BANNER CORP 10-K

Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s discussion and analysis of results of operations is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Notes to the Consolidated Financial Statements of this Form 10-K. Executive Overview Banner Corporation’s successful execution of its super community bank model and strategic initiatives has delivered solid core operating results and profitability. Highlights of this success have included solid asset quality, client acquisition and account growth, which have resulted in increased core deposit balances and strong revenue generation while maintaining the Company’s moderate risk profile. For the year ended December 31, 2020, our net income was $115.9 million, or $3.26 per diluted share, compared to net income of $146.3 million, or $4.18 per diluted share for the year ended December 31, 2019 and $136.5 million, or $4.15 per diluted share for the year ended December 31, 2018. Current year results were impacted by an increase in the provision for credit losses as a result of the COVID-19 pandemic, lower yields on earnings assets, decreased deposit fees and other service charges and increased non-interest expense these were partially offset by increased income from mortgage banking operations, growth in core deposit balances and decreased funding costs. The decreases in the yields on interest earning assets compared to a year ago were driven by the low interest rate environment, which continues to put downward pressure on loan yields, as well as the impact of the low loan yields from the PPP loan portfolio. The increase in the provision for credit losses for the current quarter compared to the same quarter a year ago primarily reflected expected lifetime credit losses due to the COVID-19 pandemic based upon the financial conditions and economic outlook that existed as of December 31, 2020. Our results for the years ended December 31, 2020, 2019, and 2018 were also impacted by $2.1 million, $7.5 million, and $5.6 million of merger and acquisition-related expenses, respectively. Our financial results for the year ended December 31, 2020 reflect the impact of the COVID-19 pandemic, which resulted in a substantial reduction in business activity or the closing of businesses in all of the states in which we operate. We are continuing to offer payment and financial relief programs for borrowers impacted by COVID-19. These programs include initial loan payment deferrals or interest-only payments for up to 90 days, waived late fees, and, on a more limited basis, waived interest and temporarily suspended foreclosure proceedings. Deferred loans are re-evaluated at the end of the initial deferral period and will either return to the original loan terms or may be eligible for an additional deferral period for up to 90 days. In addition, We have entered into payment forbearance agreements with other clients for periods of up to six months. At December 31, 2020, we had 158 loans totaling $75.4 million still on deferral. Of the loans still on deferral, 26 loans totaling $33.9 million have received a second deferral. Since these loans were performing loans that were current on their payments prior to the COVID-19 pandemic, these modifications are not considered to be troubled debt restructurings at December 31, 2020 pursuant to applicable accounting and regulatory guidance. In addition, the SBA provides assistance to small businesses impacted by COVID-19 through the PPP, which was designed to provide near-term relief to help small businesses sustain operations. The deadline for PPP loan applications to the SBA was August 8, 2020. Under this program we funded 9,103 applications totaling $1.15 billion of loans in its service area and began processing applications for loan forgiveness in the fourth quarter of 2020. As of December 31, 2020, we had received SBA forgiveness on 595 PPP loans totaling $112.3 million resulting in a remaining PPP loan balance of $1.04 billion. The CAA renewed and extended the PPP until March 31, 2021 by authorizing an additional $284.5 billion for the program. As a result, in January 2021, Banner Bank began accepting and processing loan applications under this second PPP program. Banner Bank has begun taking steps to resume more normal branch activities with specific guidelines in place to help safeguard the safety of its clients and personnel. To further the well-being of staff and clients, we implemented measures to allow employees to work from home to the extent practicable. To facilitate this approach, we allocated additional computer equipment to staff and enhanced our network capabilities with several upgrades. These expenses, plus other expenses incurred in response to the COVID-19 pandemic, resulted in $3.5 million of related costs during the year ended December 31, 2020. Our operating results depend primarily on our net interest income, which is the difference between interest income on interest-earning assets, consisting primarily of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of client deposits, FHLB advances, other borrowings, subordinated notes, and junior subordinated debentures. Net interest income is primarily a function of our interest rate spread, which is the difference between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, as well as a function of the average balances of interest-earning assets, interest-bearing liabilities and non-interest-bearing funding sources including non-interest-bearing deposits. Our net interest income before provision for credit losses increased 3% to $481.3 million for the year ended December 31, 2020, compared to $468.9 million for the prior year. This increase in net interest income is a result of growth in total loans receivable and core deposits as well as decreased funding costs, partially offset by lower yields on interest-earning assets. The growth in total loans receivable and core deposits was largely as the result of the origination of PPP loans during the second and third quarter of 2020. During the year ended December 31, 2020, our interest spread decreased to 3.84% from 4.32% for the prior year while our net interest margin on a tax equivalent basis decreased to 3.85% compared to 4.35% for the prior year. The decrease in net interest margin on a tax equivalent basis during 2020 primarily reflects lower yields on average interest-earning assets, partially offset by decreases in the cost of funding liabilities. The lower yields on average interest-earning assets compared to a year earlier was largely due to the impact of decreases to the targeted Fed Funds Rate on floating rate loan yields and the low loan yields of the PPP loan portfolio and well as excess liquidity being invested in low yielding short term investments and interest bearing deposits. The Federal Reserve reduced the targeted Fed Funds Rate by 75 basis points during the second half of 2019 and an additional 150 basis points during first quarter of 2020 to a range of 0.00% to 0.25% at December 31, 2020. Our net interest margin was enhanced seven basis points in both 2020 and 2019 by acquisition 46 accounting adjustments, primarily the amortization of acquisition accounting discounts on purchased loans obtained from acquisitions, which are accreted into loan interest income. We recorded a $64.3 million provision for credit losses - loans in the year ended December 31, 2020, primarily reflecting the expected lifetime credit losses due to the COVID-19 pandemic based upon the financial conditions and economic outlook that existed as of December 31, 2020, compared to an $10.0 million provision recorded in 2019 and a $8.5 million provision in 2018. Non-performing loans decreased to $35.6 million at December 31, 2020, compared to $39.6 million a year earlier. Net charge-offs decreased to $5.4 million for the year ended December 31, 2020, compared to net charge-offs of $5.9 million for the prior year. Our allowance for credit losses - loans at December 31, 2020 was $167.3 million, representing 470% of non-performing loans compared to $100.6 million, or 254% of non-performing loans at for the prior year. In addition to the allowance for credit losses - loans, We maintain an allowance for credit losses - unfunded loan commitments which was $13.3 million at December 31, 2020 compared to $2.7 million at December 31, 2019. (See Note 5, Loans Receivable and the Allowance for Credit Losses, as well as “Asset Quality” below in this Form 10-K.) Our net income is also affected by the level of our non-interest income, including deposit fees and other service charges, results of mortgage banking operations, which includes gains and losses on the sale of loans and servicing fees, gains and losses on the sale of securities, as well as our non-interest expenses and provisions for loan losses and income taxes. In addition, our net income is affected by the net change in the value of certain financial instruments carried at fair value. Our total non-interest income was $98.6 million for the year ended December 31, 2020, compared to $81.9 million for the year ended December 31, 2019. The increase from the prior year primarily reflects increased income from mortgage banking operations partially offset by decreased deposit fees and other service charges. For the year ended December 31, 2020, we recorded a net loss of $656,000 for fair value adjustments and $1.0 million in net gains on the sale of securities. In comparison, for the year ended December 31, 2019, we recorded a net loss of $208,000 for fair value adjustments and $33,000 in net gains on the sale of securities. Our total revenues (net interest income before the provision for credit losses plus total non-interest income) for the year ended December 31, 2020 increased $29.1 million, or 5%, to $579.9 million, compared to $550.9 million for the same period a year earlier, largely as a result of increases in both net interest income and non-interest income. Our total adjusted revenues (a non-GAAP financial measure), which excludes net gains and losses on sale of securities and fair value adjustments increased by $28.5 million, or 5%, to $579.6 million for the year ended December 31, 2020, compared to $551.0 million a year earlier. For the year ended December 31, 2020, non-interest expense increased 4% to $373.1 million, compared to $357.7 million for the year ended December 31, 2019. The increase was largely the result of the higher salary and employee benefits due to additional staffing related to the operations acquired from the acquisition of AltaPacific on November 1, 2019 and normal salary and wage adjustments, as well as increases in deposit insurance expenses and COVID-19 expenses. In addition the provision for credit losses - unfunded loan commitments was $3.6 million for the year ended December 31, 2020, compared to none for the year ended December 31, 2019. These increases were partially offset by increased capitalized loan origination costs and lower travel related expenses. *Non-GAAP financial measures: Net income, revenues and other earnings and expense information excluding fair value adjustments, gains or losses on the sale of securities, merger and acquisition-related expenses, FHLB prepayment penalties, COVID-19 expenses, amortization of CDI, REO operations, provision credit losses - unfunded loan commitments, state/municipal business and use tax and the related tax benefit, are non-GAAP financial measures. Management has presented these and other non-GAAP financial measures in this discussion and analysis because it believes that they provide useful and comparative information to assess trends in our core operations and to facilitate the comparison of our performance with the performance of our peers. However, these non-GAAP financial measures are supplemental and are not a substitute for any analysis based on GAAP. Where applicable, we have also presented comparable earnings information using GAAP financial measures. For a reconciliation of these non-GAAP financial measures, see the tables below. Because not all companies use the same calculations, our presentation may not be comparable to other similarly titled measures as calculated by other companies. See “Comparison of Results of Operations for the Years Ended December 31, 2020 and 2019” for more detailed information about our financial performance. 47 The following tables set forth reconciliations of non-GAAP financial measures discussed in this report (dollars in thousands, except share and per share data): For the Years Ended December 31 2020 2019 2018 ADJUSTED REVENUE: Net interest income before provision for loan losses (GAAP) $ 481,301 $ 468,919 $ 430,988 Total non-interest income 98,616 81,941 83,993 Total GAAP revenue 579,917 550,860 514,981 Exclude net (gain) loss on sale of securities (1,012) (33) 837 Exclude change in valuation of financial instruments carried at fair value 656 208 (3,775) Adjusted Revenue (non-GAAP) $ 579,561 $ 551,035 $ 512,043 ADJUSTED EARNINGS: Net income (GAAP) $ 115,928 $ 146,278 $ 136,515 Exclude net (gain) loss on sale of securities (1,012) (33) 837 Exclude change in valuation of financial instruments carried at fair value 656 208 (3,775) Exclude merger and acquisition-related costs 2,062 7,544 5,607 Exclude FHLB prepayment penalties — 735 — Exclude COVID-19 expenses 3,502 — — Exclude related tax benefit (1,239) (1,741) (426) Exclude tax adjustments related to tax reform and valuation reserves — — (4,207) Total adjusted earnings (non-GAAP) $ 119,897 $ 152,991 $ 134,551 Diluted earnings per share (GAAP) $ 3.26 $ 4.18 $ 4.15 Diluted adjusted earnings per share (non-GAAP) $ 3.37 $ 4.38 $ 4.09 48 December 31 ADJUSTED EFFICIENCY RATIO: 2020 2019 2018 Non-interest expense (GAAP) $ 373,148 $ 357,728 $ 341,371 Exclude merger and acquisition-related costs (2,062) (7,544) (5,607) Exclude COVID-19 expenses (3,502) — — Exclude CDI amortization (7,732) (8,151) (6,047) Exclude state/municipal tax expense (4,355) (3,880) (3,284) Exclude REO operations 190 (303) (804) Exclude FHLB prepayment penalties — (735) — Exclude provision for credit losses - unfunded loan commitments (3,559) — — Adjusted non-interest expense (non-GAAP) $ 352,128 $ 337,115 $ 325,629 Net interest income (GAAP) $ 481,301 $ 468,919 $ 430,988 Non-interest income (GAAP) 98,616 81,941 83,993 Total revenue 579,917 550,860 514,981 Exclude net (gain) loss on sale of securities (1,012) (33) 837 Exclude net change in valuation of financial instruments carried at fair value 656 208 (3,775) Adjusted revenue (non-GAAP) $ 579,561 $ 551,035 $ 512,043 Efficiency ratio (GAAP) 64.35 % 64.94 % 66.29 % Adjusted efficiency ratio (non-GAAP) 60.76 % 61.18 % 63.59 % Common shareholders’ tangible equity per share and the ratio of common shareholders’ tangible equity to tangible assets referred to in footnote (9) to Item 6, Selected Financial Data above are also non-GAAP financial measures. We calculate tangible common equity by excluding goodwill and other intangible assets from shareholders’ equity. We calculate tangible assets by excluding the balance of goodwill and other intangible assets from total assets. We believe that this is consistent with the treatment by our bank regulatory agencies, which exclude goodwill and other intangible assets from the calculation of risk-based capital ratios. Management believes that this non-GAAP financial measure provides information to investors that is useful in understanding the basis of our capital position (dollars in thousands). December 31 2020 2019 2018 Shareholders’ equity (GAAP) $ 1,666,264 $ 1,594,034 $ 1,478,595 Exclude goodwill and other intangible assets, net 394,547 402,279 372,078 Common shareholders’ tangible equity (non-GAAP) $ 1,271,717 $ 1,191,755 $ 1,106,517 Total assets (GAAP) $ 15,031,623 $ 12,604,031 $ 11,871,317 Exclude goodwill and other intangible assets, net 394,547 402,279 372,078 Total tangible assets (non-GAAP) $ 14,637,076 $ 12,201,752 $ 11,499,239 Common shareholders’ equity to total assets (GAAP) 11.09 % 12.65 % 12.46 % Common shareholders’ tangible equity to tangible assets (non-GAAP) 8.69 % 9.77 % 9.62 % Common shares outstanding 35,159,200 35,751,576 35,182,772 Common shareholders’ equity (book value) per share (GAAP) $ 47.39 $ 44.59 $ 42.03 Tangible common shareholders’ equity (tangible book value) per share (non-GAAP) $ 36.17 $ 33.33 $ 31.45 Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Notes to the Consolidated Financial Statements contained in Item IV of this Form 10-K. 49 Critical Accounting Policies In the opinion of management, the accompanying Consolidated Statements of Financial Condition and related Consolidated Statements of Operations, Comprehensive Income, Changes in Shareholders’ Equity and Cash Flows reflect all adjustments (which include reclassification and normal recurring adjustments) that are necessary for a fair presentation in conformity with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our financial statements. These policies relate to (i) the methodology for the recognition of interest income, (ii) determination of the provision and allowance for credit losses, (iii) the valuation of financial assets and liabilities recorded at fair value, (iv) the valuation of intangibles, such as goodwill, core deposit intangibles and mortgage servicing rights, (v) the valuation of real estate held for sale, (vi) the valuation of assets and liabilities acquired in business combinations and subsequent recognition of related income and expense, and (vii) the valuation of or recognition of deferred tax assets and liabilities. These policies and judgments, estimates and assumptions are described in greater detail below. Management believes the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate based on the factual circumstances at the time. However, given the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition. Further, subsequent changes in economic or market conditions could have a material impact on these estimates and our financial condition and operating results in future periods. There have been no significant changes in our application of accounting policies since December 31, 2019 except for the change related to the adoption of Financial Instruments - Credit Losses (ASC 326) as described below and in Notes 1 and 2 to the Consolidated Financial Statements. For additional information concerning critical accounting policies, see Notes 1, 3, 5, 12, 16 and 17 of the Notes to the Consolidated Financial Statements and the following: Interest Income: (Notes 4 and 5) Interest on loans and securities is accrued as earned unless management doubts the collectability of the asset or the unpaid interest. Interest accruals on loans are generally discontinued when loans become 90 days past due for payment of interest and the loans are then placed on nonaccrual status. All previously accrued but uncollected interest is deducted from interest income upon transfer to nonaccrual status. For any future payments collected, interest income is recognized only upon management’s assessment that there is a strong likelihood that the full amount of a loan will be repaid or recovered. Management’s assessment of the likelihood of full repayment involves judgment including determining the fair value of the underlying collateral which can be impacted by the economic environment. A loan may be put on nonaccrual status sooner than this policy would dictate if, in management’s judgment, the amounts owed, principal or interest, may be uncollectable. While less common, similar interest reversal and nonaccrual treatment is applied to investment securities if their ultimate collectability becomes questionable. Loans modified due to the COVID-19 pandemic are considered current if they are less than 30 days past due on the contractual payments at the time the loan modification program was put in place and therefore continue to accrue interest unless the interest is being waived. Provision and Allowance for Credit Losses - Loans: (Note 5) The methodology for determining the allowance for credit losses - loans is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for credit losses. Among the material estimates required to establish the allowance for credit losses - loans are: a reasonable and supportable forecast; a reasonable and supportable forecast period and the reversion period; value of collateral; strength of guarantors; the amount and timing of future cash flows for loans individually evaluated; and determination of the qualitative loss factors. All of these estimates are susceptible to significant change. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. The Banks have elected to exclude accrued interest receivable from the amortized cost basis in their estimate of the allowance for credit losses. The provision for credit losses reflects the amount required to maintain the allowance for credit losses at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves. The Company has established systematic methodologies for the determination of the adequacy of the Company’s allowance for credit losses. The methodologies are set forth in a formal policy and take into consideration the need for a valuation allowance for loans evaluated on a collective (pool) basis which have similar risk characteristics as well as allowances that are tied to individual loans that do not share risk characteristics. The Company increases its allowance for credit losses by charging provisions for credit losses on its consolidated statement of operations. Losses related to specific assets are applied as a reduction of the carrying value of the assets and charged against the allowance for credit loss reserve when management believes the uncollectibility of a loan balance is confirmed. Recoveries on previously charged off loans are credited to the allowance for credit losses. Management estimates the allowance for credit losses using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio. These factors include, among others, changes in the size and composition of the loan portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic conditions. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. In estimating the component of the allowance for credit losses for loans that share common risk characteristics, loans are pooled based on loan type and areas of risk 50 concentration. For loans evaluated collectively, the allowance for credit losses is calculated using life of loan historical losses adjusted for economic forecasts and current conditions. For commercial real estate, multifamily real estate, construction and land, commercial business and agricultural loans with risk rating segmentation, historical credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and risk rating. For one- to four- family residential loans, historical credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and delinquency status. These models calculate an expected life-of-loan loss percentage for each loan category by calculating the probability of default, based on the migration of loans from performing to loss by risk rating or delinquency categories using historical life-of-loan analysis and the severity of loss, based on the aggregate net lifetime losses incurred for each loan pool. For commercial real estate, commercial business, and consumer loans without risk rating segmentation, historical credit loss assumptions are estimated using a model that calculates an expected life-of-loan loss percentage for each loan category by considering the historical cumulative losses based on the aggregate net lifetime losses incurred for each loan pool. The model captures historical loss data back to the first quarter of 2008. For loans evaluated collectively, management uses economic indicators to adjust the historical loss rates so that they better reflect management’s expectations of future conditions over the remaining lives of the loans in the portfolio based on reasonable and supportable forecasts. These economic indicators are selected based on correlation to the Company’s historical credit loss experience and are evaluated for each loan category. The economic indicators evaluated include unemployment, gross domestic product, real estate price indices and growth, yield curve spreads, treasury yields, the corporate yield, the market volatility index, the Dow Jones index, the consumer confidence index, and the prime rate. Management considers various economic scenarios and forecasts when evaluating the economic indicators and probability weights the various scenarios to arrive at the forecast that most reflects management’s expectations of future conditions. The allowance for credit losses is then adjusted for the period in which those forecasts are considered to be reasonable and supportable. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, the adjustments discontinue to be applied so that the model reverts back to the historical loss rates using a straight line reversion method. Management selected an initial reasonable and supportable forecast period of 12 months with a reversion period of 12 months. Both the reasonable and supportable forecast period and the reversion period are periodically reviewed by management. Further, for loans evaluated collectively, management also considers qualitative and environmental factors for each loan category to adjust for differences between the historical periods used to calculate historical loss rates and expected conditions over the remaining lives of the loans in the portfolio. In determining the aggregate adjustment needed management considers the financial condition of the borrowers, the nature and volume of the loans, the remaining terms and the extent of prepayments on the loans, the volume and severity of past due and classified loans as well as the value of the underlying collateral on loans in which the collateral dependent practical expedient has not been used. Management also considers the Company’s lending policies, the quality of the Company’s credit review system, the quality of the Company’s management and lending staff, and the regulatory and economic environments in the areas in which the Company’s lending activities are concentrated. Loans that do not share risk characteristics with other loans in the portfolio are individually evaluated for impairment and are not included in the collective evaluation. Factors involved in determining whether a loan should be individually evaluated include, but are not limited to, the financial condition of the borrower and the value of the underlying collateral. Expected credit losses for loans evaluated individually are measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or when the Banks determine that foreclosure is probable, the expected credit loss is measured based on the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. As a practical expedient, the Banks measure the expected credit loss for a loan using the fair value of the collateral, if repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the Banks’ assessment as of the reporting date. In both cases, if the fair value of the collateral is less than the amortized cost basis of the loan, the Banks will recognize an allowance as the difference between the fair value of the collateral, less costs to sell (if applicable), at the reporting date and the amortized cost basis of the loan. If the fair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis will be limited to the amount previously charged-off. Subsequent changes in the expected credit losses for loans evaluated individually are included within the provision for credit losses in the same manner in which the expected credit loss initially was recognized or as a reduction in the provision that would otherwise be reported. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Banks. Some of the Banks’ loans are reported as troubled debt restructures (TDRs). Loans are reported as TDRs when the Banks grant a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for a transaction of similar risk. The allowance for credit losses on a TDR is determined using the same method as all other loans held for investment, except when the value of the concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method the allowance for credit losses is determined by discounting the expected future cash flows at the original interest rate of the loan. The Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or 51 other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and regulatory guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. Fair Value Accounting and Measurement: (Notes 1 and 17) We use fair value measurements to record fair value adjustments to certain financial assets and liabilities and to determine fair value disclosures. We include in the Notes to the Consolidated Financial Statements information about the extent to which fair value is used to measure financial assets and liabilities, the valuation methodologies used and the impact on our results of operations and financial condition. Additionally, for financial instruments not recorded at fair value we disclose, where required, our estimate of their fair value. Business Combinations: (Notes 1 and 3) Business combinations are accounted for using the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed, both tangible and intangible, and consideration exchanged are recorded at acquisition date fair values. The determination of the fair value of assets acquired and liabilities assumed involves a significant amount of judgment. The excess purchase consideration over the fair value of net assets acquired is recorded as goodwill. In the event that the fair value of net assets acquired exceeds the purchase price, including fair value of liabilities assumed, a bargain purchase gain is recorded on that acquisition. Expenses incurred in connection with a business combination are expensed as incurred. Changes in deferred tax asset valuation allowances related to acquired tax uncertainties are recognized in net income after the measurement period. Loans Acquired in Business Combinations: (Notes 3 and 5) Loans acquired in business combinations are recorded at their fair value at the acquisition date. Establishing the fair value of acquired loans involves a significant amount of judgment, including determining the credit discount based upon historical data adjusted for current economic conditions and other factors. If any of these assumptions are inaccurate actual credit losses could vary significantly from the credit discount used to calculate the fair value of the acquired loans. Acquired loans are evaluated upon acquisition and classified as either purchased credit-deteriorated or purchased non-credit-deteriorated. Purchased credit-deteriorated (PCD) loans have experienced more than insignificant credit deterioration since origination. For PCD loans, an allowance for credit losses is determined at the acquisition date using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The loan’s fair value grossed up for the allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through a provision for credit losses. For purchased non-credit-deteriorated loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income over the life of the loans. While credit discounts are included in the determination of the fair value for non-credit-deteriorated loans, since these discounts are expected to be accreted over the life of the loans, they cannot be used to offset the allowance for credit losses that must be recorded at the acquisition date. As a result, an allowance for credit losses is determined at the acquisition date using the same methodology as other loans held for investment and is recognized as a provision for credit losses. Any subsequent deterioration (improvement) in credit quality is recognized by recording (recapturing) a provision for credit losses. Goodwill: (Notes 1 and 16) Goodwill represents the excess of the purchase consideration paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination and is not amortized but is reviewed annually, or more frequently as current circumstances and conditions warrant, for impairment. An assessment of qualitative factors is completed to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The qualitative assessment involves judgment by management on determining whether there have been any triggering events that have occurred which would indicate potential impairment. If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed. The quantitative goodwill impairment test is used to identify the existence of impairment and the amount of impairment loss and compares the reporting unit’s estimated fair values, including goodwill, to its carrying amount. If the fair value exceeds the carry amount then goodwill is not considered impaired. If the carrying amount exceeds its fair value, an impairment loss would be recognized equal to the amount of excess, limited to the amount of total goodwill allocated to the reporting unit. The impairment loss would be recognized as a charge to earnings. The Company completed an assessment of qualitative factors as of December 31, 2020 and as a result of the economic impact of the COVID-19 pandemic concluded further analysis was required. The Company completed a quantitative goodwill impairment test and concluded the fair value of the reporting unit exceeded the carrying value of the reporting unit including goodwill and therefore no impairment existed as of December 31, 2020. Other Intangible Assets: (Notes 1 and 16) Other intangible assets consists primarily of core deposit intangibles (CDI), which are amounts recorded in business combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the client relationships associated with the deposits. Core deposit intangibles are being amortized on an accelerated basis over a weighted average estimated useful life of eight years. The determination of the estimated useful life of the core deposit intangible involves judgment by management. The actual life of the core deposit intangible could vary significantly from the estimated life. These assets are reviewed at least annually for events or circumstances that could impact their recoverability. These events could include loss of the underlying core deposits, increased competition or adverse changes in the economy. To the extent other identifiable intangible assets are deemed unrecoverable, impairment losses are recorded in other non-interest expense to reduce the carrying amount of the assets. Mortgage Servicing Rights: (Note 16) Mortgage servicing rights (MSRs) are recognized as separate assets when rights are acquired through purchase or through sale of loans. Generally, purchased MSRs are capitalized at the cost to acquire the rights. For sales of mortgage loans, the value of the MSR is estimated and capitalized. Fair value is based on market prices for comparable mortgage servicing contracts. The fair value of the MSRs includes an estimate of the life of the underlying loans which is affected by estimated prepayment speeds. The estimate of prepayment speeds is based on current market conditions. Actual market conditions could vary significantly from current conditions which could result in the estimated life of the underlying loans being different which would change the fair value of the MSR. 52 Capitalized MSRs are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Real Estate Owned Held for Sale : (Notes 1 and 6) Property acquired by foreclosure or deed in lieu of foreclosure is recorded at the estimated fair value of the property, less expected selling costs. Development and improvement costs relating to the property may be capitalized, while other holding costs are expensed. The carrying value of the property is periodically evaluated by management. Property values are influenced by current economic and market conditions, changes in economic conditions could result in a decline in property value. To the extent that property values decline, allowances are established to reduce the carrying value to net realizable value. Gains or losses at the time the property is sold are charged or credited to operations in the period in which they are realized. The amounts the 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. Income Taxes and Deferred Taxes : (Note 12) The Company and its wholly-owned subsidiaries file consolidated U.S. federal income tax returns, as well as state income tax returns in Oregon, California, Utah, Idaho and Montana. Income taxes are accounted for using the asset and liability method. Under this method a deferred tax asset or liability is determined based on the enacted tax rates which are expected to be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’s income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. We assess the appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other pertinent information and maintain tax accruals consistent with our evaluation. Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations by the tax authorities and newly enacted statutory, judicial and regulatory guidance that could impact the relative merits of tax positions. These changes, when they occur, impact accrued taxes and can materially affect our operating results. A valuation allowance is required to be recognized if it is more likely than not that all or a portion of our deferred tax assets will not be realized. The evaluation pertaining to the tax expense and related deferred tax asset and liability balances involves a high degree of judgment and subjectivity around the measurement and resolution of these matters. The ultimate realization of the deferred tax assets is dependent upon the existence, or generation, of taxable income in the periods when those temporary differences and net operating loss and credit carryforwards are deductible. Legal Contingencies: In the normal course of our business, we have various legal proceedings and other contingent matters pending. We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We assess our potential liability by analyzing our litigation and regulatory matters using available information. We develop our views on estimated losses in consultation with outside counsel handling our defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. The estimated losses often involve a level of subjectivity and usually are a range of reasonable losses and not an exact number, in those situations we accrue the best estimate within the range or the low end of the range if no estimate within the range is better than another. Accounting Standards Recently Adopted or Issued - See Note 2 of the Notes to the Consolidated Financial Statements for a description of recently adopted and new accounting pronouncements, including the respective dates of adoption and expected effects on the Company’s financial position and results of operations. C omparison of Financial Condition at December 31, 2020 and 2019 General. Total assets increased to $15.03 billion at December 31, 2020, compared to $12.60 billion at December 31, 2019. The increase in assets in 2020 was largely the result of the origination of PPP loans and a related increase in deposits starting during the second quarter of 2020, which primarily funded the increases in interest bearing deposit balances and securities. Net loans receivable (gross loans less deferred fees and discounts, and allowance for loan losses and excluding loans held for sale) increased $498.9 million, or 5%, to $9.70 billion at December 31, 2020, from $9.20 billion at December 31, 2019. The increase in net loans receivable reflects the origination of PPP loans, which totaled $1.04 billion as of December 31, 2020, partially offset by a decrease in one- to four-family loans and lower commercial line of credit usage. Loans held for sale increased to $243.8 million at December 31, 2020, compared to $210.4 million at December 31, 2019, principally as a result of one- to four- family loan originations exceeding one- to four- family loan sales. Loans held for sale at December 31, 2020 included $122.0 million of multifamily loans and $121.8 million of one- to four-family loans. Securities increased to $2.77 billion at December 31, 2020, from $1.81 billion at December 31, 2019, as the Company invested excess liquidity. The aggregate total of securities and interest-bearing deposits increased $1.80 billion, or 96%, to $3.69 billion at December 31, 2020, compared to $1.89 billion a year earlier. The average effective duration of our securities portfolio was approximately 3.6 years at December 31, 2020. The fair value of our trading securities was $2.2 million less than their amortized cost at December 31, 2020. In addition, fair value adjustments for securities designated as available-for-sale reflected an increase of $45.2 million for the year ended December 31, 2020, which was included net of the associated tax expense of $10.9 million as a component of other comprehensive income, and largely occurred as a result of decreased market interest rates. We also acquire securities (primarily municipal bonds) which are designated as held-to-maturity and this portfolio increased by $185.6 million from the prior year-end balance. (See Notes 4 and 17 of the Notes to the Consolidated Financial Statements.) Goodwill was $373.1 million at both December 31, 2020 and December 31, 2019. Other intangibles decreased $7.7 million to $21.4 million at December 31, 2020, compared to $29.2 million at December 31, 2019, primarily due scheduled amortization of CDI. 53 Deposits increased $2.52 billion, or 25%, to $12.57 billion at December 31, 2020, from $10.05 billion at December 31, 2019, primarily due to SBA PPP loan funds deposited into client accounts and an increase in general client liquidity due to reduced business investment and consumer spending. Core deposits were 93% of total deposits at December 31, 2020, compared to 89% of total deposits one year earlier. Non-interest-bearing deposits increased by $1.55 billion, or 39%, to $5.49 billion from $3.95 billion at December 31, 2019; interest-bearing transaction and savings accounts increased by $1.18 billion, to $6.16 billion at December 31, 2020 from $4.98 billion at December 31, 2019; and certificates of deposit decreased $205.1 million, or 18%, to $915.3 million at December 31, 2020 from $1.12 billion at December 31, 2019. We had no brokered deposits at December 31, 2020, compared to $202.9 million a year earlier. FHLB advances decreased $300.0 million, to $150.0 million at December 31, 2020 from $450.0 million at December 31, 2019, as core deposits were used to fund the growth in the loan and securities portfolios. Other borrowings, consisting of retail repurchase agreements primarily related to client cash management accounts, increased $66.3 million to $184.8 million at December 31, 2020, compared to $118.5 million at December 31, 2019. On June 30, 2020, Banner issued and sold in an underwritten offering the Subordinated Notes, resulting in net proceeds, after underwriting discounts and offering expenses, of $98.1 million. No additional junior subordinated debentures, which are carried at fair value, were issued or matured during the year ended December 31, 2020; however, the estimated fair value of these instruments decreased by $2.3 million to $117.0 million at December 31, 2020 from $119.3 million a year ago, reflecting wider market spreads. For more information, see Notes 9, 10 and 11 of the Notes to the Consolidated Financial Statements. Total shareholders’ equity increased $72.2 million, to $1.67 billion at December 31, 2020, compared to $1.59 billion at December 31, 2019. The increase in equity primarily reflects $115.9 million of year-to-date net income, partially offset by the accrual of $44.2 million of dividends to common shareholders and the repurchase of $31.8 million of common stock. In the year ended December 31, 2020, we repurchased 624,780 shares of our common stock at an average price of $50.84 per share. Tangible common shareholders’ equity (a non-GAAP financial measure), which excludes goodwill and other intangible assets was $1.27 billion, or 8.69% of tangible assets at December 31, 2020, compared to $1.19 billion, or 9.77% at December 31, 2019. Banner’s tangible book value per share (a non-GAAP financial measure) was $36.17 at December 31, 2020, compared to $33.33 per share a year ago. Investments. At December 31, 2020, our consolidated investment securities portfolio totaled $2.77 billion and consisted principally of U.S. Government and agency obligations, mortgage-backed and mortgage-related securities, municipal bonds, corporate debt obligations, and asset-backed securities. Our investment levels may be increased or decreased depending upon yields available on investment alternatives and management’s projections as to the demand for funds to be used in our loan origination, deposit and other activities. During the year ended December 31, 2020, our aggregate investment in securities increased $956.0 million. Securities purchased increased as we deployed excess balance sheet liquidity and market spreads for certain securities widened and exceeded sales, paydowns and maturities during the year ended December 31, 2020. Holdings of U.S. Government and agency obligations increased $52.1 million, municipal bonds increased $390.2 million, corporate debt obligations increased $216.6 million, mortgage-backed securities increased $295.9 million and asset-backed securities increased $1.3 million. U.S. Government and Agency Obligations: Our portfolio of U.S. Government and agency obligations had a carrying value of $142.1 million (with an amortized cost of $142.0 million) at December 31, 2020, a weighted average contractual maturity of 8.9 years and a weighted average coupon rate of 1.79%. Many of the U.S. Government and agency obligations we own include call features which allow the issuing agency the right to call the securities at various dates prior to the final maturity. Mortgage-Backed Obligations: At December 31, 2020, our mortgage-backed and mortgage-related securities had a carrying value of $1.69 billion ($1.65 billion at amortized cost, with a net fair value adjustment of $44.1 million). The weighted average coupon rate of these securities was 2.43% and the weighted average contractual maturity was 18.7 years, although we receive principal payments on these securities each month resulting in a much shorter expected average life. As of December 31, 2020, 88% of the mortgage-backed and mortgage-related securities pay interest at a fixed rate and 12% pay at an adjustable interest rate. Municipal Bonds: The carrying value of our tax-exempt bonds at December 31, 2020 was $587.4 million ($569.7 million at amortized cost), comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by revenues from the specific project being financed) issued by cities and counties and various housing authorities, and hospital, school, water and sanitation districts. We also had taxable bonds in our municipal bond portfolio, which at December 31, 2020 had a carrying value of $87.1 million ($85.3 million at amortized cost). Many of our qualifying municipal bonds are not rated by a nationally recognized credit rating agency due to the smaller size of the total issuance and a portion of these bonds have been acquired through direct private placement by the issuers. We have not experienced any defaults or payment deferrals on our current portfolio of municipal bonds. Our combined municipal bond portfolio is geographically diverse, with the majority within the states of Washington, Oregon, Texas and Idaho. At December 31, 2020, our municipal bond portfolio, including taxable and tax-exempt, had a weighted average maturity of approximately 18.3 years and a weighted average coupon rate of 3.67%. Corporate Bonds: Our corporate bond portfolio had a carrying value of $250.0 million ($249.5 million at amortized cost, with a net fair value adjustment of $460,000) at December 31, 2020. The corporate bond portfolio at December 31, 2020 included $130.0 million of short term commercial paper. (See “Critical Accounting Policies” above and Note 17 of the Notes to the Consolidated Financial Statements.) At December 31, 2020, the portfolio had a weighted average maturity of 4.7 years and a weighted average coupon rate of 1.66%. Asset-Backed Securities: At December 31, 2020, our asset-backed securities portfolio had a carrying value of $9.4 million (with an amortized cost of $9.4 million), and was comprised of securitized pools of student loans issued or guaranteed by the Student Loan Marketing Association and credit card receivables. The weighted average coupon rate of these securities was 1.31% and the weighted average 54 contractual maturity was 13.1 years. At December 31, 2020, 100% of these securities had adjustable interest rates tied to three-month LIBOR. The following tables set forth certain information regarding carrying values and percentage of total carrying values of our portfolio of securities—trading and securities—available-for-sale, both carried at estimated fair market value, and securities—held-to-maturity, carried at amortized cost as of December 31, 2020, 2019 and 2018 (dollars in thousands): Table 1: Securities December 31 2020 2019 2018 Carrying Value Percent of Total Carrying Value Percent of Total Carrying Value Percent of Total Trading Corporate bonds $ 24,980 100.0 % $ 25,636 100.0 % $ 25,896 100.0 % Total securities—trading $ 24,980 100.0 % $ 25,636 100.0 % $ 25,896 100.0 % Available-for-Sale U.S. Government and agency obligations $ 141,735 6.1 % $ 89,598 5.8 % $ 149,112 9.1 % Municipal bonds 303,518 13.1 107,157 6.9 117,822 7.2 Corporate bonds 221,769 9.5 4,365 0.3 3,495 0.2 Mortgage-backed or related securities 1,646,152 70.9 1,342,311 86.5 1,343,861 82.1 Asset-backed securities 9,419 0.4 8,126 0.5 21,933 1.4 Total securities—available-for-sale $ 2,322,593 100.0 % $ 1,551,557 100.0 % $ 1,636,223 100.0 % Held-to-Maturity U.S. Government and agency obligations $ 340 0.1 % $ 385 0.2 % $ 1,006 0.4 % Municipal bonds 370,998 87.9 177,208 75.0 176,663 75.5 Corporate bonds 3,222 0.8 3,353 1.4 3,736 1.6 Mortgage-backed or related securities 47,247 11.2 55,148 23.4 52,815 22.5 Total securities—held-to-maturity $ 421,807 100.0 % $ 236,094 100.0 % $ 234,220 100.0 % Estimated market value $ 448,681 $ 237,805 $ 232,537 55 The following table shows the maturity or period to repricing of our consolidated portfolio of available-for-sale and held-to-maturity securities as of December 31, 2020 (dollars in thousands): Table 2: Securities Available-for-Sale and Held-to-Maturity —Maturity/Repricing and Rates December 31, 2020 One Year or Less After One to Five Years After Five to Ten Years After Ten Years Total Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield U.S. Government and agency obligations $ — — % $ 73,431 0.82 % $ 31,679 0.67 % $ 36,965 1.25 % $ 142,075 0.90 % Municipal bonds: Taxable 3,870 1.01 34,682 2.75 7,005 3.58 41,589 2.86 87,146 2.79 Tax exempt (1) 5,370 2.70 16,238 3.19 54,051 3.40 511,711 3.23 587,370 3.24 9,240 1.99 50,920 2.89 61,056 3.42 553,300 3.20 674,516 3.18 Corporate bonds 130,370 0.30 40,898 3.61 52,050 3.99 1,672 — 224,990 2.04 Mortgage-backed or related securities 195 2.91 146,570 3.36 520,141 1.74 1,026,494 1.98 1,693,400 2.03 Asset-backed securities — — 3,857 1.70 — — 5,562 1.22 9,419 1.42 Total securities available-for-sale and held-to-maturity—carrying value $ 139,805 0.41 $ 315,676 2.71 $ 664,926 2.02 $ 1,623,993 2.37 $ 2,744,400 2.25 Total securities available-for-sale and held-to-maturity—estimated market value $ 139,864 $ 318,486 $ 667,821 $ 1,645,103 $ 2,771,274 (1) Tax-exempt weighted average yield is calculated on a tax equivalent basis using a federal tax rate of 21% and a TEFRA allowance of 10%. 56 Loans and Lending. Loans are our most significant and generally highest yielding earning assets. We attempt to maintain a portfolio of loans in a range of 90% to 95% of total deposits to enhance our revenues, while adhering to sound underwriting practices and appropriate diversification guidelines in order to maintain a moderate risk profile. The unprecedented level of liquidity and growth of deposits experienced during 2020 has result in our loan to deposit ratio being below our target levels. At December 31, 2020, our net loan portfolio totaled $9.70 billion compared to $9.20 billion at December 31, 2019. Our total loan portfolio increased $565.6 million, or 6%, during the year ended December 31, 2020, compared to an increase of $620.8 million, or 7%, during the year ended December 31, 2019. The increase in net loans receivable for the year ended December 31, 2020 primarily reflects the origination of PPP loans, primarily during the second quarter of 2020, which totaled $1.04 billion as of December 31, 2020. The increase for the year ended December 31, 2019 included $332.4 million of portfolio loans acquired in the AltaPacific acquisition as well as organic loan growth. While we originate a variety of loans, our ability to originate each type of loan is dependent upon the relative client demand and competition in each market we serve. We continue to implement strategies designed to capture more market share and achieve increases in targeted loans. Nonetheless, looking forward, new loan originations and portfolio balances will continue to be significantly affected by the course of economic activity and changes in interest rates. Originations of loans for sale increased to $1.46 billion for the year ended December 31, 2020 from $1.09 billion during 2019 and from $896.5 million during the year ended December 31, 2018. Originations of loans for sale included $234.0 million, $340.0 million, and $372.8 million of multifamily held for sale loan production for the years ended December 31, 2020 , December 31, 2019, and December 31, 2018, respectively. We generally sell a significant portion of our newly originated one- to four-family residential mortgage loans and multifamily loans to secondary market purchasers. Proceeds from sales of loans for the years ended December 31, 2020, 2019 and 2018 totaled $1.49 billion, $1.10 billion and $791.7 million, respectively. See “Loan Servicing Portfolio” below. Loans held for sale increased $33.3 million to $243.8 million at December 31, 2020, compared to $210.4 million at December 31, 2019. The increase in loans held for sale was primarily due to the increased volume of originations of one- to four-family residential mortgage loans held for sale, which exceeded sales during the year. The following table shows loan