,014

30-59 Days Past Due — — — — — — — —

60-89 Days Past Due — — — 45 — — — 45

90 Days + Past Due — — — 567 — 223 — 790

Total Small balance CRE $ 56,544 $ 80,090 $ 84,749 $ 78,249 $ 68,791 $ 202,876 $ 2,550 $ 573,849

Small business scored

Past Due Category

Current $ 157,161 $ 145,037 $ 126,578 $ 89,734 $ 47,909 $ 63,347 $ 109,287 $ 739,053

30-59 Days Past Due 129 62 310 723 4 1 230 1,459

60-89 Days Past Due 98 147 3 140 — 352 151 891

90 Days + Past Due 73 228 800 484 169 248 46 2,048

Total Small business scored $ 157,461 $ 145,474 $ 127,691 $ 91,081 $ 48,082 $ 63,948 $ 109,714 $ 743,451

One- to four- family residential

Consumer secured by one- to four-family

Past Due Category

Current $ 105,411 $ 90,425 $ 92,232 $ 101,491 $ 60,738 $ 254,850 $ 3,164 $ 708,311

30-59 Days Past Due 1,051 — 1,302 829 — 1,438 — 4,620

60-89 Days Past Due — — 19 — — 936 — 955

90 Days + Past Due — 114 1,185 456 169 2,129 — 4,053

Total One- to four- family residential $ 106,462 $ 90,539 $ 94,738 $ 102,776 $ 60,907 $ 259,353 $ 3,164 $ 717,939

December 31, 2020

Term Loans by Year of Origination Revolving Loans Total Loans

2020 2019 2018 2017 2016 Prior

Consumer—home equity revolving lines of credit

Past Due Category

Current $ 10,522 $ 2,617 $ 2,553 $ 3,359 $ 1,372 $ 2,154 $ 466,490 $ 489,067

30-59 Days Past Due — — — — — 50 409 459

60-89 Days Past Due — 202 — — — 237 — 439

90 Days + Past Due — 312 198 564 286 255 232 1,847

Total Consumer—home equity revolving lines of credit $ 10,522 $ 3,131 $ 2,751 $ 3,923 $ 1,658 $ 2,696 $ 467,131 $ 491,812

Consumer-other

Past Due Category

Current $ 21,811 $ 13,377 $ 13,936 $ 11,433 $ 8,575 $ 18,802 $ 25,460 $ 113,394

30-59 Days Past Due 48 35 15 22 46 26 44 236

60-89 Days Past Due 242 — — 33 21 14 18 328

90 Days + Past Due — — — — — — — —

Total Consumer-other $ 22,101 $ 13,412 $ 13,951 $ 11,488 $ 8,642 $ 18,842 $ 25,522 $ 113,958

The following table presents the Company’s portfolio of risk-rated loans and non-risk-rated loans by grade or other characteristics as of December 31, 2019 (in thousands) :

December 31, 2019

Pass (Risk Ratings 1-5) (1)

Special Mention

Special Mention Substandard Doubtful Loss Total Loans

Commercial real estate:

Owner-occupied

$ 1,546,649 $ 4,198 $ 29,803 $ — $ — $ 1,580,650

Investment properties

2,288,785 2,193 18,243 — — 2,309,221

Multifamily real estate 472,856 — 296 — — 473,152

3 unchanged sentences

Land and land development:

154,348 — 340 — — 154,688

26,256 — 34 — — 26,290

Commercial business 1,627,170 31,012 35,584 58 — 1,693,824

2 unchanged sentences

Consumer secured by one- to four-family

547,388 — 3,572 — — 550,960

Consumer—other

211,475 3 337 — — 211,815

Total $ 9,130,662 $ 61,189 $ 113,448 $ 58 $ — $ 9,305,357

(1) The Pass category includes some performing loans that are part of homogeneous pools which are not individually risk-rated.

This includes all consumer loans, all one- to four-family residential loans and, as of December 31, 2019 and 2018 , in the commercial business category, $ 764.6 million and $ 590.9 million , respectively, of credit-scored small business loans.

This includes all consumer loans, all one- to four-family residential loans and, as of December 31, 2019, in the commercial business category, $ 764.6 million of credit-scored small business loans.

As loans in these homogeneous pools become non-accrual, they are individually risk-rated.

The following table provides the amortized cost basis of collateral-dependent loans as of December 31, 2020 (in thousands).

Our collateral dependent loans presented in the table below have no significant concentrations by property type or location.

December 31, 2020

Real Estate Accounts Receivable Equipment Inventory Total

Commercial real estate:

Owner-occupied $ 7,506 $ — $ — $ — $ 7,506

Investment properties 8,979 — — — 8,979

Small Balance CRE 567 — — — 567

Land and land development 302 — — — 302

Commercial business

Commercial business 557 — — — 557

Small business Scored 44 — 47 — 91

Agricultural business, including secured by farmland

427 — 984 — 1,411

One- to four-family residential 196 — — — 196

Total $ 18,578 $ — $ 1,031 $ — $ 19,609

The following tables provide additional detail on the age analysis of Banner’s past due loans as of December 31, 2020 and 2019 (in thousands):

December 31, 2020

30 – 59 Days Past Due

60 – 89 Days Past Due

90 Days or More Past Due

Total Past Due

Purchased Credit-Impaired

Past Due 60-89 Days

Past Due 90 Days or More

Past Due Total

Past Due Current Total Loans Non-accrual with no Allowance Total Non-accrual (1)

Loans 90 Days or More Past Due and Accruing

2 unchanged sentences

Investment properties — — 7,981 7,981 1,947,703 1,955,684 8,979 8,979 —

Small Balance CRE — 45 790 835 573,014 573,849 567 791 —

Multifamily real estate — — — — 428,223 428,223 — — —

Construction, land and land development:

Commercial construction — — 98 98 228,839 228,937 — 98 —

3 unchanged sentences

Commercial business

Agricultural business/farmland

Commercial business 3,247 31 2,088 5,366 2,173,095 2,178,461 555 1,988 889

Small business scored 1,459 891 2,048 4,398 739,053 743,451 91 3,419 136

Agricultural business, including secured by farmland

298 37 1,548 1,883 298,066 299,949 1,412 1,743 —

One- to four-family residential 4,620 955 4,053 9,628 708,311 717,939 171 3,556 1,899

Consumer secured by one- to four-family

Consumer—home equity revolving lines of credit 459 439 1,847 2,745 489,067 491,812 — 2,697 130

Consumer—other 236 328 — 564 113,394 113,958 — 22 —

Total $ 10,675 $ 2,908 $ 22,548 $ 36,131 $ 9,834,851 $ 9,870,982 $ 19,586 $ 32,560 $ 3,054

December 31, 2019

30–59 Days Past Due

60–89 Days Past Due

90 Days or More Past Due

Total Past Due

Purchased Credit-Impaired

Loans 90 Days or More Past Due and Accruing

30–59 Days Past Due 60–89 Days Past Due 90 Days or More Past Due Total Past Due Purchased Credit-Impaired Current Total Loans Loans 90 Days or More Past Due and Accruing Non-accrual

Commercial real estate:

6 unchanged sentences

Land and land development:

Residential — — 340 340 — 154,348 154,688 — 340

Commercial — — — — — 26,290 26,290 — —

Commercial business 2,343 1,583 3,412 7,338 368 1,686,118 1,693,824 401 23,015

Agricultural business/farmland

1,972 129 584 2,685 393 367,471 370,549 — 661

One- to four-family residential 3,777 1,088 2,876 7,741 74 937,807 945,622 877 3,410

Consumer secured by one- to four-family

1,174 327 1,846 3,347 110 547,503 550,960 398 2,314

Consumer—other 350 161 — 511 63 211,241 211,815 — 159

The following tables provide additional information on the allowance for loan losses and loan balances individually and collectively evaluated for impairment at or for the year ended December 31, 2019 (in thousands):

Total $ 14,950 $ 4,885 $ 15,727 $ 35,562 $ 15,938 $ 9,253,857 $ 9,305,357 $ 2,097 $ 37,501

(1) The Company did not recognize any interest income on non-accrual loans during both the years ended December 31, 2020 and 2019.

The following tables provide the activity in the allowance for credit losses by portfolio segment for the year ended December 31, 2020 (in thousands):

For the Year Ended December 31, 2020

Construction and Land

Commercial Business

Agricultural Business

One- to Four-Family Residential

Allowance for loan losses:

Real Estate Multifamily

Real Estate Construction and Land Commercial

Business Agricultural

Business One- to Four-Family Residential Consumer Unallocated Total

Allowance for credit losses:

Beginning balance $ 30,591 $ 4,754 $ 22,994 $ 23,370 $ 4,120 $ 4,136 $ 8,202 $ 2,392 $ 100,559

Provision/(recapture) for loan losses

Impact of Adopting ASC 326 ( 2,864 ) ( 2,204 ) 2,515 3,010 ( 351 ) 7,125 2,973 ( 2,392 ) 7,812

Provision/(recapture) for credit losses 31,643 1,409 15,781 12,615 ( 87 ) ( 1,679 ) 4,603 — 64,285

Recoveries 275 — 105 3,265 1,823 467 328 — 6,263

Charge-offs ( 1,854 ) ( 66 ) ( 100 ) ( 7,253 ) ( 591 ) ( 136 ) ( 1,640 ) — ( 11,640 )

Ending balance $ 57,791 $ 3,893 $ 41,295 $ 35,007 $ 4,914 $ 9,913 $ 14,466 $ — $ 167,279

December 31, 2019

Construction and Land

Commercial Business

Agricultural Business

One- to Four-Family Residential

Allowance individually evaluated for impairment

Allowance collectively evaluated for impairment

Allowance for purchased credit-impaired loans

Total allowance for loan losses

December 31, 2019

Commercial Business

Agricultural Business

One- to Four-Family Residential

Loan balances:

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

Purchased credit-impaired loans

The changes in the allowance for credit losses during the year ended December 31, 2020 was primarily the result of the $64.3 million provision recorded during the year ended December 31, 2020, mostly due to the deterioration in the economy during the year ended December 31, 2020 as a result of the COVID-19 pandemic, as well as forecasted additional economic deterioration based on the reasonable and supportable economic forecast as of December 31, 2020.