origination (excluding loans held for sale) activity for the years ended December 31, 2020, 2019, and 2018 (in thousands): Table 3: Loan Origination Years Ended Dec 31, 2020 Dec 31, 2019 Dec 31, 2018 Commercial real estate $ 356,361 $ 428,936 $ 473,810 Multifamily real estate 27,119 71,124 14,872 Construction and land 1,588,311 1,433,313 1,464,124 Commercial business: Commercial business 628,981 840,237 927,850 PPP 1,176,018 — — Agricultural business 76,096 85,663 115,096 One-to four- family residential 116,713 112,165 172,967 Consumer 423,526 350,601 326,357 Total loan originations (excluding loans held for sale) $ 4,393,125 $ 3,322,039 $ 3,495,076 The loan origination table above includes loan participations and loan purchases. During the years ended December 31, 2020, 2019, and 2018 we purchased $2.5 million , $9.8 million, and $33.7 million respectively, of loans. The loan purchases in 2020 were one- to four-family and commercial real estate loans compared to the loan purchases in 2019 which included one- to four-family loans and commercial loans. The loan purchases in 2018 included one- to four-family loans. One- to Four-Family Residential Real Estate Lending: At December 31, 2020, $717.9 million, or 7% of our loan portfolio, consisted of permanent loans on one- to four-family residences. Our residential mortgage loan originations have been relatively strong in recent years, as interest rates have been low and declined during the current year. We are active originators of one- to four-family residential loans in most communities where we have established offices in Washington, Oregon, California and Idaho. Most of the one- to four-family loans that we originate are sold in the secondary markets with net gains on sales and loan servicing fees reflected in our revenues from mortgage banking. Our balance of loans for one- to four-family residences decreased by $207.6 million in 2020, compared to the prior year. The decrease in one-to-four family real estate loans during 2020 reflects portfolio loans being refinanced and sold as held for sale loans. Construction and Land Lending: Our construction loan originations have been relatively strong in recent years as builders have expanded production and experienced strong home sales in many markets where we operate. Despite the strong originations during 2020 one-to four-family construction loans decreased by $36.5 million in 2020 to total $507.8 million at December 31, 2020, as the velocity of one- to four-family home sales increased during the year. During the year ended December 31, 2020, land and land development loans (both residential and commercial) increased by $3.4 million to $248.9 million at December 31, 2020. At December 31, 2020, construction, land and land 57 development loans totaled $1.29 billion (including $507.8 million of one- to four-family construction loans, $248.9 million land and land development loans (both residential and commercial), and $534.5 million of commercial and multifamily real estate construction loans), or 13% of total loans, compared to $1.23 billion, or 13%, at December 31, 2019. Commercial and Multifamily Real Estate Lending: We also originate loans secured by commercial and multifamily real estate. Commercial and multifamily real estate loans originated by us include both fixed- and adjustable-rate loans with intermediate terms of generally five to ten years. Our commercial real estate portfolio consists of loans on a variety of property types with no significant concentrations by property type, borrowers or locations. At December 31, 2020, our loan portfolio included $3.61 billion of commercial real estate loans, or 37% of the total loan portfolio, compared to $3.62 billion, or 39%, at December 31, 2019. Our portfolio of multifamily real estate loans was $428.2 million, or 4% of total loans at December 31, 2020, compared to $388.4 million, or 4%, at December 31, 2019. Commercial Business Lending: Our commercial business lending is directed toward meeting the credit and related deposit needs of various small- to medium-sized business and agribusiness borrowers operating in our primary market areas. In addition to providing earning assets, this type of lending has helped increase our deposit base. At December 31, 2020, commercial business loans totaled $2.18 billion, or 22% of total loans, compared to $1.36 billion, or 15%, at December 31, 2019. The increase reflects growth in PPP loans during 2020, offset partially by declines in commercial line of credit utilization. In recent years our commercial lending has also included participation in certain national syndicated loans, including shared national credits, which totaled $122.2 million at December 31, 2020. Agricultural Lending: Agriculture is a major industry in many Washington, Oregon, California and Idaho locations in our service area. While agricultural loans are not a large part of our portfolio, we routinely make agricultural loans to borrowers with a strong capital base, sufficient management depth, proven ability to operate through agricultural cycles, reliable cash flows and adequate financial reporting. Payments on agricultural loans depend, to a large degree, on the results of operation of the related farm entity. The repayment is also subject to other economic and weather conditions as well as market prices for agricultural products, which can be highly volatile at times. At December 31, 2020, agricultural loans totaled $299.9 million, or 3% of the loan portfolio, compared to $337.3 million, or 4%, at December 31, 2019. Consumer and Other Lending: Consumer lending has traditionally been a modest part of our business with loans made primarily to accommodate our existing client base. At December 31, 2020, our consumer loans decreased $58.5 million to $605.8 million, or 6% of our loan portfolio, compared to $664.3 million, or 7%, at December 31, 2019. As of December 31, 2020, 81% of our consumer loans were secured by one- to four-family real estate, including home equity lines of credit. Credit card balances totaled $35.8 million at December 31, 2020 compared to $41.1 million a year earlier. Loan Servicing Portfolio: At December 31, 2020, we were servicing $3.03 billion of loans for others and held $13.5 million in escrow for our portfolio of loans serviced for others. The loan servicing portfolio at December 31, 2020 was composed of $1.25 billion of Freddie Mac residential mortgage loans, $1.17 billion of Fannie Mae residential mortgage loans, $311.4 million of Oregon Housing residential mortgage loans and $297.3 million of other loans serviced for a variety of investors. The portfolio included loans secured by property located primarily in the states of Washington, Oregon, Idaho and California. For the years ended December 31, 2020 and 2019, we recognized $7.4 million and $6.9 million of loan servicing income in our results of operations, respectively. For the years ended December 31, 2020 and 2019 we recognized $7.7 million and $5.1 million of amortization for MSRs, respectively, and no impairment charges or reversals for a valuation adjustment to MSRs. Mortgage Servicing Rights: For the years ended December 31, 2020, 2019 and 2018, we capitalized $8.6 million, $4.4 million, and $3.6 million, respectively, of MSRs relating to loans sold with servicing retained. Amortization of MSRs for the years ended December 31, 2020, 2019 and 2018 was $7.7 million, $5.1 million, and $3.9 million, respectively. Management periodically evaluates the estimates and assumptions used to determine the carrying values of MSRs and the amortization of MSRs. At December 31, 2020, our MSRs were carried at a value of $15.2 million, net of amortization, compared to $14.1 million at December 31, 2019. 58 The following table sets forth the composition of the Company’s loan portfolio, net of discounts and deferred fees and costs, by type of loan as of the dates indicated (dollars in thousands): Table 4: Loan Portfolio Analysis As a result of the adoption of Financial Instruments - Credit Losses (ASC 326), effective January 1, 2020, the Company changed the segmentation of its loan portfolio based on the common risk characteristics used to measure the allowance for credit losses. The following table presents the loans receivable at December 31, 2020, 2019 and 2018 by class (dollars in thousands). The presentation of loans receivable at December 31, 2019 and 2018 have been updated to conform to the loan portfolio segmentation that became effective on January 1, 2020. December 31, 2020 December 31, 2019 December 31, 2018 Amount Percent of Total Amount Percent of Total Amount Percent of Total Commercial real estate: Owner-occupied $ 1,076,467 10.9 % $ 980,021 10.5 % $ 854,541 9.8 % Investment properties 1,955,684 19.8 2,024,988 21.8 1,849,386 21.3 Small balance CRE 573,849 5.8 613,484 6.6 617,116 7.1 Multifamily real estate 428,223 4.4 388,388 4.2 284,823 3.3 Construction, land and land development: Commercial construction 228,937 2.3 210,668 2.3 171,769 2.0 Multifamily construction 305,527 3.1 233,610 2.5 184,630 2.1 One- to four-family construction 507,810 5.1 544,308 5.8 533,690 6.1 Land and land development 248,915 2.5 245,530 2.6 266,457 3.1 Commercial business: Commercial business (1) 2,178,461 22.1 1,364,650 14.7 1,146,015 13.2 Small business scored 743,451 7.5 772,657 8.3 752,769 8.7 Agricultural business, including secured by farmland 299,949 3.0 337,271 3.6 371,987 4.3 One- to four-family residential 717,939 7.3 925,531 9.9 948,140 10.9 Consumer: Consumer—home equity revolving lines of credit 491,812 5.0 519,336 5.6 537,110 6.2 Consumer—other 113,958 1.2 144,915 1.6 166,162 1.9 Total loans 9,870,982 100.0 % 9,305,357 100.0 % 8,684,595 100.0 % Less allowance for credit losses - loans (167,279) (100,559) (96,485) Net loans $ 9,703,703 $ 9,204,798 $ 8,588,110 (1) Includes $1.04 billion of PPP loans as of December 31, 2020. 59 The following table sets forth the Company’s loans by geographic concentration at December 31, 2020, 2019 and 2018 (dollars in thousands): Table 5: Loans by Geographic Concentration December 31, 2020 December 31, 2019 December 31, 2018 Amount Percent Amount Percent Amount Percent Washington $ 4,647,553 47.0 % $ 4,364,764 46.9 % $ 4,324,588 49.8 % California 2,279,749 23.1 2,129,789 22.9 1,596,604 18.4 Oregon 1,792,156 18.2 1,650,704 17.7 1,636,152 18.8 Idaho 537,996 5.5 530,016 5.7 521,026 6.0 Utah 80,704 0.8 60,958 0.7 57,318 0.7 Other 532,824 5.4 569,126 6.1 548,907 6.3 Total $ 9,870,982 100.0 % $ 9,305,357 100.0 % $ 8,684,595 100.0 % The following table sets forth certain information at December 31, 2020 regarding the dollar amount of loans maturing in our portfolio based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances are net of unamortized premiums and discounts, and exclude loans held for sale and the allowance for credit losses (in thousands): Table 6: Loans by Maturity Maturing in One Year or Less Maturing After One to Five Years Maturing After Five to Fifteen Years Maturing After Fifteen Years Total Commercial real estate: Owner-occupied $ 30,100 $ 220,290 $ 776,802 $ 49,275 $ 1,076,467 Investment properties 113,443 414,077 1,052,987 375,177 1,955,684 Small balance CRE 25,185 183,176 355,278 10,210 573,849 Multifamily real estate 19,517 63,934 244,817 99,955 428,223 Construction, land and land development: Commercial construction 144,143 31,642 43,861 9,291 228,937 Multifamily construction 186,803 96,900 13,945 7,879 305,527 One- to four-family construction 464,504 41,833 1,131 342 507,810 Land and land development 96,466 61,718 82,111 8,620 248,915 Commercial business: Commercial business 366,388 265,719 382,604 119,278 1,133,989 PPP — 1,044,472 — — 1,044,472 Small business scored 61,359 250,506 226,018 205,568 743,451 Agricultural business, including secured by farmland 84,715 69,999 143,662 1,573 299,949 One- to four-family residential 3,918 24,151 80,394 609,476 717,939 Consumer: Consumer—home equity revolving lines of credit 4,956 9,605 16,097 461,154 491,812 Consumer—other 33,228 35,164 27,346 18,220 113,958 Total loans $ 1,634,725 $ 2,813,186 $ 3,447,053 $ 1,976,018 $ 9,870,982 Contractual maturities of loans do not necessarily reflect the actual life of such assets. The average life of loans typically is substantially less than their contractual maturities because of principal repayments and prepayments. In addition, due-on-sale clauses on certain mortgage loans generally give us the right to declare loans immediately due and payable in the event that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase however when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and, conversely, decreases when rates on existing mortgage loans are substantially higher than current mortgage loan market rates. 60 The following table sets forth the dollar amount of all loans maturing after December 31, 2021 which have fixed interest rates and floating or adjustable interest rates (in thousands): Table 7: Loans Maturing after One Year Fixed Rates Floating or Adjustable Rates Total Commercial real estate: Owner-occupied $ 322,203 $ 724,164 $ 1,046,367 Investment properties 491,665 1,350,576 1,842,241 Small balance CRE 116,559 432,105 548,664 Multifamily real estate 291,274 117,432 408,706 Construction, land and land development: Commercial construction 29,816 54,978 84,794 Multifamily construction 63,749 54,975 118,724 One- to four-family construction 2,240 41,066 43,306 Land and land development 16,618 135,831 152,449 Commercial business: Commercial business 479,650 287,951 767,601 PPP 1,044,472 — 1,044,472 Small business scored 211,898 470,194 682,092 Agricultural business, including secured by farmland 84,168 131,066 215,234 One- to four-family residential 517,928 196,093 714,021 Consumer: Consumer—home equity revolving lines of credit 805 486,051 486,856 Consumer—other 74,860 5,870 80,730 Total loans maturing after one year $ 3,747,905 $ 4,488,352 $ 8,236,257 Deposits. We compete with other financial institutions and financial intermediaries in attracting deposits and we generally attract deposits within our primary market areas. Much of the focus of our expansion and current marketing efforts have been directed toward attracting additional deposit client relationships and balances. This effort has been particularly directed towards increasing transaction and savings accounts which has contributed to us being very successful in increasing these core deposit balances. The long-term success of our deposit gathering activities is reflected not only in the growth of deposit balances, but also in increases in the level of deposit fees, service charges and other payment processing revenues. One of our key strategies is to strengthen our franchise by emphasizing core deposit activity in non-interest-bearing and other transaction and savings accounts with less reliance on higher cost certificates of deposit. Increasing core deposits is a fundamental element of our business strategy. This strategy continues to help control our cost of funds and increase the opportunity for deposit fee revenues, while stabilizing our funding base. Total deposits increased $2.52 billion, or 25%, to $12.57 billion at December 31, 2020 from $10.05 billion at December 31, 2019. The increase in total deposits from year end was due primarily to PPP loan funds deposited into client accounts and an increase in general client liquidity due to reduced business investment and consumer spending. Non-interest-bearing deposits increased by $1.55 billion, or 39%, to $5.49 billion at year end from $3.95 billion at December 31, 2019. Interest-bearing transaction and savings accounts increased by $1.18 billion, to $6.16 billion at December 31, 2020 compared to $4.98 billion a year earlier. Certificates of deposit decreased $205.1 million, or 18%, to $915.3 million at December 31, 2020 from $1.12 billion at December 31, 2019. The decrease in certificates of deposit balances in 2020 was largely due to the $202.9 million decrease in brokered deposits. 61 The following table sets forth the balances of deposits in the various types of accounts offered by the Banks at the dates indicated (dollars in thousands): Table 8: Deposits December 31 2020 2019 2018 Amount Percent of Total Increase (Decrease) Amount Percent of Total Increase (Decrease) Amount Percent of Total Non-interest-bearing checking $ 5,492,924 43.7 % $ 1,547,924 $ 3,945,000 39.3 % $ 287,183 $ 3,657,817 38.6 % Interest-bearing checking 1,569,435 12.5 289,432 1,280,003 12.7 88,987 1,191,016 12.6 Regular savings 2,398,482 19.1 464,441 1,934,041 19.3 91,460 1,842,581 19.4 Money market 2,191,135 17.4 421,941 1,769,194 17.6 303,825 1,465,369 15.5 Total interest-bearing transaction and savings accounts 6,159,052 49.0 1,175,814 4,983,238 49.6 484,272 4,498,966 47.5 Certificates maturing: Within one year 701,473 5.6 (145,468) 846,941 8.4 (154,265) 1,001,206 10.6 After one year, but within two years 123,290 1.0 (44,567) 167,857 1.7 (34,062) 201,919 2.1 After two years, but within five years 88,549 0.7 (14,808) 103,357 1.0 (11,536) 114,893 1.2 After five years 2,008 — (240) 2,248 — 1 2,247 — Total certificate accounts 915,320 7.3 (205,083) 1,120,403 11.1 (199,862) 1,320,265 13.9 Total Deposits $ 12,567,296 100.0 % $ 2,518,655 $ 10,048,641 100.0 % $ 571,593 $ 9,477,048 100.0 % Included in Total Deposits: Public transaction accounts $ 302,875 2.4 % $ 58,457 $ 244,418 2.4 % $ 27,017 $ 217,401 2.3 % Public interest-bearing certificates 59,127 0.5 23,943 35,184 0.4 5,095 30,089 0.3 Total public deposits $ 362,002 2.9 % $ 82,400 $ 279,602 2.8 % $ 32,112 $ 247,490 2.6 % Total brokered deposits $ — — % $ (202,884) $ 202,884 2.0 % $ (174,463) $ 377,347 4.0 % Total deposits in excess of the FDIC insurance limit $ 4,407,935 35.1 % $ 1,579,962 $ 2,827,973 28.1 % $ 494,225 $ 2,333,748 24.6 % 62 The following table indicates the amount of the Banks’ certificates of deposit with balances in excess of the FDIC insurance limit by time remaining until maturity as of December 31, 2020 (in thousands): Table 9: Maturity Period— CDs in excess of the FDIC insurance limit Certificates of Deposit in Excess of FDIC Insurance Limit Maturing in three months or less $ 58,715 Maturing after three months through six months 44,021 Maturing after six months through twelve months 57,920 Maturing after twelve months 36,408 Total $ 197,064 The following table provides additional detail on geographic concentrations of our deposits at December 31, 2020, 2019, and 2018 (in thousands): Table 10: Geographic Concentration of Deposits December 31, 2020 December 31, 2019 December 31, 2018 Amount Percent Amount Percent Amount Percent Washington $ 7,058,404 56.2 % $ 5,861,809 58.3 % $ 5,674,328 59.9 % Oregon 2,604,908 20.7 2,006,163 20.0 1,891,145 20.0 California 2,237,949 17.8 1,698,289 16.9 1,434,033 15.1 Idaho 666,035 5.3 482,380 4.8 477,542 5.0 Total deposits $ 12,567,296 100.0 % $ 10,048,641 100.0 % $ 9,477,048 100.0 % Borrowings. The FHLB-Des Moines serves as our primary borrowing source. To access funds, we are required to own a sufficient level of capital stock in the FHLB-Des Moines and may apply for advances on the security of such stock and certain of our mortgage loans and securities provided that certain creditworthiness standards have been met. At December 31, 2020, we had $150.0 million of FHLB advances outstanding at a weighted average rate of 2.58%, a decrease of $300.0 million compared to a year earlier, as core deposits were used to fund a larger portion of the balance sheet. Also, at December 31, 2020, we had an investment of $16.4 million in FHLB capital stock. At that date, based on pledged collateral, Banner Bank had $2.28 billion of available credit capacity and Islanders Bank $32.5 million of available credit capacity with the FHLB-Des Moines. The following table provides additional detail on our FHLB advances as of December 31, 2020 and 2019 (dollars in thousands): Table 11: FHLB Advances Outstanding December 31 2020 2019 2018 Amount Weighted Average Rate Amount Weighted Average Rate Amount Weighted Average Rate Maturing in one year or less $ 100,000 2.51 % $ 300,000 1.84 % $ 540,000 2.64 % Maturing after one year through three years 50,000 2.72 150,000 2.58 — — Maturing after three years through five years — — — — — — Maturing after five years — — — — 189 5.94 Total FHLB advances $ 150,000 2.58 % $ 450,000 2.09 % $ 540,189 2.64 % At certain times the Federal Reserve Bank has also served as an important source of borrowings. The Federal Reserve Bank provides credit based upon acceptable loan collateral, which includes certain loan types not eligible for pledging to the FHLB-Des Moines. At December 31, 2020, based upon our available unencumbered collateral, Banner Bank was eligible to borrow $958.7 million from the Federal Reserve Bank, however, at that date we had no funds borrowed under this arrangement. We also issue retail repurchase agreements to clients that are primarily related to client cash management accounts and in the past have borrowed funds through the use of secured wholesale repurchase agreements with securities brokers. In each case, the repurchase agreements are generally due within 90 days. At December 31, 2020, retail repurchase agreements totaled $184.8 million, had a weighted average rate of 0.22%, and were secured by pledges of certain mortgage-backed securities and agency securities. Retail repurchase agreement balances, 63 which are primarily associated with client sweep account arrangements, increased $66.3 million, from the 2019 year-end balance. We had no borrowings under wholesale repurchase agreements at December 31, 2020 or December 31, 2019. At December 31, 2020, we had an aggregate of $143.5 million, net of repayments, of Trust Preferred Securities (TPS). This includes $120.0 million issued by us and $23.5 million acquired in our bank acquisitions. The junior subordinated debentures associated with the TPS have been recorded as liabilities on our Consolidated Statements of Financial Condition, although the TPS qualifies as Tier 1 capital for regulatory capital purposes. The junior subordinated debentures are carried at fair value on our Consolidated Statements of Financial Condition and had an estimated fair value of $117.0 million at December 31, 2020. At December 31, 2020, the TPS had a weighted average rate of 2.35%. In addition, on June 30, 2020, Banner issued and sold in an underwritten offer $100.0 million of Subordinated Notes, resulting in net proceeds, after underwriting discounts and offering expenses, of $98.1 million. At December 31, 2020, the Subordinated Notes had a weighted average interest rate of 5.00%. The Subordinated Notes qualify as Tier 2 capital for regulatory capital purposes. See Note 11, Subordinated Debt and Mandatorily Redeemable Trust Preferred Securities, of the Notes to the Consolidated Financial Statements for additional information with respect to the TPS and Subordinated Notes. Asset Quality. Maintaining a moderate risk profile by employing appropriate underwriting standards, avoiding excessive asset concentrations and aggressively managing troubled assets has been and will continue to be a primary focus for us. During 2020, we continued to be actively engaged with our borrowers in resolving remaining problem assets and with the effective management of real estate owned as a result of foreclosures. Non-performing assets decreased to $36.5 million, or 0.24% of total assets, at December 31, 2020, from $40.5 million, or 0.32% of total assets, at December 31, 2019, and increased from $18.9 million, or 0.16% of total assets, at December 31, 2018. At December 31, 2020, our allowance for credit losses was $167.3 million, or 470% of non-performing loans, compared to $100.6 million, or 254% of non-performing loans at December 31, 2019. In addition to the allowance for credit losses - loans, the Company maintains an allowance for credit losses - unfunded loan commitments which was $13.3 million at December 31, 2020 compared to $2.7 million at December 31, 2019. We continue to believe our level of non-performing loans and assets is manageable and further believe that we have sufficient capital and human resources to manage the collection of our non-performing assets in an orderly fashion. Loans are reported as troubled debit restructures (TDRs) when we grant concessions to a borrower experiencing financial difficulties that we would not otherwise consider. If anyTDR loan becomes delinquent or other matters call into question the borrower’s ability to repay full interest and principal in accordance with the restructured terms, the TDR loan would be reclassified as nonaccrual. At December 31, 2020, we had $6.7 million of TDR loans currently performing under their restructured terms. We are continuing to offer payment and financial relief programs for borrowers impacted by COVID-19. These programs include initial loan payment deferrals or interest-only payments for up to 90 days, waived late fees, and, on a more limited basis, waived interest and temporarily suspended foreclosure proceedings. Deferred loans are re-evaluated at the end of the initial deferral period and will either return to the original loan terms or may be eligible for an additional deferral period for up to 90 days. In addition, we have entered into payment forbearance agreements with other clients for periods of up to six months. At December 31, 2020, we had 158 loans totaling $75.4 million still on deferral. Of the loans still on deferral, 26 loans totaling $33.9 million have received a second deferral. Since these loans were performing loans that were current on their payments prior to the COVID-19 pandemic, these modifications are not considered to be troubled debt restructurings at December 31, 2020 pursuant to applicable accounting and regulatory guidance. Prior to the implementation of Financial Instruments—Credit Losses (ASC 326) on January 1, 2020, loans acquired in merger transactions with deteriorated credit quality were accounted for as purchased credit-impaired pools. Typically, this would include loans that were considered non-performing or restructured as of the acquisition date. Accordingly, subsequent to acquisition, loans included in the purchased credit-impaired pools were not reported as non-performing loans based upon their individual performance status, so the loan categories of nonaccrual, impaired and 90 days past due and accruing did not include any purchased credit-impaired loans. Purchased credit-impaired loans were $15.9 million at December 31, 2019. 64 The following table sets forth information with respect to our non-performing assets and restructured loans, at the dates indicated (dollars in thousands): Table 12: Non-Performing Assets December 31 2020 2019 2018 Nonaccrual loans: (1) Secured by real estate: Commercial $ 18,199 $ 5,952 $ 4,088 Multifamily — 85 — Construction/land 936 1,905 3,188 One- to four-family 3,556 3,410 1,544 Commercial business 5,407 23,015 2,936 Agricultural business, including secured by farmland 1,743 661 1,751 Consumer 2,719 2,473 1,241 32,560 37,501 14,748 Loans more than 90 days delinquent, still on accrual: Secured by real estate: Commercial — 89 — Construction/land — 332 — One- to four-family 1,899 877 658 Commercial business 1,025 401 1 Consumer 130 398 247 3,054 2,097 906 Total non-performing loans 35,614 39,598 15,654 REO assets held for sale, net (2) 816 814 2,611 Other repossessed assets held for sale, net 51 122 592 Total non-performing assets $ 36,481 $ 40,534 $ 18,857 Total non-performing loans to net loans before allowance for credit losses/allowance for loan losses 0.36 % 0.43 % 0.18 % Total non-performing loans to total assets 0.24 % 0.31 % 0.13 % Total non-performing assets to total assets 0.24 % 0.32 % 0.16 % Total nonaccrual loans to net loans before allowance for credit losses 0.33 % 0.40 % 0.17 % TDR loans (3) $ 6,673 $ 6,466 $ 13,422 Loans 30-89 days past due and on accrual (4) $ 12,291 $ 20,178 $ 25,108 (1) Includes $1.22 million of nonaccrual TDR loans as of December 31, 2020. For the year ended December 31, 2020, interest income was reduced by $1.5 million as a result of nonaccrual loan activity, which includes the reversal of $846,000 of accrued interest as of the date the loan was placed on nonaccrual. There was no interest income recognized on nonaccrual loans during the year ended December 31, 2020. (2) Real estate acquired by us as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate held for sale until it is sold. When property is acquired, it is recorded at the estimated fair value of the property, less expected selling costs. Subsequent to foreclosure, the property is carried at the lower of the foreclosed amount or net realizable value. Upon receipt of a new appraisal and market analysis, the carrying value is written down through the establishment of a specific reserve to the anticipated sales price, less selling and holding costs. (3) These loans were performing under their restructured terms. (4) PCI loans are included at December 31, 2019 and December 31, 2018. In addition to the non-performing loans as of December 31, 2020, we had other classified loans with an aggregate outstanding balance of $305.2 million that are not on nonaccrual status, with respect to which known information concerning possible credit problems with the borrowers or the cash flows of the properties securing the respective loans has caused management to be concerned about the ability of the borrowers to comply with present loan repayment terms. This may result in the future inclusion of such loans in the nonaccrual loan category. 65 The following table presents the Company’s portfolio of risk-rated loans and non-risk-rated loans by grade at the dates indicated (in thousands): Table 13: Loans by Grade For the years ended December 31, 2020 2019 2018 Pass $ 9,494,147 $ 9,130,662 $ 8,557,839 Special Mention 36,598 61,189 31,162 Substandard 340,237 113,448 95,507 Doubtful — 58 87 Total $ 9,870,982 $ 9,305,357 $ 8,684,595 The increase in substandard loans during the year ended December 31, 2020 primarily reflects Banner Bank proactively downgrading loans in industries the most at risk due to COVID-19. The following table presents the REO activity for the years ended December 31, 2020, 2019 and 2018 (in thousands): Table 14: REO For the years ended December 31, 2020 2019 2018 Balance, beginning of the period $ 814 $ 2,611 $ 360 Additions from loan foreclosures 1,588 109 641 Additions from acquisitions — 650 2,593 Proceeds from dispositions of REO (2,360) (2,588) (838) Gain on sale of REO 819 32 242 Valuation adjustments in period (45) — (387) Balance, end of period $ 816 $ 814 $ 2,611 REO increased $2,000, to $816,000 at December 31, 2020 compared to $814,000 at December 31, 2019 and decreased compared to $2.6 million at December 31, 2018. The decrease during 2019 primarily reflects the sale of REO properties acquired in the Skagit Bank acquisition. Non-recurring fair value adjustments to REO are recorded to reflect partial write-downs based on an observable market price or current appraised value of property. The individual carrying values of these assets are reviewed for impairment at least annually and any additional impairment charges are expensed to operations. Comparison of Results of Operations for the Years Ended December 31, 2020 and 2019 For the year ended December 31, 2020, our net income was $115.9 million, or $3.26 per diluted share, compared to net income of $146.3 million, or $4.18 per diluted share for the year ended December 31, 2019. Current year results were impacted by an increase in the provision for credit losses as a result of the COVID-19 pandemic, lower yields on earnings assets, decreased deposit fees and other service charges and increased non-interest expense these were partially offset by increased volume and gain on sale spreads on one- to four-family held for sale loans, growth in interest-earnings assets, driven by increases in core deposits and decreased funding costs. Our net income for the year ended December 31, 2020 included a provision for credit losses of $64.3 million, increased non-interest expense, including $3.5 million of COVID-19 related expenses and $2.1 million of merger and acquisition-related expenses, partially offset by increased non-interest income, including $51.6 million of mortgage banking income. Our results for the year ended December 31, 2019 included $7.5 million of merger and acquisition-related expenses. The results for year ended December 31, 2020 also included the operations acquired in the AltaPacific acquisition which closed in the fourth quarter of 2019 and reflect the impact of the COVID-19 pandemic resulting in a substantial reduction in business activity or the closing of businesses in all the western states Banner Bank operates. Our operating results depend largely on our net interest income which increased by $12.4 million to $481.3 million, primarily reflecting an increase in the average balance of interest-earning assets, due to the origination of PPP loans and organic growth, as well as the AltaPacific acquisition, and a decrease in funding costs, partially offset by lower yields on interest-earning assets. The increase in net interest income contributed to an increase of $29.1 million, or 5%, in revenue to $579.9 million for the year ended December 31, 2020, compared to $550.9 66 million for the year ended December 31, 2019. Our operating results for the year ended December 31, 2020 also reflected a $16.7 million increase in non-interest income primarily as a result of increased mortgage banking revenues due to increased volume and gain on sale spreads on one- to four-family held for sale loans. The decrease in deposit fees and other service charges is a result of our becoming subject to the Durbin Amendment on July 1, 2019, which reduced interchange fee income during the second half of 2019 compared to the full year of 2020 as well as fee waivers and reduced transaction deposit account activity since the start of the COVID-19 pandemic. Non-interest expense increased to $373.1 million for the year ended December 31, 2020 compared with $357.7 million for the year ended December 31, 2019, largely as a result of an increase in the provision for credit losses - unfunded commitments, higher salary and employee benefits due to additional staffing related to the operations acquired from the inclusion of the acquired AltaPacific operations for a full year and normal salary and wage adjustments, increased deposit insurance expense due to the receipt of an FDIC credit of $2.7 million during 2019 for previously paid deposit insurance premiums, and COVID-19 expenses, partially offset by increases in capitalized loan origination costs, decreased travel expenses and reduced merger and acquisition-related expenses. Net Interest Income. Net interest income before provision for credit losses increased by $12.4 million, or 3%, to $481.3 million for the year ended December 31, 2020, compared to $468.9 million one year earlier, as an increase in the average balance of interest-earning assets produced growth for this key source of revenue. The growth in the average balance of interest-earning assets reflects the origination of PPP loans and organic growth, as well as the AltaPacific acquisition. The net interest margin on a tax equivalent basis of 3.85% for the year ended December 31, 2020 was 50 basis points lower than the prior year. The net interest margin included seven basis points from acquisition accounting adjustments for both the years ended December 31, 2020 and 2019. The decrease in net interest margin compared to a year earlier primarily reflects lower yields on average interest-earning assets, partially offset by decreases in the cost of funding liabilities. The average yield on interest-earning assets of 4.15% for the year ended December 31, 2020 decreased 72 basis points compared to the prior year, largely due to the impact of decreases to the targeted Fed Funds Rate on floating rate loan yields indexed to prime and LIBOR rates and low loan yields on the PPP loan portfolio as well as excess deposit liquidity being invested in low yielding short term investments and interest bearing deposits. The Federal Reserve reduced the targeted Fed Funds Rate by 75 basis points during the second half of 2019 and an additional 150 basis points during first quarter of 2020 to a range of 0.00% to 