The 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 Financial Instruments - Credit Losses (ASC 326).

For the Year Ended December 31, 2019

Commercial Business

Agricultural Business

One- to Four-Family Residential

Real Estate Multifamily

Real Estate Construction

and Land Commercial Business Agricultural Business One- to Four-Family Residential Consumer Unallocated Total

Allowance for loan losses:

1 unchanged sentence

Provision/(recapture) for loan losses 4,121 936 ( 1,611 ) 7,478 1,206 ( 1,053 ) 1,722 ( 2,799 ) 10,000

Recoveries 476 — 208 625 47 561 548 — 2,465

Charge-offs ( 1,138 ) — ( 45 ) ( 4,171 ) ( 911 ) ( 86 ) ( 2,040 ) — ( 8,391 )

Ending balance $ 30,591 $ 4,754 $ 22,994 $ 23,370 $ 4,120 $ 4,136 $ 8,202 $ 2,392 $ 100,559

December 31, 2019

Commercial Business

Agricultural Business

One- to Four-Family Residential

Real Estate Multifamily

Real Estate Construction

and Land Commercial Business Agricultural Business One- to Four-Family Residential Consumer Unallocated Total

Allowance individually evaluated for impairment

$ 58 $ — $ — $ 4,128 $ 141 $ 41 $ 6 $ — $ 4,374

Allowance collectively evaluated for impairment

30,533 4,754 22,994 19,224 3,919 4,095 8,196 2,392 96,107

Allowance for purchased credit-impaired loans

— — — 18 60 — — — 78

Total allowance for loan losses

$ 30,591 $ 4,754 $ 22,994 $ 23,370 $ 4,120 $ 4,136 $ 8,202 $ 2,392 $ 100,559

December 31, 2019

Commercial Business

Agricultural Business

One- to Four-Family Residential

Real Estate Multifamily

Real Estate Construction

and Land Commercial Business Agricultural Business One- to Four-Family Residential Consumer Unallocated Total

Loan balances:

Loans individually evaluated for impairment

$ 4,738 $ — $ 1,467 $ 19,331 $ 2,243 $ 4,390 $ 235 $ — $ 32,404

Loans collectively evaluated for impairment

3,870,210 473,145 1,168,097 1,674,125 367,913 941,158 762,367 — 9,257,015

Purchased credit-impaired loans

14,923 7 — 368 393 74 173 — 15,938

Total loans $ 3,889,871 $ 473,152 $ 1,169,564 $ 1,693,824 $ 370,549 $ 945,622 $ 762,775 $ — $ 9,305,357

The following table provides additional information on the allowance for loan losses for the year ended December 31, 2018 (in thousands):

For the Year Ended December 31, 2018

Commercial Business

Agricultural Business

One- to Four-Family Residential

Real Estate Multifamily

Real Estate Construction

and Land Commercial Business Agricultural Business One- to Four-Family Residential Consumer Unallocated Total

Allowance for loan losses:

1 unchanged sentence

Provision/(recapture) for loan losses 3,063 2,185 ( 2,860 ) 2,129 417 1,952 5,141 ( 3,527 ) 8,500

Recoveries 1,646 — 213 1,049 64 750 366 — 4,088

Charge-offs ( 401 ) — ( 479 ) ( 2,051 ) ( 756 ) ( 43 ) ( 1,401 ) — ( 5,131 )

Ending balance $ 27,132 $ 3,818 $ 24,442 $ 19,438 $ 3,778 $ 4,714 $ 7,972 $ 5,191 $ 96,485

2 unchanged sentences

Years Ended December 31

2020 2019 2018

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

Additions from loan foreclosures 1,588 109 641

Additions from capitalized costs

Additions from acquisitions — 650 2,593

3 unchanged sentences

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

The Company had $ 48,000 of foreclosed residential real estate properties held as REO at December 31, 2019 and had no foreclosed residential real estate properties held as REO at December 31, 2018.

The recorded investment in one- to four-family residential loans in the process of foreclosure was $ 1.5 million at December 31, 2019 and $ 1.2 million at December 31, 2018.

The Company had no foreclosed residential real estate properties held as REO at December 31, 2020 and had $ 48,000 foreclosed residential real estate properties held as REO at December 31, 2019.

The recorded investment in one- to four-family residential loans in the process of foreclosure was $ 609,000 at December 31, 2020 and $ 1.5 million at December 31, 2019.

PROPERTY AND EQUIPMENT, NET

Land, buildings and equipment owned by the Company and its subsidiaries at December 31, 2020 and 2019 are summarized as follows (in thousands):

$ 32,196 $ 34,841

Buildings and leasehold improvements (1)

153,934 169,272

Furniture and equipment 126,115 123,851

312,245 327,964

Less accumulated depreciation ( 147,689 ) ( 149,956 )

Property and equipment, net $ 164,556 $ 178,008

(1) The Company had $ 1.5 million and $ 557,000 of properties held for sale that were included in land and buildings at December 31, 2019 and 2018 , respectively.

(1) The Company had $ 8.4 million and $ 1.5 million of properties held for sale that were included in land and buildings at December 31, 2020 and 2019, respectively.

The Company’s depreciation expense related to property and equipment was $ 18.1 million, $ 17.3 million, and $ 15.2 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The Company’s rental expense was $ 17.3 million , $ 17.2 million , and $ 16.4 million for the years ended December 31, 2019 , 2018 and 2017 , respectively.

Deposits consist of the following at December 31, 2020 and 2019 (in thousands):

6 unchanged sentences

Certificates of deposit less than or equal to $250,000

718,256 936,940

Certificates of deposit greater than $250,000

197,064 183,463

Total certificates of deposit (1)

915,320 1,120,403

Total deposits $ 12,567,296 $ 10,048,641

4 unchanged sentences

Total brokered deposits $ — $ 202,884

(1 ) Certificates of deposit included $ 269,000 of acquisition discounts at December 31, 2019 and $ 563,000 of acquisition premiums at December 31, 2018 .

(1 ) Certificates of deposit included $ 58,000 of acquisition discounts at December 31, 2020 and $ 269,000 of acquisition discounts at December 31, 2019.

Deposits at December 31, 2020 and 2019 included deposits from the Company’s directors, executive officers and related entities totaling $ 11.2 million and $ 7.9 million, respectively.

2 unchanged sentences

December 31, 2020

Amount Weighted

Maturing in one year or less $ 701,473 0.80 %

9 unchanged sentences

At or for the Years Ended December 31

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 %

8 unchanged sentences

Islanders Bank similarly may borrow up to 45 % of its total assets, also contingent on collateral and FHLB stock.

At December 31, 2019 , the maximum total FHLB credit line was $ 5.31 billion and $ 132.7 million for Banner Bank and Islanders Bank, respectively.

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 had $32.5 million of available credit capacity.

OTHER BORROWINGS

8 unchanged sentences

Such borrowings are secured by a pledge of eligible loans.

At December 31, 2019 , based upon available unencumbered collateral, Banner Bank was eligible to borrow $ 1.19 billion from the Federal Reserve Bank, although, at that date, as well as at December 31, 2018 , Banner Bank had no funds borrowed under this or other borrowing arrangements.

At December 31, 2020, based upon available unencumbered collateral, Banner Bank was eligible to borrow $ 958.7 million from the Federal Reserve Bank, although, at that date, as well as at December 31, 2019, Banner Bank had no funds borrowed under this or other borrowing arrangements.

At December 31, 2020, Banner Bank had uncommitted federal funds lines 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.

4 unchanged sentences

At or for the Years Ended December 31

Amount Weighted

Average Rate Amount Weighted

Repurchase agreements:

4 unchanged sentences

Average outstanding $ 158,478 0.30 % $ 121,771 0.27 %

Maximum outstanding at any month-end

JUNIOR SUBORDINATED DEBENTURES AND MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES

Maximum outstanding at any month-end $ 189,937 n/a $ 124,415 n/a

SUBORDINATED DEBT AND MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES

At December 31, 2020, the Company had ten wholly-owned subsidiary grantor trusts (the Trusts), which had issued $ 143.5 million of TPS to third parties, as well as $ 4.4 million of common capital securities, carried among other assets, which were issued to the Company.

8 unchanged sentences

The following table is a summary of trust preferred securities at December 31, 2020 (dollars in thousands):

Name of Trust

Aggregate Liquidation Amount of Trust Preferred Securities

Aggregate Liquidation Amount of Common Capital Securities

Aggregate Principal Amount of Junior Subordinated Debentures

Current Interest Rate

Interest Rate Spread

Banner Capital Trust II

Three-month LIBOR + 3.35%

Banner Capital Trust III

Three-month LIBOR + 2.90%

Banner Capital Trust IV

Three-month LIBOR + 2.85%

Banner Capital Trust V

Three-month LIBOR + 1.57%

Banner Capital Trust VI

Three-month LIBOR + 1.62%

Banner Capital Trust VII

Three-month LIBOR + 1.38%

Siuslaw Statutory Trust I

Three-month LIBOR + 2.70%

Greater Sacramento Bancorp Statutory Trust I

Three-month LIBOR + 3.35%

Greater Sacramento Bancorp Statutory Trust II

Three-month LIBOR + 1.68%

Mission Oaks Statutory Trust I

Three-month LIBOR + 1.65%

Name of Trust Aggregate Liquidation Amount of Trust Preferred Securities Aggregate Liquidation Amount of Common Capital Securities Aggregate Principal Amount of Junior Subordinated Debentures Stated

Current Interest Rate Reset Period Interest Rate Spread

Banner Capital Trust II $ 15,000 $ 464 $ 15,464 2033 3.59 % Quarterly Three-month LIBOR + 3.35 %

Banner Capital Trust III 15,000 465 15,465 2033 3.14 Quarterly Three-month LIBOR + 2.90 %

Banner Capital Trust IV 15,000 465 15,465 2034 3.09 Quarterly Three-month LIBOR + 2.85 %

Banner Capital Trust V 25,000 774 25,774 2035 1.78 Quarterly Three-month LIBOR + 1.57 %

Banner Capital Trust VI 25,000 774 25,774 2037 1.85 Quarterly Three-month LIBOR + 1.62 %

Banner Capital Trust VII 25,000 774 25,774 2037 1.61 Quarterly Three-month LIBOR + 1.38 %

Siuslaw Statutory Trust I 8,000 248 8,248 2034 2.93 Quarterly Three-month LIBOR + 2.70 %

Greater Sacramento Bancorp Statutory Trust I 4,000 124 4,124 2033 3.59 Quarterly Three-month LIBOR + 3.35 %

Greater Sacramento Bancorp Statutory Trust II 4,000 124 4,124 2035 1.90 Quarterly Three-month LIBOR + 1.68 %

Mission Oaks Statutory Trust I 7,500 232 7,732 2036 1.87 Quarterly Three-month LIBOR + 1.65 %

Total TPS liability at par $ 143,500 $ 4,444 147,944 2.35 %

3 unchanged sentences

(2) The Company has elected to use fair value accounting on its TPS.

On June 30, 2020, Banner issued and sold in an underwritten offering $100.0 million aggregate principal amount of 5.000% Fixed-to-Floating Rate Subordinated Notes due 2030 (Notes) at a public offering price equal to 100% of the aggregate principal amount of the Notes, resulting in net proceeds, after underwriting discounts and estimated offering expenses, of approximately $98.1 million.

The interest rate on the Notes remains fixed equal to 5.000% for the first 5 years, after 5 years the interest rate changes to a floating interest rate tied to a benchmark rate, which

is expected to be Three-Month Term SOFR, plus a spread of 489 basis points.

The Notes will mature on June 30, 2030.

On or after June 30, 2025, the Company may redeem the Notes, in whole or in part.

The Notes are unsecured obligations and are subordinated in right of payment to all existing and future indebtedness, deposits and other liabilities of the Company's current and future subsidiaries, including the Banks’ deposits as well as the Company's subsidiaries' liabilities to general creditors and liabilities arising during the ordinary course of business.

The Notes may be included in Tier 2 capital for the Company under current regulatory guidelines and interpretations.

The following table presents the components of the provision for income taxes included in the Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018 (in thousands):

Years Ended December 31

2020 2019 2018

Federal $ 30,325 $ 25,278 $ 21,869

State 6,964 2,494 4,130

Total Current 37,289 27,772 25,999

Federal ( 8,134 ) 7,738 2,021

State ( 2,630 ) 1,344 575

Total Deferred ( 10,764 ) 9,082 2,596

2 unchanged sentences

Years Ended December 31

2020 2019 2018

Federal income tax statutory rate 21.0 % 21.0 % 21.0 %

3 unchanged sentences

State income taxes, net of federal tax offset 2.5 2.0 2.3

Tax credits ( 2.6 ) ( 1.2 ) ( 0.8 )

Merger and acquisition costs — 0.1 0.1

Valuation reserve release — — ( 2.5 )

Federal law change

State audits and amended returns — ( 0.5 ) —

Low income housing partnerships, net of amortization 1.6 0.7 0.4

Other 1.4 0.7 ( 0.6 )

Effective income tax rate 18.6 % 20.1 % 17.3 %

8 unchanged sentences

Lease liability 14,088 15,485

Unrealized loss on securities - available for sale

Other 9,177 2,556

Total deferred tax assets 127,140 110,504

Deferred tax liabilities:

Depreciation ( 7,537 ) ( 5,373 )

Deferred loan fees, servicing rights and loan origination costs ( 11,646 ) ( 11,525 )

Intangibles ( 6,278 ) ( 7,756 )

Right of use asset ( 13,144 ) ( 14,531 )

Unrealized gain on securities - available-for-sale ( 21,662 ) ( 10,353 )

Financial instruments accounted for under fair value accounting ( 947 ) ( 1,143 )

25 unchanged sentences

The applicable state Section 382 limitations range from $525,000 to $21.5 million.

In 2017, the Company established a $ 184,000 valuation reserve against the portion of its various state net operating loss carryforwards and tax credits that it believed it is more likely than not that it would not realize the benefit because the application of the Section 382 limitations at the state level is based on future apportionment rates.

For non-Section 382 limited alternative minimum tax credits, there is a five year carryover period.

on future apportionment rates.

In 2017, the Company established a valuation reserve against its federal Section 382 limited alternative minimum tax credit carryovers because of the uncertainty under the new tax law of the interplay of Section 382 and the revised carryover period.

The valuation reserve was released in 2018 as the Company determined the Section 382 limited alternative minimum tax credits are not subject to the revised carryover period and will continue to carryover indefinitely until they are utilized.

For non-Section 382 limited alternative minimum tax credits, the credits expired in 2019 due to the passage of the CARES Act in 2020.

As a consequence of Banner’s capital raise in June 2010, the Company experienced a change in control within the meaning of Section 382 of the Code.

7 unchanged sentences

In the future, if this tax bad debt reserve is used for purposes other than to absorb bad debts or the Company no longer qualifies as a bank or is completely liquidated, the Company will incur a federal tax liability at the then-prevailing corporate tax rate, established as $ 1.1 million at December 31, 2020.

As of December 31, 2019 , the Company had $275,000 of unrecognized tax benefits for uncertain tax positions compared to an insignificant amount as of December 31, 2018 , none of which if recognized would materially affect the effective tax rate.

As of December 31, 2020 and December 31, 2019, the Company had $450,000 and $275,000, respectively, of unrecognized tax benefits for uncertain tax positions and an insignificant amount as of December 31, 2018, none of which if recognized would materially affect the effective tax rate.

The Company does not anticipate that the amount of unrecognized tax benefits will significantly increase or decrease in the next twelve months.

2 unchanged sentences

The Company files consolidated income tax returns in Oregon, California, Utah, Montana and Idaho and for federal purposes.

The Company is no longer subject to tax examination for tax years before 2016, except for Idaho for which it is no longer subject to examination for tax years before 2015.

The Company is no longer subject to tax examination for tax years before 2017.

Tax credit investments:

2 unchanged sentences

The following table presents the balances of the Company’s tax credit investments and related unfunded commitments at December 31, 2020 and 2019 (in thousands):

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Tax credit investments $ 33,528 $ 29,620

2 unchanged sentences

For the years ended December 31,

2020 2019 2018

Tax credits and other tax benefits recognized $ 3,842 $ 1,916 $ 1,456

6 unchanged sentences

For the years ended December 31, 2020, 2019 and 2018 , $ 6.7 million, $ 6.2 million and $ 5.4 million, respectively, was expensed for 401(k) contributions.

The Board of Directors has elected to make a 4 % of eligible compensation matching contribution for 2020 .

During 2020, the Board of Directors has elected to make a 4 % of eligible compensation matching contribution.

Supplemental Retirement and Salary Continuation Plans:

of the Banks’ Boards of Directors or in certain cases by the former directors of acquired banks.

Through the Banks, the Company is obligated under various non-qualified deferred compensation plans to help supplement the retirement income of certain executives, including certain retired executives, selected by resolution of the Banks’ Boards of Directors or in certain cases by the former directors of acquired banks.

These plans are unfunded, include both defined benefit and defined contribution plans, and provide for payments after the executive’s retirement.

28 unchanged sentences

The Company has reserved 900,000 shares of its common stock for issuance under the 2014 Plan in connection with the exercise of awards.

As of December 31, 2019 , 315,548 restricted stock shares and 382,872 restricted stock units have been granted under the 2014 Plan of which 246,310 restricted stock shares and 82,973 restricted stock units have vested.

As of December 31, 2020, 300,015 restricted stock shares and 401,662 restricted stock units have been granted under the 2014 Plan of which 3,382 restricted stock shares and 222,210 restricted stock units are unvested.

2018 Omnibus Incentive Plan

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The Company reserved 900,000 shares of common stock for issuance under the 2018 Plan in connection with the exercise of awards.

As of December 31, 2019 , no shares have been granted under the 2018 Plan.

As of December 31, 2020, 352,544 restricted stock units have been granted under the 2018 Plan of which 352,544 restricted stock units are unvested.

The expense associated with all restricted stock and unit grants was $ 9.2 million, $ 7.1 million and $ 6.6 million respectively, for the years ended December 31, 2020, 2019 and 2018.

1 unchanged sentence

A summary of the Company’s Restricted Stock/Unit award activity during the years ended December 31, 2020, 2019 and 2018 follows:

Weighted Average

Shares/Units Weighted Average

Unvested at January 1, 2018 302,077 $ 48.97

Granted (159,541 non-voting) 161,598 55.04

( 103,363 ) 48.60

( 42,215 ) 47.05

Unvested at December 31, 2018 318,097 52.43

Granted (224,210 non-voting) 227,262 53.50

( 120,675 ) 50.23

( 41,812 ) 46.25

Unvested at December 31, 2019 382,872 54.39

Granted (All non-voting)

Granted (380,004 non-voting) 384,807 33.49

( 146,919 ) 55.18

( 42,624 ) 47.90

Unvested at December 31, 2020

Includes 169 unvested restricted stock grants related to the 2012 Restricted Stock and Incentive Bonus Plan.

578,136 40.76

REGULATORY CAPITAL REQUIREMENTS

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The following table shows the regulatory capital ratios of the Company and the Banks and the minimum regulatory requirements (dollars in thousands):

Minimum for Capital Adequacy Purposes

Minimum to be Categorized as “Well-Capitalized” Under Prompt Corrective Action Provisions

Actual Minimum for Capital Adequacy Purposes Minimum to be Categorized as “Well-Capitalized” Under Prompt Corrective Action Provisions

Amount Ratio Amount Ratio Amount Ratio

December 31, 2020:

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Tier 1 capital to risk-weighted assets 1,371,736 12.56 655,104 6.00 655,104 6.00

Tier 1 common equity to risk-weighted assets

Tier 1 capital to average leverage assets

Tier 1 capital to average leverage assets 1,371,736 9.50 577,331 4.00 n/a n/a

Tier 1 common equity to risk-weighted assets 1,228,236 11.25 491,328 4.50 n/a n/a

Total capital to risk- weighted assets 1,438,012 13.39 859,260 8.00 1,074,075 10.00

Tier 1 capital to risk- weighted assets 1,303,590 12.14 644,445 6.00 859,260 8.00

Tier 1 common equity to risk-weighted assets

Tier 1 capital to average leverage assets 1,303,590 9.22 565,620 4.00 707,025 5.00

Tier 1 common equity to risk-weighted assets 1,303,590 12.14 483,334 4.50 698,149 6.50

Islanders Bank:

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Tier 1 capital to risk- weighted assets 26,983 14.39 11,248 6.00 14,997 8.00

Tier 1 common equity to risk-weighted assets

Tier 1 capital to average leverage assets 26,983 7.87 13,720 4.00 17,150 5.00

Tier 1 common equity to risk-weighted assets 26,983 14.39 8,436 4.50 12,185 6.50

December 31, 2019:

2 unchanged sentences

Tier 1 capital to risk-weighted assets 1,283,208 11.97 643,160 6.00 643,160 6.00

Tier 1 common equity to risk-weighted assets

Tier 1 capital to average leverage assets

Tier 1 capital to average leverage assets 1,283,208 10.71 479,458 4.00 n/a n/a

Tier 1 common equity to risk-weighted assets 1,139,708 10.63 482,370 4.50 n/a n/a

Total capital to risk- weighted assets 1,321,580 12.55 842,219 8.00 1,052,773 10.00

Tier 1 capital to risk- weighted assets 1,220,811 11.60 631,664 6.00 842,219 8.00

Tier 1 common equity to risk-weighted assets

Tier 1 capital to average leverage assets 1,220,811 10.45 467,330 4.00 584,163 5.00

Tier 1 common equity to risk-weighted assets 1,220,811 11.60 473,748 4.50 684,303 6.50

Islanders Bank:

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Tier 1 capital to risk- weighted assets 34,658 18.17 11,444 6.00 15,258 8.00

Tier 1 common equity to risk-weighted assets

Tier 1 capital to average leverage assets 34,658 11.66 11,887 4.00 14,859 5.00

Tier 1 common equity to risk-weighted assets 34,658 18.17 8,583 4.50 12,397 6.50

At December 31, 2020, Banner Corporation and the Banks each exceeded the requirements to be “well capitalized” and the fully phased-in capital conservation buffer requirement.

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Tier 1 capital generally consists of CET1 and noncumulative perpetual preferred stock.

Tier 2 capital generally consists of other preferred stock and subordinated debt meeting certain conditions plus an amount of the allowance for loan and lease losses up to 1.25% of assets.

Tier 2 capital generally consists of other preferred stock and subordinated debt meeting certain conditions plus an amount of the allowance for credit losses up to 1.25% of assets.

Total capital is the sum of Tier 1 and Tier 2 capital.

For purposes of determining risk-based capital, assets and certain off-balance sheet items are risk-weighted from 0% to 1,250%, depending on the risk characteristics of the asset or item.

The regulations include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in nonaccrual status;

a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (up from 0%);

and a 250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital.

In addition to the minimum CET1, Tier 1, leverage ratio and total capital ratios, Banner and each of the Banks must maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based capital levels in

order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses.

GOODWILL, OTHER INTANGIBLE ASSETS AND MORTGAGE SERVICING RIGHTS

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Banner has identified one reporting unit for purposes of evaluating goodwill for impairment.

At December 31, 2019 , the Company completed a qualitative assessment of goodwill and concluded that it is more likely than not that the fair value of Banner, the reporting unit, exceeds the carrying value.

CDI represents the value of transaction-related deposits and the value of the customer relationships associated with the deposits.

For the years ended December 31, 2018 and 2017 intangible assets also included favorable leasehold intangibles (LHI).

At December 31, 2020, the Company completed an assessment of qualitative factors 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.

CDI represents the value of transaction-related deposits and the value of the client relationships associated with the deposits.

At December 31, 2018 intangible assets also included favorable leasehold intangibles (LHI).

LHI represented the value ascribed to leases assumed in an acquisition in which the lease terms are favorable compared to a market lease at the date of acquisition.

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The following table summarizes the changes in the Company’s goodwill, CDI and LHI for the years ended December 31, 2020, 2019 and 2018 (in thousands):

Goodwill CDI LHI Total

Balance, January 1, 2018 $ 242,659 $ 22,378 $ 277 $ 265,314

Adjustments to goodwill (1)

Balance, December 31, 2017

Additions through acquisition (1)

96,495 16,368 — 112,863

Amortization — ( 6,047 ) ( 52 ) ( 6,099 )

Balance, December 31, 2018 339,154 32,699 225 372,078

Additions through acquisition (2)

33,967 4,610 — 38,577

Amortization — ( 8,151 ) — ( 8,151 )

Adjustments (3)

— — ( 225 ) ( 225 )

Balance, December 31, 2019 373,121 29,158 — 402,279

Acquired Goodwill and CDI were adjusted for the sale of the Utah branches in 2017.

The additions to Goodwill and CDI in 2018 relate to the acquisition of Skagit.

Amortization — ( 7,732 ) — ( 7,732 )

Balance, December 31, 2020 $ 373,121 $ 21,426 $ — $ 394,547

(1 ) The additions to Goodwill and CDI in 2018 relate to the acquisition of Skagit Bank.

(2) The additions to Goodwill and CDI in 2019 relate to the acquisition of AltaPacific.

2 unchanged sentences

Estimated Amortization

Thereafter 1,490

Net carrying amount $ 21,426

9 unchanged sentences

Years Ended December 31

2020 2019 2018

Balance, beginning of the year $ 14,148 $ 14,638 $ 14,738

2 unchanged sentences

Amortization (1)

( 7,672 ) ( 5,050 ) ( 3,889 )

Balance, end of the year (2)

$ 15,223 $ 14,148 $ 14,638

(1) Amortization of mortgage servicing rights is recorded as a reduction of loan servicing income and any unamortized balance is fully written off if the loan repays in full.

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The following table presents estimated fair values of the Company’s financial instruments as of December 31, 2020 and 2019, whether or not recognized or recorded in the Consolidated Statements of Financial Condition (in thousands):

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Level Carrying

Value Estimated

Fair Value Carrying

Value Estimated

Cash and cash equivalents 1 $ 1,234,183 $ 1,234,183 $ 307,735 $ 307,735

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Loans receivable 3 9,870,982 9,810,293 9,305,357 9,304,340

FHLB stock 3 16,358 16,358 28,342 28,342

Bank-owned life insurance 1 191,830 191,830 192,088 192,088

Mortgage servicing rights 3 15,223 18,084 14,148 22,611

Equity securities

Interest rate swaps

2 39,066 39,066 15,202 15,202

Interest rate lock and forward sales commitments

2,3 5,641 5,641 1,108 1,108

Demand, interest-bearing checking and money market 2 9,253,494 9,253,494 6,994,197 6,994,197

1 unchanged sentence

Certificates of deposit 2 915,320 919,920 1,120,403 1,117,921

Advances from FHLB

Junior subordinated debentures at fair value

FHLB advances 2 150,000 152,779 450,000 452,720

Other borrowings 2 184,785 184,785 118,474 118,474

Subordinated notes, net 3 98,201 98,201 — —

Junior subordinated debentures 3 116,974 116,974 119,304 119,304

Interest rate swaps

2 22,336 22,336 10,966 10,966

Interest rate lock and forward sales commitments

2 1,755 1,755 674 674

The Company measures and discloses certain assets and liabilities at fair value.

22 unchanged sentences

December 31, 2020

Level 1 Level 2 Level 3 Total

Securities—trading

6 unchanged sentences

Asset-backed securities — 9,419 — 9,419

— 2,322,593 — 2,322,593

Loans held for sale — 133,554 — 133,554

1 unchanged sentence

Interest rate lock and forward sales commitments — 420 5,221 5,641

Junior subordinated debentures at fair value

$ — $ 2,495,633 $ 30,201 $ 2,525,834

Junior subordinated debentures $ — $ — $ 116,974 $ 116,974

Interest rate swaps — 22,336 — 22,336

Interest rate lock and forward sales commitments — 1,755 — 1,755

$ — $ 24,091 $ 116,974 $ 141,065

December 31, 2019

Level 1 Level 2 Level 3 Total

Securities—trading

6 unchanged sentences

Asset-backed securities — 8,126 — 8,126

— 1,551,557 — 1,551,557

Loans held for sale — 199,397 — 199,397

Equity securities

Interest rate swaps — 15,202 — 15,202

Interest rate lock and forward sales commitments — 317 791 1,108

$ — $ 1,766,473 $ 26,427 $ 1,792,900

Junior subordinated debentures at fair value

$ — $ — $ 119,304 $ 119,304

Interest rate swaps — 10,966 — 10,966

Interest rate lock and forward sales commitments — 674 — 674

$ — $ 11,640 $ 119,304 $ 130,944

The following methods were used to estimate the fair value of each class of financial instruments:

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The following table provides a description of the valuation technique, unobservable inputs, quantitative and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring and nonrecurring basis at December 31, 2020 and 2019:

Financial Instruments

Valuation Technique

Unobservable Inputs

Weighted Average Rate

Corporate bonds (TPS securities)

Discounted cash flows

Discount rate

Junior subordinated debentures

Discounted cash flows

Discount rate

Impaired loans

Collateral valuations

Discount to appraised value

Financial Instruments Valuation Technique Unobservable Inputs Weighted Average Rate Weighted Average Rate

Corporate bonds (TPS securities) Discounted cash flows Discount rate 4.24 % 5.91 %

Junior subordinated debentures Discounted cash flows Discount rate 4.24 % 5.91 %

Loans individually evaluated Collateral valuations Discount to appraised value 0.0 % to 20.0 %

0.0 % to 20.0 %

Discount to appraised value

Interest rate lock commitments

Pricing model

Pull-through rate

REO Appraisals Discount to appraised value 51.9 % 58.5 %

Interest rate lock commitments Pricing model Pull-through rate 86.35 % 89.61 %

TPS Securities :

12 unchanged sentences

Level 3 Fair Value Inputs

TPS Securities

TPS Securities Borrowings—

Junior Subordinated

Debentures Interest rate lock and forward sales commitments

Balance at January 1, 2019 $ 25,896 $ 114,091 $ 273

Total gains or losses recognized

Assets gains ( 260 ) — 518

Liabilities losses — ( 601 ) —

Purchases, issuances and settlements, including acquisitions — 5,814

Balance at December 31, 2019 25,636 119,304 791

Total gains or losses recognized

Assets gains ( 656 ) — 4,430

Liabilities losses — ( 2,330 ) —

Purchases, issuances and settlements, including acquisitions

Purchases, issuances and settlements — — —

Balance at December 31, 2020 $ 24,980 $ 116,974 $ 5,221

Interest income and dividends from the TPS securities are recoded as a component of interest income.

Interest income and dividends from the TPS securities are recorded as a component of interest income.

Interest expense related to the junior subordinated debentures is measured based on contractual interest rates and reported in interest expense.

The change in fair market value on TPS securities and on junior subordinated debentures prior to 2018 has been recorded as a component of non-interest income.

Beginning in 2018, the change in fair value of the junior subordinated debentures, which represents changes in instrument specific credit risk, is recorded in other comprehensive income (loss).

The change in fair value of the junior subordinated debentures, which represents changes in instrument specific credit risk, is recorded in other comprehensive income.

Items Measured at Fair Value on a Non-recurring Basis

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December 31, 2020

Impaired loans

Level 1 Level 2 Level 3 Total

Loans individually evaluated $ — $ — $ 3,482 $ 3,482

REO $ — $ — $ 816 $ 816

December 31, 2019

Level 1 Level 2 Level 3 Total

Impaired loans $ — $ — $ 14,853 $ 14,853

REO — — 814 814

The following table presents the losses resulting from non-recurring fair value adjustments for the years ended December 31, 2020 , 2019 and 2018 (in thousands):

For the years ended December 31,

Impaired loans

2020 2019 2018

Loans individually evaluated $ ( 3,482 ) $ ( 425 ) $ ( 910 )

REO ( 45 ) — ( 387 )

Total loss from nonrecurring measurements $ ( 3,527 ) $ ( 425 ) $ ( 1,297 )

Impaired loans :

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.

If this practical expedient is used, the impaired loans are considered to be held at fair value.

Impaired loans are periodically evaluated to determine if valuation adjustments, or partial write-downs, should be recorded.

The need for valuation adjustments arises when observable market prices or current appraised values of collateral indicate a shortfall

in collateral value compared to current carrying values of the related loan.

If the Company determines that the value of the impaired loan is less than the carrying value of the loan, the Company either establishes an impairment reserve as a specific component of the allowance for loan losses or charges off the impaired amount.

These valuation adjustments are considered non-recurring fair value adjustments.

Loans individually evaluated :

Expected credit losses for loans evaluated individually are measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or when the Bank determines that foreclosure is probable, the expected credit loss is measured based on the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable.

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 by the subsequent changes in the expected credit losses for loans evaluated individually are included within the provision for credit losses in the same manner in which the expected credit loss initially was recognized or as a reduction in the provision that would otherwise be reported.

The Company records REO (acquired through a lending relationship) at fair value on a non-recurring basis.

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Summary financial information is as follows (in thousands):

Statements of Financial Condition

Statements of Financial Condition December 31

Cash $ 131,594 $ 54,257

Investment in trust equities 4,444 4,444

Investment in subsidiaries 1,751,141 1,691,907

Other assets 2,852 19,471

$ 1,890,031 $ 1,770,079

LIABILITIES AND SHAREHOLDERS’ EQUITY

1 unchanged sentence

Deferred tax liability 6,422 4,419

Subordinated notes, net 98,201 —

Junior subordinated debentures at fair value 116,974 119,304

1 unchanged sentence

Total liabilities and shareholders’ equity $ 1,890,031 $ 1,770,079

Statements of Operations

Years Ended December 31

Statements of Operations Years Ended December 31

2020 2019 2018

INTEREST INCOME:

3 unchanged sentences

Equity in undistributed income of subsidiaries 36,401 35,134 72,419

Net change in valuation of financial instruments carried at fair value

Other income 62 33 56

Interest on other borrowings ( 7,204 ) ( 6,574 ) ( 6,136 )

2 unchanged sentences

BENEFIT FROM INCOME TAXES ( 2,339 ) ( 2,299 ) ( 2,284 )

Statements of Cash Flows

Years Ended December 31

NET INCOME $ 115,928 $ 146,278 $ 136,515

Statements of Cash Flows Years Ended December 31

2020 2019 2018

OPERATING ACTIVITIES:

Net income $ 115,928 $ 146,278 $ 136,515

Adjustments to reconcile net income to net cash provided by operating activities:

Equity in undistributed income of subsidiaries ( 36,401 ) ( 35,134 ) ( 72,419 )

Decrease (increase) in deferred taxes

Net change in valuation of financial instruments carried at fair value

Decrease in deferred taxes 1,438 6,969 150

Share-based compensation 9,168 7,142 6,554

(Increase) decrease in other assets

Increase (decrease) in other liabilities

Net change in other assets 16,756 2,594 ( 19,268 )

Net change in other liabilities ( 235 ) ( 120 ) 201

Net cash provided from operating activities 106,654 127,729 51,733

2 unchanged sentences

Reduction in investment in subsidiaries — — 37,000

Net cash provided from investing activities

Acquisitions — 442 ( 329 )

Net cash (used by) provided from investing activities ( 38 ) 410 36,644

FINANCING ACTIVITIES:

Net proceeds from issuance of subordinated notes 98,027 — —

Withholding taxes paid on share-based compensation ( 1,453 ) ( 1,915 ) ( 1,554 )

7 unchanged sentences

On March 28, 2018 the Company announced that its Board of Directors had authorized the repurchase up to 5 % of the Company’s common stock, or 1,621,549 of the Company’s outstanding shares.

Under the authorization, shares were repurchased by the Company in open market purchases.

During the year ended December 31, 2017, the Company repurchased 545,166 common shares at an average price of $ 56.91 per share.

In addition to the shares repurchased under the authorization, there were 29,579 shares surrendered during 2017 by employees to satisfy tax withholding obligations upon vesting of restricted stock grants.

On March 28, 2018 the Company announced that its Board of Directors had authorized the repurchase up to 5 % of the Company's common stock, or 1,621,549 of the Company's outstanding shares.

Under the authorization, shares could be repurchased by the Company in open market purchases.

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Under the authorization, shares may be repurchased by the Company in open market purchases.

The extent to which the Company repurchases its shares and the timing of such repurchases will depend upon market conditions and other corporate considerations.

During the year ended December 31, 2019, the Company repurchased 1,000,000 common shares at an average price of $ 53.90 per share.

1 unchanged sentence

In addition to the shares repurchased under the 2019 authorization, there were 33,777 shares surrendered during 2019 by employees to satisfy tax withholding obligations upon vesting of restricted stock.

There were 624,780 shares repurchased in the first quarter of 2020 under the 2019 authorization at an average price of $50.84 per share.

This authorization expired in March 2020.

On December 21, 2020, the Company announced that its Board of Directors had authorized the repurchase of up to 1,757,781 of the Company’s common stock (which was equivalent to 5% of the Company’s common stock).

Under the authorization, shares may be repurchased by the Company in open market purchases.

The extent to which the Company repurchases its shares and the timing of such repurchases will depend upon market conditions and other corporate considerations.

During the year ended December 31, 2020 no shares were repurchased under the 2020 authorization.

Additionally, there were 41,507 shares surrendered during 2020 by employees to satisfy tax withholding obligations upon vesting of restricted stock and settlement of restricted stock units.

CALCULATION OF EARNINGS PER COMMON SHARE

1 unchanged sentence

Years Ended December 31

2020 2019 2018

Net income $ 115,928 $ 146,278 $ 136,515

Weighted average number of common shares outstanding

Basic 35,264,252 34,868,434 32,784,724

Diluted 35,528,848 34,967,684 32,894,425

Earnings per common share

Basic $ 3.29 $ 4.20 $ 4.16

Diluted $ 3.26 $ 4.18 $ 4.15

At December 31, 2020, 2019 and 2018 there were 578,136 , 367,230 , and 315,301 , respectively, of issued but unvested restricted stock shares and units that were included in the computation of diluted earnings per share.

2 unchanged sentences

Year Ended December 31, 2020

Quarter Second

Quarter Third

Quarter Fourth

Interest income $ 131,665 $ 128,747 $ 129,581 $ 129,153

1 unchanged sentence

Net interest income before provision for loan losses 119,258 119,580 121,026 121,437

Provision for loan losses

Provision (recapture) for credit losses 21,748 29,528 13,641 ( 601 )

Net interest income 97,510 90,052 107,385 122,038

3 unchanged sentences

Provision for income taxes 4,608 4,594 7,492 9,831

Net income $ 16,882 $ 23,541 $ 36,548 $ 38,957

Basic earnings per share $ 0.48 $ 0.67 $ 1.04 $ 1.11

2 unchanged sentences

Year Ended December 31, 2019

Quarter Second

Quarter Third

Quarter Fourth

Interest income $ 130,000 $ 130,840 $ 131,438 $ 133,409

7 unchanged sentences

Provision for income taxes 8,869 10,955 8,602 8,428

Net income $ 33,346 $ 39,700 $ 39,577 $ 33,655

Basic earnings per share $ 0.95 $ 1.14 $ 1.15 $ 0.96

2 unchanged sentences

Year Ended December 31, 2018

Quarter Second

Quarter Third

Quarter Fourth

Interest income $ 104,820 $ 112,423 $ 117,660 $ 128,744

7 unchanged sentences

Provision for income taxes 8,239 9,219 8,084 3,053

Net income $ 28,790 $ 32,424 $ 37,773 $ 37,528

Basic earnings per share $ 0.89 $ 1.01 $ 1.17 $ 1.10

2 unchanged sentences

COMMITMENTS AND CONTINGENCIES

Financial Instruments with Off-Balance Sheet Risk—The Company has financial instruments with off-balance-sheet risk generated in the normal course of business to meet the financing needs of its customers.

Financial Instruments with Off-Balance Sheet Risk —The Company has financial instruments with off-balance-sheet risk generated in the normal course of business to meet the financing needs of its clients.

These financial instruments include commitments to extend credit, commitments related to standby letters of credit, commitments to originate loans, commitments to sell loans, and commitments to buy or sell securities.

4 unchanged sentences

Contract or Notional Amount

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Commitments to extend credit $ 3,207,072 $ 3,051,681

8 unchanged sentences

During 2019, the Company entered into an agreement to invest $ 10.0 million in a limited partnership.

At December 31, 2019 , the Company had funded $ 467,000 of the commitment, with $ 9.5 million of the commitment remaining to be funded.

Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the contract.

At December 31, 2020, the Company had funded $ 2.8 million of the commitment, with $ 7.2 million of the commitment remaining to be funded, compared to $467,000 of the commitment funded, with $9.5 million to be funded at December 31, 2019.

Commitments to extend credit are agreements to lend to a client, as long as there is no violation of any condition established in the contract.

Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

1 unchanged sentence

therefore, the total commitment amounts do not necessarily represent future cash requirements.

Each customer’s creditworthiness is evaluated on a case-by-case basis.

The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the customer.

Each client’s creditworthiness is evaluated on a case-by-case basis.

The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the client.

Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties.

The Company's reserve for unfunded loan commitments was $ 2.7 million and $ 2.6 million , at December 31, 2019 and 2018 , respectively.

Standby letters of credit are conditional commitments issued to guarantee a customer’s performance or payment to a third party.

The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

The Company’s allowance for credit losses - unfunded loan commitments was $ 13.3 million and $ 2.7 million, at December 31, 2020 and 2019, respectively.

Standby letters of credit are conditional commitments issued to guarantee a client’s performance or payment to a third party.

The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients.

Under a risk participation agreement, Banner Bank guarantees the financial performance of a borrower on the participated portion of an interest rate swap on a loan.

Interest rates on residential one- to four-family mortgage loan applications are typically rate locked (committed) to customers during the application stage for periods ranging from 30 to 60 days, the most typical period being 45 days.

Traditionally, these loan applications with rate lock commitments had the pricing for the sale of these loans locked with various qualified investors under a best-efforts delivery program at or near the time the interest rate is locked with the customer.

The Bank then attempts to deliver these loans before their rate locks expired.

Interest rates on residential one- to four-family mortgage loan applications are typically rate locked (committed) to clients during the application stage for periods ranging from 30 to 60 days, the most typical period being 45 days.

The Banner Bank then attempts to deliver these loans before their rate locks expired.

This arrangement generally required delivery of the loans prior to the expiration of the rate lock.

Delays in funding the loans would require a lock extension.

The cost of a lock extension at times was borne by the customer and at times by the Bank.

The cost of a lock extension at times was borne by the client and at times by the Banner Bank.

These lock extension costs have not had a material impact to our operations.

4 unchanged sentences

Market risk with respect to forward contracts arises principally from changes in the value of contractual positions due to changes in interest rates.

The Company limits its exposure to market risk by monitoring differences between commitments to customers and forward contracts with market investors and securities broker/dealers.

The Company limits its exposure to market risk by monitoring differences between commitments to clients and forward contracts with market investors and securities broker/dealers.

In the event the Company has forward delivery contract commitments in excess of available mortgage loans, the transaction is completed by either paying or receiving a fee to or from the investor or broker/dealer equal to the increase or decrease in the market value of the forward contract.

6 unchanged sentences

In connection with certain asset sales, the Banks typically make representations and warranties about the underlying assets conforming to specified guidelines.

If the underlying assets do not conform to the specifications, the Bank may have an obligation to repurchase the assets or indemnify the purchaser against any loss.

If the underlying assets do not conform to the specifications, the Banks may have an obligation to repurchase the assets or indemnify the purchaser against any loss.

The Banks believe that the potential for material loss under these arrangements is remote.

1 unchanged sentence

DERIVATIVES AND HEDGING

The Company, through its Banner Bank subsidiary, is party to various derivative instruments that are used for asset and liability management and customer financing needs.

The Company, through its Banner Bank subsidiary, is party to various derivative instruments that are used for asset and liability management and client financing needs.

Derivative instruments are contracts between two or more parties that have a notional amount and an underlying variable, require no net investment and allow for the net settlement of positions.

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The Company’s predominant derivative and hedging activities involve interest rate swaps related to certain term loans and forward sales contracts associated with mortgage banking activities.

Generally, these instruments help the Company manage exposure to market risk and meet customer financing needs.

Generally, these instruments help the Company manage exposure to market risk and meet client financing needs.

Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors such as market-driven interest rates and prices or other economic factors.

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For a qualifying fair value hedge, changes in the value of the derivatives are recognized in current period earnings along with the corresponding changes in the fair value of the designated hedged item attributable to the risk being hedged.

Under a prior program, customers received fixed interest rate commercial loans and Banner Bank subsequently hedged that fixed-rate loan by entering into an interest rate swap with a dealer counterparty.

Banner Bank receives fixed-rate payments from the customers on the loans and makes similar fixed-rate payments to the dealer counterparty on the swaps in exchange for variable-rate payments based on the one-month LIBOR index.

Under a prior program, clients received fixed interest rate commercial loans and Banner Bank subsequently hedged that fixed-rate loan by entering into an interest rate swap with a dealer counterparty.

Banner Bank receives fixed-rate payments from the clients on the loans and makes similar fixed-rate payments to the dealer counterparty on the swaps in exchange for variable-rate payments based on the one-month LIBOR index.

Some of these interest rate swaps are designated as fair value hedges.

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As of December 31, 2020 and December 31, 2019, the notional values or contractual amounts and fair values of the Company’s derivatives designated in hedge relationships were as follows (in thousands):

Asset Derivatives

Liability Derivatives

December 31, 2019

December 31, 2018

December 31, 2019

December 31, 2018

Contract Amount

Asset Derivatives Liability Derivatives

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

Contract Amount Fair

Interest rate swaps $ 338 $ 9 $ 3,567 $ 220 $ 338 $ 9 $ 3,567 $ 220

3 unchanged sentences

Interest Rate Swaps:

Banner Bank uses an interest rate swap program for commercial loan customers, that provides the client with a variable-rate loan and enters into an interest rate swap in which the client receives a variable-rate payment in exchange for a fixed-rate payment.

Banner Bank uses an interest rate swap program for commercial loan clients, that provides the client with a variable-rate loan and enters into an interest rate swap in which the client receives a variable-rate payment in exchange for a fixed-rate payment.

The Bank offsets its risk exposure by entering into an offsetting interest rate swap with a dealer counterparty for the same notional amount and length of term as the client interest rate swap providing the dealer counterparty with a fixed-rate payment in exchange for a variable-rate payment.

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The Company sells originated one- to four-family and multifamily mortgage loans into the secondary mortgage loan markets.

During the period of loan origination and prior to the sale of the loans in the secondary market, the Company has exposure to movements in interest rates associated with written interest rate lock commitments with potential borrowers to originate one- to four-family loans that are intended to be sold and for closed one- to four-family and multifamily mortgage loans held for sale that are awaiting sale and delivery into the secondary market.

During the period of loan origination and prior to the sale of the loans in the secondary market, the Company has exposure to movements in interest rates associated with written interest rate lock commitments with potential borrowers to originate one- to four-family loans that are intended to be sold and for closed one- to four-family and multifamily mortgage loans held for sale for which fair value accounting has been elected, that are awaiting sale and delivery into the secondary market.

The Company economically hedges the risk of changing interest rates associated with these mortgage loan commitments by entering into forward sales contracts to sell one- to four-family and multifamily mortgage loans or mortgage-backed securities to broker/dealers at specific prices and dates.

As of December 31, 2020 and December 31, 2019, the notional values or contractual amounts and fair values of the Company’s derivatives not designated in hedge relationships were as follows (in thousands):

Asset Derivatives

Liability Derivatives

December 31, 2019

December 31, 2018

December 31, 2019

December 31, 2018

Contract Amount

Asset Derivatives Liability Derivatives

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

Contract Amount Fair

Interest rate swaps $ 451,760 $ 39,057 $ 371,957 $ 14,982 $ 451,760 $ 22,327 $ 371,957 $ 10,746

1 unchanged sentence

Forward sales contracts

79,414 420 70,895 317 204,000 1,556 239,320 484

$ 671,564 $ 44,698 $ 493,607 $ 16,090 $ 728,271 $ 24,082 $ 677,132 $ 11,420

(1) Included in Other assets on the Consolidated Statements of Financial Condition, with the exception of certain interest swaps and mortgage loan commitments (with a fair value of $ 231,000 at December 31, 2020 and $ 347,000 at December 31, 2019), which are included in Loans Receivable.

3 unchanged sentences

Location on Income Statement 2020 2019 2018

Mortgage loan commitments

Mortgage banking operations

Forward sales contracts

Mortgage banking operations

Mortgage loan commitments Mortgage banking operations $ 4,430 $ 518 $ 47

Forward sales contracts Mortgage banking operations ( 1,334 ) ( 693 ) ( 775 )

$ 3,096 $ ( 175 ) $ ( 728 )

The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to these agreements.

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The variation margin is treated as an adjustment to our cash collateral, as well as a corresponding adjustment to our derivative liability.

As of December 31, 2019 the variation margin adjustment was a negative adjustment of $ 4.3 million .

There was no variation margin adjustment as of December 31, 2018 .

As of December 31, 2020 and December 31, 2019, the variation margin adjustment was a negative adjustment of $16.9 million and $4.3 million, respectively.

The following presents additional information related to the Company’s derivative contracts, by type of financial instrument, as of December 31, 2020 and December 31, 2019 (in thousands):

1 unchanged sentence

Gross Amounts of Financial Instruments Not Offset in the Statement of Financial Condition

Gross Amounts Recognized

Amounts offset in the Statement

of Financial Condition

Gross Amounts Recognized Amounts offset in the Statement

of Financial Condition Net Amounts

in the Statement

of Financial Condition

Derivative Amount

of Financial Condition Derivative Amount Fair Value

of Financial Collateral

in the Statement

of Financial Condition

of Financial Condition Net Amount

Derivative assets

Interest rate swaps $ 39,066 $ — $ 39,066 $ — $ — $ 39,066

$ 39,066 $ — $ 39,066 $ — $ — $ 39,066

Derivative liabilities

Interest rate swaps $ 39,204 $ ( 16,868 ) $ 22,336 $ — $ ( 22,220 ) $ 116

$ 39,204 $ ( 16,868 ) $ 22,336 $ — $ ( 22,220 ) $ 116

December 31, 2019

Gross Amounts of Financial Instruments Not Offset in the Statement of Financial Condition

Gross Amounts Recognized

Amounts offset in the Statement

of Financial Condition

Gross Amounts Recognized Amounts offset in the Statement

of Financial Condition Net Amounts

in the Statement

of Financial Condition

Derivative Amount

of Financial Condition Derivative Amount Fair Value

of Financial Collateral

in the Statement

of Financial Condition

of Financial Condition Net Amount

Derivative assets

Interest rate swaps $ 15,242 $ ( 40 ) $ 15,202 $ — $ — $ 15,202

$ 15,242 $ ( 40 ) $ 15,202 $ — $ — $ 15,202

Derivative liabilities

Interest rate swaps $ 15,242 $ ( 4,276 ) $ 10,966 $ — $ ( 15,209 ) $ ( 4,243 )

REVENUE FROM CONTRACTS WITH CUSTOMERS

$ 15,242 $ ( 4,276 ) $ 10,966 $ — $ ( 15,209 ) $ ( 4,243 )

REVENUE FROM CONTRACTS WITH CLIENTS

Disaggregation of Revenue:

Deposit fees and other service charges for the years ended December 31, 2020, 2019 and 2018 are summarized as follows (in thousands):

2020 2019 2018

Deposit service charges 16,428 19,236 18,089

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Deposit fees and other service charges include transaction and non-transaction based deposit fees.

Transaction based fees on deposit accounts are charged to deposit customers for specific services provided to the customer.

Transaction based fees on deposit accounts are charged to deposit clients for specific services provided to the client.

These fees include such items as wire fees, official check fees, and overdraft fees.

These are contract specific to each individual transaction and do not extend beyond the individual transaction.

The performance obligation is completed and the fees are recognized at the time the specific transactional service is provided to the customer.

The performance obligation is completed and the fees are recognized at the time the specific transactional service is provided to the client.

Non-transactional deposit fees are typically monthly account maintenance fees charged on deposit accounts.

8 unchanged sentences

Merchant services income

Merchant services income represents fees earned by the Banks for card payment services provided to its merchant customers.

Merchant services income represents fees earned by the Banks for card payment services provided to its merchant clients.

The Banks have a contract with a third party to provide card payment services to the Banks’ merchants that contract for those services.

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Substantially all of the leases provide the Company with the option to extend the lease term one or more times following expiration of the initial term.

The Company adopted the requirements of Topic 842 effective January 1, 2019, which required the Company to record a right-of-use lease asset and a lease liability for leases with an initial term of more than 12 months for leases that existed as of January 1, 2019.

The periods prior to the date of adoption are accounted for under Lease Topic 840;

therefore, the following disclosures include only the periods for which Topic 842 was effective.

Lease Position as of December 31, 2019

The table below presents the lease right-of-use assets and lease liabilities recorded on the balance sheet at December 31, 2019 (dollars in thousands):

Classification on the Balance Sheet

December 31, 2019

Operating right-of-use lease assets

Operating lease liabilities

Accrued expenses and other liabilities

Lease Position

The table below presents the lease right-of-use assets and lease liabilities recorded on the balance sheet at December 31, 2020 and December 31, 2019 (dollars in thousands):

Classification on the Balance Sheet December 31, 2020 December 31, 2019

Operating right-of-use lease assets Other assets $ 55,367 $ 61,766

Operating lease liabilities Accrued expenses and other liabilities $ 59,343 $ 65,818

Weighted-average remaining lease term

Operating leases

Operating leases 5.8 years 6.2 years

Weighted-average discount rate

Operating leases 3.3 % 3.7 %

The table below presents certain information related to the lease costs for operating leases for the year ended December 31, 2019 (in thousands):

Twelve Months Ended December 31,

The table below presents certain information related to the lease costs for operating leases for the year ended December 31, 2020 and December 31, 2019 (in thousands):

Operating lease cost (1)

$ 17,337 $ 15,388

Short-term lease cost (1)

1 unchanged sentence

Less sublease income (1)

( 946 ) ( 925 )

Total lease cost $ 19,266 $ 17,186

(1) Lease expenses and sublease income are classified within occupancy and equipment expense on the Consolidated Statements of Operations.

Rental expense was $ 17.2 million for the year ended December 31, 2018.

Supplemental Cash Flow Information

Operating cash flows paid for operating lease amounts included in the measurement of lease liabilities were $ 15.4 million for the year ended December 31, 2019 .

During the year ended December 31, 2019 , the Company recorded $ 78.8 million of right-of-use lease assets in exchange for operating lease liabilities.

Operating cash flows paid for operating lease amounts included in the measurement of lease liabilities were $ 17.1 million for the year ended December 31, 2020 and $ 15.4 million for the year ended December 31, 2019.

The Company recorded $9.2 million of right-of-use lease assets in exchange for operating lease liabilities for the year ended December 31, 2020 and $78.8 million for the year ended December 31, 2019

Undiscounted Cash Flows

1 unchanged sentence

Operating Leases

2021 $ 16,020

Thereafter 12,217

Total minimum lease payments

1 unchanged sentence

Lease obligations

As of December 31, 2019 , the Company had no undiscounted lease payments under an operating lease that had not yet commenced.

As of December 31, 2020 and December 31, 2019, the Company had no undiscounted lease payments under an operating lease that had not yet commenced.

BANNER CORPORATION

Index of Exhibits

Agreement and Plan of Merger, dated as of July 25, 2018, by and between Banner Corporation and Skagit Bancorp, Inc.

Exhibit Index of Exhibits

2 {a} Agreement and Plan of Merger, dated as of July 25, 2018, by and between Banner Corporation and Skagit Bancorp, Inc.

(incorporated herein by reference to Exhibit 2.1 to the Registrant ’ s Current Report on Form 8-K filed with the SEC on July 27, 2018 (File No.

Amended and Restated Articles of Incorporation of Registrant [incorporated by reference to the Registrant's Current Report on Form 8-K filed on April 29, 2010 (File No.

Articles of Amendment of Registrant (incorporated herein by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed with the SEC on June 1,2011 (File No.

Articles of Amendment to Amended and Restated Articles of Incorporation of Registrant for nonvoting common stock (incorporated by reference to the Registrant's Current Report on Form 8-K filed on March 18, 2015 (File No.

Amended and Restated Bylaws of Registrant [incorporated by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K filed on December 20, 2016 (File No.

3{a} Amended and Restated Articles of Incorporation of Registrant [incorporated by reference to the Registrant's Current Report on Form 8-K filed on April 29, 2010 (File No.

3{b} Articles of Amendment of Registrant (incorporated herein by reference to Exhibit 3.1 to the Registrant ’ s Current Report on Form 8-K filed with the SEC on June 1,2011 (File No.

3{c} Articles of Amendment to Amended and Restated Articles of Incorporation of Registrant for nonvoting common stock (incorporated by reference to the Registrant ’ s Current Report on Form 8-K filed on March 18, 2015 (File No.

3{d} Amended and Restated Bylaws of Registrant [incorporated by reference to Exhibit 3.2 to the Registrant ’ s Current Report on Form 8-K filed on October 29, 20 20 (File No.

4.2 Description of Capital Stock

Executive Salary Continuation Agreement with Gary L.

Sirmon [incorporated by reference to exhibits filed with the Annual Report on Form 10-K for the year ended March 31, 1996 (File No.

Amended and Restated Employment Agreement, with Mark J.

4.3 Issuance of base indenture, first supplemental indenture and subordinated note [incorporated by reference to the exhibits filed with Form 8-K on June 30, 2020 (File No.

10{a} Amended and Restated Employment Agreement, with Mark J.

Grescovich [incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on June 4, 2013 (File No.

Form of Supplemental Executive Retirement Program Agreement with Gary Sirmon, Michael K.

10{b} Form of Supplemental Executive Retirement Program Agreement with Gary Sirmon, Michael K.

Larsen, Lloyd W.

2 unchanged sentences

Barton [incorporated by reference to exhibits filed with the Annual Report on Form 10-K for the year ended December 31, 2001 and the exhibits filed with the Form 8-K on May 6, 2008 (File No.

Form of Employment Contract entered into with Lloyd W.

10{c} Form of Employment Contract entered into with Lloyd W.

Baker, Cynthia D.

1 unchanged sentence

Barton [incorporated by reference to exhibits filed with the Form 8-K on June 25, 2014 (File No.

Long-Term Incentive Plan and Form of Repricing Agreement [incorporated by reference to the exhibits filed with the Form 8-K on May 6, 2008 (File No.

2005 Executive Officer and Director Stock Account Deferred Compensation Plan [incorporated by reference to exhibits filed with the Annual Report on Form 10-K for the year ended December 31, 2008 (File No.

Entry into an Indemnification Agreement with each of the Registrant's Directors [incorporated by reference to exhibits filed with the Form 8-K on January 29, 2010 (File No.

2012 Restricted Stock and Incentive Bonus Plan [incorporated by reference to Appendix B to the Registrant's Definitive Proxy Statement on Schedule 14A filed on March 19, 2013 (File No.

Form of Performance-Based Restricted Stock Award Agreement [incorporated by reference to Exhibit 10.1 included in the Registrant's Current Report on Form 8-K filed on June 4, 2013 (File No.

Form of Time-Based Restricted Stock Award Agreement [incorporated by reference to Exhibit 10.1 included in the Registrant's Current Report on Form 8-K filed on June 4, 2013 (File No.

2014 Omnibus Incentive Plan [incorporated by reference as Appendix C to the Registrant's Definitive Proxy Statement on Schedule 14A filed on March 24, 2014 (File No.

10{d} 2005 Executive Officer and Director Stock Account Deferred Compensation Plan [incorporated by reference to exhibits filed with the Annual Report on Form 10-K for the year ended December 31, 2008 (File No.

10{e} Entry into an Indemnification Agreement with each of the Registrant ’ s Directors [incorporated by reference to exhibits filed with the Form 8-K on January 29, 2010 (File No.

10{f} 2012 Restricted Stock and Incentive Bonus Plan [incorporated by reference to Appendix B to the Registrant ’ s Definitive Proxy Statement on Schedule 14A filed on March 19, 2013 (File No.

10{g} Form of Performance-Based Restricted Stock Award Agreement [incorporated by reference to Exhibit 10.1 included in the Registrant ’ s Current Report on Form 8-K filed on June 4, 2013 (File No.

10{h} Form of Time-Based Restricted Stock Award Agreement [incorporated by reference to Exhibit 10.1 included in the Registrant ’ s Current Report on Form 8-K filed on June 4, 2013 (File No.

10{i} 2014 Omnibus Incentive Plan [incorporated by reference as Appendix C to the Registrant ’ s Definitive Proxy Statement on Schedule 14A filed on March 24, 2014 (File No.

000-26584)] and amendments [incorporated by reference to the Form 8-K filed on March 25, 2015 (File No.

Forms of Equity-Based Award Agreements:

10{j} Forms of Equity-Based Award Agreements:

Incentive Stock Option Award Agreement, Non-Qualified Stock Option Award Agreement, Restricted Stock Award Agreement, Restricted Stock Unit Award Agreement, Stock Appreciation Right Award Agreement, and Performance Unit Award Agreement [incorporated by reference to Exhibits 10.2 - 10.7 included in the Registration Statement on Form S-8 dated May 9, 2014 (File No.

333-195835)].

2018 Omnibus Incentive Plan [incorporated by reference as Appendix D to the Registrant's Definitive Proxy Statement on Schedule 14A filed on March 23, 2018 (File No.

Forms of Equity-Based Award Agreements:

10{k} 2018 Omnibus Incentive Plan [incorporated by reference as Appendix D to the Registrant ’ s Definitive Proxy Statement on Schedule 14A filed on March 23, 2018 (File No.

10{l} Forms of Equity-Based Award Agreements:

Incentive Stock Option Award Agreement, Non-Qualified Stock Option Award Agreement under the Banner Corporation 2018 Omnibus Incentive Plan;

12 unchanged sentences

32 Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Inline XBRL Taxonomy Extension Schema Document

Inline XBRL Taxonomy Extension Calculation Linkbase Document

Inline XBRL Taxonomy Extension Definition Linkbase Document

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Inline XBRL Taxonomy Extension Presentation Linkbase Document

101.INS Inline XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the XBRL document.

101.SCH Inline XBRL Taxonomy Extension Schema Document

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101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document

104 The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, formatted in Inline XBRL (included in Exhibit 101)

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 9A. Controls and Procedures