0.25% at December 31, 2020. Funding costs were also lower, as the average cost of funding liabilities increased by 24 basis points to 0.31% as compared to the prior year. The decreases in the costs of funding liabilities compared to a year earlier were also largely due to the impact of decreases to the targeted Fed Funds Rate, although the pace of decline in the cost of funding liabilities typically lags the effect on the yield earned on interest-earning assets primarily because offer rates on interest bearing deposit accounts reprice more slowly than loans for a given change in market rates. As a result, the net interest spread decreased to 3.84% for the year ended December 31, 2020 compared to 4.32% for the prior year. Interest Income. Interest income for the year ended December 31, 2020 was $519.1 million, compared to $525.7 million for the prior year, a decrease of $6.5 million, or 1%. The decrease in interest income occurred as a result of the decrease in the yield on interest-earning assets, partially offset by increases in the average balance of both loans and investment securities. The average balance of total interest-earning assets was $12.70 billion for the year ended December 31, 2020, an increase of $1.79 billion, or 16%, compared to $10.91 billion one year earlier. The yield on average interest-earning assets was 4.15% for the year ended December 31, 2020, compared to 4.87% for the year ended December 31, 2019. The decreased yield on interest-earning assets reflects decreases in the average yields on loans and securities and excess liquidity being invested in short term investments and interest bearing deposits. Average loan yields decreased 63 basis points to 4.66% for the year ended December 31, 2020 compared to 5.29% in the preceding year, reflecting the impact of lower interest rates over the last year as well as the impact of the low loan yields for the PPP loan portfolio. The acquisition accounting loan discount accretion and related balance sheet impact added ten basis points to the loan yield for the year ended December 31, 2020, compared to nine basis points for the year ended December 31, 2019. Average loans receivable for the year ended December 31, 2020 increased $1.12 billion, or 12%, to $10.12 billion, compared to $9.00 billion for the prior year, principally as a result of the PPP loan program and AltaPacific acquisition. Interest income on loans decreased by $5.1 million, or 1%, to $466.4 million for the year ended December 31, 2020, from $471.5 million for the prior year, reflecting the impact of the 63 basis point decrease in the average yield on total loans, partially offset by the $1.12 billion increase in average loan balances. The combined average balance of mortgage-backed securities, other investment securities, equity securities, daily interest-bearing deposits and FHLB stock increased to $2.58 billion for the year ended December 31, 2020 (excluding the effect of fair value adjustments), compared to $1.91 billion for the year ended December 31, 2019, contributing to the $455,000 increase in interest and dividend income compared to the prior year. The average yield on the combined portfolio decreased to 2.18% for the year ended December 31, 2020, from 2.92% for the prior year. For the year ended December 31, 2020, the average yield on mortgage-backed securities decreased 41 basis points to 2.42% compared to the prior year, while the yield on other securities decreased 34 basis points to 2.81% compared to the prior year. The decrease in yield reflects the overall decline in market interest rates as well as the investment of excess liquidity in a short term investments and interest bearing deposits. Interest Expense. Interest expense for the year ended December 31, 2020 was $37.8 million, compared to $56.8 million for the prior year, an increase of $18.9 million, or 33%. The decrease in interest expense occurred as a result of a 24 basis point decrease in the average cost of all funding liabilities to 0.31% for the year ended December 31, 2020, compared to 0.55% for the year ended December 31, 2019, partially offset by a $1.86 billion, or 18%, increase in average funding liabilities. The increase in average funding liabilities reflects increases in low costing core deposits, including non-interest-bearing deposits and interest-bearing transaction and savings accounts. Deposit interest expense decreased $12.6 million, or 34%, to $25.0 million for the year ended December 31, 2020 compared to $37.6 million for the prior year as a result of a 17 basis point decrease in the average cost of deposits, partially offset by an $1.99 billion, or 21%, increase in the average balance of deposits. Average deposit balances increased to $11.54 billion for the year ended December 31, 2020, from $9.54 billion for the year ended December 31, 2019, while the average rate paid on deposit balances decreased to 0.22% in the current year from 67 0.39% for the prior year. The cost of interest-bearing deposits decreased by 27 basis points to 0.38% for the year ended December 31, 2020 compared to 0.65% in the prior year. The $1.18 billion increase in the average balance of non-interest-bearing accounts also contributed to the decrease in total deposit costs. The decrease in the cost of interest-bearing deposits between the periods was driven by market and competitive factors following decreases in the target Fed Funds Rate over the last year as well as a higher percentage of our interest-bearing deposits being lower costing core deposits. Average total borrowings decreased to $607.4 million for the year end December 31, 2020, compared to $741.6 million for the prior year. The decrease in average total borrowings was largely due to a $262.7 million decrease in average FHLB advances. The decrease in average FHLB advances was partially offset by the previously mentioned issuance of the Subordinated Notes and an increase in average other borrowings due to increases in retail repurchase agreements primarily related to client cash management accounts. The average rate paid on total borrowings decreased 47 basis points to 2.11% from 2.58% reflecting the 102 basis point decrease in the average cost for our subordinated debt due to a decrease in the average cost of our junior subordinated debentures (which reprice every three months based on changes in the three-month LIBOR index) partially offset by the higher average cost of our Subordinated Notes and a 22 basis point decrease in the average cost of FHLB advances. The decrease in the average cost of total borrowings was the primary reason for the $6.3 million decrease in the related interest expense to $12.8 million for the year ended December 31, 2020, from $19.1 million in the prior year. Table 15, Analysis of Net Interest Spread, presents, for the periods indicated, our condensed average balance sheet information, together with interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities. Average balances are computed using daily average balances. (See the footnotes to the tables for more information on average balances.) 68 The following table provides an analysis of our net interest spread for the last three years (dollars in thousands): Table 15: Analysis of Net Interest Spread Year Ended December 31, 2020 Year Ended December 31, 2019 Year Ended December 31, 2018 Average Balance Interest and Dividends Yield/ Cost (3) Average Balance Interest and Dividends Yield/ Cost (3) Average Balance Interest and Dividends Yield/ Cost (3) Interest-earning assets: Held for sale loans $ 144,220 $ 5,482 3.80 % $ 126,086 $ 5,343 4.24 % $ 81,873 $ 3,926 4.80 % Mortgage loans 7,303,584 352,878 4.83 6,911,067 363,241 5.26 6,188,279 321,620 5.20 Commercial/agricultural loans 2,526,177 103,700 4.11 1,784,468 95,915 5.37 1,519,871 80,859 5.32 Consumer and other loans 147,827 9,208 6.23 176,373 11,230 6.37 149,184 9,575 6.42 Total loans (1)(3) 10,121,808 471,268 4.66 8,997,994 475,729 5.29 7,939,207 415,980 5.24 Mortgage-backed securities 1,330,355 32,188 2.42 1,368,927 38,809 2.83 1,247,758 35,076 2.81 Other securities 777,378 21,839 2.81 441,402 13,926 3.15 468,416 14,747 3.15 Equity securities 182,846 373 0.20 169 8 4.73 441 15 3.40 Interest-bearing deposits with banks 272,725 907 0.33 72,579 1,649 2.27 59,031 1,080 1.83 FHLB stock 18,952 947 5.00 29,509 1,407 4.77 20,496 774 3.78 Total investment securities (3) 2,582,256 56,254 2.18 1,912,586 55,799 2.92 1,796,142 51,692 2.88 Total interest-earning assets 12,704,064 527,522 4.15 10,910,580 531,528 4.87 9,735,349 467,672 4.80 Non-interest-earning assets 1,262,170 1,078,108 827,743 Total assets $ 13,966,234 $ 11,988,688 $ 10,563,092 Deposits: Interest-bearing checking accounts $ 1,385,252 $ 1,479 0.11 $ 1,188,985 $ 2,224 0.19 $ 1,048,327 $ 1,200 0.11 Savings accounts 2,194,418 4,257 0.19 1,890,467 8,310 0.44 1,665,608 3,944 0.24 Money market accounts 1,996,870 6,275 0.31 1,534,909 10,693 0.70 1,421,161 4,107 0.29 Certificates of deposit 1,030,722 13,004 1.26 1,175,942 16,403 1.39 1,127,612 11,391 1.01 Total interest-bearing deposits 6,607,262 25,015 0.38 5,790,303 37,630 0.65 5,262,708 20,642 0.39 Non-interest-bearing deposits 4,929,768 — — 3,751,878 — — 3,411,010 — — Total deposits 11,537,030 25,015 0.22 9,542,181 37,630 0.39 8,673,718 20,642 0.24 Other interest-bearing liabilities: FHLB advances 215,093 5,023 2.34 477,796 12,234 2.56 253,661 5,636 2.22 Other borrowings 193,862 603 0.31 122,343 330 0.27 108,730 245 0.23 Subordinated debt 198,490 7,204 3.63 141,504 6,574 4.65 140,212 6,136 4.38 Total borrowings 607,445 12,830 2.11 741,643 19,138 2.58 502,603 12,017 2.39 Total funding liabilities 12,144,475 37,845 0.31 10,283,824 56,768 0.55 9,176,321 32,659 0.36 Other non-interest-bearing liabilities (2) 197,422 164,318 79,901 Total liabilities 12,341,897 10,448,142 9,256,222 Shareholders’ equity 1,624,337 1,540,546 1,306,870 Total liabilities and shareholders’ equity $ 13,966,234 $ 11,988,688 $ 10,563,092 Net interest income/rate spread (tax equivalent) $ 489,677 3.84 % $ 474,760 4.32 % $ 435,013 4.44 % Net interest margin (tax equivalent) 3.85 % 4.35 % 4.47 % Reconciliation to reported net interest income: Adjustments for taxable equivalent basis (8,376) (5,841) (4,025) Net interest income and margin, as reported $ 481,301 3.79 % $ 468,919 4.30 % $ 430,988 4.43 % Average interest-earning assets / average interest-bearing liabilities 176.09 % 167.03 % 168.86 % Average interest-earning assets / average funding liabilities 104.61 % 106.09 % 106.09 % (footnotes follow) 69 (1) Average balances include loans accounted for on a nonaccrual basis and loans 90 days or more past due. Amortization of net deferred loan fees/costs is included with interest on loans. (2) Average other non-interest-bearing liabilities include fair value adjustments related to junior subordinated debentures. (3) Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $4.9 million, $4.3 million, and $2.6 million for the years ended December 31, 2020, December 31, 2019, and December 31, 2018, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $3.5 million, $1.6 million, and $1.4 million for the years ended December 31, 2020, December 31, 2019, and December 31, 2018, respectively. The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown (in thousands). Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Effects on interest income attributable to changes in rate and volume (changes in rate multiplied by changes in volume) have been allocated between changes in rate and changes in volume (in thousands): Table 16: Rate/Volume Analysis Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 Increase (Decrease) in Income/Expense Due to Year Ended December 31, 2019 Compared to Year Ended December 31, 2018 Increase (Decrease) in Income/Expense Due to Rate Volume Net Rate Volume Net Interest-earning assets: Held for sale loans $ (348) $ 487 $ 139 $ (388) $ 1,805 $ 1,417 Mortgage loans (35,247) 24,884 (10,363) 3,926 37,695 41,621 Commercial/agricultural loans (10,370) 18,155 7,785 765 14,291 15,056 Consumer and other loans (242) (1,780) (2,022) (71) 1,726 1,655 Total loans (1)(2) (46,207) 41,746 (4,461) 4,232 55,517 59,749 Mortgage-backed securities (5,480) (1,141) (6,621) 237 3,496 3,733 Other securities (1,312) 9,225 7,913 8 (829) (821) Equity securities — 365 365 12 (19) (7) Interest-bearing deposits with banks 336 (1,078) (742) 291 278 569 FHLB stock 72 (532) (460) 237 396 633 Total investment securities (2) (6,384) 6,839 455 785 3,322 4,107 Total net change in interest income on interest-earning assets (52,591) 48,585 (4,006) 5,017 58,839 63,856 Interest-bearing liabilities: Interest-bearing checking accounts (1,209) 464 (745) 880 144 1,024 Savings accounts (5,786) 1,733 (4,053) 3,780 586 4,366 Money market accounts (9,904) 5,486 (4,418) 6,284 302 6,586 Certificates of deposit (1,447) (1,952) (3,399) 4,448 564 5,012 Total interest-bearing deposits (18,346) 5,731 (12,615) 15,392 1,596 16,988 FHLB advances (973) (6,238) (7,211) 969 5,629 6,598 Other borrowings 55 218 273 52 33 85 Subordinated debt (748) 1,378 630 387 51 438 Total borrowings (1,666) (4,642) (6,308) 1,408 5,713 7,121 Total net change in interest expense on interest-bearing liabilities (20,012) 1,089 (18,923) 16,800 7,309 24,109 Net change in net interest income (tax equivalent) $ (32,579) $ 47,496 $ 14,917 $ (11,783) $ 51,530 $ 39,747 (1) Includes loans accounted for on a nonaccrual basis and loans 90 days or more past due. Amortization of net deferred loan fees/costs is included with interest on loans. (2) Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $4.9 million, $4.3 million, and $2.6 million for the years ended December 31, 2020, December 31, 2019, and December 31, 2018, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $3.5 million, $1.6 million, and $1.4 million for the years ended December 31, 2020, December 31, 2019, and December 31, 2018, respectively. 70 Provision and Allowance for Credit Losses . We recorded a $64.3 million provision for credit losses - loans in the year ended December 31, 2020, compared to a $10.0 million provision recorded in 2019. As discussed in the “Summary of Critical Accounting Policies” section above and in Note 1 of the Notes to the Consolidated Financial Statements, the provision and allowance for credit losses is one of the most critical accounting estimates included in our Consolidated Financial Statements. The provision for credit losses - loans reflects the amount required to maintain the allowance for credit losses - loans at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves. The increased provisions for loan credit losses for the current year primarily reflects expected lifetime credit losses based upon current economic conditions, as well as the impact of COVID-19 on the economic indicators included in our reasonable and supportable forecast as of December 31, 2020. In addition, the current year provision for credit losses also reflects risk rating downgrades on loans that are considered at heightened risk due to the COVID-19 pandemic. In addition, the change for the year ended December 31, 2020 included a $7.8 million increase related to the adoption of CECL. Future assessments of the expected credit losses will not only be impacted by changes to the reasonable and supportable forecast, but will also include an updated assessment of qualitative factors, as well as consideration of any required changes in the reasonable and supportable forecast reversion period. No allowance for credit losses-loans was recorded on the $1.04 billion balance of PPP loans at December 31, 2020 as these loans are fully guaranteed by the SBA. We recorded net charge-offs of $5.4 million for the year ended December 31, 2020, compared to net charge-offs of $5.9 million for the prior year. Non-performing loans decreased by $4.0 million during the year to $35.6 million at December 31, 2020, compared to $39.6 million at December 31, 2019. A comparison of the allowance for credit losses - loans at December 31, 2020 and 2019 reflects an increase of $66.7 million, or 66%, to $167.3 million at December 31, 2020, from $100.6 million at December 31, 2019. The allowance for credit losses - loans as a percentage of total loans (loans receivable excluding allowance for credit losses) increased to 1.69% at December 31, 2020, compared to 1.08% at December 31, 2019. The increase in the allowance for credit losses - loans as a percentage of loans reflects the adoption of Financial Instruments - Credit Losses (ASC 326) as well as the increased provision for credit losses - loans recorded during the year ended December 31 31, 2020, primarily as the result of forecasted credit deterioration due to the COVID-19 pandemic. 71 The following table sets forth an analysis of our allowance for credit losses - loans for the periods indicated (dollars in thousands): Table 17: Changes in Allowance for Credit Losses - Loans Years Ended December 31 2020 2019 2018 Balance, beginning of period $ 100,559 $ 96,485 $ 89,028 Beginning balance adjustment for adoption of ASC 326 7,812 — — Provision 64,285 10,000 8,500 Recoveries of loans previously charged off: Commercial real estate 275 476 1,646 Construction and land 105 208 213 One- to four-family real estate 467 561 750 Commercial business 3,265 625 1,049 Agricultural business, including secured by farmland 1,823 47 64 Consumer 328 548 366 6,263 2,465 4,088 Loans charged off: Commercial real estate (1,854) (1,138) (401) Construction and land (100) (45) (479) One- to four-family real estate (136) (86) (43) Commercial business (7,253) (4,171) (2,051) Agricultural business, including secured by farmland (591) (911) (756) Consumer (1,640) (2,040) (1,401) (11,640) (8,391) (5,131) Net charge-offs (5,377) (5,926) (1,043) Balance, end of period $ 167,279 $ 100,559 $ 96,485 Allowance for credit losses - loans as a percent of total loans 1.69 % 1.08 % 1.11 % Net loan charge-offs as a percent of average outstanding loans during the period (0.05) % (0.07) % (0.01) % Allowance for credit losses - loans as a percent of non-performing loans 470 % 254 % 616 % Allowance for credit losses - loans as a percent of nonaccrual loans 514 % 268 % 654 % 72 The following table sets forth the breakdown of the allowance for credit losses - loans by loan category at the dates indicated (dollars in thousands): Table 18: Allocation of Allowance for Credit Losses - Loans December 31 2020 2019 2018 Amount Percent of Loans in Each Category to Total Loans Amount Percent of Loans in Each Category to Total Loans Amount Percent of Loans in Each Category to Total Loans Allowance for credit losses - loans: Commercial real estate $ 57,791 36.5 % $ 30,591 41.8 % $ 27,132 41.0 % Multifamily real estate 3,893 4.4 4,754 5.1 3,818 4.2 Construction and land 41,295 13.0 22,994 12.6 24,442 12.8 One-to-four-family real estate 9,913 7.3 4,136 10.1 4,714 11.2 Commercial business 35,007 29.6 23,370 18.2 19,438 17.1 Agricultural business, including secured by farmland 4,914 3.0 4,120 4.0 3,778 4.7 Consumer 14,466 6.2 8,202 8.2 7,972 9.0 Total allocated 167,279 98,167 91,294 Unallocated — n/a 2,392 n/a 5,191 n/a Total allowance for credit losses - loans $ 167,279 100.0 % $ 100,559 100.0 % $ 96,485 100.0 % The allowance for credit losses - unfunded loan commitments was $13.3 million at December 31, 2020 compared to $2.7 million at December 31, 2019. The increase in the allowance for credit losses - unfunded loan commitments reflects the adoption of Financial Instruments - Credit Losses (ASC 326) as well as the increased provision for credit losses - unfunded loan commitments recorded during year ended December 31, 2020. During the year ended December 31, 2020, we recorded a provision for credit losses - unfunded loan commitments of $3.6 million, compared to no provision for loan losses - unfunded loan commitments during the prior year. The provision for loan credit losses - unfunded loan commitments for the year ended December 31, 2020 was primarily due to the economic impacts of COVID-19 as well as forecasted changes to economic indicators in our reasonable and supportable forecast. The following table sets forth an analysis of our allowance for credit losses - unfunded loan commitments for the periods indicated (dollars in thousands): Table 19: Changes in Allowance for Credit Losses - Unfunded Loan Commitments Years Ended, December 31, 2020 2019 2018 Balance, beginning of period $ 2,716 $ 2,599 $ 2,449 Beginning balance adjustment for adoption of ASC 326 7,022 — — Provision/recapture for credit losses - unfunded loan commitments 3,559 — — Additions through acquisitions — 117 150 Balance, end of period $ 13,297 $ 2,716 $ 2,599 73 Non-interest Income. The following table presents the key components of non-interest income for the years ended December 31, 2019, 2019, 2018 (dollars in thousands): Table 20: Non-interest Income 2020 compared to 2019 2019 compared to 2018 2020 2019 Change Amount Change Percent 2019 2018 Change Amount Change Percent Deposit fees and other service charges $ 34,384 $ 46,632 $ (12,248) (26.3) % $ 46,632 $ 48,074 $ (1,442) (3.0) % Mortgage banking operations 51,581 22,215 29,366 132.2 % 22,215 21,343 872 4.1 % Bank owned life insurance 5,972 4,645 1,327 28.6 % 4,645 4,505 140 3.1 % Miscellaneous 6,323 8,624 (2,301) (26.7) % 8,624 7,133 1,491 20.9 % 98,260 82,116 16,144 19.7 % 82,116 81,055 1,061 1.3 % Net gain (loss) on sale of securities 1,012 33 979 nm 33 (837) 870 (103.9) % Net change in valuation of financial instruments carried at fair value (656) (208) (448) 215.4 % (208) 3,775 (3,983) (105.5) % Total non-interest income $ 98,616 $ 81,941 $ 16,675 20.4 % $ 81,941 $ 83,993 $ (2,052) (2.4) % Non-interest income increased $16.7 million, or 20%, to $98.6 million for the year ended December 31, 2020, compared to $81.9 million for the year ended December 31, 2019. This increase was primarily due an increase in income from mortgage banking operations, partially offset a decrease in deposit fees and other service charges and miscellaneous income. Income from deposit fees and other service charges decreased by $12.2 million, or 26%, to $34.4 million for the year ended December 31, 2020, compared to $46.6 million for the prior year as a result of reduced transaction deposit account activity since the start of the COVID-19 pandemic as well as fee waivers in response to the COVID-19 pandemic primarily in the second quarter of 2020. In addition, interchange fee income decreased as we were subject to the Durbin Amendment for the full year 2020 compared to only the second half of 2019. Mortgage banking income, including gains on one- to four-family and multifamily loan sales and loan servicing fees, increased by $29.4 million to $51.6 million for the year ended December 31, 2020, compared to $22.2 million in the prior year. Sales of one- to four-family loans held for sale for the year ended December 31, 2020 resulted in gains of $50.1 million, compared to $18.0 million for the year ended December 31, 2019. In addition, for the year ended December 31, 2020, mortgage banking income included $1.8 million of gains on the sale of multifamily loans, compared to $2.4 million for the year ended December 31, 2019. The higher mortgage banking income reflected increased loan production of one- to four-family held-for-sale loans primarily related to refinance activity as well as an increase in the gain on sale spreads on one- to four-family held for sale loans during the current year. The increase in bank owned life insurance income for year ended December 31, 2020 compared to the prior year was due to a death benefit payment. The $2.3 million decrease in miscellaneous income was primarily driven by lower gains on the sales of SBA loans as well as an increase in losses related to the disposition of assets related to branch consolidation activity. Securities sales for the year ended December 31, 2020 resulted in a gain of $1.0 million, primarily as a result of the gain recognized on the sale of Visa Class B shares held by us, compared to a $33,000 gain for securities sold for the year ended December 31, 2019. For the year ended December 31, 2020, we recorded a net loss of $656,000 for changes in the valuation of financial instruments carried at fair value, compared to a net loss of $208,000 for the year ended December 31, 2019. 74 Non-interest Expense. The following table represents key elements of non-interest expense for the years ended December 31, 2020, 2019, 2018 (dollars in thousands). Table 21: Non-interest Expense 2020 compared to 2019 2019 compared to 2018 2020 2019 Change Amount Change Percent 2019 2018 Change Amount Change Percent Salary and employee benefits $ 245,400 $ 226,409 $ 18,991 8.4 % $ 226,409 $ 202,613 $ 23,796 11.7 % Less capitalized loan origination costs (34,848) (28,934) (5,914) 20.4 % (28,934) (17,925) (11,009) 61.4 % Occupancy and equipment 53,362 52,390 972 1.9 % 52,390 49,215 3,175 6.5 % Information/computer data services 24,386 22,458 1,928 8.6 % 22,458 18,823 3,635 19.3 % Payment and card processing expenses 16,095 16,993 (898) (5.3) % 16,993 15,412 1,581 10.3 % Professional and legal expenses 12,093 9,736 2,357 24.2 % 9,736 17,945 (8,209) (45.7) % Advertising and marketing 6,412 7,836 (1,424) (18.2) % 7,836 8,346 (510) (6.1) % Deposit insurance 6,516 2,840 3,676 129.4 % 2,840 4,446 (1,606) (36.1) % State/Municipal business and use taxes 4,355 3,880 475 12.2 % 3,880 3,284 596 18.1 % REO operations (190) 303 (493) (162.7) % 303 804 (501) (62.3) % Amortization of core deposit intangibles 7,732 8,151 (419) (5.1) % 8,151 6,047 2,104 34.8 % Provision for credit losses - unfunded loan commitments 3,559 — 3,559 nm — — — nm Miscellaneous 22,712 28,122 (5,410) (19.2) % 28,122 26,754 1,368 5.1 % $ 367,584 $ 350,184 $ 17,400 5.0 % $ 350,184 $ 335,764 $ 14,420 4.3 % COVID-19 expenses 3,502 — 3,502 nm — — — nm Merger and acquisition-related costs 2,062 7,544 (5,482) (72.7) % 7,544 5,607 1,937 34.5 % Total non-interest expense $ 373,148 $ 357,728 $ 15,420 4.3 % $ 357,728 $ 341,371 $ 16,357 4.8 % Non-interest expense for the year ended December 31, 2020 was $373.1 million, an increase of $15.4 million, or 4%, as compared to the same period in 2019. The increase was primarily due to increases in salaries and employee benefits expenses, deposit insurance expenses, and provision for credit losses – unfunded loan commitments, partially offset by increases in capitalized loan origination costs and decreases in merger and acquisition-related costs. In addition, the year ended December 31, 2020 included $3.5 million of COVID-19 expenses. We expect to see COVID-19 expenses continue throughout the duration of the current pandemic. Salary and employee benefits expenses increased $19.0 million to $245.4 million for the year ended December 31, 2020 from $226.4 million for the year ended December 31, 2019, primarily reflecting additional staffing related to the operations acquired from the acquisition of AltaPacific on November 1, 2019, as well as normal salary and wage adjustments. Capitalized loan origination costs increased $5.9 million for the year ended December 31, 2020, compared to the prior year, reflecting the increase in loan originations, primarily PPP loans. Occupancy and equipment expenses increased $1.0 million, or 2%, to $53.4 million in 2020, compared to $52.4 million in 2019, primarily reflecting the operations acquired from the AltaPacific acquisition. Information and computer data services expense increased $1.9 million, or 9%, to $24.4 million in the current year, compared to $22.5 million in the prior year, reflecting incremental costs as the Company continued to grow. Professional and legal expense increased $2.4 million to $12.1 million for the year ended December 31, 2020 from $9.7 million for the year ended December 31, 2019 due to a $2.5 million accrual related to pending litigation. Advertising and marketing expenses decreased $1.4 million to $6.4 million for the year ended December 31, 2020 from $7.8 million for the year ended December 31, 2019, reflecting curtailment of direct mail and marketing campaigns in response to the COVID-19 pandemic. The provision for credit losses - unfunded loan commitments increased $3.6 million for the year ended December 31, 2019, compared to the prior year, primarily due to the economic impacts of COVID-19. Deposit insurance expense increased $3.7 million for the year ended December 31, 2020, compared to the same period in 2019 as the result of a credit of $2.7 million recognized in 2019 for previously paid deposit insurance premiums. REO operations for the year ended December 31, 2020 resulted in $190,000 of benefit, compared to $303,000 of expense in the prior year as we realized gains on the sale of REO. There were $2.1 million of merger and acquisition-related costs added to non-interest expense in the 75 current year, compared to $7.5 million in the year ended December 31, 2019. Miscellaneous expenses decreased $5.4 million for the year ended December 31, 2020, compared to the prior year, reflecting a reduction in employee travel, conferences and training expenses. Income Taxes. For the year ended December 31, 2020, we recognized $26.5 million in income tax expense for an effective rate of 18.6%, which reflects our statutory tax rate reduced by the effect of tax-exempt income, certain tax credits, and tax benefits related to restricted stock vesting. Our blended federal and state statutory income tax rate is 23.7%, representing a blend of the statutory federal income tax rate of 21.0% and apportioned effects of the state and local jurisdictions where we do business. For the year ended December 31, 2019, we recognized $36.9 million in income tax expense for an effective tax rate of 20.1%. For more information on income taxes and deferred taxes, see Note 12 of the Notes to the Consolidated Financial Statements. Comparison of Results of Operations for the Years Ended December 31, 2019 and 2018 See Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC. Market Risk and Asset/Liability Management Our financial condition and operations are influenced significantly by general economic conditions, including the absolute level of interest rates as well as changes in interest rates and the slope of the yield curve. Our profitability is dependent to a large extent on our net interest income, which is the difference between the interest received from our interest-earning assets and the interest expense incurred on our interest-bearing liabilities. Our activities, like all financial institutions, inherently involve the assumption of interest rate risk. Interest rate risk is the risk that changes in market interest rates will have an adverse impact on the institution’s earnings and underlying economic value. Interest rate risk is determined by the maturity and repricing characteristics of an institution’s assets, liabilities and off-balance-sheet contracts. Interest rate risk is measured by the variability of financial performance and economic value resulting from changes in interest rates. Interest rate risk is the primary market risk affecting our financial performance. The greatest source of interest rate risk to us results from the mismatch of maturities or repricing intervals for rate sensitive assets, liabilities and off-balance sheet contracts. This mismatch or gap is generally characterized by a substantially shorter maturity structure for interest-bearing liabilities than interest-earning assets, although our floating-rate assets tend to be more immediately responsive to changes in market rates than most funding deposit liabilities. Additional interest rate risk results from mismatched repricing indices and formula (basis risk and yield curve risk), and product caps and floors and early repayment or withdrawal provisions (option risk), which may be contractual or market driven, that are generally more favorable to clients than to us. An exception to this generalization is the beneficial effect of interest rate floors on a substantial portion of our performing floating-rate loans, which help us maintain higher loan yields in periods when market interest rates decline significantly. However, in a declining interest rate environment, as loans with floors are repaid they generally are replaced with new loans which have lower interest rate floors. As of December 31, 2020, our loans with interest rate floors totaled approximately $3.10 billion and had a weighted average floor rate of 4.40% compared to a current average note rate of 4.61%. The Company actively manages its exposure to interest rate risk through on-going adjustments to the mix of interest earning assets and funding sources that affect the repricing speeds of loans, investments, interest-bearing deposits and borrowings. The principal objectives of asset/liability management are: to evaluate the interest rate risk exposure; to determine the level of risk appropriate given our operating environment, business plan strategies, performance objectives, capital and liquidity constraints, and asset and liability allocation alternatives; and to manage our interest rate risk consistent with regulatory guidelines and policies approved by the Board of Directors. Through such management, we seek to reduce the vulnerability of our earnings and capital position to changes in the level of interest rates. Our actions in this regard are taken under the guidance of the Asset/Liability Management Committee, which is comprised of members of our senior management. The Committee closely monitors our interest sensitivity exposure, asset and liability allocation decisions, liquidity and capital positions, and local and national economic conditions and attempts to structure the loan and investment portfolios and funding sources to maximize earnings within acceptable risk tolerances. Sensitivity Analysis Our primary monitoring tool for assessing interest rate risk is asset/liability simulation modeling, which is designed to capture the dynamics of balance sheet, interest rate and spread movements and to quantify variations in net interest income resulting from those movements under different rate environments. The sensitivity of net interest income to changes in the modeled interest rate environments provides a measurement of interest rate risk. We also utilize economic value analysis, which addresses changes in estimated net economic value of equity arising from changes in the level of interest rates. The net economic value of equity is estimated by separately valuing our assets and liabilities under varying interest rate environments. The extent to which assets gain or lose value in relation to the gains or losses of liability values under the various interest rate assumptions determines the sensitivity of net economic value to changes in interest rates and provides an additional measure of interest rate risk. The interest rate sensitivity analysis performed by us incorporates beginning-of-the-period rate, balance and maturity data, using various levels of aggregation of that data, as well as certain assumptions concerning the maturity, repricing, amortization and prepayment characteristics of loans and other interest-earning assets and the repricing and withdrawal of deposits and other interest-bearing liabilities into an asset/liability computer simulation model. We update and prepare simulation modeling at least quarterly for review by senior management 76 and the directors. We believe the data and assumptions are realistic representations of our portfolio and possible outcomes under the various interest rate scenarios. Nonetheless, the interest rate sensitivity of our net interest income and net economic value of equity could vary substantially if different assumptions were used or if actual experience differs from the assumptions used. The following table sets forth as of December 31, 2020, the estimated changes in our net interest income over one-year and two-year time horizons and the estimated changes in economic value of equity based on the indicated interest rate environments (dollars in thousands): Table 23: Interest Rate Risk Indicators December 31, 2020 Estimated Increase (Decrease) in Change (in Basis Points) in Interest Rates (1) Net Interest Income Next 12 Months Net Interest Income Next 24 Months Economic Value of Equity +400 $ 46,775 9.9 % $ 127,122 13.6 % $ (61,585) (2.9) % +300 44,065 9.3 118,584 12.7 10,878 0.5 +200 35,082 7.4 94,784 10.2 84,030 4.0 +100 20,355 4.3 55,467 6.0 99,728 4.7 0 — — — — — — -25 (4,307) (0.9) (12,334) (1.3) (43,328) (2.0) (1) Assumes an instantaneous and sustained uniform change in market interest rates at all maturities; however, no rates are allowed to go below zero. The current targeted federal funds rate is between 0.00% and 0.25%. Another (although less reliable) monitoring tool for assessing interest rate risk is gap analysis. The matching of the repricing characteristics of assets and liabilities may be analyzed by examining the extent to which assets and liabilities are interest sensitive and by monitoring an institution’s interest sensitivity gap. An asset or liability is said to be interest sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated, based upon certain assumptions, to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated to mature or reprice, based upon certain assumptions, within that same time period. A gap is considered positive when the amount of interest-sensitive assets exceeds the amount of interest-sensitive liabilities. A gap is considered negative when the amount of interest-sensitive liabilities exceeds the amount of interest-sensitive assets. Generally, during a period of rising rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income. Certain shortcomings are inherent in gap analysis. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of some borrowers to service their debt may decrease in the event of a severe change in market rates. Table 23, Interest Sensitivity Gap, presents our interest sensitivity gap between interest-earning assets and interest-bearing liabilities at December 31, 2020. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities which are anticipated by us, based upon certain assumptions, to reprice or mature in each of the future periods shown. At December 31, 2020, total interest-earning assets maturing or repricing within one year exceeded total interest-bearing liabilities maturing or repricing in the same time period by $4.84 billion, representing a one-year cumulative gap to total assets ratio of 32.19%. Management is aware of the sources of interest rate risk and in its opinion actively monitors and manages it to the extent possible. Management believes that our current level of interest rate risk is reasonable. 77 The following table provides a GAP analysis as of December 31, 2020 (dollars in thousands): Table 24: Interest Sensitivity Gap December 31, 2020 Within 6 Months After 6 Months Within 1 Year After 1 Year Within 3 Years After 3 Years Within 5 Years After 5 Years Within 10 Years Over 10 Years Total Interest-earning assets: (1) Construction loans $ 765,940 $ 84,610 $ 119,661 $ 31,614 $ 11,498 $ 359 $ 1,013,682 Fixed-rate mortgage loans 387,853 271,651 797,713 434,404 356,180 26,089 2,273,890 Adjustable-rate mortgage loans 1,289,515 460,939 1,163,508 569,557 89,080 6 3,572,605 Fixed-rate mortgage-backed securities 179,879 184,215 375,464 211,467 421,623 71,877 1,444,525 Adjustable-rate mortgage-backed securities 213,309 6,127 28,833 4,444 2,281 — 254,994 Fixed-rate commercial/agricultural loans 356,937 329,152 816,783 124,697 94,637 26,622 1,748,828 Adjustable-rate commercial/agricultural loans 734,958 31,473 78,780 39,508 12,574 — 897,293 Consumer and other loans 475,764 30,365 46,385 15,700 15,840 31,794 615,848 Investment securities and interest-earning deposits 1,176,780 33,892 64,559 141,645 348,864 120,040 1,885,780 Total rate sensitive assets 5,580,935 1,432,424 3,491,686 1,573,036 1,352,577 276,787 13,707,445 Interest-bearing liabilities: (2) Interest-bearing checking accounts 250,888 170,374 549,150 388,127 553,407 486,534 2,398,480 Regular savings 166,285 63,975 225,613 186,046 338,723 588,794 1,569,436 Money market deposit accounts 244,947 144,367 477,690 350,608 521,213 452,312 2,191,137 Certificates of deposit 431,100 270,140 188,663 23,467 2,008 — 915,378 FHLB advances 50,000 50,000 50,000 — — — 150,000 Subordinated notes — — — 100,000 — — 100,000 Junior subordinated debentures 147,944 — — — — — 147,944 Retail repurchase agreements 184,785 — — — — — 184,785 Total rate sensitive liabilities 1,475,949 698,856 1,491,116 1,048,248 1,415,351 1,527,640 7,657,160 Excess (deficiency) of interest-sensitive assets over interest-sensitive liabilities $ 4,104,986 $ 733,568 $ 2,000,570 $ 524,788 $ (62,774) $ (1,250,853) $ 6,050,285 Cumulative excess of interest-sensitive assets $ 4,104,986 $ 4,838,554 $ 6,839,124 $ 7,363,912 $ 7,301,138 $ 6,050,285 $ 6,050,285 Cumulative ratio of interest-earning assets to interest-bearing liabilities 378.13 % 322.48 % 286.56 % 256.21 % 219.11 % 179.01 % 179.01 % Interest sensitivity gap to total assets 27.31 % 4.88 % 13.31 % 3.49 % (0.42) % (8.32) % 40.25 % Ratio of cumulative gap to total assets 27.31 % 32.19 % 45.50 % 48.99 % 48.57 % 40.25 % 40.25 % (footnotes follow) 78 (1) Adjustable-rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due to mature, and fixed-rate assets are included in the period in which they are scheduled to be repaid based upon scheduled amortization, in each case adjusted to take into account estimated prepayments. Mortgage loans and other loans are not reduced for allowances for loan losses and non-performing loans. Mortgage loans, mortgage-backed securities, other loans and investment securities are not adjusted for deferred fees and unamortized acquisition premiums and discounts. (2) Adjustable-rate liabilities are included in the period in which interest rates are next scheduled to adjust rather than in the period they are due to mature. Although regular savings, demand, interest-bearing checking, and money market deposit accounts are subject to immediate withdrawal, based on historical experience management considers a substantial amount of such accounts to be core deposits having significantly longer maturities. For the purpose of the gap analysis, these accounts have been assigned decay rates to reflect their longer effective maturities. If all of these accounts had been assumed to be short-term, the one-year cumulative gap of interest-sensitive assets would have been $(279,661), or (1.86)% of total assets at December 31, 2020. Interest-bearing liabilities for this table exclude certain non-interest-bearing deposits that are included in the average balance calculations reflected in Table 15, Analysis of Net Interest Spread . Liquidity and Capital Resources Our primary sources of funds are deposits, borrowings, proceeds from loan principal and interest payments and sales of loans, and the maturity of and interest income on mortgage-backed and investment securities. While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, competition and our pricing strategies. Our primary investing activity is the origination and purchase of loans and, in certain periods, the purchase of securities. During the years ended December 31, 2020, 2019 and 2018, our loan originations exceeded our loan repayments by $2.02 billion, $1.40 billion and $1.31 billion, respectively. During those periods we purchased loans of $2.5 million, $9.8 million and $33.7 million, respectively. This activity was funded primarily by increased core deposits and the sale of loans in 2020 and by principal repayment and maturities of securities in 2019. During the years ended December 31, 2020, 2019 and 2018, we sold $1.49 billion, $1.10 billion, and $791.7 million, respectively, of loans. Securities purchased during the years ended December 31, 2020, 2019 and 2018 totaled $1.58 billion, $332.4 million, and $923.6 million, respectively, and securities repayments, maturities and sales in those periods were $659.1 million, $458.6 million, and $421.3 million, respectively. Our primary financing activity is gathering deposits. Our deposits increased by $2.52 billion during the year ended December 31, 2020, as core deposits increased by $2.72 billion and certificates of deposits, primarily brokered deposits, decreased by $205.1 million. The increase in total deposits during 2020 was due primarily to PPP loan funds deposited into client accounts, fiscal stimulus payments, and an increase in average deposit account balances due to an increase in general client liquidity due to reduced business investment and consumer spending. At December 31, 2020, core deposits totaled $11.65 billion, or 93% of total deposits, compared with $8.93 billion, or 89% of total deposits at December 31, 2019, and $8.16 billion, or 86% of total deposits at December 31, 2018. Certificates of deposit are generally more price sensitive than other retail deposits and our pricing of those deposits varies significantly based upon our liquidity management strategies at any point in time. At December 31, 2020, certificates of deposit amounted to $915.3 million, or 7% of our total deposits, including $701.5 million which were scheduled to mature within one year. Certificates of deposit decreased from 11% of our total deposits at December 31, 2019, due to the decrease in brokered certificates of deposit and were 14% of total deposits at December 31, 2018. While no assurance can be given as to future periods, historically, we have been able to retain a significant amount of our deposits as they mature. FHLB advances (excluding fair value adjustments) decreased $300.0 million for the year ended December 31, 2020, after decreasing $90.2 million for the year ended December 31, 2019. Other borrowings at December 31, 2020 increased $66.3 million to $184.8 million following a decrease of $521,000 in 2019. We must maintain an adequate level of liquidity to ensure the availability of sufficient funds to accommodate deposit withdrawals, to support loan growth, to satisfy financial commitments and to take advantage of investment opportunities. During the years ended December 31, 2020, 2019 and 2018, we used our sources of funds primarily to fund loan commitments and purchase securities. At December 31, 2020, we had outstanding commitments to extend credit, originate loans and for letters of credit totaling $3.54 billion. While representing potential growth in the loan portfolio and lending activities, this level of commitments is proportionally consistent with our historical experience and does not represent a departure from normal operations. We generally maintain sufficient cash and readily marketable securities to meet short-term liquidity needs; however, our primary liquidity management practice to supplement deposits is to increase or decrease short-term borrowings, including FHLB advances and Federal Reserve Bank of San Francisco (FRBSF) borrowings. We maintain credit facilities with the FHLB-Des Moines, which provided for advances that in the aggregate would equal the lesser of 45% of Banner Bank’s assets or adjusted qualifying collateral (subject to a sufficient level of ownership of FHLB stock) and 45% of Islanders Bank’s assets or adjusted qualifying collateral. At December 31, 2020, under these credit facilities based on pledged collateral, Banner Bank had $2.28 billion of available credit capacity and Islanders Bank $32.5 million of available credit capacity. Advances under these credit facilities (excluding fair value adjustments) totaled $150.0 million at December 31, 2020. In addition, Banner Bank has been approved for participation in the FRBSF’s Borrower-In-Custody (BIC) program. Under this program, based on pledged collateral, Banner Bank had available lines of credit of approximately $958.7 million as of December 31, 2020, subject to certain collateral requirements, namely the collateral type and risk rating of eligible pledged loans. We had no funds borrowed from the FRBSF at December 31, 2020 or 2019. At December 31, 2020, Banner Bank also had uncommitted federal funds line of credit agreements with other financial institutions totaling $125.0 million, while Islanders Bank had an uncommitted federal funds line of credit agreement with another 79 financial institution totaling $5.0 million. No balances were outstanding under these agreements as of December 31, 2020. Availability of lines is subject to federal funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs and the agreements may restrict consecutive day usage. Management believes it has adequate resources and funding potential to meet our foreseeable liquidity requirements. Additionally, the Federal Reserve recently established the Paycheck Protection Program Liquidity Facility (PPPLF) to bolster the effectiveness of the PPP. As of December 31, 2020, Banner Bank was approved to utilize the PPPLF. Banner Bank may utilize the PPPLF pursuant to which it will pledge PPP loans at face value as collateral to obtain FRB non-recourse advances. Banner Bank utilized and repaid outstanding advances from the PPPLF during the year ended December 31, 2020. There were no borrowings outstanding under this program during the quarter ended December 31, 2020. Banner Corporation is a separate legal entity from the Banks and, on a stand-alone level, must provide for its own liquidity and pay its own operating expenses and cash dividends. Banner’s primary sources of funds consist of capital raised through dividends or capital distributions from the Banks, although there are regulatory restrictions on the ability of the Banks to pay dividends. At December 31, 2020, Banner Corporation (on an unconsolidated basis) had liquid assets of $131.6 million. On June 30, 2020, Banner issued and sold in an underwritten offering of the Subordinated Notes, resulting in net proceeds, after underwriting discounts and offering expenses, of $98.1 million. The Subordinated Notes qualify as Tier 2 capital for regulatory capital purposes. As noted below, Banner Corporation and its subsidiary banks continued to maintain capital levels in excess of the requirements to be categorized as “Well-Capitalized” under applicable regulatory standards. During the year ended December 31, 2020, total equity increased $72.2 million to $1.67 billion. At December 31, 2020, tangible common shareholders’ equity, which excludes goodwill and other intangible assets, was $1.27 billion, or 8.69% of tangible assets. See the discussion and reconciliation of non-GAAP financial information above in the Executive Overview section of this Management’s Discussion and Analysis of Financial Condition and Results of Operation for more detailed information with respect to tangible common shareholders’ equity. Also, see the capital requirements discussion and table below with respect to our regulatory capital positions. Capital Requirements Banner Corporation is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended (BHCA), and the regulations of the Federal Reserve. Banner Bank and Islanders Bank, as state-chartered, federally insured commercial banks, are subject to the capital requirements established by the FDIC. The capital adequacy requirements are quantitative measures established by regulation that require Banner Corporation and the Banks to maintain minimum amounts and ratios of capital. The Federal Reserve requires Banner Corporation to maintain capital adequacy that generally parallels the FDIC requirements. The FDIC requires the Banks to maintain minimum ratios of Total Capital, Tier 1 Capital, and Common Equity Tier 1 Capital to risk-weighted assets as well as Tier 1 leverage capital to average assets. In addition to the minimum capital ratios, the Banks have to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. At December 31, 2020, Banner Corporation and the Banks each exceeded all current regulatory capital requirements and the fully phased-in capital conservation buffer requirement. The following table shows the regulatory capital ratios of Banner Corporation and its subsidiaries, Banner Bank and Islanders Bank, as of December 31, 2020. Table 25: Regulatory Capital Ratios Capital Ratios Banner Corporation Banner Bank Islanders Bank Total capital to risk-weighted assets 14.73 % 13.39 % 15.65 % Tier 1 capital to risk-weighted assets 12.56 12.14 14.39 Tier 1 capital to average leverage assets 9.50 9.22 7.87 Tier 1 common equity to risk-weighted assets 11.25 12.14 14.39 (See Item 1, “Business–Regulation,” and Note 15 of the Notes to the Consolidated Financial Statements for additional information regarding Banner Corporation’s and Banner Bank’s regulatory capital requirements.) Effect of Inflation and Changing Prices The Consolidated Financial Statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering the changes in relative purchasing power of money over time due to inflation. The primary effect of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant effect on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. 80 Contractual Obligations The following table shows the obligations of Banner Corporation and its subsidiaries as of December 31, 2020 by maturity (in thousands): Table 26: Contractual Obligations One Year or Less After One to Three Years After Three to Five Years After Five Years Total Advances from Federal Home Loan Bank $ 100,000 $ 50,000 $ — $ — $ 150,000 Subordinated notes — — — 100,000 100,000 Junior subordinated debentures — — — 147,944 147,944 Repurchase agreements 184,785 — — — 184,785 Certificates of Deposit 701,473 188,384 23,455 2,008 915,320 Operating lease obligations 16,020 23,151 13,973 12,217 65,361 Purchase obligation 28,553 25,612 4,660 123 58,948 Total $ 1,030,831 $ 287,147 $ 42,088 $ 262,292 $ 1,622,358 In addition, we have contracts with various vendors to provide services, including information processing, for periods generally ranging from one to five years, for which our financial obligations are dependent upon acceptable performance by the vendor. For additional information regarding future financial commitments, this discussion should be read in conjunction with our Consolidated Financial Statements and related notes included elsewhere in this filing, including Note 22: “Commitments and Contingencies.” ITEM 7A – Quantitative and Qualitative Disclosures about Market Risk See pages 70 – 74 of Management’s Discussion and Analysis of Financial Condition and Results of Operations. ITEM 8 – Financial Statements and Supplementary Data For financial statements, see index on page 83 . ITEM 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable.