UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER 30, 2017~~MARCH 31, 2019


[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ to ______________

Commission File Number 000-26584

BANNER CORPORATION

(Exact name of registrant as specified in its charter)





Washington		91-1691604
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

	10 South First Avenue, Walla Walla, Washington 99362
	(Address of principal executive offices and zip code)

	Registrant's telephone number, including area code: (509) 527-3636

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

[x]

[ ]

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate website, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files).

Yes

[x]

[ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [x]

Accelerated filer [ ]

Non-accelerated filer [ ]

Smaller reporting company [ ]

Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

[ ]

[x]

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $.01 per share

BANR

The NASDAQ Stock Market LLC

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Title of class:

As of ~~November 3, 2017~~April 30, 2019

Common Stock, $.01 par value per share

~~32,806,473~~35,121,930 shares

Non-voting Common Stock, $.01 par value per share

~~100,029~~39,192 shares

BANNER CORPORATION AND SUBSIDIARIES

Table of Contents



PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements. The Unaudited Condensed Consolidated Financial Statements of Banner Corporation and Subsidiaries filed as a part of the report are as follows:

Consolidated Statements of Financial Condition as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018	4

Consolidated Statements of Operations for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018	5

Consolidated Statements of Comprehensive Income for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018	6

Consolidated Statements of Changes in Shareholders’ Equity for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2019 and the Year Ended December 31, ~~2016~~2018	7

Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018	810

Selected Notes to the Consolidated Financial Statements	1012

Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview	4347

Comparison of Financial Condition at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018	4853

Comparison of Results of Operations for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018	5156

Asset Quality	5860

Liquidity and Capital Resources	6062

Capital Requirements	6163

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Market Risk and Asset/Liability Management	6264

Sensitivity Analysis	6264

Item 4 – Controls and Procedures	6769

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings	6870

Item 1A – Risk Factors	6870

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	6870

Item 3 – Defaults upon Senior Securities	6870

Item 4 – Mine Safety Disclosures	6870

Item 5 – Other Information	6870

Item 6 – Exhibits	6971

SIGNATURES	7173

Special Note Regarding Forward-Looking Statements

Certain matters in this Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, liquidity, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance and projections of financial items. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: expected revenues, cost savings, synergies and other benefits from the merger of Banner and Skagit Bancorp, Inc. (Skagit) might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected; the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in ~~our~~estimates of the adequacy of the allowance for loan losses and ~~provision~~provisions for loan losses that may be impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and non-performing assets, and may result in ~~our~~the allowance for loan losses not being adequate to cover actual losses and require usa material increase in reserves; results of examinations by regulatory authorities, including the possibility that any such regulatory authority may, among other things, require the writing down of assets or increases in the allowance for loan losses; the ability to ~~materially increase our reserves;~~manage loan delinquency rates; competitive pressures among financial services companies; changes in ~~economic conditions in general~~consumer spending or borrowing and ~~in Washington, Idaho, Oregon, Utah and California in particular; changes in the levels of general~~spending habits; interest ~~rates~~rate movements generally and the relative differences between short and long-term interest rates, loan and deposit interest rates, ~~our~~ net interest margin and funding sources; the impact of repricing and competitors’ pricing initiatives on loan and deposit products; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate ~~values~~values; the ability to adapt successfully to technological changes to meet customers’ needs and developments in ~~our market areas;~~the marketplace; the ability to access cost-effective funding; increases in premiums for deposit insurance; the ability to control operating costs and expenses; the use of estimates in determining fair value of certain assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect employees, and potential associated charges; disruptions, security breaches or other adverse events, failures or interruptions in, or attacks on, information technology systems or on the third-party vendors who perform critical processing functions; changes in financial markets; changes in economic conditions in general and in Washington, Idaho, Oregon and California in particular; secondary market conditions for loans and ~~our~~the ability to sell loans in the secondary market; the costs, effects and outcomes of litigation; legislation or regulatory changes or reforms, including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including changes related to Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the implementing regulations; results of safety and soundness and compliance examinations by the Board of ~~us by~~Governors of the Federal Reserve ~~and of our bank subsidiaries by~~System, the Federal Deposit Insurance Corporation (the FDIC), the Washington State Department of Financial Institutions, Division of Banks, (the Washington DFI) or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require restitution or institute an informal or formal enforcement action ~~against us or any of our bank subsidiaries~~ which could require ~~us to~~an increase ~~our reserve~~in reserves for loan losses, ~~write-down~~write-downs of assets ~~change our~~or changes in regulatory capital position, or affect ~~our~~the ability to borrow funds, or maintain or increase deposits, or impose additional requirements and restrictions, ~~on us,~~ any of which could adversely affect ~~our~~ liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including changes related to Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation; difficulties in reducing risk associated with the loans and securities on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; the failure or security breach of computer systems on which we depend; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; our ability to successfully integrate any assets, liabilities, customers, systems, and personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames or at all, and any goodwill charges related thereto and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, which might be greater than expected; future goodwill impairment due to changes in our business, changes in market conditions, or other factors; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; ~~our ability to pay dividends on our common stock and non-voting common stock, and interest or principal payments on our junior subordinated debentures;~~ adverse changes in the securities markets; the inability of key third-party providers to perform their ~~obligations to us;~~obligations; changes in accounting principles, policies ~~and practices, as may be adopted by the financial institution regulatory agencies~~ or ~~the Financial Accounting Standards Board~~guidelines, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory and technological factors affecting ~~our~~ operations, pricing, products and services; future acquisitions by Banner of other depository institutions or lines of business; and future goodwill impairment due to changes in Banner’s business, changes in market conditions, or other factors; and other risks detailed from time to time in our filings with the U.S. Securities and Exchange Commission (SEC), including this report on Form 10-Q. Any forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. We do not undertake and specifically disclaim any obligation to update any forward-looking statements included in this report or the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. These risks could cause our actual results to differ materially from those expressed in any forward-looking statements by, or on behalf of, us. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.

As used throughout this report, the terms “we,” “our,” “us,” or the “Company” refer to Banner Corporation and its consolidated subsidiaries, unless the context otherwise requires. All references to “Banner” refer to Banner Corporation and those to “the Banks” refer to its wholly-owned subsidiaries, Banner Bank and Islanders Bank, collectively.

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited) (In thousands, except shares)

~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018


ASSETS	September 30 2017			December 31 2016			March 31 2019			December 31 2018
Cash and due from banks	$	192,278		$	177,083		$	218,458		$	231,029
Interest bearing deposits	49,488			70,636			43,080			41,167
Total cash and cash equivalents	241,766			247,719			261,538			272,196
Securities—trading, amortized cost $28,663 and $30,154, respectively	23,466			24,568
Securities—available-for-sale, amortized cost $1,338,863 and $806,336, respectively	1,339,057			800,917
Securities—held-to-maturity, fair value $268,663 and $270,528, respectively	264,752			267,873
Securities—trading, amortized cost $27,203 and $27,203, respectively							25,838			25,896
Securities—available-for-sale, amortized cost $1,599,347 and $1,648,421, respectively							1,603,804			1,636,223
Securities—held-to-maturity, fair value $220,112 and $232,537, respectively							218,993			234,220
Total securities							1,848,635			1,896,339
Federal Home Loan Bank (FHLB) stock	20,854			12,506			27,063			31,955
Loans held for sale (includes $64,399 and $9,600, at fair value, respectively)	71,905			246,353
Loans held for sale (includes $37.4 million and $164.8 million, at fair value, respectively)							45,865			171,031
Loans receivable	7,774,449			7,451,148			8,692,657			8,684,595
Allowance for loan losses	(89,100		)	(85,997		)	(97,308		)	(96,485		)
Net loans	7,685,349			7,365,151
Net loans receivable							8,595,349			8,588,110
Accrued interest receivable	33,837			30,178			41,220			38,593
Real estate owned (REO), held for sale, net	1,496			11,081			2,611			2,611
Property and equipment, net	159,893			166,481			171,057			171,809
Goodwill	244,583			244,583			339,154			339,154
Other intangibles, net	25,219			30,162			30,647			32,924
Bank-owned life insurance (BOLI)	161,648			158,936			178,202			177,467
Deferred tax assets, net	119,333			127,694			69,642			75,020
Other assets	49,928			59,466			129,302			74,108
Total assets	$	10,443,086		$	9,793,668		$	11,740,285		$	11,871,317
LIABILITIES
Deposits:
Non-interest-bearing	$	3,379,841		$	3,140,451		$	3,676,984		$	3,657,817
Interest-bearing transaction and savings accounts	4,058,435			3,935,630			4,535,969			4,498,966
Interest-bearing certificates	1,100,574			1,045,333			1,163,276			1,320,265
Total deposits	8,538,850			8,121,414			9,376,229			9,477,048
Advances from FHLB at fair value	263,349			54,216
Advances from FHLB							418,000			540,189
Other borrowings	103,713			105,685			121,719			118,995
Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)	97,280			95,200			113,917			114,091
Accrued expenses and other liabilities	72,604			71,369			158,669			102,061
Deferred compensation	40,279			40,074			40,560			40,338
Total liabilities	9,116,075			8,487,958			10,229,094			10,392,722
COMMITMENTS AND CONTINGENCIES (Note 12)
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS’ EQUITY
Preferred stock - $0.01 par value per share, 500,000 shares authorized; no shares outstanding at September 30, 2017 and December 31, 2016	—			—
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized; 33,154,755 shares issued and outstanding at September 30, 2017; 33,108,599 shares issued and outstanding at December 31, 2016	1,214,547			1,213,225
Common stock (non-voting) and paid in capital- $0.01 par value per share, 5,000,000 shares authorized; 100,029 shares issued and outstanding at September 30, 2017; 84,788 shares issued and outstanding at December 31, 2016	935			612
Preferred stock - $0.01 par value per share, 500,000 shares authorized; no shares outstanding at March 31, 2019 and December 31, 2018							—			—
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized; 35,113,554 shares issued and outstanding at March 31, 2019; 35,107,839 shares issued and outstanding at December 31, 2018							1,337,592			1,336,030
Common stock (non-voting) and paid in capital - $0.01 par value per share, 5,000,000 shares authorized; 39,192 shares issued and outstanding at March 31, 2019; 74,933 shares issued and outstanding at December 31, 2018							794			1,406
Retained earnings	111,405			95,328			152,911			134,055
Carrying value of shares held in trust for stock related compensation plans	(7,283		)	(7,283		)
Liability for common stock issued to deferred, stock related, compensation plans	7,283			7,283
Accumulated other comprehensive income (loss)	124			(3,455		)
Carrying value of shares held in trust for stock-based compensation plans							(7,294		)	(7,289		)
Liability for common stock issued to stock related compensation plans							7,294			7,289
Accumulated other comprehensive loss							19,894			7,104
Total shareholders' equity	1,327,011			1,305,710			1,511,191			1,478,595
Total liabilities & shareholders' equity	$	10,443,086		$	9,793,668
Total liabilities and shareholders' equity							$	11,740,285		$	11,871,317

See Selected Notes to the Consolidated Financial Statements

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited) (In thousands, except shares and per share amounts)

For the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2019				2018
INTEREST INCOME:
Loans receivable	$	95,221		$	89,805		$	281,304		$	265,697		$	115,455			$	94,022
Mortgage-backed securities	6,644			4,803			17,529			15,467			10,507				7,331
Securities and cash equivalents	3,413			3,241			9,976			9,306			4,034				3,467
Total interest income	105,278			97,849			308,809			290,470			129,996				104,820
INTEREST EXPENSE:
Deposits	3,189			2,784			9,162			8,501			8,643				3,358
FHLB advances	569			256			1,142			874			3,476				677
Other borrowings	84			82			241			234			60				70
Junior subordinated debentures	1,226			1,019			3,494			2,962			1,713				1,342
Total interest expense	5,068			4,141			14,039			12,571			13,892				5,447
Net interest income	100,210			93,708			294,770			277,899			116,104				99,373
PROVISION FOR LOAN LOSSES	2,000			2,000			6,000			4,000			2,000				2,000
Net interest income after provision for loan losses	98,210			91,708			288,770			273,899			114,104				97,373
NON-INTEREST INCOME:
Deposit fees and other service charges	13,316			12,927			38,739			36,957			12,618				11,296
Mortgage banking operations	4,498			8,141			15,854			20,409			3,415				4,864
Bank-owned life insurance (BOLI)	1,043			1,333			3,599			3,646			1,276				853
Miscellaneous	1,705			1,344			7,062			3,936			804				1,037
	20,562			23,745			65,254			64,948			18,113				18,050
Net gain on sale of securities	270			891			230			531			1				4
Net change in valuation of financial instruments carried at fair value	(493		)	(1,124		)	(1,831		)	(1,472		)	11				3,308
Total non-interest income	20,339			23,512			63,653			64,007			18,125				21,362
NON-INTEREST EXPENSE:																��
Salary and employee benefits	48,931			44,758			144,014			136,497			54,640				50,067
Less capitalized loan origination costs	(4,331		)	(4,953		)	(13,245		)	(14,110		)	(4,849		)		(4,011		)
Occupancy and equipment	11,737			10,979			35,778			32,419			13,766				11,766
Information/computer data services	4,420			4,836			12,513			14,607			5,326				4,381
Payment and card processing expenses	5,839			5,878			16,651			16,164			3,984				3,700
Professional services	3,349			2,258			12,233			5,736
Professional and legal expenses													2,434				4,428
Advertising and marketing	2,130			2,282			5,225			6,489			1,529				1,830
Deposit insurance	1,101			890			3,438			3,539			1,418				1,341
State/municipal business and use taxes	780			956			1,857			2,564			945				713
REO operations	240			(21		)	(1,089		)	513			(123		)		439
Amortization of core deposit intangibles	1,542			1,724			4,790			5,339			2,052				1,382
Miscellaneous	6,851			7,785			20,432			22,311			6,744				5,670
	82,589			77,372			242,597			232,068			87,866				81,706
Acquisition-related costs	—			1,720			—			10,945
Acquisition-related expenses													2,148				—
Total non-interest expense	82,589			79,092			242,597			243,013			90,014				81,706
Income before provision for income taxes	35,960			36,128			109,826			94,893			42,215				37,029
PROVISION FOR INCOME TAXES	10,883			12,277			35,502			32,312			8,869				8,239
NET INCOME	$	25,077		$	23,851		$	74,324		$	62,581		$	33,346			$	28,790
Earnings per common share:
Basic	$	0.76		$	0.70		$	2.25		$	1.84		$	0.95			$	0.89
Diluted	$	0.76		$	0.70		$	2.25		$	1.83		$	0.95			$	0.89
Cumulative dividends declared per common share	$	0.25		$	0.23		$	1.75		$	0.65		$	0.41			$	0.35
Weighted average number of common shares outstanding:
Basic	32,982,532			34,045,225			32,966,214			34,050,459			35,050,376				32,397,568
Diluted	33,079,099			34,124,611			33,061,172			34,104,875			35,172,056				32,516,456

See Selected Notes to the Consolidated Financial Statements

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited) (In thousands)

For the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2019			2018
NET INCOME	$	25,077		$	23,851		$	74,324		$	62,581		$	33,346		$	28,790
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:
Unrealized holding gain (loss) on available-for-sale securities arising during the period	493			(4,659		)	5,841			14,043			16,656			(14,768		)
Income tax (expense) benefit related to available-for-sale securities unrealized holding gain (loss)	(202		)	1,677			(2,116		)	(5,060		)
Reclassification for net gains on available-for-sale securities realized in earnings	(270		)	(735		)	(230		)	(376		)	(1		)	(2		)
Income tax expense related to available-for-sale securities realized gains	97			265			84			136
Changes in fair value of junior subordinated debentures related to instrument specific credit risk													174			(13,809		)
Income tax related to other comprehensive income (loss)													(4,039		)	6,802
Other comprehensive income (loss)	118			(3,452		)	3,579			8,743			12,790			(21,777		)
COMPREHENSIVE INCOME	$	25,195		$	20,399		$	77,903		$	71,324		$	46,136		$	7,013

See Selected Notes to the Consolidated Financial Statements

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited) (In thousands, except shares)

For the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2019 and the Year Ended December 31, ~~2016~~2018


	Common Stock and Paid in Capital					Retained Earnings				Accumulated Other Comprehensive Loss				Shareholders’ Equity			Common Stock and Paid in Capital					Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Shareholders’ Equity
	Shares		Amount						Shares								Amount
Balance, January 1, 2016	34,242,255		$	1,261,174				$	39,615				$	(730	)		$	1,300,059
Balance, January 1, 2018																	32,726,485		$	1,187,127		$	90,535		$	(5,036	)	$	1,272,626

Cumulative effect of reclassification of the instrument-specific credit risk portion of junior subordinated debentures fair value adjustments and reclassification of equity securities from available-for-sale																						(28,203		)	28,203			—
Net income						85,385								85,385								28,790						28,790
Other comprehensive loss, net of income tax										(2,725		)		(2,725		)									(21,777		)	(21,777		)
Accrual of dividends on common stock ($0.88/share cumulative)						(29,672		)						(29,672		)
Repurchase of common stock	(1,145,250	)	(50,772		)									(50,772		)	(269,711	)	(15,359		)							(15,359		)
Accrual of dividends on common stock ($0.35/share)																						(11,349		)				(11,349		)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered	96,382		3,401											3,401			(33,101	)	1,192									1,192
Excess tax benefit on stock-based compensation			34											34
Balance, December 31, 2016	33,193,387		$	1,213,837		$	95,328			$	(3,455	)		$	1,305,710

Balance, March 31, 2018																	32,423,673		$	1,172,960		$	79,773		$	1,390		$	1,254,123

Balance, January 1, 2017 33,193,387
$ 1,213,837
$ 95,328
$ (3,455 ) $ 1,305,710
Net income 74,324
74,324
Other comprehensive income, net of income tax 3,579
3,579
Accrual of dividends on common stock ($1.75/share cumulative) (58,247 ) (58,247 )
Repurchase of common stock (25,000 ) (1,400 ) (1,400 )
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered 86,397
3,045
3,045
Balance, September 30, 2017 33,254,784
$ 1,215,482
$ 111,405
$ 124
$ 1,327,011



Balance, April 1, 2018	32,423,673		$	1,172,960	$	79,773		$	1,390		$	1,254,123

Net income					32,424						32,424
Other comprehensive loss, net of income tax								(6,521		)	(6,521		)
Accrual of dividends on common stock ($0.85/share)					(27,712		)				(27,712		)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered	(17,977	)	696								696

Balance, June 30, 2018	32,405,696		$	1,173,656	$	84,485		$	(5,131	)	$	1,253,010

Continued on next page



	Common Stock and Paid in Capital				Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Shareholders’ Equity
	Shares		Amount		Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Shareholders’ Equity
Balance, July 1, 2018	32,405,696		$	1,173,656	$	84,485		$	(5,131	)	$	1,253,010

Net income					37,773						37,773
Other comprehensive loss, net of income tax								(7,863		)	(7,863		)
Accrual of dividends on common stock ($0.38/share)					(12,316		)				(12,316		)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered	(2,939	)	1,594								1,594

Balance, September 30, 2018	32,402,757		$	1,175,250	$	109,942		$	(12,994	)	$	1,272,198



Balance, October 1, 2018	32,402,757		$	1,175,250		$	109,942		$	(12,994	)	$	1,272,198

Net income						37,527						37,527
Other comprehensive income, net of income tax									20,098			20,098
Accrual of dividends on common stock ($0.38/share)						(13,414		)				(13,414		)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered	(3,056	)	1,519									1,519
Repurchase of common stock	(325,000	)	(19,042		)							(19,042		)
Business acquisition	3,108,071		179,709									179,709

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

Continued on next page



	Common Stock and Paid in Capital				Retained Earnings			Accumulated Other Comprehensive Income		Stockholders’ Equity
	Shares		Amount		Retained Earnings			Accumulated Other Comprehensive Income		Stockholders’ Equity
Balance, January 1, 2019	35,182,772		$	1,337,436	$	134,055		$	7,104	$	1,478,595

Net income					33,346					33,346
Other comprehensive income, net of income tax								12,790		12,790
Accrual of dividends on common stock ($0.41/share)					(14,490		)			(14,490		)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered	(30,026	)	950							950

Balance, March 31, 2019	35,152,746		$	1,338,386	$	152,911		$	19,894	$	1,511,191

See Selected Notes to the Consolidated Financial Statements

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)

For the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018


	Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2019			2018
OPERATING ACTIVITIES:
Net income	$	74,324		$	62,581		$	33,346		$	28,790
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation	10,153			9,219			4,481			3,584
Deferred income and expense, net of amortization	(1,513		)	419			(895		)	(608		)
Amortization of core deposit intangibles	4,790			5,339			2,052			1,382
Gain on sale of securities	(230		)	(531		)	(1		)	(4		)
Net change in valuation of financial instruments carried at fair value	1,831			1,472			(11		)	(3,308		)
Purchases of securities—trading	—			(1,725		)
Proceeds from sales of securities—trading	—			1,682
Principal repayments and maturities of securities—trading	1,618			3,527
Decrease in deferred taxes	8,361			10,747
Decrease (increase) in deferred taxes							5,379			(5,416		)
Increase in current taxes payable	2,853			2,108			7,243			6,569
Equity-based compensation	3,045			3,129
Stock-based compensation							1,219			1,320
Increase in cash surrender value of BOLI	(3,046		)	(3,628		)	(1,267		)	(844		)
Gain on sale of loans, net of capitalized servicing rights	(11,653		)	(14,583		)	(2,063		)	(3,375		)
Gain on disposal of real estate held for sale and property and equipment	(2,438		)	(748		)
Loss on disposal of real estate held for sale and property and equipment							371			58
Provision for loan losses	6,000			4,000			2,000			2,000
Provision for losses on real estate held for sale	256			804			—			160
Origination of loans held for sale	(626,677		)	(753,714		)	(134,747		)	(222,168		)
Proceeds from sales of loans held for sale	812,778			691,355			261,978			124,460
Net change in:
Other assets	(4,082		)	(20,428		)	(984		)	(5,100		)
Other liabilities	(144		)	13,560			(12,847		)	(2,311		)
Net cash provided from operating activities	276,226			14,585
Net cash provided from (used in) operating activities							165,254			(74,811		)
INVESTING ACTIVITIES:
Purchases of securities—available-for-sale	(706,911		)	(242,222		)	(5,140		)	(537,864		)
Principal repayments and maturities of securities—available-for-sale	135,163			143,244			51,910			28,839
Proceeds from sales of securities—available-for-sale	35,559			233,252			516			—
Purchases of securities—held-to-maturity	(5,105		)	(60,344		)	—			(5,312		)
Principal repayments and maturities of securities—held-to-maturity	6,544			7,458			14,744			2,358
Loan originations, net of principal repayments	(120,116		)	(34,328		)	(8,988		)	45,574
Purchases of loans and participating interest in loans	(266,481		)	(230,778		)	—			(1,340		)
Proceeds from sales of other loans	73,366			193,939			3,186			1,750
Purchases of property and equipment	(7,641		)	(9,223		)	(4,435		)	(5,024		)
Proceeds from sale of real estate held for sale and sale of other property, net	15,873			8,021			876			192
Proceeds from FHLB stock repurchase program	80,056			70,237			52,372			32,558
Purchase of FHLB stock	(88,404		)	(67,006		)	(47,480		)	(40,260		)
Other	327			1,922			485			228
Net cash (used in) provided from investing activities	(847,770		)	14,172
Net cash provided from (used in) investing activities							58,046			(478,301		)
FINANCING ACTIVITIES:
Increase in deposits, net	417,436			56,904
(Decrease) increase in deposits, net							(100,819		)	359,631
Proceeds from long term FHLB advances	150,000			—			300,000			—
Repayment of long term FHLB advances	(7		)	(70,007		)	(189		)	(2		)
Proceeds from (repayments of) overnight and short term FHLB advances, net	59,000			(600		)
(Decrease) increase in other borrowings, net	(1,971		)	10,586
(Repayment) proceeds from overnight and short term FHLB advances, net							(422,000		)	192,000
Increase in other borrowings, net							2,724			5,984
Cash dividends paid	(57,467		)	(20,542		)	(13,405		)	(8,165		)
Taxes paid related to net share settlement of equity awards							(269		)	(129		)
Cash paid for the repurchase of common stock	(1,400		)	(21,098		)	—			(15,359		)
Net cash provided from (used in) financing activities	565,591			(44,757		)
Net cash (used in) provided from financing activities							(233,958		)	533,960
NET CHANGE IN CASH AND CASH EQUIVALENTS	(5,953		)	(16,000		)	(10,658		)	(19,152		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	247,719			261,917			272,196			261,200
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	241,766		$	245,917		$	261,538		$	242,048

~~(Continued on next page)~~

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited) (In thousands)

For the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018


	Nine Months Ended September 30,				Three Months Ended March 31,
	2017		2016		2019			2018
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid in cash	$	13,406	$	12,781	$	13,812		$	5,185
Taxes paid, net of refunds received in cash	25,599		23,751
Tax refunds received, net					(71		)	(3		)
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Loans, net of discounts, specific loss allowances and unearned income, transferred to real estate owned and other repossessed assets	10		758		—			976
Dividends accrued but not paid until after period end	8,443		7,873		14,863			11,450

See Selected Notes to the Consolidated Financial Statements

BANNER CORPORATION AND SUBSIDIARIES

SELECTED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements include the accounts of Banner Corporation (the Company or Banner), a bank holding company incorporated in the State of Washington and its wholly-owned subsidiaries, Banner Bank and Islanders Bank (the Banks).

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (SEC). In preparing these financial statements, the Company has evaluated events and transactions subsequent to ~~September 30, 2017~~March 31, 2019 for potential recognition or disclosure. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC and the accounting standards for interim financial statements. Certain reclassifications have been made to the ~~2016~~2018 Consolidated Financial Statements and/or schedules to conform to the ~~2017~~2019 presentation. These reclassifications may have affected certain ratios for the prior periods. The effect of these reclassifications is considered immaterial. All significant intercompany transactions and balances have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are significant to an understanding of Banner’s financial statements. These policies relate to (i) the methodology for the recognition of interest income, (ii) determination of the provision and allowance for loan losses, (iii) the valuation of financial assets and liabilities recorded at fair value, including other-than-temporary impairment (OTTI) losses, (iv) the valuation of intangibles, such as goodwill, core deposit intangibles (CDI) and mortgage servicing rights, (v) the valuation of real estate held for sale, (vi) the valuation of assets acquired and liabilities ~~acquired~~assumed in business combinations and subsequent recognition of related income and expense, and (vii) the valuation or recognition of deferred tax assets and liabilities. These policies and judgments, estimates and assumptions are described in greater detail in subsequent notes to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations (Critical Accounting Policies) in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2018 filed with the ~~SEC.~~SEC (2018 Form 10-K). There have been no significant changes in our application of these accounting policies during the first ~~nine~~three months of ~~2017.~~2019, except as described in Note 2.

The information included in this Form 10-Q should be read in conjunction with our ~~Annual Report on~~2018 Form ~~10-K for the year ended~~ ~~December 31, 2016~~ ~~as filed with the SEC (2016~~ ~~Form 10-K).~~10-K. Interim results are not necessarily indicative of results for a full year or any other interim period.

Note 2: ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED

~~Revenue from Contracts with Customers~~

~~In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,~~ ~~Revenue from Contracts with Customers, which creates Topic 606 and supersedes Topic 605,~~ ~~Revenue Recognition~~. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, the new guidance requires companies to use more judgment and make more estimates than under current guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. Under the terms of ASU 2015-14 the standard is effective for interim and annual periods beginning after December 15, 2017. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. Management intends to adopt the new guidance on January 1, 2018. Management has completed its identification of all revenue streams included in the financial statements (excluding interest income, which is outside of the scope of the pronouncement) and identified which revenue streams are within the scope of the pronouncement. Management is finalizing its evaluation on whether the implementation of this ASU will result in any accounting changes for the revenue streams within the scope of this ASU. Management does not expect the adoption of this ASU to have a material impact on the Company’s Consolidated Financial Statements other than additional disclosure requirements.

~~In April 2016, FASB issued ASU No. 2016-10,~~ ~~Identifying Performance Obligations and Licensing~~. The amendments in this ASU do not change the core principle of the guidance in Topic 606. Rather, the amendments in this ASU clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The amendments in this ASU affect the guidance in ASU 2014-09, discussed above, which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition requirements in Topic 606 (~~Revenues from Contracts with Customers~~). The Company is evaluating the provisions of this ASU in conjunction with ASU No. 2014-09 to determine the potential impact Topic 606 and its amendments will have on the Company’s Consolidated Financial Statements.

~~In May 2016, FASB issued ASU No. 2016-12,~~ ~~Narrow-Scope Improvements and Practical Expedients, amending ASC Topic 606 (Revenue from Contracts with Customers~~). The amendments in this ASU do not change the core principle of the guidance in Topic 606. Rather, the amendments in this ASU affect only several narrow aspects of Topic 606. The amendments in this ASU affect the guidance in ASU 2014-09, discussed above, which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition requirements in Topic 606. The Company is evaluating the provisions of this ASU in conjunction with ASU No. 2014-09 to determine the potential impact Topic 606 and its amendments will have on the Company’s Consolidated Financial Statements.

~~Recognition and Measurement of Financial Assets and Financial Liabilities~~

~~In January 2016, FASB issued ASU No. 2016-01,~~ ~~Recognition and Measurement of Financial Assets and Financial Liabilities~~. The amendments in this ASU require equity securities to be measured at fair value with changes in the fair value recognized through net income. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value under certain circumstances and require enhanced disclosures about those investments. This ASU simplifies the impairment assessment of equity investments without readily determinable fair values. This ASU also eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The amendments in this ASU require separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This ASU excludes from net income gains or losses that the entity may not realize because those financial liabilities are not usually transferred or settled at their fair values before maturity. The amendments in this ASU require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or in the accompanying notes to the financial statements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. At September 30, 2017, Banner held $5.6 million of available-for-sale equity investment securities. The provisions of ASU No. 2016-01 require changes in the value of equity securities to be recognized in the income statement which could result in additional volatility in income.

Leases (Topic 842)

In February 2016, ~~FASB~~the Financial Accounting Standards Board (FASB) issued ~~ASU~~Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). The amendments in this ASU require lessees to recognize the following for all leases (with the exception of ~~short-term)~~short-term leases) at the commencement date; a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. In July 2018, FASB issued ASU No. 2018-11, Targeted Improvements. The amendments in this ASU ~~leave lessor accounting largely unchanged, although~~provide entities with an additional (and optional) transition method to adopt the new leases standard. The Company adopted the requirements of Topic 842 effective January 1, 2019. The Company elected the transition option provided in ASU No. 2018-11 and applied the modified retrospective approach for leases that existed as of January 1, 2019, or were entered into thereafter. The Company elected certain ~~targeted improvements were made~~relief options for practical expedients: the option to ~~align lessor accounting with~~not separate lease and non-lease components and instead to account for them as a single lease component, and the ~~lessee accounting model. This ASU simplifies the accounting for sale and leaseback transactions primarily because lessees must~~option to not recognize ~~lease~~right-of-use assets and lease ~~liabilities. Lessees will no longer be provided with a source~~liabilities that arise from short-term leases (i.e. lease terms of ~~off-balance sheet financing. The amendments~~twelve months or less). In addition, the Company elected the package of practical expedients in ~~this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is~~transition, which permitted ~~upon issuance. Lessees (for capital~~us to not reassess our prior conclusions pertaining to lease identification, lease classification, and ~~operating leases) and lessors (for sales-type,~~initial direct ~~financing, and operating leases) must apply a modified retrospective transition approach for~~costs on leases ~~existing at, or entered into after, the beginning~~that commenced prior to our adoption of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently evaluating the provisions of ASU No. 2016-02 to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements and regulatory capital ratios. The Company leases 115 buildings and offices under non-cancelable operating leases, the majority of which will be subject to this ASU. While the Company has not quantified the impact to its balance sheet, uponstandard. In connection with the adoption of this ASU, as of January 1, 2019, the Company ~~expects to report increased assets~~recorded a $56 million right-of-use asset and ~~increased liabilities~~a $59 million lease liability on its Consolidated Statements of Financial Condition as a result of recognizing right-of-use assets and lease liabilities related to these leases and certain equipment under non-cancelable operating lease agreements, which currently are not reflected in its Consolidated Statements of Financial Condition.

~~Derivatives and Hedging (Topic 815)~~

~~In March 2016, FASB issued ASU No. 2016-05,~~ ~~Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The amendments in this ASU clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 (Derivatives and Hedging~~) does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments in this ASU were effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. An entity has an option to apply the amendments in this ASU on either a prospective basis or a modified retrospective basis. Early adoption is permitted, including adoption in an interim period. At September 30, 2017, Banner had three swap relationships using hedge accounting with a total market value of $531,000. This ASU has not had a material impact on the Company’s Consolidated Financial Statements.

~~In March 2016, FASB issued ASU No. 2016-06,~~ ~~Contingent Put and Call Options in Debt Instruments~~. The amendments in this ASU clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. To determine how to account for debt instruments with embedded features, including contingent put and call options, an entity is required to assess whether the embedded derivatives must be bifurcated from the host contract and accounted for separately. Part of this assessment consists of evaluating whether the embedded derivative features are clearly and closely related to the debt host. Under existing guidance, for contingently exercisable options to be considered clearly and closely related to a debt host, they must be indexed only to interest rates or credit risk. ASU 2016-06 addresses inconsistent interpretations of whether an event that triggers an entity’s ability to exercise the embedded contingent option must be indexed to interest rates or credit risk for that option to qualify as clearly and closely related. Diversity in practice has developed because the existing four-step decision sequence in ASC 815 focuses only on whether the payoff

was indexed to something other than an interest rate or credit risk. As a result, entities have been uncertain whether they should (1) determine whether the embedded features are clearly and closely related to the debt host solely on the basis of the four-step decision sequence or (2) first apply the four-step decision sequence and then also evaluate whether the event triggering the exercisability of the contingent put or call option is indexed only to an interest rate or credit risk. This ASU clarifies that in assessing whether an embedded contingent put or call option is clearly and closely related to the debt host, an entity is required to perform only the four-step decision sequence in ASC 815 as amended by this ASU. The entity does not have to separately assess whether the event that triggers its ability to exercise the contingent option is itself indexed only to interest rates or credit risk. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. This ASU has not had a material impact on the Company’s Consolidated Financial Statements.

~~In August 2017, FASB issued ASU No. 2017-12,~~ ~~Targeted Improvements to Accounting for Hedging Activities~~. The amendments in this ASU are intended to provide investors better insight to an entity's risk management hedging strategies by permitting a company to recognize the economic results of its hedging strategies in its financial statements. The amendments in this ASU permit hedge accounting for hedging relationships involving nonfinancial risk and interest rate risk by removing certain limitations in cash flow and fair value hedging relationships. In addition, the ASU requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. This ASU is effective for fiscal years beginning after December 15, 2018, and early adoption is permitted. Adoption of ASU 2017-12 is not expected to have a material impact on the Company's Consolidated Financial Statements.

Financial Instruments—Credit Losses (Topic 326)

In June 2016, FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The ~~amendment~~ASU affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial asset not excluded from the scope that have the contractual right to receive cash. The ~~amendments in this~~ ASU ~~replace~~replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ~~The amendments in this~~This ASU ~~require~~requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ~~The amendments in this~~This ASU ~~broaden~~broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. ~~The amendments in this~~This ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is still evaluating the effects this ASU will have on the Company’s Consolidated Financial Statements. The Company has formed an internal committee to oversee the project, ~~and has~~ engaged a third-party vendor to assist with the project and has completed its gap analysis phase of the project. In addition, the Company has selected a second third-party vendor to assist with building and developing the required models and has completed the initial build out of the required models. The Company has also selected a different third party to provide a reasonable and supportable forecast. Next the Company will begin to incorporate the reasonable and supportable forecast and qualitative factors into the models. Upon adoption, the Company expects ~~a change~~changes in the processes and procedures used to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. The new guidance may result in an increase in the allowance for loan losses which will also reflect the new requirement to include the nonaccretable principal differences on purchased credit-impaired loans; however, the Company is still in the process of determining the magnitude of the change and its impact on the Consolidated Financial Statements. In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities available-for-sale will be replaced with an allowance approach. ~~The Company has begun developing and implementing processes to address the amendments of this ASU.~~

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

In March 2017, FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities. The amendments in this ASU shorten the premium amortization period for ~~certain~~ callable debt securities ~~held~~purchased at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. Under current GAAP, premiums and discounts on callable debt securities generally are amortized to the maturity date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to the maturity date. The amendments in this ASU more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. ~~Early adoption is permitted, including adoption in an interim period.~~ The Company ~~is still evaluating the effects~~adopted this ASU ~~will have~~effective January 1, 2019. The adoption of this ASU has not had a material impact on the Company’s Consolidated Financial Statements.

~~Compensation—Stock Compensation~~Derivatives and Hedging (Topic ~~718)~~815)

In ~~May~~August 2017, FASB issued ASU ~~2017-09,~~No. 2017-12, ~~Scope of Modification~~Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU are intended to provide ~~clarity and reduce both (1) diversity~~investors better insight into an entity's risk management hedging strategies by permitting a company to recognize the economic results of its hedging strategies in ~~practice and (2) cost and complexity when applying the guidance in Topic 718,~~ ~~Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award.~~its financial statements. The amendments in this ASU ~~provide guidance about which changes to~~permit hedge accounting for hedging relationships involving nonfinancial risk and interest rate risk by removing certain limitations in cash flow and fair value hedging relationships. In addition, the ~~terms or conditions of a share-based payment award require~~ASU requires an entity to ~~apply modification~~present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. This ASU is effective for fiscal years beginning after December 15, 2018. Adoption of ASU 2017-12 did not have a material impact on the Company's Consolidated Financial Statements.

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

In August 2018, FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU broaden the scope of ASC Subtopic 350-40 to include costs incurred to implement a hosting arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred, consistent with the accounting for costs for internal-use software. The amendments in this ASU result in consistent capitalization of implementation costs of a hosting arrangement that is a service contract and implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The amendments in this ASU should be applied either retrospectively to all implementation costs incurred after the date of adoption. Adoption of ASU 2018-15 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

Fair Value Measurement (Topic 820)

In August 2018, FASB issued ASU 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic ~~718. An entity should account~~820, Fair Value Measurement. The ASU removes, modifies and adds disclosure requirements in Topic 820. The following disclosure requirements were removed: 1) the amount and reasons for ~~the effects~~transfers between Level 1 and Level 2 of ~~a modification unless all the following are met: (1)~~ the fair value ~~(or calculated~~hierarchy, 2) the policy for timing of transfers between levels, and 3) the valuation processes for Level 3 fair value ~~or intrinsic value, if such an alternative~~measurements. This ASU modified disclosure requirements by requiring: that the measurement ~~method is used)~~uncertainty disclosure communicates information about the uncertainty in measurement as of the ~~modified award is~~reporting date. The following disclosure requirements were added: 1) changes in unrealized gains and losses for the ~~same as~~period included in other comprehensive income for the recurring Level 3 fair value ~~(or calculated value or intrinsic value, if such an~~

~~alternative measurement method is used)~~measurements held at the end of the ~~original award immediately before~~reporting period, and 2) the ~~original award is modified. If the modification does not affect any~~range and weighted average of ~~the~~significant unobservable inputs used to ~~the valuation technique that the entity uses to~~develop Level 3 fair value the award, the entity is not required to estimate the value immediately before and after the modification, (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.measurements. The amendments in this ASU are effective for all entities for ~~annual periods,~~fiscal years, and interim periods within those ~~annual periods,~~fiscal years, beginning after December 15, ~~2017. Early adoption~~2019. An entity is permitted ~~including adoption in~~to early adopt any ~~interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued~~removed or modified disclosures upon issuance of this ASU and ~~(2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The Company's early~~delay adoption of the ~~amendments in this~~additional disclosures until their effective date. Adoption of ASU ~~in the quarter ended June 30, 2017 did~~2018-13 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

NOTE 3: BUSINESS COMBINATION

Acquisition of Skagit Bancorp, Inc.

Effective as of the close of business on November 1, 2018, the Company acquired 100% of the outstanding common shares of Skagit Bancorp, Inc. (“Skagit”) and its wholly-owned subsidiary, Skagit Bank, a Washington State chartered commercial bank headquartered in Burlington, Washington, with 11 branches serving markets along the I-5 corridor from Seattle to the Canadian border. On that date, Skagit merged with and into Banner and Skagit Bank merged with and into Banner Bank. Pursuant to the previously announced terms of the merger, the equity holders of Skagit received an aggregate of 3.1 million shares of Banner voting common stock, plus cash in lieu of fractional shares and to cancel Skagit stock options for total consideration paid of $180.0 million. The acquisition provided $915.8 million in assets, $810.2 million in deposits and $632.4 million in loans to Banner.

The application of the acquisition method of accounting resulted in recognition of a CDI asset of $16.4 million and goodwill of $96.5 million. The acquired CDI has been determined to have a useful life of approximately nine years and will be amortized on an accelerated basis. Goodwill is not amortized but will be evaluated for impairment on an annual basis or more often if circumstances dictate to determine if the carrying value remains appropriate. Goodwill will not be deductible for income tax purposes as the acquisition is accounted for as a tax-free exchange for tax purposes.

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



	Skagit
	November 1, 2018
Consideration to Skagit equity holders:
Cash paid			$	329
Fair value of common shares issued			179,709
Total consideration			$	180,038

Fair value of assets acquired:
Cash and cash equivalents	$	19,167
Securities	210,326
Loans receivable (contractual amount of $645.6 million)	632,374
Real estate owned held for sale	2,593
Property and equipment	15,788
Core deposit intangible	16,368
Deferred tax asset	95
Other assets	19,110
Total assets acquired	915,821

Fair value of liabilities assumed:
Deposits	810,209
Other liabilities	22,069
Total liabilities assumed	832,278

Net assets acquired			83,543
Goodwill			$	96,495

Acquired goodwill represents the premium the Company paid over the fair value of the net tangible and intangible assets acquired. The primary reason for the acquisition was to expand the Company’s presence and density in the North Sound region of the Pacific Northwest along the I-5 corridor. The Company paid this premium for a number of reasons, including growing the Company's customer base, acquiring assembled workforces, and expanding its presence in existing markets. See Note 7, Goodwill, Other Intangible Assets and Mortgage Servicing Rights for the accounting for goodwill and other intangible assets.

Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available. Additional adjustments to the acquisition accounting that may be required would most likely involve loans, property and equipment, or the deferred tax asset. As of November 1, 2018, the unpaid principal balance on purchased non-credit-impaired loans was $637.4 million. The fair value of the purchased non-credit-impaired loans was $625.2 million, resulting in a discount of $12.2 million recorded on these loans, which includes $7.9 million of a credit related discount. This discount is being accreted into income over the life of the loans on an effective yield basis.

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



	Skagit
	November 1, 2018
Acquired PCI loans:
Contractually required principal and interest payments	$	9,897
Nonaccretable difference	(1,915		)
Cash flows expected to be collected	7,982
Accretable yield	(995		)
Fair value of PCI loans	$	6,987

The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities of Skagit for the period since November 2, 2018. Disclosure of the amount of Skagit’s revenue and net income (excluding integration costs) included in the Company’s Consolidated Statements of Operations is impracticable due to the integration of the operations and accounting for this acquisition. The pro forma impact of the Skagit acquisition to the historical financial results was determined to not be significant.

Note 3:4: SECURITIES

The amortized cost, gross unrealized gains and losses and estimated fair value of securities at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 are summarized as follows (in thousands):


	September 30, 2017									March 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Trading:
U.S. Government and agency obligations	$	1,230						$	1,305
Municipal bonds	330							331
Corporate bonds	27,089							21,675		$	27,203						$	25,838
Equity securities	14							155
	$	28,663						$	23,466	$	27,203						$	25,838
Available-for-Sale:
U.S. Government and agency obligations	$	87,509	$	379	$	(303	)	$	87,585	$	139,621	$	134	$	(1,440	)	$	138,315
Municipal bonds	113,794		1,194		(342		)	114,646		116,954		3,288		(187		)	120,055
Corporate bonds	10,567		79		(44		)	10,602		4,057		4		(17		)	4,044
Mortgage-backed or related securities	1,093,203		4,103		(4,874		)	1,092,432		1,320,826		10,952		(8,201		)	1,323,577
Asset-backed securities	28,104		157		(54		)	28,207		17,889		5		(81		)	17,813
Equity securities	5,686		10		(111		)	5,585
	$	1,338,863	$	5,922	$	(5,728	)	$	1,339,057	$	1,599,347	$	14,383	$	(9,926	)	$	1,603,804
Held-to-Maturity:
U.S. Government and agency obligations	$	1,035	$	24	$	—		$	1,059	$	389	$	3	$	—		$	392
Municipal bonds:	193,987		4,638		(1,015		)	197,610
Municipal bonds										163,614		2,527		(1,248		)	164,893
Corporate bonds	4,265		—		—			4,265		3,701		—		(13		)	3,688
Mortgage-backed or related securities	65,465		476		(212		)	65,729		51,289		151		(301		)	51,139
	$	264,752	$	5,138	$	(1,227	)	$	268,663	$	218,993	$	2,681	$	(1,562	)	$	220,112


	December 31, 2016									December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Trading:
U.S. Government and agency obligations	$	1,230						$	1,326
Municipal bonds	331							335
Corporate bonds	26,959							21,143		$	27,203						$	25,896
Mortgage-backed or related securities	1,620							1,641
Equity securities	14							123
	$	30,154						$	24,568	$	27,203						$	25,896
Available-for-Sale:
U.S. Government and agency obligations	$	57,288	$	146	$	(456	)	$	56,978	$	151,012	$	149	$	(2,049	)	$	149,112
Municipal bonds	110,487		455		(1,089		)	109,853		116,548		1,806		(532		)	117,822
Corporate bonds	10,255		77		(49		)	10,283		3,556		—		(61		)	3,495
Mortgage-backed or related securities	598,899		2,064		(6,251		)	594,712		1,355,258		5,210		(16,607		)	1,343,861
Asset-backed securities	29,319		—		(326		)	28,993		22,047		6		(120		)	21,933
Equity securities	88		10		—			98
	$	806,336	$	2,752	$	(8,171	)	$	800,917	$	1,648,421	$	7,171	$	(19,369	)	$	1,636,223
Held-to-Maturity:
U.S. Government and agency obligations	$	1,065	$	—	$	(18	)	$	1,047	$	1,006	$	14	$	(1	)	$	1,019
Municipal bonds:	196,989		4,173		(1,272		)	199,890
Municipal bonds										176,663		1,727		(2,578		)	175,812
Corporate bonds	3,876		—		—			3,876		3,736		—		(13		)	3,723
Mortgage-backed or related securities	65,943		309		(537		)	65,715		52,815		66		(898		)	51,983
	$	267,873	$	4,482	$	(1,827	)	$	270,528	$	234,220	$	1,807	$	(3,490	)	$	232,537

At ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018, the gross unrealized losses and the fair value for securities available-for-sale and held-to-maturity aggregated by the length of time that individual securities have been in a continuous unrealized loss position ~~was~~were as follows (in thousands):


	September 30, 2017															March 31, 2019
	Less Than 12 Months					12 Months or More					Total					Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-Sale:
U.S. Government and agency obligations	$	39,846	$	(286	)	$	5,680	$	(17	)	$	45,526	$	(303	)	$	713	$	(4	)	$	120,227	$	(1,436	)	$	120,940	$	(1,440	)
Municipal bonds	32,559		(169		)	13,023		(173		)	45,582		(342		)	753		(3		)	23,686		(184		)	24,439		(187		)
Corporate bonds	300		(1		)	4,814		(43		)	5,114		(44		)	2,344		(14		)	297		(3		)	2,641		(17		)
Mortgage-backed or related securities	437,934		(3,417		)	95,051		(1,457		)	532,985		(4,874		)	42,354		(203		)	608,455		(7,998		)	650,809		(8,201		)
Asset-backed securities	9,968		(54		)	—		—			9,968		(54		)	6,861		(32		)	9,956		(49		)	16,817		(81		)
Equity securities	5,487		(111		)	—		—			5,487		(111		)
	$	526,094	$	(4,038	)	$	118,568	$	(1,690	)	$	644,662	$	(5,728	)	$	53,025	$	(256	)	$	762,621	$	(9,670	)	$	815,646	$	(9,926	)
Held-to-Maturity
Municipal bonds	$	40,230	$	(903	)	$	4,347	$	(112	)	$	44,577	$	(1,015	)	$	915	$	(1	)	$	42,524	$	(1,247	)	$	43,439	$	(1,248	)
Corporate bonds																—		—			488		(13		)	488		(13		)
Mortgage-backed or related securities	18,889		(212		)	—		—			18,889		(212		)	1,037		(7		)	32,991		(294		)	34,028		(301		)
	$	59,119	$	(1,115	)	$	4,347	$	(112	)	$	63,466	$	(1,227	)	$	1,952	$	(8	)	$	76,003	$	(1,554	)	$	77,955	$	(1,562	)

	December 31, 2016															December 31, 2018
	Less Than 12 Months					12 Months or More					Total					Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-Sale:
U.S. Government and agency obligations	$	39,043	$	(442	)	$	1,012	$	(14	)	$	40,055	$	(456	)	$	75,885	$	(1,240	)	$	50,508	$	(809	)	$	126,393	$	(2,049	)
Municipal bonds	60,765		(1,087		)	556		(2		)	61,321		(1,089		)	6,422		(54		)	27,231		(478		)	33,653		(532		)
Corporate bonds	5,206		(49		)	—		—			5,206		(49		)	3,199		(56		)	295		(5		)	3,494		(61		)
Mortgage-backed or related securities	403,431		(5,604		)	47,467		(647		)	450,898		(6,251		)	316,074		(2,939		)	571,989		(13,668		)	888,063		(16,607		)
Asset-backed securities	9,928		(101		)	19,064		(225		)	28,992		(326		)	10,582		(24		)	9,913		(96		)	20,495		(120		)
	$	518,373	$	(7,283	)	$	68,099	$	(888	)	$	586,472	$	(8,171	)	$	412,162	$	(4,313	)	$	659,936	$	(15,056	)	$	1,072,098	$	(19,369	)
Held-to-Maturity
U.S. Government and agency obligations	$	1,047	$	(18	)	$	—	$	—		$	1,047	$	(18	)	$	145	$	(1	)	$	—	$	—		$	145	$	(1	)
Municipal bonds	64,802		(1,267		)	204		(5		)	65,006		(1,272		)	29,898		(274		)	44,637		(2,304		)	74,535		(2,578		)
Corporate bonds																—		—			487		(13		)	487		(13		)
Mortgage-backed or related securities	42,245		(537		)	—		—			42,245		(537		)	10,761		(220		)	30,035		(678		)	40,796		(898		)
	$	108,094	$	(1,822	)	$	204	$	(5	)	$	108,298	$	(1,827	)	$	40,804	$	(495	)	$	75,159	$	(2,995	)	$	115,963	$	(3,490	)

At ~~September 30, 2017,~~March 31, 2019, there were ~~221~~233 securities—available-for-sale with unrealized losses, compared to ~~243~~271 at December 31, ~~2016.~~2018. At ~~September 30, 2017,~~March 31, 2019, there were 3149 securities—held-to-maturity with unrealized losses, compared to 7390 at December 31, ~~2016.~~2018. Management does not believe that any individual unrealized loss as of ~~September 30, 2017~~March 31, 2019 or December 31, ~~2016~~2018 represented other-than-temporary impairment (OTTI). The decline in fair market value of these securities was generally due to changes in interest rates and changes in market-desired spreads subsequent to their purchase.

There were no sales of securities—trading during the ~~nine months~~three-month periods ended ~~September 30, 2017 compared with sales of $1.7 million with a resulting net gain of $156,000 for the nine months ending September 30, 2016.~~March 31, 2019 or 2018. The Company did not recognize any OTTI charges or recoveries on securities—trading during the ~~nine months~~three-month periods ended ~~September 30, 2017~~March 31, 2019 or ~~the nine months ended September 30, 2016.~~2018. There were no securities—trading in a nonaccrual status at ~~September 30, 2017~~March 31, 2019 or December 31, ~~2016.~~2018. Net unrealized holding ~~gains~~losses of ~~$389,000~~$58,000 were recognized during the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2019 compared to $3.4 million of net unrealized holdings gains recognized during the three months ended March 31, 2018.

~~Sales~~There was one sale of securities—available-for-sale ~~totaled $35.6 million~~during the three months ended March 31, 2019, with a ~~resulting~~ net gain of ~~$230,000~~$1,000. There were no sales of securities—available-for-sale during the three months ended March 31, 2018, although partial calls of securities resulted in a net gain

of $4,000 for the ~~nine~~three months ended ~~September 30, 2017. Sales of securities—available-for-sale totaled $233.3 million with a resulting net gain of $374,000 for the nine months ended September 30, 2016.~~March 31, 2018. There were no securities—available-for-sale in a nonaccrual status at ~~September 30, 2017~~March 31, 2019 or December 31, ~~2016.~~2018.

There were no sales of securities—held-to-maturity during the ~~nine months~~three-month periods ended ~~September 30, 2017 or September 30, 2016.~~March 31, 2019 and 2018. There were no securities—held-to-maturity in a nonaccrual status at ~~September 30, 2017~~March 31, 2019 or December 31, ~~2016.~~2018.

The amortized cost and estimated fair value of securities at ~~September 30, 2017,~~March 31, 2019, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because some securities may be called or prepaid with or without call or prepayment penalties.


	September 30, 2017												March 31, 2019
	Trading				Available-for-Sale				Held-to-Maturity				Trading				Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturing in one year or less	$	130	$	131	$	26,951	$	26,911	$	1,226	$	1,226	$	—	$	—	$	6,520	$	6,514	$	2,869	$	2,865
Maturing after one year through five years	230		231		110,023		110,293		24,269		24,432		—		—		86,092		86,474		61,698		61,839
Maturing after five years through ten years	1,200		1,274		265,137		264,366		108,739		110,368		—		—		382,934		386,318		57,947		58,934
Maturing after ten years through twenty years	17,089		14,248		255,076		256,319		88,407		91,280		27,203		25,838		198,705		201,247		62,540		63,667
Maturing after twenty years	10,000		7,427		675,990		675,583		42,111		41,357		—		—		925,096		923,251		33,939		32,807
	28,649		23,311		1,333,177		1,333,472		264,752		268,663		$	27,203	$	25,838	$	1,599,347	$	1,603,804	$	218,993	$	220,112
Equity securities	14		155		5,686		5,585		—		—
	$	28,663	$	23,466	$	1,338,863	$	1,339,057	$	264,752	$	268,663

The following table presents, as of ~~September 30, 2017~~March 31, 2019, investment securities which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law (in thousands):


	September 30, 2017						March 31, 2019
	Carrying Value		Amortized Cost		Fair Value		Carrying Value		Amortized Cost		Fair Value
Purpose or beneficiary:
State and local governments public deposits	$	127,661	$	127,549	$	130,380	$	149,193	$	149,306	$	150,815
Interest rate swap counterparties	16,172		16,197		16,218		10,835		10,931		10,895
Repurchase agreements	127,632		127,803		127,797		150,783		150,027		150,783
Other	3,949		3,948		3,888		2,739		2,739		2,678
Total pledged securities	$	275,414	$	275,497	$	278,283	$	313,550	$	313,003	$	315,171

Note 4:5: LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES

Loans receivable at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 are summarized as follows (dollars in thousands):


	September 30, 2017					December 31, 2016					March 31, 2019					December 31, 2018
	Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total
Commercial real estate:
Owner-occupied	$	1,369,130		17.6	%	$	1,352,999		18.1	%	$	1,442,724		16.6	%	$	1,430,097		16.4	%
Investment properties	1,993,144			25.6		1,986,336			26.7		2,124,049			24.4		2,131,059			24.5
Multifamily real estate	311,706			4.0		248,150			3.3		387,142			4.5		368,836			4.2
Commercial construction	157,041			2.0		124,068			1.7		181,888			2.1		172,410			2.0
Multifamily construction	136,532			1.8		124,126			1.7		183,203			2.1		184,630			2.1
One- to four-family construction	399,361			5.1		375,704			5.0		514,468			5.9		534,678			6.2
Land and land development:
Residential	158,384			2.0		170,004			2.3		187,660			2.2		188,508			2.2
Commercial	27,095			0.4		29,184			0.4		28,928			0.3		27,278			0.3
Commercial business	1,311,409			16.9		1,207,879			16.2		1,524,298			17.5		1,483,614			17.1
Agricultural business, including secured by farmland	339,932			4.4		369,156			5.0		373,322			4.3		404,873			4.7
One- to four-family residential	869,556			11.2		813,077			10.9		967,581			11.1		973,616			11.2
Consumer:
Consumer secured by one- to four-family	535,300			6.9		493,211			6.6		564,872			6.5		568,979			6.6
Consumer—other	165,859			2.1		157,254			2.1		212,522			2.5		216,017			2.5
Total loans	7,774,449			100.0	%	7,451,148			100.0	%	8,692,657			100.0	%	8,684,595			100.0	%
Less allowance for loan losses	(89,100		)			(85,997		)			(97,308		)			(96,485		)
Net loans	$	7,685,349				$	7,365,151				$	8,595,349				$	8,588,110

Loan amounts ~~included~~are net of unearned loan fees in excess of unamortized costs of ~~$389,000~~$724,000 as of ~~September 30, 2017~~March 31, 2019 and ~~were net of unearned fees of $5.8~~$1.4 million as of December 31, ~~2016.~~2018. Net loans include net discounts on acquired loans of ~~$23.4~~$24.2 million and ~~$31.1~~$25.7 million as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, respectively.

Purchased credit-impaired loans and purchased non-credit-impaired loans. Purchased loans, including loans acquired in business combinations, are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan and lease losses is not recorded at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased credit-impaired (PCI) or purchased non-credit-impaired. PCI loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments. The outstanding contractual unpaid principal balance of PCI loans, excluding acquisition accounting adjustments, was ~~$34.9~~$20.7 million at ~~September 30, 2017~~March 31, 2019 and ~~$48.4~~$22.0 million at December 31, ~~2016.~~2018. The carrying balance of PCI loans was ~~$23.2~~$13.3 million at ~~September 30, 2017~~March 31, 2019 and ~~$32.3~~$14.4 million at December 31, ~~2016.~~2018.

The following table presents the changes in the accretable yield for PCI loans for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2019			2018
Balance, beginning of period	$	7,666		$	11,035		$	8,717		$	10,375		$	5,216		$	6,520
Accretion to interest income	(1,720		)	(1,811		)	(5,210		)	(6,349		)	(493		)	(1,097		)
Disposals	—			(899		)	(497		)	(1,018		)	—			58
Reclassifications from non-accretable difference	918			1,120			3,854			6,437			55			807
Balance, end of period	$	6,864		$	9,445		$	6,864		$	9,445		$	4,778		$	6,288

As of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, the non-accretable difference between the contractually required payments and cash flows expected to be collected ~~were $11.7~~was $6.5 million and ~~$15.7~~$7.1 million, respectively.

Impaired Loans and the Allowance for Loan Losses. A loan is considered impaired when, based on current information and circumstances, the Company determines it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Factors involved in determining impairment include, but are not limited to, the financial condition of

the borrower, the value of the underlying collateral and the current status of the economy. Impaired loans are comprised of loans on nonaccrual,

troubled debt restructurings (TDRs) that are performing under their restructured terms, and loans that are 90 days or more past due, but are still on accrual. PCI loans are considered performing within the scope of the purchased credit-impaired accounting guidance and are not included in the impaired loan tables.

The following tables provide information on impaired loans, excluding PCI loans, with and without allowance reserves at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016.~~2018. Recorded investment includes the unpaid principal balance or the carrying amount of loans less charge-offs and net deferred loan fees (in thousands):


	September 30, 2017								March 31, 2019
	Unpaid Principal Balance		Recorded Investment				Related Allowance		Unpaid Principal Balance		Recorded Investment				Related Allowance
			Without Allowance ⁽¹⁾		With Allowance ⁽²⁾						Without Allowance ⁽¹⁾		With Allowance ⁽²⁾
Commercial real estate:
Owner-occupied	$	8,250	$	7,438	$	200	$	19	$	3,771	$	3,345	$	200	$	21
Investment properties	7,657		4,247		3,208		245		8,624		2,388		5,574		219
Multifamily construction									1,901		1,427		—		—
One- to four-family construction									919		919		—		—
Land and land development:
Residential	1,322		798		193		66		1,026		690		—		—
Commercial	1,538		928		—		—
Commercial business	7,945		7,195		573		52		4,948		3,615		393		12
Agricultural business/farmland	8,579		6,956		500		196		5,619		2,507		2,561		66
One- to four-family residential	8,858		2,878		5,904		184		6,335		3,961		2,333		59
Consumer:
Consumer secured by one- to four-family	1,698		1,492		140		7		2,130		1,948		132		5
Consumer—other	147		71		77		4		345		275		61		3
	$	45,994	$	32,003	$	10,795	$	773	$	35,618	$	21,075	$	11,254	$	385

	December 31, 2016								December 31, 2018
	Unpaid Principal Balance		Recorded Investment				Related Allowance		Unpaid Principal Balance		Recorded Investment				Related Allowance
			Without Allowance ⁽¹⁾		With Allowance ⁽²⁾						Without Allowance ⁽¹⁾		With Allowance ⁽²⁾
Commercial real estate:
Owner-occupied	$	3,786	$	3,373	$	203	$	20	$	3,193	$	2,768	$	200	$	19
Investment properties	9,916		5,565		4,304		408		7,287		1,320		5,606		226
Multifamily real estate	508		147		349		64		1,901		1,427		—		—
One- to four-family construction	1,180		—		1,180		156		919		919		—		—
Land and land development:
Residential	3,012		750		1,106		219		1,134		798		—		—
Commercial	1,608		998		—		—		44		44		—		—
Commercial business	3,753		3,074		651		69		4,014		2,937		391		16
Agricultural business/farmland	6,438		6,354		—		—		4,863		1,751		2,561		96
One- to four-family residential	11,439		3,149		8,026		479		6,724		4,314		2,358		51
Consumer:
Consumer secured by one- to four-family	1,904		1,721		144		1		1,622		1,438		133		6
Consumer—other	391		226		166		4		112		49		62		2
	$	43,935	$	25,357	$	16,129	$	1,420	$	31,813	$	17,765	$	11,311	$	416

⁽¹⁾

Includes loans without an allowance reserve that have been individually evaluated for impairment and that evaluation concluded that no reserve was needed, and ~~$9.3~~$10.6 million and ~~$10.0~~$9.0 million, respectively, of homogenous and small balance loans as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016, respectively,~~2018, that are collectively evaluated for impairment for which a general reserve has been established.


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

The following ~~tables summarize~~table summarizes our average recorded investment and interest income recognized on impaired loans by loan class for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 (in thousands):


	Three Months Ended September 30, 2017				Three Months Ended September 30, 2016				Three Months Ended March 31, 2019				Three Months Ended March 31, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial real estate:
Owner-occupied	$	3,657	$	3	$	2,544	$	3	$	3,451	$	2	$	5,383	$	3
Investment properties	8,849		37		19,046		74		7,227		76		9,972		83
Multifamily real estate	115		1		529		27
Commercial construction									1,427		—		—		—
One- to four-family construction	—		—		1,176		3		919		—		605		4
Land and land development:
Residential	1,095		6		1,964		20		726		—		798		—
Commercial	928		—		997		—
Commercial business	8,128		6		4,283		16		3,803		5		4,007		7
Agricultural business/farmland	6,196		69		4,973		6		5,117		27		9,109		33
One- to four-family residential	8,899		73		11,973		131		6,446		65		8,892		101
Consumer:
Consumer secured by one- to four-family	1,608		2		1,894		5		2,063		5		1,390		2
Consumer—other	140		1		512		3		319		1		149		1
	$	39,615	$	198	$	49,891	$	288	$	31,498	$	181	$	40,305	$	234

	Nine Months Ended September 30, 2017				Nine Months Ended September 30, 2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial real estate:
Owner-occupied	$	3,079	$	7	$	2,673	$	9
Investment properties	8,393		124		19,775		224
Multifamily real estate	335		10		518		36
One- to four-family construction	524		27		1,151		56
Land and land development:
Residential	1,574		42		1,971		63
Commercial	950		—		1,005		—
Commercial business	5,838		63		4,470		28
Agricultural business/farmland	5,605		131		4,824		19
One- to four-family residential	9,602		240		12,193		358
Consumer:
Consumer secured by one- to four-family	1,647		7		1,913		13
Consumer—other	194		5		572		10
	$	37,741	$	656	$	51,065	$	816

Troubled Debt Restructurings. Some of the Company’s loans are reported as TDRs. Loans are reported as TDRs when the bank grants one or more concessions to a borrower experiencing financial difficulties that it would not otherwise consider. 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. Our TDRs have generally not involved forgiveness of amounts due, but almost always include a modification of multiple factors; the most common combination includes interest rate, payment amount and maturity date. As a result of these concessions, restructured loans are impaired as the Company will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement. Loans identified as TDRs are accounted for in accordance with the Company's impaired loan accounting policies.

The following table presents TDRs by accrual and nonaccrual status at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 (in thousands):


	September 30, 2017						December 31, 2016						March 31, 2019						December 31, 2018
	Accrual Status		Nonaccrual Status		Total TDRs		Accrual Status		Nonaccrual Status		Total TDRs		Accrual Status		Nonaccrual Status		Total TDRs		Accrual Status		Nonaccrual Status		Total TDRs
Commercial real estate:
Owner-occupied	$	200	$	89	$	289	$	203	$	96	$	299	$	200	$	76	$	276	$	200	$	78	$	278
Investment properties	3,207		—		3,207		4,304		—		4,304		5,574		1,090		6,664		5,606		—		5,606
Multifamily real estate	—		—		—		349		—		349
One- to four-family construction	—		—		—		1,180		—		1,180
Land and land development:
Residential	193		—		193		1,106		—		1,106
Commercial business	573		—		573		653		—		653		392		—		392		391		—		391
Agricultural business, including secured by farmland	3,172		29		3,201		3,125		79		3,204		2,561		—		2,561		2,561		—		2,561
One- to four-family residential	5,182		810		5,992		7,678		843		8,521		4,116		239		4,355		4,469		239		4,708
Consumer:
Consumer secured by one- to four-family	140		1		141		143		6		149		132		—		132		133		—		133
Consumer—other	77		—		77		166		—		166		61		—		61		62		—		62
	$	12,744	$	929	$	13,673	$	18,907	$	1,024	$	19,931	$	13,036	$	1,405	$	14,441	$	13,422	$	317	$	13,739

As of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, the Company had commitments to advance additional funds related to TDRs up to ~~$59,000~~$49,000 and ~~$127,000,~~none, respectively.

One new ~~TDRs~~TDR occurred during the ~~nine~~three months ended ~~September 30, 2017 or 2016.~~March 31, 2019 and none during the three months ended March 31, 2018 (dollars in thousands):



	Three Months Ended March 31, 2019					Three Months Ended March 31, 2018
	Number of Contracts	Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment		Number of Contracts	Pre- modification Outstanding Recorded Investment		Post- modification Outstanding Recorded Investment
Recorded Investment
Commercial real estate
Investment properties	1	$	1,090	$	1,090		$	—	$	—
Total	1	$	1,090	$	1,090	—	$	—	$	—

There were no TDRs which incurred a payment default within twelve months of the restructure date during the ~~three and nine-month~~three-month periods ended ~~September 30, 2017~~March 31, 2019 and ~~2016.~~2018. A default on a TDR results in either a transfer to nonaccrual status or a partial charge-off, or both.

Credit Quality Indicators: To appropriately and effectively manage the ongoing credit quality of the Company’s loan portfolio, management has implemented a risk-rating or loan grading system for its loans. The system is a tool to evaluate portfolio asset quality throughout each applicable loan’s life as an asset of the Company. Generally, loans and leases are risk rated on an aggregate borrower/relationship basis with individual loans sharing similar ratings. There are some instances when specific situations relating to individual loans will provide the basis for different risk ratings within the aggregate relationship. Loans are graded on a scale of 1 to 9. A description of the general characteristics of these categories is shown below:

Overall Risk Rating Definitions: Risk-ratings contain both qualitative and quantitative measurements and take into account the financial strength of a borrower and the structure of the loan or lease. Consequently, the definitions are to be applied in the context of each lending transaction and judgment must also be used to determine the appropriate risk rating, as it is not unusual for a loan or lease to exhibit characteristics of more than one risk-rating category. Consideration for the final rating is centered in the borrower’s ability to repay, in a timely fashion, both principal and interest. There were no material changes in the risk-rating or loan grading system in the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2019.

Risk Rating 1: Exceptional

A credit supported by exceptional financial strength, stability, and liquidity. The risk rating of 1 is reserved for the Company’s top quality loans, generally reserved for investment grade credits underwritten to the standards of institutional credit providers.

Risk Rating 2: Excellent

A credit supported by excellent financial strength, stability and liquidity. The risk rating of 2 is reserved for very strong and highly stable customers with ready access to alternative financing sources.

Risk Rating 3: Strong

A credit supported by good overall financial strength and stability. Collateral margins are strong; cash flow is stable although susceptible to cyclical market changes.

Risk Rating 4: Acceptable

A credit supported by the borrower’s adequate financial strength and stability. Assets and cash flow are reasonably sound and provide for orderly debt reduction. Access to alternative financing sources will be more difficult to obtain.

Risk Rating 5: Watch

A credit with the characteristics of an acceptable credit which requires, however, more than the normal level of supervision and warrants formal quarterly management reporting. Credits in this category are not yet criticized or classified, but due to adverse events or aspects of underwriting require closer than normal supervision. Generally, credits should be watch credits in most cases for six months or less as the impact of stress factors are analyzed.

Risk Rating 6: Special Mention

A credit with potential weaknesses that deserves management’s close attention is risk rated a 6. If left uncorrected, these potential weaknesses will result in deterioration in the capacity to repay debt. A key distinction between Special Mention and Substandard is that in a Special Mention credit, there are identified weaknesses that pose potential risk(s) to the repayment sources, versus well defined weaknesses that pose risk(s) to the repayment sources. Assets in this category are expected to be in this category no more than 9-12 months as the potential weaknesses in the credit are resolved.

Risk Rating 7: Substandard

A credit with well defined weaknesses that jeopardize the ability to repay in full is risk rated a 7. These credits are inadequately protected by either the sound net worth and payment capacity of the borrower or the value of pledged collateral. These are credits with a distinct possibility of loss. Loans headed for foreclosure and/or legal action due to deterioration are rated 7 or worse.

Risk Rating 8: Doubtful

A credit with an extremely high probability of loss is risk rated 8. These credits have all the same critical weaknesses that are found in a substandard loan; however, the weaknesses are elevated to the point that based upon current information, collection or liquidation in full is improbable. While some loss on doubtful credits is expected, pending events may strengthen a credit making the amount and timing of any loss indeterminable. In these situations taking the loss is inappropriate until it is clear that the pending event has failed to strengthen the credit and improve the capacity to repay debt.

Risk Rating 9: Loss

A credit that is considered to be currently uncollectible or of such little value that it is no longer a viable ~~Bank~~bank asset is risk rated 9. Losses should be taken in the accounting period in which the credit is determined to be uncollectible. Taking a loss does not mean that a credit has absolutely no recovery or salvage value but, rather, it is not practical or desirable to defer writing off the credit, even though partial recovery may occur in the future.

The following tables present the Company’s portfolio of risk-rated loans and non-risk-rated loans by grade or other characteristics as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 (in thousands):


	September 30, 2017												March 31, 2019
By class:	Pass (Risk Ratings 1-5)⁽¹⁾		Special Mention		Substandard		Doubtful		Loss		Total Loans		Pass (Risk Ratings 1-5)⁽¹⁾		Special Mention		Substandard		Doubtful		Loss		Total Loans
Commercial real estate:
Owner-occupied	$	1,339,550	$	996	$	28,584	$	—	$	—	$	1,369,130	$	1,416,650	$	6,898	$	19,176	$	—	$	—	$	1,442,724
Investment properties	1,978,603		3,601		10,940		—		—		1,993,144		2,113,616		—		10,433		—		—		2,124,049
Multifamily real estate	310,936		—		770		—		—		311,706		386,584		—		558		—		—		387,142
Commercial construction	157,041		—		—		—		—		157,041		168,683		11,778		1,427		—		—		181,888
Multifamily construction	136,532		—		—		—		—		136,532		183,203		—		—		—		—		183,203
One- to four-family construction	397,135		—		2,226		—		—		399,361		513,549		—		919		—		—		514,468
Land and land development:
Residential	147,874		9,374		1,136		—		—		158,384		186,970		—		690		—		—		187,660
Commercial	23,202		—		3,893		—		—		27,095		28,892		—		36		—		—		28,928
Commercial business	1,241,338		19,068		51,003		—		—		1,311,409		1,489,952		8,019		26,243		84		—		1,524,298
Agricultural business, including secured by farmland	317,808		3,390		18,734		—		—		339,932		359,102		6,316		7,904		—		—		373,322
One- to four-family residential	864,053		674		4,829		—		—		869,556		962,602		449		4,530		—		—		967,581
Consumer:
Consumer secured by one- to four-family	532,907		—		2,393		—		—		535,300		560,087		—		4,785		—		—		564,872
Consumer—other	165,444		17		398		—		—		165,859		211,967		7		548		—		—		212,522
Total	$	7,612,423	$	37,120	$	124,906	$	—	$	—	$	7,774,449	$	8,581,857	$	33,467	$	77,249	$	84	$	—	$	8,692,657


	December 31, 2016												December 31, 2018
By class:	Pass (Risk Ratings 1-5)⁽¹⁾		Special Mention		Substandard		Doubtful		Loss		Total Loans		Pass (Risk Ratings 1-5)⁽¹⁾		Special Mention		Substandard		Doubtful		Loss		Total Loans
Commercial real estate:
Owner-occupied	$	1,313,142	$	14,394	$	25,463	$	—	$	—	$	1,352,999	$	1,396,721	$	6,963	$	26,413	$	—	$	—	$	1,430,097
Investment properties	1,948,822		23,846		13,668		—		—		1,986,336		2,122,621		—		8,438		—		—		2,131,059
Multifamily real estate	247,258		—		892		—		—		248,150		368,262		—		574		—		—		368,836
Commercial construction	124,068		—		—		—		—		124,068		159,167		11,816		1,427		—		—		172,410
Multifamily construction	124,126		—		—		—		—		124,126		184,630		—		—		—		—		184,630
One- to four-family construction	371,636		—		4,068		—		—		375,704		533,759		—		919		—		—		534,678
Land and land development:
Residential	167,764		—		2,240		—		—		170,004		187,710		—		798		—		—		188,508
Commercial	25,090		—		4,094		—		—		29,184		27,200		—		78		—		—		27,278
Commercial business	1,148,585		35,036		24,258		—		—		1,207,879		1,436,733		7,661		39,133		87		—		1,483,614
Agricultural business, including secured by farmland	356,656		3,335		9,165		—		—		369,156		392,318		4,214		8,341		—		—		404,873
One- to four-family residential	807,837		967		4,273		—		—		813,077		969,011		499		4,106		—		—		973,616
Consumer:
Consumer secured by one- to four-family	490,877		5		2,327		2		—		493,211		564,001		—		4,978		—		—		568,979
Consumer—other	156,547		108		594		5		—		157,254		215,706		9		302		—		—		216,017
Total	$	7,282,408	$	77,691	$	91,042	$	7	$	—	$	7,451,148	$	8,557,839	$	31,162	$	95,507	$	87	$	—	$	8,684,595

⁽¹⁾

The Pass category includes some performing loans that are part of homogenous pools which are not individually risk-rated. This includes all consumer loans, all one- to four-family residential loans and, as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, in the commercial business category, ~~$296.0~~$732.3 million and ~~$225.0~~$590.9 million, respectively, of credit-scored small business loans. As loans in these pools become non-performing, they are individually risk-rated.

The following tables provide additional detail on the age analysis of the Company’s past due loans as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 (in thousands):


	September 30, 2017																		March 31, 2019
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Purchased Credit-Impaired		Current		Total Loans		Loans 90 Days or More Past Due and Accruing		Non-accrual		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Purchased Credit-Impaired		Current		Total Loans		Loans 90 Days or More Past Due and Accruing		Non-accrual
Commercial real estate:
Owner-occupied	$	414	$	3,156	$	3,360	$	6,930	$	7,896	$	1,354,304	$	1,369,130	$	—	$	7,438	$	2,758	$	100	$	2,720	$	5,578	$	8,411	$	1,428,735	$	1,442,724	$	—	$	3,346
Investment properties	—		—		4,136		4,136		7,788		1,981,220		1,993,144		53		4,194		2,143		—		925		3,068		3,394		2,117,587		2,124,049		—		2,388
Multifamily real estate	1,101		—		—		1,101		173		310,432		311,706		—		—		300		—		—		300		128		386,714		387,142		—		—
Commercial construction	223		—		—		223		—		156,818		157,041		—		—		—		—		1,427		1,427		—		180,461		181,888		—		1,427
Multifamily construction	—		—		—		—		—		136,532		136,532		—		—		4,586		—		—		4,586		—		178,617		183,203		—		—
One-to-four-family construction	—		—		—		—		794		398,567		399,361		—		—		9,896		—		919		10,815		—		503,653		514,468		—		919
Land and land development:
Residential	819		—		798		1,617		—		156,767		158,384		—		798		—		—		690		690		—		186,970		187,660		—		690
Commercial	—		—		928		928		2,965		23,202		27,095		—		928		—		—		—		—		—		28,928		28,928		—		—
Commercial business	1,712		371		5,192		7,275		2,608		1,301,526		1,311,409		51		7,144		2,782		648		2,421		5,851		618		1,517,829		1,524,298		1		3,614
Agricultural business, including secured by farmland	1,051		—		2,330		3,381		683		335,868		339,932		—		4,285		—		726		2,371		3,097		431		369,794		373,322		—		2,507
One- to four-family residential	431		628		2,211		3,270		265		866,021		869,556		722		2,878		3,662		1,026		1,695		6,383		95		961,103		967,581		640		1,538
Consumer:
Consumer secured by one- to four-family	1,537		220		788		2,545		5		532,750		535,300		76		1,416		1,667		655		847		3,169		165		561,538		564,872		42		1,906
Consumer—other	290		173		26		489		44		165,326		165,859		25		46		721		213		238		1,172		88		211,262		212,522		—		275
Total	$	7,578	$	4,548	$	19,769	$	31,895	$	23,221	$	7,719,333	$	7,774,449	$	927	$	29,127	$	28,515	$	3,368	$	14,253	$	46,136	$	13,330	$	8,633,191	$	8,692,657	$	683	$	18,610


	December 31, 2016																		December 31, 2018
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Purchased Credit-Impaired		Current		Total Loans		Loans 90 Days or More Past Due and Accruing		Non-accrual		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Purchased Credit-Impaired		Current		Total Loans		Loans 90 Days or More Past Due and Accruing		Non-accrual
Commercial real estate:
Owner-occupied	$	1,938	$	—	$	2,538	$	4,476	$	13,281	$	1,335,242	$	1,352,999	$	—	$	3,373	$	785	$	519	$	2,223	$	3,527	$	8,531	$	1,418,039	$	1,430,097	$	—	$	2,768
Investment properties	117		—		5,447		5,564		10,168		1,970,604		1,986,336		701		4,864		91		498		934		1,523		3,462		2,126,074		2,131,059		—		1,320
Multifamily real estate	—		—		147		147		139		247,864		248,150		147		—		317		—		—		317		138		368,381		368,836		—		—
Commercial construction	—		—		—		—		—		124,068		124,068		—		—		—		—		1,427		1,427		—		170,983		172,410		—		1,427
Multifamily construction	—		—		—		—		—		124,126		124,126		—		—		—		—		—		—		—		184,630		184,630		—		—
One-to-four-family construction	—		—		—		—		862		374,842		375,704		—		—		4,781		1,078		919		6,778		137		527,763		534,678		—		919
Land and land development:
Residential	48		—		750		798		—		169,206		170,004		—		750		450		—		798		1,248		—		187,260		188,508		—		798
Commercial	—		—		998		998		3,016		25,170		29,184		—		998		34		—		44		78		—		27,200		27,278		—		44
Commercial business	2,314		647		1,591		4,552		3,821		1,199,506		1,207,879		—		3,074		3,982		1,305		1,756		7,043		1,028		1,475,543		1,483,614		1		2,936
Agricultural business, including secured by farmland	360		1,244		2,768		4,372		684		364,100		369,156		—		3,229		343		1,518		1,601		3,462		493		400,918		404,873		—		1,751
One-to four-family residential	1,793		249		2,110		4,152		274		808,651		813,077		1,233		2,263		5,440		1,790		1,657		8,887		101		964,628		973,616		658		1,544
Consumer:
Consumer secured by one- to four-family	932		160		986		2,078		18		491,115		493,211		61		1,660		1,136		765		706		2,607		432		565,940		568,979		238		1,201
Consumer—other	1,421		154		147		1,722		59		155,473		157,254		11		215		911		385		9		1,305		91		214,621		216,017		9		40
Total	$	8,923	$	2,454	$	17,482	$	28,859	$	32,322	$	7,389,967	$	7,451,148	$	2,153	$	20,426	$	18,270	$	7,858	$	12,074	$	38,202	$	14,413	$	8,631,980	$	8,684,595	$	906	$	14,748

The following tables provide additional information on the allowance for loan losses and loan balances individually and collectively evaluated for impairment at or for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 (in thousands):


	For the Three Months Ended September 30, 2017																										For the Three Months Ended March 31, 2019
	Commercial Real Estate			Multifamily Real Estate		Construction and Land			Commercial Business			Agricultural Business			One- to Four-Family Residential			Consumer			Unallocated			Total			Commercial Real Estate			Multifamily Real Estate		Construction and Land			Commercial Business			Agricultural Business			One- to Four-Family Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	24,232		$	1,562	$	27,312		$	19,126		$	3,808		$	2,010		$	3,987		$	6,549		$	88,586		$	27,132		$	3,818	$	24,442		$	19,438		$	3,778		$	4,714		$	7,972		$	5,191	$	96,485
Provision for loan losses	(236		)	63		2,037			(555		)	1,141			22			117			(589		)	2,000			369			202		(751		)	(209		)	(178		)	(46		)	269			2,344		2,000
Recoveries	19			—		73			577			1			8			98			—			776			21			—		22			23			—			43			110			—		219
Charge-offs	(584		)	—		—			(491		)	(1,001		)	—			(186		)	—			(2,262		)	(431		)	—		—			(590		)	(4		)	—			(371		)	—		(1,396		)
Ending balance	$	23,431		$	1,625	$	29,422		$	18,657		$	3,949		$	2,040		$	4,016		$	5,960		$	89,100		$	27,091		$	4,020	$	23,713		$	18,662		$	3,596		$	4,711		$	7,980		$	7,535	$	97,308

	For the Nine months ended September 30, 2017
	Commercial Real Estate			Multifamily Real Estate		Construction and Land			Commercial Business			Agricultural Business			One- to Four-Family Residential			Consumer			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	20,993		$	1,360	$	34,252		$	16,533		$	2,967		$	2,238		$	4,104		$	3,550		$	85,997
Provision for loan losses	2,716			254		(6,010		)	4,489			2,113			(460		)	488			2,410			6,000
Recoveries	353			11		1,180			921			133			262			293			—			3,153
Charge-offs	(631		)	—		—			(3,286		)	(1,264		)	—			(869		)	—			(6,050		)
Ending balance	$	23,431		$	1,625	$	29,422		$	18,657		$	3,949		$	2,040		$	4,016		$	5,960		$	89,100


	September 30, 2017																		March 31, 2019
	Commercial Real Estate		Multifamily Real Estate		Construction and Land		Commercial Business		Agricultural Business		One- to Four-Family Residential		Consumer		Unallocated		Total		Commercial Real Estate		Multifamily Real Estate		Construction and Land		Commercial Business		Agricultural Business		One- to Four-Family Residential		Consumer		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment	$	263	$	—	$	67	$	52	$	196	$	184	$	11	$	—	$	773	$	240	$	—	$	—	$	12	$	66	$	59	$	8	$	—	$	385
Collectively evaluated for impairment	23,168		1,625		29,348		18,605		3,753		1,856		4,005		5,960		88,320		26,851		4,020		23,713		18,627		3,472		4,652		7,972		7,535		96,842
Purchased credit-impaired loans	—		—		7		—		—		—		—		—		7		—		—		—		23		58		—		—		—		81
Total allowance for loan losses	$	23,431	$	1,625	$	29,422	$	18,657	$	3,949	$	2,040	$	4,016	$	5,960	$	89,100	$	27,091	$	4,020	$	23,713	$	18,662	$	3,596	$	4,711	$	7,980	$	7,535	$	97,308


Loan balances:
Individually evaluated for impairment	$	13,866	$	—	$	1,871	$	5,899	$	6,495	$	5,182	$	218	$	—	$	33,531	$	9,806	$	—	$	2,988	$	514	$	4,110	$	4,116	$	193	$	—	$	21,727
Collectively evaluated for impairment	3,332,724		311,533		872,783		1,302,902		332,754		864,109		700,892		—		7,717,697		3,545,162		387,014		1,093,159		1,523,166		368,781		963,370		776,948		—		8,657,600
Purchased credit-impaired loans	15,684		173		3,759		2,608		683		265		49		—		23,221		11,805		128		—		618		431		95		253		—		13,330
Total loans	$	3,362,274	$	311,706	$	878,413	$	1,311,409	$	339,932	$	869,556	$	701,159	$	—	$	7,774,449	$	3,566,773	$	387,142	$	1,096,147	$	1,524,298	$	373,322	$	967,581	$	777,394	$	—	$	8,692,657


	For the Three Months Ended September 30, 2016																									For the Three Months Ended March 31, 2018
	Commercial Real Estate			Multifamily Real Estate			Construction and Land		Commercial Business			Agricultural Business			One- to Four-Family Residential			Consumer			Unallocated		Total			Commercial Real Estate			Multifamily Real Estate		Construction and Land		Commercial Business			Agricultural Business			One- to Four-Family Residential			Consumer			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	20,149		$	1,515		$	31,861	$	17,758		$	2,891		$	2,204		$	3,743		$	1,197	$	81,318		$	22,824		$	1,633	$	27,568	$	18,311		$	4,053		$	2,055		$	3,866		$	8,718		$	89,028
Provision for loan losses	(337		)	(79		)	1,269		(1,351		)	80			(404		)	348			2,474		2,000			(715		)	959		1,024		1,923			(1,047		)	1,450			1,913			(3,507		)	2,000
Recoveries	34			—			673		433			(138		)	482			73			—		1,557			1,352			—		174		170			—			290			112			—			2,098
Charge-offs	—			—			—		(333		)	—			(92		)	(230		)	—		(655		)	—			—		—		(519		)	(7		)	(16		)	(377		)	—			(919		)
Ending balance	$	19,846		$	1,436		$	33,803	$	16,507		$	2,833		$	2,190		$	3,934		$	3,671	$	84,220		$	23,461		$	2,592	$	28,766	$	19,885		$	2,999		$	3,779		$	5,514		$	5,211		$	92,207

	For the Nine Months Ended September 30, 2016
	Commercial Real Estate			Multifamily Real Estate			Construction and Land		Commercial Business			Agricultural Business			One- to Four-Family Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	20,716		$	4,195		$	27,131	$	13,856		$	3,645		$	4,732		$	902		$	2,831	$	78,008
Provision for loan losses	(788		)	(2,759		)	5,404		1,519			(284		)	(3,468		)	3,536			840		4,000
Recoveries	98			—			1,268		1,775			39			1,052			529			—		4,761
Charge-offs	(180		)	—			—		(643		)	(567		)	(126		)	(1,033		)	—		(2,549		)
Ending balance	$	19,846		$	1,436		$	33,803	$	16,507		$	2,833		$	2,190		$	3,934		$	3,671	$	84,220


	September 30, 2016																		March 31, 2018
	Commercial Real Estate		Multifamily Real Estate		Construction and Land		Commercial Business		Agricultural Business		One- to Four-Family Residential		Consumer		Unallocated		Total		Commercial Real Estate		Multifamily Real Estate		Construction and Land		Commercial Business		Agricultural Business		One- to Four-Family Residential		Consumer		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment	$	832	$	65	$	396	$	54	$	—	$	456	$	6	$	—	$	1,809	$	284	$	—	$	—	$	39	$	201	$	182	$	11	$	—	$	717
Collectively evaluated for impairment	19,014		1,371		33,374		16,453		2,833		1,734		3,928		3,671		82,378		23,177		2,592		28,766		19,799		2,707		3,597		5,503		5,211		91,352
Purchased credit-impaired loans	—		—		33		—		—		—		—		—		33		—		—		—		47		91		—		—		—		138
Total allowance for loan losses	$	19,846	$	1,436	$	33,803	$	16,507	$	2,833	$	2,190	$	3,934	$	3,671	$	84,220	$	23,461	$	2,592	$	28,766	$	19,885	$	2,999	$	3,779	$	5,514	$	5,211	$	92,207


Loan balances:
Individually evaluated for impairment	$	16,630	$	351	$	4,137	$	2,026	$	2,758	$	8,270	$	315	$	—	$	34,487	$	11,607	$	—	$	750	$	534	$	7,943	$	5,092	$	208	$	—	$	26,134
Collectively evaluated for impairment	3,214,042		266,274		789,037		1,181,558		379,710		838,328		656,527		—		7,325,476		3,130,700		320,872		944,726		1,294,328		298,885		828,377		692,708		—		7,510,596
Purchased credit impaired loans	28,544		258		4,153		4,264		807		301		347		—		38,674		13,444		167		3,264		1,829		415		129		68		—		19,316
Total loans	$	3,259,216	$	266,883	$	797,327	$	1,187,848	$	383,275	$	846,899	$	657,189	$	—	$	7,398,637	$	3,155,751	$	321,039	$	948,740	$	1,296,691	$	307,243	$	833,598	$	692,984	$	—	$	7,556,046

Note 5:6: REAL ESTATE OWNED, NET

The following table presents the changes in REO for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2019		2018
Balance, beginning of the period	$	2,427		$	6,147		$	11,081		$	11,627		$	2,611	$	360
Additions from loan foreclosures	—			156			46			534			—		128
Additions from acquisitions	—			—			—			400
Additions from capitalized costs	—			—			54			—
Proceeds from dispositions of REO	(961		)	(1,699		)	(11,382		)	(8,021		)
Gain on sale of REO	30			281			1,953			981
Valuation adjustments in the period	—			(168		)	(256		)	(804		)	—		(160		)
Balance, end of the period	$	1,496		$	4,717		$	1,496		$	4,717		$	2,611	$	328

REO properties are recorded at the estimated fair value of the property, less expected selling costs, establishing a new cost basis. Subsequently, REO properties are carried at the lower of the new cost basis or updated fair market values, based on updated appraisals of the underlying properties, as received. Valuation allowances on the carrying value of REO may be recognized based on updated appraisals or on management’s authorization to reduce the selling price of a property. ~~At September 30, 2017 and December 31, 2016, the~~The Company had ~~none and $917,000, respectively, of~~no foreclosed one- to four-family residential real estate properties held as ~~REO.~~REO at March 31, 2019 and December 31, 2018. The recorded investment in one- to four-family residential loans in the process of foreclosure was ~~$2.0 million~~$952,000 at ~~September 30, 2017~~March 31, 2019 compared with ~~$715,000~~$1.2 million at December 31, ~~2016.~~2018.

Note 6:7: GOODWILL, OTHER INTANGIBLE ASSETS AND MORTGAGE SERVICING RIGHTS

Goodwill and Other Intangible Assets: At ~~September 30, 2017~~March 31, 2019, intangible assets are comprised of goodwill, CDI, and favorable leasehold intangibles (LHI) acquired in business combinations. Goodwill represents the excess of the purchase ~~considerations~~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 at least annually for impairment. At December 31, ~~2016,~~2018, the Company completed its qualitative assessment of goodwill and concluded that it is more likely than not that the fair value of Banner, the reporting unit, exceeds the carrying value. The adjustments to goodwill in 2016 relate to changes in the preliminary goodwill recorded for the merger of Banner Bank and AmericanWest Bank (AmericanWest) in October, 2015, including adjustments to loan discount, deferred taxes and REO valuations.

CDI represents the value of transaction-related deposits and the value of the customer relationships associated with the deposits. LHI represents the value ascribed to leases assumed in an acquisition in which the lease terms are favorable compared to a market lease at the date of acquisition. The Company amortizes CDI and LHI over their estimated useful lives and reviews them at least annually for events or circumstances that could impair their value.

The following table summarizes the changes in the Company’s goodwill and other intangibles for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and the year ended December 31, ~~2016~~2018 (in thousands):

Goodwill CDI Favorable LHI Total
Balance, December 31, 2015 $ 247,738
$ 36,762
$ 710
$ 285,210
Amortization —
(7,061 ) (249 ) (7,310 )
Adjustments to goodwill (3,155 ) —
—
(3,155 )
Balance, December 31, 2016 244,583
29,701
461
274,745
Amortization —
(4,790 ) (153 ) (4,943 )
Balance, September 30, 2017 $ 244,583
$ 24,911
$ 308
$ 269,802



	Goodwill		CDI			LHI			Total
Balance, December 31, 2017	$	242,659	$	22,378		$	277		$	265,314
Additions through acquisitions⁽¹⁾	96,495		16,368			—			112,863
Amortization	—		(6,047		)	(52		)	(6,099		)
Balance, December 31, 2018	339,154		32,699			225			372,078
Amortization	—		(2,052		)	—			(2,052		)
Adjustments⁽²⁾	—		—			(225		)	(225		)
Balance, March 31, 2019	$	339,154	$	30,647		$	—		$	369,801

⁽¹⁾The additions to goodwill and CDI in 2018 relate to the acquisition of Skagit.

⁽²⁾The adjustment to LHI represents a reclassification to the right of use lease asset in connection with the implementation of Lease Topic 842.

The following table presents the estimated amortization expense with respect to CDI for the periods indicated (in thousands):


	Estimated Amortization		Estimated Amortization
Remainder of 2017	$	1,542
2018	5,609
2019	4,889
Remainder of 2019			$	5,905
2020	4,169		6,888
2021	3,448		5,816
2022			4,651
2023			3,237
Thereafter	5,254		4,150
	$	24,911	$	30,647

Mortgage Servicing Rights: Mortgage servicing rights are reported in other assets. Mortgage servicing rights are initially recorded at fair value and are amortized in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Mortgage servicing rights are subsequently evaluated for impairment based upon the fair value of the rights compared to the amortized cost (remaining unamortized initial fair value). If the fair value is less than the amortized cost, a valuation allowance is created through an impairment charge, which is recognized in servicing fee income within mortgage banking operations on the consolidated statement of operations. However, if the fair value is greater than the amortized cost, the amount above the amortized cost is not recognized in the carrying value. During the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, the Company did not record any impairment charges or recoveries against mortgage servicing rights. The unpaid principal balance for loans which mortgage servicing rights have been recorded totaled ~~$2.13~~$2.39 billion and ~~$2.05~~$2.36 billion at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, respectively. Custodial accounts maintained in connection with this servicing totaled ~~$22.5~~$20.8 million and ~~$10.3~~$11.1 million at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018, respectively.

An analysis of our mortgage servicing rights for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 is presented below (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2019			2018
Balance, beginning of the period	$	14,985		$	14,276		$	15,249		$	13,354		$	14,638		$	14,738
Additions—amounts capitalized	826			1,652			2,477			4,371			672			821
Additions—through purchase													47			15
Amortization ⁽¹⁾	(1,057		)	(1,102		)	(2,972		)	(2,899		)	(940		)	(957		)
Balance, end of the period ⁽²⁾	$	14,754		$	14,826		$	14,754		$	14,826		$	14,417		$	14,617


⁽¹⁾	Amortization of mortgage servicing rights is recorded as a reduction of loan servicing income within mortgage banking operations and any unamortized balance is fully amortized if the loan repays in full.


⁽²⁾	There was no valuation allowance as of ~~September 30, 2017~~March 31, 2019 and ~~2016.~~2018.

Note 7:8: DEPOSITS

Deposits consisted of the following at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 (in thousands):


	September 30, 2017		December 31, 2016		March 31, 2019		December 31, 2018
Non-interest-bearing accounts	$	3,379,841	$	3,140,451	$	3,676,984	$	3,657,817
Interest-bearing checking	955,486		914,484		1,174,169		1,191,016
Regular savings accounts	1,577,292		1,523,391		1,865,852		1,842,581
Money market accounts	1,525,657		1,497,755		1,495,948		1,465,369
Total interest-bearing transaction and saving accounts	4,058,435		3,935,630		4,535,969		4,498,966
Certificates of deposit:
Certificates of deposit less than or equal to $250,000	945,161		884,403		987,992		1,143,303
Certificates of deposit greater than $250,000	155,413		160,930		175,284		176,962
Total certificates of deposit⁽¹⁾	1,100,574		1,045,333		1,163,276		1,320,265
Total deposits	$	8,538,850	$	8,121,414	$	9,376,229	$	9,477,048
Included in total deposits:
Public fund transaction and savings accounts	$	194,519	$	221,765	$	210,155	$	217,401
Public fund interest-bearing certificates	26,543		25,650		29,572		30,089
Total public deposits	$	221,062	$	247,415	$	239,727	$	247,490
Total brokered deposits	$	171,718	$	34,074	$	239,444	$	377,347


⁽¹⁾	Certificates of deposit include ~~$30,000~~$473,000 and ~~$426,000~~$563,000 of acquisition premiums at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, respectively.

At ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, the Company had certificates of deposit of ~~$159.9~~$178.8 million and ~~$165.4~~$180.5 million, respectively, that were equal to or greater than $250,000.

Scheduled maturities and weighted average interest rates of certificate accounts at ~~September 30, 2017~~March 31, 2019 are as follows (dollars in thousands):


	September 30, 2017				March 31, 2019
	Amount		Weighted Average Rate		Amount		Weighted Average Rate
Maturing in one year or less	$	808,770	0.51	%	$	868,391	1.16	%
Maturing after one year through two years	107,060		0.69		181,460		1.31
Maturing after two years through three years	137,253		1.26		87,538		1.76
Maturing after three years through four years	27,870		1.08		12,880		1.34
Maturing after four years through five years	17,208		1.21		10,633		2.01
Maturing after five years	2,413		1.05		2,374		1.06
Total certificates of deposit	$	1,100,574	0.65	%	$	1,163,276	1.24	%

Note 8:9: FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents estimated fair values of the Company’s financial instruments as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, whether or not measured at fair value in the Consolidated Statements of Financial Condition ~~(in~~(dollars in thousands):


		September 30, 2017				December 31, 2016					March 31, 2019				December 31, 2018
	Level	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value		Level	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets:
Cash and cash equivalents	1	$	241,766	$	241,766	$	247,719	$	247,719	1	$	261,538	$	261,538	$	272,196	$	272,196
Securities—trading	2,3	23,466		23,466		24,568		24,568		3	25,838		25,838		25,896		25,896
Securities—available-for-sale	2	1,339,057		1,339,057		800,917		800,917		2	1,603,804		1,603,804		1,636,223		1,636,223
Securities—held-to-maturity	2,3	264,752		268,663		267,873		270,528		2	215,792		216,911		230,984		229,301
Securities—held-to-maturity										3	3,201		3,201		3,236		3,236
Loans held for sale	2	71,905		72,018		246,353		246,815		2	45,865		46,038		171,031		171,157
Loans receivable	3	7,774,449		7,666,707		7,451,148		7,337,608		3	8,692,657		8,685,672		8,684,595		8,629,450
FHLB stock	3	20,854		20,854		12,506		12,506		3	27,063		27,063		31,955		31,955
Bank-owned life insurance	1	161,648		161,648		158,936		158,936		1	178,202		178,202		177,467		177,467
Mortgage servicing rights	3	14,754		18,312		15,249		16,740		3	14,417		23,766		14,638		25,813
Equity securities										1	422		422		352		352
Derivatives:
Interest rate swaps	2	7,186		7,186		8,330		8,330		2	6,772		6,772		3,138		3,138
Interest rate lock and forward sales commitments	2	664		664		482		482		2	548		548		471		471
Liabilities:
Demand, interest checking and money market accounts	2	5,860,984		5,860,984		5,552,690		5,552,690		2	6,347,100		6,347,100		6,314,202		6,314,202
Regular savings	2	1,577,292		1,577,292		1,523,391		1,523,391		2	1,865,852		1,865,852		1,842,581		1,842,581
Certificates of deposit	2	1,100,574		1,082,829		1,045,333		1,028,866		2	1,163,276		1,152,443		1,320,265		1,298,238
FHLB advances	2	263,349		263,349		54,216		54,216		2	418,000		418,000		540,189		540,189
Other borrowings	2	103,713		103,713		105,685		105,685		2	121,719		121,719		118,995		118,995
Junior subordinated debentures	3	97,280		97,280		95,200		95,200		3	113,917		113,917		114,091		114,091
Derivatives:
Interest rate swaps	2	7,186		7,186		8,330		8,330		2	5,536		5,536		3,138		3,138
Interest rate lock and forward sales commitments	2	115		115		289		289		2	674		674		1,654		1,654

The Company measures and discloses certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (that is, not a forced liquidation or distressed sale). GAAP establishes a consistent framework for measuring fair value and disclosure requirements about fair value measurements. Among other things, the accounting standard requires the reporting entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s estimates for market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices in active markets for identical instruments. An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

Level 2 – Observable inputs other than Level 1 including quoted prices in active markets for similar instruments, quoted prices in less active markets for identical or similar instruments, or other observable inputs that can be corroborated by observable market data.

Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs from non-binding single dealer quotes not corroborated by observable market data.

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize at a future date. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for certain financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. Transfers between levels of the fair value hierarchy are deemed to occur at the end of the reporting period.

Items Measured at Fair Value on a Recurring Basis:

The following tables present financial assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy of the fair value measurements for those assets and liabilities as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 (in thousands):


	September 30, 2017								March 31, 2019
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Securities—trading
U.S. Government and agency obligations	$	—	$	1,305	$	—	$	1,305
Municipal bonds	—		331		—		331
Corporate bonds (Trust Preferred Securities)	—		—		21,675		21,675		$	—	$	—	$	25,838	$	25,838
Equity securities	—		155		—		155
	—		1,791		21,675		23,466		—		—		25,838		25,838
Securities—available-for-sale
U.S. Government and agency obligations	—		87,585		—		87,585		—		138,315		—		138,315
Municipal bonds	—		114,646		—		114,646		—		120,055		—		120,055
Corporate bonds	—		10,602		—		10,602		—		4,044		—		4,044
Mortgage-backed or related securities	—		1,092,432		—		1,092,432		—		1,323,577		—		1,323,577
Asset-backed securities	—		28,207		—		28,207		—		17,813		—		17,813
Equity securities	—		5,585		—		5,585
	—		1,339,057		—		1,339,057		—		1,603,804		—		1,603,804

Loans held for sale	—		64,399		—		64,399		—		37,410		—		37,410
Equity securities									—		422		—		422

Derivatives
Interest rate swaps	—		7,186		—		7,186		—		6,772		—		6,772
Interest rate lock and forward sales commitments	—		664		—		664		—		548		—		548
	$	—	$	1,413,097	$	21,675	$	1,434,772	$	—	$	1,648,956	$	25,838	$	1,674,794

Liabilities:
Advances from FHLB	$	—	$	263,349	$	—	$	263,349
Junior subordinated debentures, net of unamortized deferred issuance costs	—		—		97,280		97,280		$	—	$	—	$	113,917	$	113,917
Derivatives
Interest rate swaps	—		7,186		—		7,186		—		5,536		—		5,536
Interest rate lock and forward sales commitments	—		115		—		115		—		674		—		674
	$	—	$	270,650	$	97,280	$	367,930	$	—	$	6,210	$	113,917	$	120,127


	December 31, 2016								December 31, 2018
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Securities—trading
U.S. Government and agency obligations	$	—	$	1,326	$	—	$	1,326
Municipal bonds	—		335		—		335
Corporate Bonds (Trust Preferred Securities)	—		—		21,143		21,143
Mortgage-backed securities	—		1,641		—		1,641
Equity securities	—		123		—		123
Corporate bonds (Trust Preferred Securities)									$	—	$	—	$	25,896	$	25,896
	—		3,425		21,143		24,568		—		—		25,896		25,896
Securities—available-for-sale
U.S. Government and agency obligations	—		56,978		—		56,978		—		149,112		—		149,112
Municipal bonds	—		109,853		—		109,853		—		117,822		—		117,822
Corporate bonds	—		10,283		—		10,283		—		3,495		—		3,495
Mortgage-backed securities	—		594,712		—		594,712		—		1,343,861		—		1,343,861
Asset-backed securities	—		28,993		—		28,993		—		21,933		—		21,933
Equity securities	—		98		—		98
	—		800,917		—		800,917		—		1,636,223		—		1,636,223

Loans held for sale	—		9,600		—		9,600		—		164,767		—		164,767
Equity securities									—		352		—		352

Derivatives
Interest rate swaps	—		8,330		—		8,330		—		3,138		—		3,138
Interest rate lock and forward sales commitments	—		482		—		482		—		471		—		471
	$	—	$	822,754	$	21,143	$	843,897	$	—	$	1,804,951	$	25,896	$	1,830,847

Liabilities:
Advances from FHLB	$	—	$	54,216	$	—	$	54,216
Junior subordinated debentures, net of unamortized deferred issuance costs	—		—		95,200		95,200		$	—	$	—	$	114,091	$	114,091
Derivatives
Interest rate swaps	—		8,330		—		8,330		—		3,138		—		3,138
Interest rate lock and forward sales commitments	—		289		—		289		—		1,654		—		1,654
	$	—	$	62,835	$	95,200	$	158,035	$	—	$	4,792	$	114,091	$	118,883

The following methods were used to estimate the fair value of each class of financial instruments above:

~~Cash and Cash Equivalents:~~ ~~The carrying amount of these items is a reasonable estimate of their fair value.~~

Securities: The estimated fair values of investment securities and mortgaged-backed securities are priced using current active market quotes, if available, which are considered Level 1 measurements. For most of the portfolio, matrix pricing based on the securities’ relationship to other benchmark quoted prices is used to establish the fair value. These measurements are considered Level 2. Due to the continued limited activity in the trust preferred markets that have limited the observability of market spreads for some of the Company’s Trust Preferred Securities (TPS) securities, management has classified these securities as a Level 3 fair value measure. Management periodically reviews the pricing information received from third-party pricing services and tests those prices against other sources to validate the reported fair values.

Loans Held for Sale: Fair values for residential mortgage loans held for sale are determined by comparing actual loan rates to current secondary market prices for similar loans. Fair values for multifamily loans held for sale are calculated based on discounted cash flows using as a discount rate a combination of market spreads for similar loan types added to selected index rates.

~~Loans Receivable:~~ Fair values are estimated first by stratifying the portfolios of loans with similar financial characteristics. Loans are segregated by type such as multifamily real estate, residential mortgage, nonresidential mortgage, commercial/agricultural, consumer and other. Each loan category is further segmented into fixed- and adjustable-rate interest terms. A preliminary estimate of fair value is then calculated based on discounted cash flows using as a discount rate the current rate offered on similar products, plus an adjustment for liquidity to reflect the non-homogeneous nature of the loans. The preliminary estimate is then further reduced by the amount of the allowance for loan losses to arrive at a final estimate of fair value. Fair value for impaired loans is also based on recent appraisals or estimated cash flows discounted using rates commensurate with risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information.

~~FHLB Stock:~~ ~~The fair value is based upon the redemption value of the stock which equates to its carrying value.~~

~~Bank-Owned Life Insurance:~~ ~~The fair value of BOLI policies owned is based on the various insurance contracts' cash surrender value.~~

Mortgage Servicing Rights: Fair values are estimated based on an independent dealer analysis of discounted cash flows. The evaluation utilizes assumptions market participants would use in determining fair value including prepayment speeds, delinquency and foreclosure rates, the discount rate, servicing costs, and the timing of cash flows. The mortgage servicing portfolio is stratified by loan type and fair value estimates are adjusted up or down based on the serviced loan interest rates versus current rates on new loan originations since the most recent independent analysis.

~~Deposits:~~ The carrying amount of deposits with no stated maturity, such as savings and checking accounts, is a reasonable estimate of their fair value. The market value of certificates of deposit is based upon the discounted value of contractual cash flows. The discount rate is determined using current market rates on comparable instruments.

~~FHLB Advances:~~ Fair valuations for Banner’s FHLB advances are estimated using fair market values provided by the lender, the FHLB of Des Moines. The FHLB of Des Moines prices advances by discounting the future contractual cash flows for individual advances, using its current cost of funds curve to provide the discount rate.

Junior Subordinated Debentures: The fair value of junior subordinated debentures is estimated using a discounted cash flow approach. The significant inputs included in the estimation of fair value are the credit risk adjusted spread and three month LIBOR. The credit risk adjusted spread represents the nonperformance risk of the liability. The Company utilizes an external valuation firm to assist management in validating the reasonableness of the credit risk adjusted spread used to determine the fair value. The junior subordinated debentures are carried at fair value which represents the estimated amount that would be paid to transfer these liabilities in an orderly transaction amongst market participants. Due to credit concerns in the capital markets and inactivity in the trust preferred markets that have limited the observability of market spreads, management has classified this as a Level 3 fair value measure.

~~Other Borrowings:~~ ~~Other borrowings include securities sold under agreements to repurchase and occasionally federal funds purchased and their carrying amount is considered a reasonable approximation of their fair value.~~

Derivatives: Derivatives include interest rate swap agreements, interest rate lock commitments to originate loans held for sale and forward sales contracts to sell loans and securities related to mortgage banking activities. Fair values for these instruments, which generally change as a result of changes in the level of market interest rates, are estimated based on dealer quotes and secondary market sources.

Off-Balance-Sheet Items: Off-balance-sheet financial instruments include unfunded commitments to extend credit, including standby letters of credit, and commitments to purchase investment securities. The fair value of these instruments is not considered to be material.

Limitations: The fair value estimates presented herein are based on pertinent information available to management as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016.~~2018. The factors used in the fair values estimates are subject to change subsequent to the dates the fair value estimates are completed, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3):

The following table provides a description of the valuation technique, unobservable inputs, and qualitative information about the unobservable inputs for certain of the Company's assets and liabilities classified as Level 3 and measured at fair value on a recurring and non-recurring basis at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016:~~2018:

Weighted Average Rate / Range

Financial Instruments

Valuation Techniques

Unobservable Inputs

September 30, 2017

December 31, 2016

Valuation Techniques

Unobservable Inputs

March 31, 2019

December 31, 2018

Corporate Bonds (TPS securities)

Discounted cash flows

Discount rate

6.33

6.00

Corporate bonds (TPS securities)

Discounted cash flows

Discount rate

6.60

6.81

Junior subordinated debentures

Discounted cash flows

Discount rate

6.33

6.00

Discounted cash flows

Discount rate

6.60

6.81

Impaired loans

Collateral Valuations

Discount to appraised value

8.5% to 9.0%

n/a

Collateral Valuations

Discount to appraised value

8.50

0.0% to 8.50%

REO

Appraisals

Discount to appraised value

17.0% to 42.0%

0% to 45%

Appraisals

Discount to appraised value

69.20

TPS securities : Management believes that the credit risk-adjusted spread used to develop the discount rate utilized in the fair value measurement of TPS securities is indicative of the risk premium a willing market participant would require under current market conditions for instruments with similar contractual rates and terms and conditions and issuers with similar credit risk profiles and with similar expected probability of default. Management attributes the change in fair value of these instruments, compared to their par value, primarily to perceived general market adjustments to the risk premiums for these types of assets subsequent to their issuance.

Junior subordinated debentures: Similar to the TPS securities discussed above, management believes that the credit risk-adjusted spread utilized in the fair value measurement of the junior subordinated debentures is indicative of the risk premium a willing market participant would require under current market conditions for an issuer with Banner's credit risk profile. Management attributes the change in fair value of the junior subordinated debentures, compared to their par value, primarily to perceived general market adjustments to the risk premiums for these types

of liabilities subsequent to their issuance. Future contractions in the risk adjusted spread relative to the spread currently utilized to measure the Company's junior subordinated debentures at fair value as of ~~September 30, 2017,~~March 31, 2019, or the passage of time, will result in negative fair value adjustments. At ~~September 30, 2017,~~March 31, 2019, the discount rate utilized was based on a credit spread of ~~500~~400 basis points and three-month LIBOR of ~~133~~260 basis points.

The following tables provide a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 (in thousands):


									Three Months Ended
									March 31, 2019
									Level 3 Fair Value Inputs
									TPS Securities			Borrowings—Junior Subordinated Debentures
Beginning balance									$	25,896		$	114,091
Total gains or losses recognized
Assets losses									(58		)	—
Liabilities gains									—			(174		)
Ending balance at March 31, 2019									$	25,838		$	113,917

	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30, 2017				September 30, 2017				March 31, 2018
	Level 3 Fair Value Inputs				Level 3 Fair Value Inputs				Level 3 Fair Value Inputs
	TPS Securities		Borrowings—Junior Subordinated Debentures		TPS Securities		Borrowings— Junior Subordinated Debentures		TPS Securities			Borrowings—Junior Subordinated Debentures
Beginning balance	$	21,568	$	96,852	$	21,143	$	95,200	$	22,058		$	98,707
Total gains or losses recognized
Assets gains	107		—		532		—		3,416			—
Liabilities losses	—		428		—		2,080		—			13,809
Ending balance at September 30, 2017	$	21,675	$	97,280	$	21,675	$	97,280

	Three Months Ended				Nine Months Ended
	September 30, 2016				September 30, 2016
	Level 3 Fair Value Inputs				Level 3 Fair Value Inputs
	TPS Securities		Borrowings—Junior Subordinated Debentures		TPS Securities		Borrowings— Junior Subordinated Debentures
Beginning balance	$	20,645	$	93,298	$	18,699	$	92,480
Total gains or losses recognized
Assets gains	280		—		501		—
Liabilities losses	—		1,066		—		1,884
Purchases, issuances and settlements, including acquisitions	—		—		1,725		—
Ending balance at September 30, 2016	$	20,925	$	94,364	$	20,925	$	94,364
Ending balance at March 31, 2018									$	25,474		$	112,516

~~The Company has elected to continue to recognize the interest~~Interest income and dividends from the TPS securities ~~reclassified to fair value~~are recorded as a component of interest ~~income as was done in prior years when they were classified as available-for-sale.~~income. Interest expense related to the ~~FHLB advances and~~ junior subordinated debentures ~~continues to be~~are measured based on contractual interest rates and reported in interest expense. The change in fair market value ~~of these financial instruments~~on TPS securities has been recorded as a component of non-interest income. The change in fair value of the junior subordinated debentures, which represents changes in instrument specific credit risk, is recorded in other comprehensive income (loss).

Items Measured at Fair Value on a Non-recurring Basis:

The following tables present financial assets measured at fair value on a non-recurring basis and the level within the fair value hierarchy of the fair value measurements for those assets as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 (in thousands):


	September 30, 2017								March 31, 2019
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Impaired loans	$	—	$	7,494	$	—	$	7,494	$	—	$	—	$	450	$	450
REO	—		—		1,496		1,496		—		—		2,611		2,611

	December 31, 2016								December 31, 2018
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Impaired loans									$	—	$	—	$	2,915	$	2,915
REO	$	—	$	—	$	11,081	$	11,081	—		—		2,611		2,611

The following table presents the losses resulting from non-recurring fair value adjustments for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 (in thousands):


	Three months ended September 30,						Nine months ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2019			2018
Impaired loans	$	(1,584	)	$	(128	)	$	(2,059	)	$	(182	)	$	(300	)	$	—
REO	—			(168		)	(256		)	(599		)	—			(160		)
Total loss from non-recurring measurements	$	(1,584	)	$	(296	)	$	(2,315	)	$	(781	)	$	(300	)	$	(160	)

Impaired loans: Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of collateral if the loan is collateral dependent. If this practical expedient is used, the impaired loans are considered to be held at fair value. Subsequent changes in the value of impaired loans are included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported. Impaired loans are periodically evaluated to determine if valuation adjustments, or partial write-downs, should be recorded. The need for valuation adjustments arises when observable market prices or current appraised values of collateral indicate a shortfall in collateral value compared to current carrying values of the related loan. If the Company determines that the value of the impaired loan is less than the carrying value of the loan, the Company either establishes an impairment reserve as a specific component of the allowance for loan losses or charges off the impaired amount. These valuation adjustments are considered non-recurring fair value adjustments. The remaining impaired loans are evaluated for reserve needs in homogenous pools within the Company’s methodology for assessing the adequacy of the allowance for loan losses.

REO: The Company records REO (acquired through a lending relationship) at fair value on a non-recurring basis. Fair value adjustments on REO are based on updated real estate appraisals which are based on current market conditions. All REO properties are recorded at the lower of the estimated fair value of the real estate, less expected selling costs, or the carrying amount of the defaulted loans. From time to time, non-recurring fair value adjustments to REO are recorded to reflect partial write-downs based on an observable market price or current appraised value of property. Banner considers any valuation inputs related to REO to be Level 3 inputs. The individual carrying values of these assets are reviewed for impairment at least annually and any additional impairment charges are expensed to operations.

Note 9:10: INCOME TAXES AND DEFERRED TAXES

The Company files a consolidated income tax return including all of its wholly-owned subsidiaries on a calendar year basis. 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 will 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 of change. A valuation allowance is recognized as a reduction to deferred tax assets when management determines it is more likely than not that deferred tax assets will not be available to offset future income tax liabilities.

Accounting standards for income taxes prescribe a recognition threshold and measurement process for financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a tax return, and also provide guidance on the de-recognition of previously recorded benefits and their classification, as well as the proper recording of interest and penalties, accounting in interim periods, disclosures and transition. The Company periodically reviews its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This review takes into consideration the status of current taxing authorities’ examinations of the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment.

As of ~~September 30, 2017,~~March 31, 2019, the Company had an insignificant amount of unrecognized tax benefits for uncertain tax positions, none of which would materially affect the effective tax rate if recognized. The Company does not anticipate that the amount of unrecognized tax benefits will significantly increase or decrease in the next twelve months. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits in the income tax expense. The Company files consolidated income tax returns in the U.S. federal jurisdiction and in the Oregon, California, Utah, Idaho and ~~Idaho~~Montana state jurisdictions.

Tax credit investments: The Company invests in low income housing tax credit funds that are designed to generate a return primarily through the realization of federal tax credits. The Company accounts for these investments by amortizing the cost of tax credit investments over the life of the investment using a proportional amortization method and tax credit investment amortization expense is a component of the provision for income taxes.

The following table presents the balances of the Company’s tax credit investments and related unfunded commitments at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 (in thousands):


	September 30, 2017		December 31, 2016		March 31, 2019		December 31, 2018
Tax credit investments	$	4,058	$	4,654	$	21,764	$	17,360
Unfunded commitments—tax credit investments	$	638	$	665	15,945		12,726

The following table presents other information related to the Company's tax credit investments for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2017		2016		2017		2016		2019		2018
Tax credits and other tax benefits recognized	$	285	$	284	$	855	$	852	$	494	$	364
Tax credit amortization expense included in provision for income taxes	$	199	$	168	597		504		405		288

Note ~~10:~~11: CALCULATION OF WEIGHTED AVERAGE SHARES OUTSTANDING FOR EARNINGS PER SHARE (EPS)

The following table reconciles basic to diluted weighted average shares outstanding used to calculate earnings per share data for the three months ended March 31, 2019 and 2018 (in thousands, except shares and per share data):

Three Months Ended
September 30, Nine Months Ended
September 30,
2017
2016
2017
2016
Net income $ 25,077
$ 23,851
$ 74,324
$ 62,581

Basic weighted average shares outstanding 32,982,532
34,045,225
32,966,214
34,050,459
Plus unvested restricted stock 96,567
79,386
94,958
54,416
Diluted weighted shares outstanding 33,079,099
34,124,611
33,061,172
34,104,875
Earnings per common share

Basic $ 0.76
$ 0.70
$ 2.25
$ 1.84
Diluted $ 0.76
$ 0.70
$ 2.25
$ 1.83

~~As of~~ ~~September 30, 2017~~, warrants expiring on November 21, 2018 to purchase up to $18.6 million (243,998 shares, post reverse-split) of common stock were not included in the computation of diluted earnings per share because the exercise price of the warrants was greater than the average market price of common shares.



	Three Months Ended March 31,
	2019		2018
Net income	$	33,346	$	28,790

Basic weighted average shares outstanding	35,050,376		32,397,568
Plus unvested restricted stock	121,680		118,888
Diluted weighted shares outstanding	35,172,056		32,516,456
Earnings per common share
Basic	$	0.95	$	0.89
Diluted	$	0.95	$	0.89

Note ~~11:~~12: STOCK-BASED COMPENSATION PLANS

The Company operates the following stock-based compensation plans as approved by its shareholders:

2012 Restricted Stock and Incentive Bonus Plan (2012 Restricted Stock Plan).

2014 Omnibus Incentive Plan (the 2014 Plan).

2018 Omnibus Incentive Plan (the 2018 Plan).

The purpose of these plans is to promote the success and enhance the value of the Company by providing a means for attracting and retaining highly skilled employees, officers and directors of Banner Corporation and its affiliates and linking their personal interests with those of the Company's shareholders. Under these plans the Company currently has outstanding restricted stock share grants and restricted stock unit grants.

2012 Restricted Stock and Incentive Bonus Plan

Under the 2012 Restricted Stock Plan, which was initially approved on April 24, 2012, the Company is authorized to issue up to 300,000 shares of its common stock to provide a means for attracting and retaining highly skilled officers of Banner Corporation and its affiliates. Shares granted under the 2012 Restricted Stock Plan have a minimum vesting period of three years. The 2012 Restricted Stock Plan will continue in effect for a term of ten years, after which no further awards may be granted.

The 2012 Restricted Stock Plan was amended on April 23, 2013 to provide for the ability to grant (1) cash-denominated incentive-based awards payable in cash or common stock, including those that are eligible to qualify as qualified performance-based compensation for the purposes of Section 162(m) of the Code and (2) restricted stock awards that qualify as qualified performance-based compensation for the purposes of Section 162(m) of the Code. Vesting requirements may include time-based conditions, performance-based conditions, or market-based conditions.

As of ~~September 30, 2017,~~March 31, 2019, the Company had granted ~~270,961~~269,863 shares of restricted stock from the 2012 Restricted Stock Plan (as amended and restated), of which ~~242,972~~261,966 shares had vested and ~~27,989~~7,897 shares remain unvested.

2014 Omnibus Incentive Plan

The 2014 Plan was approved by shareholders on April 22, 2014. The 2014 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, other stock-based awards and other cash awards, and provides for vesting requirements which may include time-based or performance-based conditions. The Company reserved 900,000 shares of its common stock for issuance under the 2014 Plan in connection with the exercise of awards. As of ~~September 30, 2017, 372,512~~March 31, 2019, 314,521 restricted stock shares and ~~34,975~~378,934 restricted stock units have been granted under the 2014 Plan of which ~~81,148~~196,365 restricted stock shares and ~~20,967~~34,975 restricted stock units have vested.

2018 Omnibus Incentive Plan

The 2018 Plan was approved by shareholders on April 24, 2018. The 2018 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, other stock-based awards and other cash awards, and provides for vesting requirements which may include time-based or performance-based conditions. The Company reserved 900,000 shares of common stock for issuance under the 2018 Plan in connection with the exercise of awards. As of March 31, 2019, no shares or units have been granted under the 2018 Plan.

The expense associated with all restricted stock grants (including restricted stock shares and restricted stock units) was ~~$1.6~~$1.2 million and ~~$4.2~~$1.3 million for the three ~~and nine-month~~month periods ended ~~September 30, 2017~~March 31, 2019 and ~~$1.4 million and $4.0 million for the three and nine-month periods ended September 30, 2016,~~March 31, 2018, respectively. Unrecognized compensation expense for these awards as of ~~September 30, 2017~~March 31, 2019 was ~~$9.8~~$17.7 million and will be amortized over the next 34 months.

Note ~~12:~~13: COMMITMENTS AND CONTINGENCIES

~~Lease Commitments~~ — The Company leases 115 buildings and offices under non-cancelable operating leases. The leases contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule. Substantially all of the leases provide the Company with the option to extend the lease term one or more times following expiration of the initial term.

Financial Instruments with Off-Balance-Sheet Risk — The Company has financial instruments with off-balance-sheet risk generated in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, commitments related to standby letters of credit, commitments to originate loans, commitments to sell loans, commitments to buy and sell securities. These instruments involve, to varying degrees, elements of credit and interest rate risk similar to the risk involved in on-balance-sheet items recognized in our Consolidated Statements of Financial Condition.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument from commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments.

Outstanding commitments for which no asset or liability for the notional amount has been recorded consisted of the following at the dates indicated (in thousands):


	Contract or Notional Amount				Contract or Notional Amount
	September 30, 2017		December 31, 2016		March 31, 2019		December 31, 2018
Commitments to extend credit	$	2,339,558	$	2,204,795	$	2,843,134	$	2,837,981
Standby letters of credit and financial guarantees	15,432		17,694		15,861		17,784
Commitments to originate loans	64,263		69,833		50,692		32,145
Risk participation agreement	11,516		7,488		24,074		24,091

Derivatives also included in Note 13:
Derivatives also included in Note 14:
Commitments to originate loans held for sale	68,976		69,487		55,667		31,728
Commitments to sell loans secured by one- to four-family residential properties	39,848		36,907		39,871		18,328
Commitments to sell securities related to mortgage banking activities	100,500		44,000		68,803		144,250

Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Many of the commitments may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the customer. The type of collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties. The Company's reserve for unfunded loan commitments was ~~$2.4 million and $3.6~~$2.6 million at ~~September 30, 2017~~both March 31, 2019 and December 31, ~~2016, respectively.~~2018.

Standby letters of credit are conditional commitments issued to guarantee a customer’s performance or payment to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Through the acquisition of AmericanWest, Banner Bank assumed a risk participation agreement. Under the risk participation agreement, Banner Bank guarantees the financial performance of a borrower on the participated portion of an interest rate swap on a loan.

Interest rates on residential one- to four-family mortgage loan applications are typically rate locked (committed) to customers during the application stage for periods ranging from 30 to 60 days, the most typical period being 45 days. Traditionally, these loan applications with rate lock commitments had the pricing for the sale of these loans locked with various qualified investors under a best-efforts delivery program at or near the time the interest rate is locked with the customer. The ~~Bank~~Company then attempts to deliver these loans before their rate locks expired. This arrangement generally required delivery of the loans prior to the expiration of the rate lock. Delays in funding the loans required a lock extension. The cost of a lock extension at times was borne by the customer and at times by the ~~Bank.~~Company. These lock extension costs have not had a material impact to our operations. The Company enters into forward commitments at specific prices and settlement dates to deliver either: (1) residential mortgage loans for purchase by secondary market investors (i.e., Freddie Mac or Fannie Mae), or (2) mortgage-backed securities to broker/dealers. The purpose of these forward commitments is to offset the movement in interest rates between the execution of its residential mortgage rate lock commitments with borrowers and the sale of those loans to the secondary market investor. There were no counterparty default losses on forward contracts during the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 or ~~September 30, 2016.~~March 31, 2018. Market risk with respect to forward contracts arises

principally from changes in the value of contractual positions due to changes in interest rates. The Company limits its exposure to market risk by monitoring differences between commitments to customers and forward contracts with market investors and securities broker/dealers. In the event the Company has forward delivery contract commitments in excess of available mortgage loans, the transaction is completed by either paying or receiving a fee to or from the investor or broker/dealer equal to the increase or decrease in the market value of the forward contract.

In the normal course of business, the Company and/or its subsidiaries have various legal proceedings and other contingent matters outstanding. These proceedings and the associated legal claims are often contested and the outcome of individual matters is not always predictable. These claims and counter-claims typically arise during the course of collection efforts on problem loans or with respect to action to enforce liens on properties in which the Banks hold a security interest. Based upon the information known to management at this time, the Company and the Banks are not a party to any legal proceedings that management believes would have a material adverse effect on the results of operations or consolidated financial position at ~~September 30, 2017.~~March 31, 2019.

In connection with certain asset sales, the Banks typically make representations and warranties about the underlying assets conforming to specified guidelines. If the underlying assets do not conform to the specifications, the ~~Bank~~Banks may have an obligation to repurchase the assets or indemnify the purchaser against any loss. The Banks believe that the potential for material loss under these arrangements is remote. Accordingly, the fair value of such obligations is not material.

NOTE ~~13:~~14: DERIVATIVES AND HEDGING

The Company, through its Banner Bank subsidiary, is party to various derivative instruments that are used for asset and liability management and customer financing needs. Derivative instruments are contracts between two or more parties that have a notional amount and an underlying variable, require no net investment and allow for the net settlement of positions. The notional amount serves as the basis for the payment provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents a specified interest rate, index, or other component. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the market value of the derivative contract. The Company obtains dealer quotations to value its derivative contracts.

The Company's predominant derivative and hedging activities involve interest rate swaps related to certain term loans and forward sales contracts associated with mortgage banking activities. Generally, these instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors such as market-driven interest rates and prices or other economic factors.

Derivatives Designated in Hedge Relationships

The Company's fixed rate loans result in exposure to losses in value or net interest income as interest rates change. The risk management objective for hedging fixed rate loans is to effectively convert the fixed rate received to a floating rate. The Company has hedged exposure to changes in the fair value of certain fixed rate loans through the use of interest rate swaps. For a qualifying fair value hedge, changes in the value of the derivatives are recognized in current period earnings along with the corresponding changes in the fair value of the designated hedged item attributable to the risk being hedged.

Under a prior program, customers received fixed interest rate commercial loans and ~~the~~ Banner Bank subsequently hedged that fixed rate loan by entering into an interest rate swap with a dealer counterparty. Banner Bank receives fixed rate payments from the customers on the loans and makes similar fixed rate payments to the dealer counterparty on the swaps in exchange for variable rate payments based on the one-month LIBOR index. Some of these interest rate swaps are designated as fair value hedges. Through application of the “short cut method of accounting,” there is an assumption that the hedges are effective. Banner Bank discontinued originating interest rate swaps under this program in 2008.

As of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, the notional values or contractual amounts and fair values of the Company's derivatives designated in hedge relationships were as follows (in thousands):

Asset Derivatives Liability Derivatives
September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016

Notional/
Contract Amount

Fair
   Value ⁽¹⁾

Notional/
Contract Amount

Fair
   Value ⁽¹⁾

Notional/
Contract Amount

Fair
   Value ⁽²⁾

Notional/
Contract Amount

Fair
   Value ⁽²⁾
Interest rate swaps $ 4,441
$ 531
$ 5,855
$ 660
$ 4,441
$ 531
$ 5,855
$ 660



	Asset Derivatives								Liability Derivatives
	March 31, 2019				December 31, 2018				March 31, 2019				December 31, 2018
	Notional/ Contract Amount		Fair Value ⁽¹⁾		Notional/ Contract Amount		Fair Value ⁽¹⁾		Notional/ Contract Amount		Fair Value ⁽²⁾		Notional/ Contract Amount		Fair Value ⁽²⁾
Interest rate swaps	$	3,873	$	269	$	3,973	$	270	$	3,873	$	269	$	3,973	$	270


⁽¹⁾	Included in Loans receivable on the Consolidated Statements of Financial Condition.


⁽²⁾	Included in Other liabilities on the Consolidated Statements of Financial Condition.

Derivatives Not Designated in Hedge Relationships

Interest Rate Swaps: Banner Bank uses an interest rate swap program for commercial loan customers that provides the client with a variable rate loan and enters into an interest rate swap in which the client locks in a fixed rate and the Bank receives a variable rate payment. The Bank offsets its risk exposure by entering into an offsetting interest rate swap with a dealer counterparty for the same notional amount and length of

term as the client interest rate swap providing the dealer counterparty with a fixed-rate payment in exchange for a variable-rate payment. These swaps do not qualify as designated hedges; therefore, each swap is accounted for as a free standing derivative.

Mortgage Banking: In the normal course of business, the Company sells originated one- to four-family and multifamily mortgage loans into the secondary mortgage loan markets. During the period of loan origination and prior to the sale of the loans in the secondary market, the Company has exposure to movements in interest rates associated with written interest rate lock commitments with potential borrowers to originate one- to four-family loans that are intended to be sold and for closed one- to four-family and multifamily mortgage loans held for sale that are awaiting sale and delivery into the secondary market. The Company attempts to economically hedge the risk of changing interest rates associated with these mortgage loan commitments by entering into forward sales contracts to sell one- to four-family and multifamily mortgage loans or mortgage-backed securities to broker/dealers as specific prices and dates.

As of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, the notional values or contractual amounts and fair values of the Company's derivatives not designated in hedge relationships were as follows (in thousands):


	Asset Derivatives								Liability Derivatives								Asset Derivatives								Liability Derivatives
	September 30, 2017				December 31, 2016				September 30, 2017				December 31, 2016				March 31, 2019				December 31, 2018				March 31, 2019				December 31, 2018
	Notional/ Contract Amount		Fair Value ⁽¹⁾		Notional/ Contract Amount		Fair Value ⁽¹⁾		Notional/ Contract Amount		Fair Value ⁽²⁾		Notional/ Contract Amount		Fair Value ⁽²⁾		Notional/ Contract Amount		Fair Value ⁽¹⁾		Notional/ Contract Amount		Fair Value ⁽¹⁾		Notional/ Contract Amount		Fair Value ⁽²⁾		Notional/ Contract Amount		Fair Value ⁽²⁾
Interest rate swaps	$	303,500	$	6,655	$	309,936	$	7,670	$	303,500	$	6,655	$	309,936	$	7,670	$	290,064	$	6,503	$	272,374	$	2,868	$	290,064	$	5,267	$	272,374	$	2,868
Mortgage loan commitments	46,351		265		42,296		30		22,625		115		27,191		174		26,194		280		20,229		273		37,927		222		17,763		187
Forward sales contracts	140,348		399		71,192		452		—		—		9,715		115		39,871		268		18,328		198		68,803		452		144,250		1,467
	$	490,199	$	7,319	$	423,424	$	8,152	$	326,125	$	6,770	$	346,842	$	7,959	$	356,129	$	7,051	$	310,931	$	3,339	$	396,794	$	5,941	$	434,387	$	4,522


⁽¹⁾	Included in Other assets on the Consolidated Statements of Financial Condition, with the exception of certain interest swaps and mortgage loan commitments (with a fair value of ~~$216,000~~$315,000 at ~~September 30, 2017~~March 31, 2019 and ~~$822,000~~$282,000 at December 31, ~~2016)~~2018), which are included in Loans receivable.


⁽²⁾	Included in Other liabilities on the Consolidated Statements of Financial Condition.

Gains (losses) recognized in income on derivatives not designated in hedge relationships for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 were as follows (in thousands):


	Location on Consolidated Statements of Operations	Three Months Ended September 30,						Nine Months Ended September 30,						Location on Consolidated Statements of Operations	Three Months Ended March 31,
	Location on Consolidated Statements of Operations	2017			2016			2017			2016			Location on Consolidated Statements of Operations	2019		2018
Mortgage loan commitments	Mortgage banking operations	$	50		$	(376	)	$	235		$	516		Mortgage banking operations	$	7	$	68
Forward sales contracts	Mortgage banking operations	(398		)	315			(654		)	(297		)	Mortgage banking operations	150		(11		)
		$	(348	)	$	(61	)	$	(419	)	$	219			$	157	$	57

The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to these agreements. Credit risk of the financial contract is controlled through the credit approval, limits, and monitoring procedures and management does not expect the counterparties to fail their obligations.

In connection with the interest rate swaps between Banner Bank and the dealer counterparties, the agreements contain a provision where if Banner Bank fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions and Banner Bank would be required to settle its obligations. Similarly, Banner Bank could be required to settle its obligations under certain of its agreements if specific regulatory events occur, such as a publicly issued prompt corrective action directive, cease and desist order, or a capital maintenance agreement that required Banner Bank to maintain a specific capital level. If Banner Bank had breached any of these provisions at ~~September 30, 2017~~March 31, 2019 or December 31, ~~2016,~~2018, it could have been required to settle its obligations under the agreements at the termination value. As of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, the termination value of derivatives in a net liability position related to these agreements was ~~$4.5~~$6.2 million and ~~$7.6~~$1.3 million, respectively. The Company generally posts collateral against derivative liabilities in the form of cash, government agency-issued bonds, mortgage-backed securities, or commercial mortgage-backed securities. Collateral posted against derivative liabilities was ~~$18.4~~$15.6 million and ~~$29.3~~$13.6 million as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, respectively.

Derivative assets and liabilities are recorded at fair value on the balance ~~sheet and do not take into account the effects of master netting agreements.~~sheet. Master netting agreements allow the Company to settle all derivative contracts held with a single counterparty on a net basis and to offset net derivative positions with related collateral where applicable.

The following ~~tables illustrate the potential effect of~~presents additional information related to the Company's derivative ~~master netting arrangements,~~contracts, by type of financial instrument, ~~on the Company's Consolidated Statements of Financial Condition~~ as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 (in thousands):


	September 30, 2017														March 31, 2019
							Gross Amounts of Financial Instruments Not Offset in the Consolidated Statements of Financial Condition															Gross Amounts of Financial Instruments Not Offset in the Consolidated Statements of Financial Condition
	Gross Amounts Recognized		Amounts offset in the Statement of Financial Condition		Net Amounts in the Statement of Financial Condition		Netting Adjustment Per Applicable Master Netting Agreements			Fair Value of Financial Collateral in the Statement of Financial Condition			Net Amount		Gross Amounts Recognized		Amounts offset in the Statement of Financial Condition			Net Amounts in the Statement of Financial Condition		Netting Adjustment Per Applicable Master Netting Agreements		Fair Value of Financial Collateral in the Statement of Financial Condition			Net Amount
Derivative assets
Interest rate swaps	$	7,186	$	—	$	7,186	$	(1,148	)	$	—		$	6,038	$	7,444	$	(672	)	$	6,772	$	—	$	—		$	6,772
	$	7,186	$	—	$	7,186	$	(1,148	)	$	—		$	6,038	$	7,444	$	(672	)	$	6,772	$	—	$	—		$	6,772

Derivative liabilities
Interest rate swaps	$	7,186	$	—	$	7,186	$	(1,148	)	$	(4,461	)	$	1,577	$	7,444	$	(1,908	)	$	5,536	$	—	$	(4,917	)	$	619
	$	7,186	$	—	$	7,186	$	(1,148	)	$	(4,461	)	$	1,577	$	7,444	$	(1,908	)	$	5,536	$	—	$	(4,917	)	$	619

	December 31, 2016														December 31, 2018
							Gross Amounts of Financial Instruments Not Offset in the Consolidated Statements of Financial Condition															Gross Amounts of Financial Instruments Not Offset in the Consolidated Statements of Financial Condition
	Gross Amounts Recognized		Amounts offset in the Statement of Financial Condition		Net Amounts in the Statement of Financial Condition		Netting Adjustment Per Applicable Master Netting Agreements			Fair Value of Financial Collateral in the Statement of Financial Condition			Net Amount		Gross Amounts Recognized		Amounts offset in the Statement of Financial Condition			Net Amounts in the Statement of Financial Condition		Netting Adjustment Per Applicable Master Netting Agreements		Fair Value of Financial Collateral in the Statement of Financial Condition			Net Amount
Derivative assets
Interest rate swaps	$	8,330	$	—	$	8,330	$	(362	)	$	—		$	7,968	$	5,038	$	(1,900	)	$	3,138	$	—	$	—		$	3,138
	$	8,330	$	—	$	8,330	$	(362	)	$	—		$	7,968	$	5,038	$	(1,900	)	$	3,138	$	—	$	—		$	3,138

Derivative liabilities
Interest rate swaps	$	8,330	$	—	$	8,330	$	(362	)	$	(7,557	)	$	411	$	5,038	$	(1,900	)	$	3,138	$	—	$	(1,320	)	$	1,818
	$	8,330	$	—	$	8,330	$	(362	)	$	(7,557	)	$	411	$	5,038	$	(1,900	)	$	3,138	$	—	$	(1,320	)	$	1,818

NOTE ~~14: SUBSEQUENT EVENT~~15: REVENUE FROM CONTRACTS WITH CUSTOMERS

~~On October 6, 2017, Banner Bank completed the sale~~Disaggregation of ~~its Utah branches and related assets and liabilities to People’s Intermountain Bank, a banking subsidiary of People’s Utah Bancorp (NASDAQ: PUB).~~Revenue:

~~Under~~Deposit fees and other service charges for the ~~terms~~three months ended March 31, 2019 and 2018 are summarized as follows (in thousands):



	Three Months Ended March 31,
	2019			2018
Deposit service charges	$	4,586		$	4,320
Debit and credit interchange fees	6,573			7,320
Debit and credit card expense	(2,449		)	(1,970		)
Merchant services income	2,856			2,261
Merchant services expenses	(2,319		)	(1,804		)
Other service charges	3,371			1,169
Total deposit fees and other service charges	$	12,618		$	11,296

Deposit fees and other service charges

Deposit fees and other service charges include transaction and non-transaction based deposit fees. Transaction based fees on deposit accounts are charged to deposit customers for specific services provided to the customer. These fees include such items as wire fees, official check fees, and overdraft fees. These are contract specific to each individual transaction and do not extend beyond the individual transaction. The performance obligation is completed and the fees are recognized at the time the specific transactional service is provided to the customer. Non-transactional deposit fees are typically monthly account maintenance fees charged on deposit accounts. These are day-to-day contracts that can be canceled by either party without notice. The performance obligation is satisfied and the fees are recognized on a monthly basis after the service period is completed.

Debit and credit card interchange income and expenses

Debit and credit card interchange income represent fees earned when a debit or credit card issued by the Banks is used to purchase goods or services at a merchant. The merchant's bank pays the Banks a default interchange rate set by MasterCard on a transaction by transaction basis. The merchant acquiring bank can stop accepting the Banks’ cards at any time and the Banks can stop further use of cards issued by them at any time. The performance obligation is satisfied and the fees are earned when the cost of the ~~purchase~~transaction is charged to the Banks cardholders’ card. Direct expenses associated with the credit and ~~assumption agreement,~~debit card are recorded as a net reduction against the ~~sale included approximately $255 million~~interchange income.

Merchant services income

Merchant services income represents fees earned by the Banks for card payment services provided to its merchant customers. The Banks have a contract with a third party to provide card payment services to the Banks’ merchants that contract for those services. The third party provider has contracts with the Banks’ merchants to provide the card payment services. The Banks do not have a direct contractual relationship with its merchants for these services. The Banks set the rates for the services provided by the third party. The third party provider passes the payments made by the Banks’ merchants through to the Banks. The Banks, in ~~loans, $160 million~~turn, pay the third party provider for the services it provides to the Banks’ merchants. These payments to the third party provider are recorded as expenses as a net reduction against fee income. In addition, a portion of the payment received by the Banks represents interchange fees which are passed through to the card issuing bank. Income is primarily earned based on the dollar volume and number of transactions processed. The performance obligation is satisfied and the related fee is earned when each payment is accepted by the processing network.

Note 16: LEASES

The Company leases 110 buildings and offices under non-cancelable operating leases. The leases contain various provisions for increases in ~~deposits and~~rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule. Substantially all of ~~Banner Bank’s seven Utah branches located in Provo, Orem, Salem, Springville, South Jordan, Salt Lake City~~the leases provide the Company with the option to extend the lease term one or more times following expiration of the initial term. The Company adopted the requirements of Topic 842 effective January 1, 2019, which required the Company record a right-of-use lease asset and ~~Woods Cross.~~a lease liability for leases with an initial term of more than 12 months for leases that existed as of January 1, 2019. The ~~sale also included $3.9 million~~periods prior to the date of ~~property and equipment and $581,000 of accrued interest. In addition, Banner wrote off an associated $1.8 million of goodwill and $1.1 million of other intangibles. The deposit premium paid to Banner~~adoption are accounted for under Lease Topic 840; therefore, the following disclosures include only the periods for which Topic 842 was ~~$13.8 million based on average deposits at closing. The net gain recorded on the sale was approximately $12 million.~~effective.

Lease Position as of March 31, 2019

The table below presents the lease right-of-use assets and lease liabilities recorded on the balance sheet at March 31, 2019 (dollars in thousands):



	Classification on the Balance Sheet	March 31, 2019
Assets
Operating right-of-use lease assets	Other assets	$	55,163

Liabilities
Operating lease liabilities	Accrued expenses and other liabilities	$	58,083



Weighted-average remaining lease term
Operating leases	5.8 years

Weighted-average discount rate
Operating leases	4.38	%

Lease Costs

The table below presents certain information related to the lease costs for operating leases for the three months ended March 31, 2019 (in thousands):



Operating lease cost ⁽¹⁾	$	3,975
Short-term lease costs ⁽¹⁾	121
Variable lease cost ⁽¹⁾	561
Less sublease income ⁽¹⁾	(237		)
Total lease cost	$	4,420

⁽¹⁾ Lease expenses and sublease income are classified within occupancy and equipment expense on the Consolidated Statements of Operations.

Supplemental Cash Flow Information

Operating cash flows paid for operating lease amounts included in the measurement of lease liabilities was $3.9 million for the three months ended March 31, 2019. During the three months ended March 31, 2019, the Company recorded $61.0 million of right-of-use lease assets in exchange for operating lease liabilities.

Undiscounted Cash Flows

The table below reconciles the undiscounted cash flows for each of the first five years beginning with 2019 and the total of the remaining years to the operating lease liabilities recorded on the Consolidated Statements of Financial Position (in thousands):



	Operating Leases
Remainder of 2019	$	11,003
2020	13,721
2021	12,019
2022	8,542
2023	5,567
Thereafter	15,023
Total minimum lease payments	65,875
Less: amount of lease payments representing interest	(7,792		)
Lease obligations	$	58,083

As of March 31, 2019, we had $713,000 of undiscounted lease payments under an operating lease that had not yet commenced. This lease will commence later in 2019 with a lease term of 10 years.

ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

We are a bank holding company incorporated in the State of Washington which owns two subsidiary banks, Banner Bank and Islanders Bank. Banner Bank is a Washington-chartered commercial bank that conducts business from its main office in Walla Walla, Washington and, as of ~~September 30, 2017,~~March 31, 2019, its ~~182~~173 branch offices and 1217 loan production offices located in Washington, Oregon, California, Utah and Idaho. ~~On October 9, 2017, Banner Bank announced that it had completed the sale of its seven Utah branches and related operations.~~ Islanders Bank is a Washington-chartered commercial bank and conducts its business from three locations in San Juan County, Washington. Banner Corporation is subject to regulation by the Board of Governors of the Federal Reserve System (the Federal Reserve Board). Banner Bank and Islanders Bank (the Banks) are subject to regulation by the Washington State Department of Financial Institutions, Division of Banks and the Federal Deposit Insurance Corporation (the FDIC). As of ~~September 30, 2017,~~March 31, 2019, we had total consolidated assets of ~~$10.44~~$11.74 billion, total loans of ~~$7.77~~$8.69 billion, total deposits of ~~$8.54~~$9.38 billion and total shareholders’ equity of ~~$1.33~~$1.51 billion.

Banner Bank is a regional bank which offers a wide variety of commercial banking services and financial products to individuals, businesses and public sector entities in its primary market areas. Islanders Bank is a community bank which offers similar banking services to individuals, businesses and public entities located in the San Juan Islands. The Banks’ primary business is that of traditional banking institutions, accepting deposits and originating loans in locations surrounding their offices in portions of Washington, Oregon, California and Idaho. Banner Bank is also an active participant in ~~the~~ secondary ~~market,~~loan markets, engaging in mortgage banking operations largely through the origination and sale of one- to four-family and multifamily residential loans. Lending activities include commercial business and commercial real estate loans, agriculture business loans, construction and land development loans, one- to four-family and multifamily residential loans and consumer loans.

Banner Corporation's successful execution of its super community bank model and strategic initiatives ~~has~~have delivered solid ~~profitability~~core operating results and ~~growth.~~profitability. We ~~continue to execute~~have made substantial progress on our goals to achieve and maintain the Company's moderate risk profile as well as to develop ~~and continue strong~~sustainable earnings momentum. Highlights of this success have included ~~maintaining strong~~solid asset quality, ~~outstanding~~ client acquisition and account growth, which have resulted in increased non-interest-bearing deposit balances and strong revenue generation from core operations.

For the quarter ended ~~September 30, 2017,~~March 31, 2019, our net income was ~~$25.1~~$33.3 million, or ~~$0.76~~$0.95 per diluted share, compared to net income of ~~$23.9~~$28.8 million, or ~~$0.70~~$0.89 per diluted share, for the quarter ended ~~September 30, 2016. For the nine months ended September 30, 2017, our net income~~March 31, 2018. The current quarter was $74.3 million, or $2.25 per diluted share, compared to net income of $62.6 million, or $1.83 per diluted share for the same period a year earlier. Our net income for the quarter and nine months ended September 30, 2016 was negativelypositively impacted by ~~$1.7 million~~the completion of the integration of Skagit operations and $10.9 million, respectively, of acquisition-related expenses, which net of related tax benefits reduced earnings per diluted share by $0.03 and $0.21, respectively, for those periods. There were no acquisition-related expensesgrowth in ~~the quarter or nine months ended September 30, 2017.~~average earning assets.

Highlights for the current quarter included additional client acquisition, solid asset quality ~~strong revenues from core operations,~~ and growth in ~~loans and~~ core deposits. Compared to the same quarter a year ago, we had a significant increase in net interest income, reflecting the ~~organic~~ growth of the ~~Company.~~Company, both organically and through an acquisition, and an improved yield on interest-earning assets.

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 customer deposits, FHLB advances, other borrowings and junior subordinated debentures. Net interest income is primarily a function of our interest rate spread which is the difference between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, as well as a function of the average balances of interest-earning assets, interest-bearing liabilities and non-interest-bearing funding sources including non-interest-bearing deposits. Our net interest income increased ~~$6.5~~$16.7 million, or 7%17%, to ~~$100.2~~$116.1 million for the quarter ended ~~September 30, 2017,~~March 31, 2019, compared to ~~$93.7~~$99.4 million for the same quarter one year earlier. This increase in net interest income primarily reflects the ~~organic~~ growth in ~~earning~~interest-earning assets ~~and a continued strong~~with improved net interest ~~margin.~~margin also contributing to the increase.

Our net income also is affected by the level of our non-interest income, including deposit fees and other service charges, results of mortgage banking operations, which includes loan origination and servicing fees and gains and losses on the sale of loans, and gains and losses on the sale of ~~loans and~~ securities, as well as our non-interest expenses and provisions for loan losses and income ~~tax provisions.~~taxes. In addition, our net income is affected by the net change in the value of certain financial instruments carried at fair value.

Our total revenues (net interest income before the provision for loan losses plus total non-interest income) for the ~~third~~first quarter of ~~2017~~2019 increased ~~$3.3~~$13.5 million, or 3%11%, to ~~$120.5~~$134.2 million, compared to ~~$117.2~~$120.7 million for the same period a year earlier, largely as a result of increased net interest ~~income as well as increased deposit fees and service charges.~~income. Our total non-interest income, which is a component of total revenue and includes the net gain on sale of securities and changes in the value of financial instruments carried at fair value, was ~~$20.3~~$18.1 million for the quarter ended ~~September 30, 2017,~~March 31, 2019, compared to ~~$23.5~~$21.4 million for the quarter ended ~~September 30, 2016.~~

Our total revenues, excluding changes in the fair value of financial instruments and the net gain on sale of securities, which we believe are more indicative of our core operations*, also were strong at $120.8 million for the quarter ended September 30, 2017, a $3.3 million, or 3%, increase compared to $117.5 million for the same period a year earlier.March 31, 2018.

Our non-interest expense increased in the ~~third~~first quarter of ~~2017~~2019 compared to a year earlier largely as a result of ~~costs incurred related to enhanced regulatory requirements attributable to compliance and risk management infrastructure build-out as a result~~$2.1 million of ~~crossing the $10 billion asset threshold. There were no~~ acquisition-related expenses infor the current quarter ~~compared~~and the higher salary and employee benefits due to ~~$1.7 million in~~normal salary and wage adjustments and additional staffing related to the ~~same quarter a year ago.~~operations acquired from the acquisition of Skagit on November 1, 2018. Non-interest expense was ~~$82.6~~$90.0 million for the quarter ended ~~September 30, 2017,~~March 31, 2019, compared to ~~$79.1~~$81.7 million for the same quarter a year earlier.

Although our credit quality metrics continue to reflect our moderate risk profile, we recorded a $2.0 million provision for loan losses in the quarter ended ~~September 30, 2017,~~March 31, 2019, the same amount as was recorded in the first quarter a year ago. The current quarter provision for loan losses was primarily ~~due to loan growth and~~a result of the origination of new loans, the renewal of acquired loans out of the discounted acquired loan ~~portfolios, as well as~~portfolio and net ~~charge-offs during the quarter, compared to a $2.0 million loan loss provision recorded in the third quarter a year ago.~~charge-offs. The allowance for loan losses at ~~September 30, 2017~~March 31, 2019 was ~~$89.1~~$97.3 million, representing ~~296%~~504% of non-performing loans. Non-performing loans

were ~~$30.1~~$19.3 million at ~~September 30, 2017,~~March 31, 2019, compared to ~~$22.6~~$15.7 million at December 31, ~~2016~~2018 and ~~$27.3~~$22.5 million a year earlier. (See Note 4,5, Loans Receivable and the Allowance for Loan Losses, as well as “Asset Quality” below in this Form 10-Q.)

~~During 2016 our strategy was to maintain assets below $10.0 billion through December 31, 2016. Remaining below $10.0~~Banner and Banner Bank exceeded $10 billion in assets ~~through the year end had the beneficial effect~~as of ~~delaying the adverse impact on our future operating results from certain enhanced regulatory compliance requirements~~December 31, 2018 and, therefore, Banner Bank and Islanders Bank will be subject to the Durbin Amendment ~~cap~~interchange fee limitation effective July 1, 2019. Based on ~~interchange fees. Beginning~~current debit card transaction volumes, Banner anticipates that the Durbin Amendment will have a $15 million annualized negative impact on pre-tax revenues commencing in early 2017, we renewed our strategy of funding additional investment securities purchases/interest-earning assets with deposits and borrowings to leverage our capital, resulting in a $649.4 million increase in total assets during the first nine months of 2017, further enhancing our revenue growth.July 2019.

*Non-GAAP financial measures: ~~Non-interest~~Net income, revenues and other earnings and expense information excluding fair value adjustments, OTTI losses or recoveries, gains or losses on the sale of securities, acquisition-related expenses, amortization of CDI, REO gain (loss) and ~~in certain periods, acquisition-related costs~~state/municipal business and use taxes 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 in understanding our capital position. However, these non-GAAP financial measures are supplemental and are not a substitute for any analysis based on GAAP. Where applicable, we have also presented comparable earnings information using GAAP financial measures. For a reconciliation of these non-GAAP financial measures, see the tables below. Because not all companies use the same calculations, our presentation may not be comparable to other similarly titled measures as calculated by other companies. See “Comparison of Results of Operations for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018” for more detailed information about our financial performance.

The following tables set forth reconciliations of non-GAAP financial measures discussed in this report (in thousands):

For the Three Months Ended
September 30,
For the Nine Months Ended
September 30,
2017 2016 2017 2016
REVENUE FROM CORE OPERATIONS:
Net interest income $ 100,210
$ 93,708
$ 294,770
$ 277,899
Total non-interest income 20,339
23,512
63,653
64,007
Total GAAP revenue 120,549
117,220
358,423
341,906
Exclude net gain on sale of securities (270 ) (891 ) (230 ) (531 )
Exclude change in valuation of financial instruments carried at fair value 493
1,124
1,831
1,472
Revenue from core operations (non-GAAP) $ 120,772
$ 117,453
$ 360,024
$ 342,847

NON-INTEREST INCOME FROM CORE OPERATIONS:
Total non-interest income (GAAP) $ 20,339
$ 23,512
$ 63,653
$ 64,007
Exclude net gain on sale of securities (270 ) (891 ) (230 ) (531 )
Exclude change in valuation of financial instruments carried at fair value 493
1,124
1,831
1,472
Total non-interest income from core operations (non-GAAP) $ 20,562
$ 23,745
$ 65,254
$ 64,948



	For the Three Months Ended March 31,
	2019			2018
REVENUE FROM CORE OPERATIONS:
Net interest income	$	116,104		$	99,373
Total non-interest income	18,125			21,362
Total GAAP revenue	134,229			120,735
Exclude net gain on sale of securities	(1		)	(4		)
Exclude change in valuation of financial instruments carried at fair value	(11		)	(3,308		)
Revenue from core operations (non-GAAP)	$	134,217		$	117,423


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended March 31,
	2017			2016			2017			2016			2019			2018
EARNINGS FROM CORE OPERATIONS:
Net income (GAAP)	$	25,077		$	23,851		$	74,324		$	62,581		$	33,346		$	28,790
Exclude net gain on sale of securities	(270		)	(891		)	(230		)	(531		)	(1		)	(4		)
Exclude change in valuation of financial instruments carried at fair value	493			1,124			1,831			1,472			(11		)	(3,308		)
Exclude acquisition related costs	—			1,720			—			10,945
Exclude related tax benefit	(80		)	(703		)	(576		)	(4,261		)
Exclude acquisition related expenses													2,148			—
Exclude related tax (expense) benefit													(513		)	795
Total earnings from core operations (non-GAAP)	$	25,220		$	25,101		$	75,349		$	70,206		$	34,969		$	26,273
Diluted earnings per share (GAAP)	$	0.76		$	0.70		$	2.25		$	1.83		$	0.95		$	0.89
Diluted core earnings per share (non-GAAP)	$	0.76		$	0.74		$	2.28		$	2.06		$	0.99		$	0.81


													For the Three Months Ended March 31,
													2019			2018
ADJUSTED EFFICIENCY RATIO
Non-interest expense (GAAP)	$	82,589		$	79,092		$	242,597		$	243,013		$	90,014		$	81,706
Exclude acquisition-related costs	—			(1,720		)	—			(10,945		)
Exclude acquisition-related expenses													(2,148		)	—
Exclude CDI amortization	(1,542		)	(1,724		)	(4,790		)	(5,339		)	(2,052		)	(1,382		)
Exclude Business and Occupancy (B&O) tax expense	(780		)	(956		)	(1,857		)	(2,564		)	(945		)	(713		)
Exclude REO gain (loss)	(240		)	21			1,089			(513		)	123			(439		)
Adjusted non-interest expense (non-GAAP)	$	80,027		$	74,713		$	237,039		$	223,652		$	84,992		$	79,172

Net interest income (GAAP)	$	100,210		$	93,708		$	294,770		$	277,899		$	116,104		$	99,373
Non-interest income (GAAP)	20,339			23,512			63,653			64,007			18,125			21,362
Total revenue	120,549			117,220			358,423			341,906			134,229			120,735
Exclude net gain on sale of securities	(270		)	(891		)	(230		)	(531		)	(1		)	(4		)
Exclude net change in valuation of financial instruments carried at fair value	493			1,124			1,831			1,472			(11		)	(3,308		)
Adjusted revenue (non-GAAP)	$	120,772		$	117,453		$	360,024		$	342,847
Revenue from core operations (non-GAAP)													$	134,217		$	117,423

Efficiency ratio (GAAP)	68.51		%	67.47		%	67.68		%	71.08		%	67.06		%	67.67		%
Adjusted efficiency ratio (non-GAAP)	66.26		%	63.61		%	65.84		%	65.23		%	63.32		%	67.42		%

The ratio of tangible common shareholders’ equity to tangible assets is also a non-GAAP financial measure. We calculate tangible common equity by excluding goodwill and other intangible assets from shareholders’ equity. We calculate tangible assets by excluding the balance of goodwill and other intangible assets from total assets. We believe that this is consistent with the treatment by our bank regulatory agencies, which exclude goodwill and other intangible assets from the calculation of risk-based capital ratios. Management believes that this non-GAAP financial measure provides information to investors that is useful in understanding the basis of our capital position (dollars in thousands).


TANGIBLE COMMON SHAREHOLDERS' EQUITY TO TANGIBLE ASSETS
TANGIBLE COMMON SHAREHOLDERS' EQUITY TO TANGIBLE ASSETS	September 30, 2017			December 31, 2016			September 30, 2016			March 31, 2019			December 31, 2018			March 31, 2018
Shareholders’ equity (GAAP)	$	1,327,011		$	1,305,710		$	1,331,271		$	1,511,191		$	1,478,595		$	1,254,123
Exclude goodwill and other intangible assets, net	269,802			274,745			276,517			369,801			372,078			263,910
Tangible common shareholders’ equity (non-GAAP)	$	1,057,209		$	1,030,965		$	1,054,754		$	1,141,390		$	1,106,517		$	990,213
Total assets (GAAP)	$	10,443,086		$	9,793,668		$	9,841,028		$	11,740,285		$	11,871,317		$	10,317,264
Exclude goodwill and other intangible assets, net	269,802			274,745			276,517			369,801			372,078			263,910
Total tangible assets (non-GAAP)	$	10,173,284		$	9,518,923		$	9,564,511		$	11,370,484		$	11,499,239		$	10,053,354
Common shareholders’ equity to total assets (GAAP)	12.71		%	13.33		%	13.53		%	12.87		%	12.46		%	12.16		%
Tangible common shareholders’ equity to tangible assets (non-GAAP)	10.39		%	10.83		%	11.03		%	10.04		%	9.62		%	9.85		%

TANGIBLE COMMON SHAREHOLDERS' EQUITY PER SHARE
Tangible common shareholders' equity (non-GAAP)	$	1,057,209		$	1,030,965		$	1,054,754		$	1,141,390		$	1,106,517		$	990,213
Common shares outstanding at end of period	33,254,784			33,193,387			33,867,311			35,152,746			35,182,772			32,423,673
Common shareholders' equity (book value) per share (GAAP)	$	39.90		$	39.34		$	39.31		$	42.99		$	42.03		$	38.68
Tangible common shareholders' equity (tangible book value) per share (non-GAAP)	$	31.79		$	31.06		$	31.14		$	32.47		$	31.45		$	30.54

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Selected Notes to the Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

Summary of Critical Accounting Policies and Estimates

In the opinion of management, the accompanying Consolidated Statements of Financial Condition and related Consolidated Statements of Operations, Comprehensive Income, Changes in Shareholders’ Equity and Cash Flows reflect all adjustments (which include reclassification and normal recurring adjustments) that are necessary for a fair presentation in conformity with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements.

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our financial statements. These policies relate to (i) the methodology for the recognition of interest income, (ii) determination of the provision and allowance for loan losses, (iii) the valuation of financial assets and liabilities recorded at fair value, including OTTI losses, (iv) the valuation of intangibles, such as goodwill, core deposit intangibles and mortgage servicing rights, (v) the valuation of real estate held for sale, (vi) the valuation of assets and liabilities acquired in business combinations and subsequent recognition of related income and expense, and (vii) the valuation of or recognition of deferred tax assets and liabilities. These policies 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, ~~2016.~~2018 except as described in Note 2 to the Consolidated Financial Statements. For additional information concerning critical accounting policies, see the Selected Notes to the Consolidated Financial Statements and the following:

Interest Income: (Notes 34 and 4)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.

Provision and Allowance for Loan Losses: (Note 4)5) The methodology for determining the allowance for loan losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses. The provision for loan losses reflects the amount required to maintain the allowance loan for losses at an appropriate level based upon management’s evaluation of the adequacy of general and specific loss reserves. Among the material estimates required to establish the allowance for loan losses are: overall economic conditions; value of collateral; strength of guarantors; loss exposure at default; the amount and timing of future cash flows on impaired loans; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. We have established systematic methodologies for the determination of the adequacy of our allowance for loan losses. The methodologies are set forth in a formal policy and take into consideration the need for an overall general valuation allowance as well as specific allowances that are tied to individual problem loans. We increase our allowance for loan losses by charging provisions for probable loan losses against our ~~income~~.income.

The allowance for loan losses is maintained at a level sufficient to provide for probable losses based on evaluating known and inherent risks in the loan portfolio and upon our continuing analysis of the factors underlying the quality of the loan portfolio. These factors include, among others, changes in the size and composition of the loan portfolio, delinquency rates, actual loan loss experience, current and economic conditions, detailed analysis of individual loans for which full collectability may not be assured, and determination of the existence and realizable value of the collateral and guarantees securing the loans. Realized losses related to specific assets are applied as a reduction of the carrying value of the assets and charged immediately against the allowance for loan loss reserve. Recoveries on previously charged off loans are credited to the allowance for loan losses. The reserve is based upon factors and trends identified by us at the time financial statements are prepared. Although we use the best information available, future adjustments to the allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond our control. The adequacy of general and specific reserves is based on our continuing evaluation of the pertinent factors underlying the quality of the loan portfolio as well as individual review of certain large balance loans. Loans are considered impaired when, based on current information and events, we determine that it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors involved in determining impairment include, but are not limited to, the financial condition of the borrower, the value of the underlying collateral less selling costs and the current status of the economy. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of collateral if the loan is collateral dependent. We continue to assess the collateral of these impaired loans and update our appraisals on these loans on an annual basis. To the extent the property values continue to decline, there could be additional losses on these impaired loans, which may be material. Subsequent changes in the value of impaired loans are included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported. Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. Loans that are collectively evaluated for impairment include residential real estate and consumer loans and, as appropriate, smaller balance non-homogeneous loans. Larger balance non-homogeneous residential construction and land, commercial real estate, commercial business loans and unsecured loans are individually evaluated for impairment.

Our methodology for assessing the appropriateness of the allowance for loan losses consists of several key elements, which include specific allowances, an allocated formula allowance and an unallocated allowance. Losses on specific loans are provided for when the losses are probable and estimable. General loan loss reserves are established to provide for inherent loan portfolio risks not specifically provided for. The level of general reserves is based on analysis of potential exposures existing in our loan portfolio including evaluation of historical trends, current market conditions and other relevant factors identified by us at the time the financial statements are prepared. The formula allowance is calculated by applying loss factors to outstanding loans, excluding those loans that are subject to individual analysis for specific allowances. Loss factors are based on our historical loss experience adjusted for significant environmental considerations, including the experience of other banking organizations, which in our judgment affect the collectability of the loan portfolio as of the evaluation date. The unallocated allowance is based upon our evaluation of various factors that are not directly measured in the determination of the formula and specific allowances. This methodology may result in actual losses or recoveries differing significantly from the allowance for loan losses in the Consolidated Financial Statements.

While we believe the estimates and assumptions used in our determination of the adequacy of the allowance for loan losses are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of the Banks’ allowance for loan losses is subject to review by bank regulators as part of the routine examination process, which may result in the adjustment of reserves based upon their judgment of information available to them at the time of their examination.

Fair Value Accounting and Measurement: (Note 8)9) 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 ~~appropriate,~~required, our estimate of their fair value. ~~For more information regarding fair value accounting, please refer to Note 8 in the Selected Notes to the Consolidated Financial Statements.~~

Acquired Loans: (~~Note 4)~~Notes 3 and 5) Purchased loans, including loans acquired in business combinations, are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date. Establishing the fair value of acquired loan involves a significant amount of judgment, including determining the credit discount. The credit discount is based upon historical data adjusted for current economic conditions and other factors. If any of these assumptions are inaccurate actual credit losses could vary significantly from the credit discount used to calculate the fair value of the acquired loans. Acquired loans are evaluated upon acquisition and classified as either purchased credit-impaired or purchased non-credit-impaired. Purchased credit-impaired (PCI) loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will

be unable to collect all contractually required payments. The accounting for PCI loans is periodically updated for changes in cash flow expectations, and reflected in interest income over the life of the loans as accretable yield. Any subsequent decreases in expected cash flows attributable to credit deterioration are recognized by recording a provision for loan losses.

For purchased non-credit-impaired loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income over the life of the loans. Any subsequent deterioration in credit quality is recognized by recording a provision for loan losses.

Goodwill: (Note 6)7) Goodwill represents the excess of the purchase ~~considerations~~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 ~~a two-step process. The first step~~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, ~~then~~an impairment loss would be recognized equal to the amount of excess, limited to the amount of total goodwill ~~impairment may be indicated. The second step allocates~~allocated to the reporting ~~units fair value to its assets and liabilities. If the unallocated fair value does not exceed the carrying amount of goodwill then an~~unit. The impairment loss would be recognized as a charge to earnings.

Other Intangible Assets:(Note 6) 7) Other intangible assets consists primarily of core deposit intangibles (CDI), which are amounts recorded in business combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the customer relationships associated with the deposits. Core deposit intangibles are being amortized on an accelerated basis over a weighted average estimated useful life of eight ~~to ten~~ 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.

Other intangibles also include favorable leasehold intangibles (LHI). LHI represents the value assigned to leases assumed in an acquisition in which the lease terms are favorable compared to a market lease at the date of acquisition. LHI is amortized over the underlying lease term and is reviewed at least annually for events or circumstances that could impair the value.

Mortgage Servicing Rights:~~(Note 6)~~ (Note 7) Mortgage servicing rights (MSRs) are recognized as separate assets when rights are acquired through purchase or through sale of loans. Generally, purchased MSRs are capitalized at the cost to acquire the rights. For sales of mortgage loans, the value of the MSR is estimated and capitalized. Fair value is based on market prices for comparable mortgage servicing contracts. The fair value of the MSRs includes an estimate of the life of the underlying loans which is affected by estimated prepayment speeds. The estimate of prepayment speeds is based on current market conditions. Actual market conditions could vary significantly from current conditions which could result in the estimated life of the underlying loans being different which would change the fair value of the MSR. Capitalized MSRs are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.

Real Estate Owned Held for Sale: (Note 5)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~~management. Property values are influenced by current economic and ~~if necessary,~~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 9)10) 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 ~~Utah.~~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.

Comparison of Financial Condition at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018

General: Total assets ~~increased $649.4~~decreased $131.0 million, to ~~$10.44~~$11.74 billion at ~~September 30, 2017,~~March 31, 2019, from ~~$9.79~~$11.87 billion at December 31, ~~2016.~~2018. The ~~increase in total assets reflects the re-leveraging of the balance sheet following our strategy to maintain total assets below $10.0 billion through December 31, 2016. The increase~~decrease was largely the result of ~~increases~~the sale of $149.9 million of multifamily held for sale loans and decreases in the securities ~~and loans which~~portfolio. The proceeds from these decreases were ~~primarily funded by increases in deposits as well as~~used to reduce FHLB advances ~~to a lesser extent.~~and brokered CDs.

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. We offer a wide range of loan products to meet the demands of our customers. Our lending activities are primarily directed toward the origination of real estate and commercial loans. ~~We had a $323.3~~Portfolio loans increased $8.1 million ~~increase in portfolio loans~~ during the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019, primarily reflecting increased commercial real estate, multifamily and commercial business ~~construction, multifamily, one- to four-family and consumer lending partially~~loan balances offset by seasonal and other market factors resulting in decreased agricultural and one-to-four-family construction loan balances. At ~~September 30, 2017,~~March 31, 2019, our loan portfolio totaled ~~$7.77~~$8.69 billion compared to ~~$7.45~~$8.68 billion at December 31, ~~2016~~2018 and ~~$7.40~~$7.56 billion at ~~September 30, 2016.~~March 31, 2018. The growth over the year ago period includes the impact of the acquisition of Skagit during the fourth quarter of 2018 which included $631.7 million of portfolio loans.

The following table sets forth the composition of the Company's loans receivable by type of loan as of the dates indicated (dollars in thousands):


							Percentage Change										Percentage Change
	Sep 30, 2017		Dec 31, 2016		Sep 30, 2016		Prior Yr End		Prior Year		Mar 31, 2019		Dec 31, 2018		Mar 31, 2018		Prior Yr End		Prior Year
Commercial real estate:
Owner occupied	$	1,369,130	$	1,352,999	$	1,340,577	1.2	%	2.1	%	$	1,442,724	$	1,430,097	$	1,278,814	0.9	%	12.8	%
Investment properties	1,993,144		1,986,336		1,918,639		0.3		3.9		2,124,049		2,131,059		1,876,937		(0.3	)	13.2
Multifamily real estate	311,706		248,150		266,883		25.6		16.8		387,142		368,836		321,039		5.0		20.6
Commercial construction	157,041		124,068		135,487		26.6		15.9		181,888		172,410		163,314		5.5		11.4
Multifamily construction	136,532		124,126		105,669		10.0		29.2		183,203		184,630		159,108		(0.8	)	15.1
One- to four-family construction	399,361		375,704		363,586		6.3		9.8		514,468		534,678		434,204		(3.8	)	18.5
Land and land development:
Residential	158,384		170,004		162,029		(6.8	)	(2.2	)	187,660		188,508		167,783		(0.4	)	11.8
Commercial	27,095		29,184		30,556		(7.2	)	(11.3	)	28,928		27,278		24,331		6.0		18.9
Commercial business	1,311,409		1,207,879		1,187,848		8.6		10.4		1,524,298		1,483,614		1,296,691		2.7		17.6
Agricultural business including secured by farmland	339,932		369,156		383,275		(7.9	)	(11.3	)	373,322		404,873		307,243		(7.8	)	21.5
One- to four-family real estate	869,556		813,077		846,899		6.9		2.7		967,581		973,616		833,598		(0.6	)	16.1
Consumer:
Consumer secured by one- to four-family real estate	535,300		493,211		497,643		8.5		7.6		564,872		568,979		522,826		(0.7	)	8.0
Consumer-other	165,859		157,254		159,546		5.5		4.0		212,522		216,017		170,158		(1.6	)	24.9
Total loans receivable	$	7,774,449	$	7,451,148	$	7,398,637	4.3	%	5.1	%	$	8,692,657	$	8,684,595	$	7,556,046	0.1	%	15.0	%

Our commercial real estate loans for both owner-occupied and investment properties totaled ~~$3.36~~$3.57 billion, or ~~43%~~41% of our loan portfolio at ~~September 30, 2017.~~March 31, 2019. In addition, multifamily residential real estate loans totaled ~~$311.7~~$387.1 million and comprised 4%5% of our loan portfolio. Commercial real estate loans increased by ~~$22.9~~$5.6 million during the first ~~nine~~three months of ~~2017, while~~2019 and multifamily real estate loans increased by ~~$63.6~~$18.3 million. Although multifamily real estate loans remain a modest portion of our loan portfolio, originations and sales of multifamily real estate loans have made a significant contribution to our mortgage banking revenue.

We also originate commercial and residential construction, land and land development loans, which totaled ~~$878.4 million,~~$1.10 billion, or ~~11%~~13% of our loan portfolio at ~~September 30, 2017.~~March 31, 2019. Our residential construction loans are a significant component of construction lending. ~~Originations~~Despite the seasonal slowdown in residential construction loan growth, we continue to see demand for residential construction loans ~~have increased in recent years as builders have expanded production and experienced strong sales~~ in many markets where we operate. We ~~have~~ also ~~experienced a meaningful increase in originations of~~originate residential construction loans for owner occupants, although construction balances for these loans are modest as the loans convert to one- to four-family real estate loans upon completion of the homes and are often sold in the secondary market. Residential construction, land and land development balances ~~increased $12.0~~decreased $21.1 million, or 2%3%, to ~~$557.7~~$702.1 million at ~~September 30, 2017~~March 31, 2019 compared to ~~$545.7~~$723.2 million at December 31, ~~2016~~2018 and increased ~~$32.1~~$100.1 million, or 6%17%, compared to ~~$525.6~~$602.0 million at ~~September 30, 2016.~~March 31, 2018. Residential construction, residential land and land development loans represented approximately 7%8% of our total loan portfolio at ~~September 30, 2017.~~March 31, 2019.

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 recent years, our commercial business lending has also included participation in certain syndicated loans, including shared national credits, which totaled ~~$124.6~~$164.6 million at ~~September 30, 2017.~~March 31, 2019. Our commercial and agricultural business loans increased ~~$74.3~~$9.1 million ~~or 5%,~~ to ~~$1.65~~$1.90 billion at ~~September 30, 2017,~~March 31, 2019, compared to ~~$1.58~~$1.89 billion at December 31, ~~2016,~~2018, and increased ~~$80.2~~$293.7 million, or 5%18%, compared to ~~$1.57~~$1.60 billion at ~~September 30, 2016,~~March 31, 2018. The increase in ~~each comparison~~the current quarter primarily ~~reflecting~~reflects growth in commercial business loans offset partially ~~offset~~ by ~~decreased~~seasonal decreases in agricultural loan balances. Commercial and agricultural business loans represented approximately ~~21%~~22% of our portfolio at ~~September 30, 2017.~~March 31, 2019.

Our one- to four-family real estate loan originations have been relatively strong, despite the increases in ~~recent years, as exceptionally low~~ interest rates ~~have supported demand for loans to refinance existing debt as well as loans to finance home purchases.~~during the past year. We are active originators of one- to four-family real estate loans in most communities where we have established offices in Washington, Oregon, California and Idaho. Most of the one- to ~~four-~~

~~family~~four-family real estate 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. At ~~September 30, 2017,~~March 31, 2019, our outstanding balances of one- to four-family real estate loans retained in our portfolio ~~increased $56.5~~decreased $6.0 million, ~~or 7%,~~ to ~~$869.6~~$967.6 million, compared to ~~$813.1~~$973.6 million at December 31, ~~2016,~~2018, and increased ~~$22.7~~$134.0 million, or 3%16%, compared to ~~$846.9~~$833.6 million at ~~September 30, 2016 as a result of an increase in the amount of loans originated for the portfolio compared to loans sold in the secondary market.~~March 31, 2018. One- to four-family real estate loans represented 11% of our loan portfolio at ~~September 30, 2017.~~March 31, 2019.

Our consumer loan activity is primarily directed at meeting demand from our existing deposit customers. At ~~September 30, 2017,~~March 31, 2019, consumer loans, including consumer loans secured by one- to four-family residences, ~~increased $50.7~~decreased $7.6 million to ~~$701.2~~$777.4 million, compared to ~~$650.5~~$785.0 million at December 31, ~~2016,~~2018, and increased ~~$44.0~~$84.4 million compared to ~~$657.2~~$693.0 million at ~~September 30, 2016. Consumer~~March 31, 2018.

The following table shows loan origination (excluding loans ~~increased~~held for sale) activity for the three months ended March 31, 2019 and March 31, 2018 (in thousands):



	Three Months Ended
	Mar 31, 2019		Mar 31, 2018
Commercial real estate	$	94,196	$	65,725
Multifamily real estate	7,617		735
Construction and land	233,494		330,923
Commercial business	125,912		132,987
Agricultural business	32,059		26,574
One-to four- family residential	31,789		17,935
Consumer	63,774		70,533
Total loan originations (excluding loans held for sale)	$	588,841	$	645,412

The origination table above includes loan participations and loan purchases. There were no loan purchases during ~~2017 largely~~the three months ended March 31, 2019. We purchased $1.3 million of loans during the three months ended March 31, 2018 all of which were one-to four-family loans.

Loans held for sale decreased to $45.9 million at March 31, 2019, compared to $171.0 million at December 31, 2018, as ~~a result~~the sales of ~~a successful campaign in~~multifamily held-for-sale loans exceeded origination of multifamily held-for-sale loans during the ~~second quarter~~three months ended March 31, 2019. Origination of loans held for sale decreased to ~~generate additional home equity lines~~$134.7 million for the three months ended March 31, 2019 compared to $222.2 million for the same period last year. Loans held for sale were $141.8 million at March 31, 2018. Loans held for sale at March 31, 2019 included $3.3 million of ~~credit.~~multifamily loans and $42.5 million of one- to four-family loans compared to $116.2 million of multifamily loans and $25.7 million of one- to four-family loans at March 31, 2018.

The following table presents loans by geographic concentration at ~~September 30, 2017,~~March 31, 2019, December 31, ~~2016~~2018 and ~~September 30, 2016 (in~~March 31, 2018 (dollars in thousands):

September 30, 2017 December 31, 2016 September 30, 2016
Amount Percentage Amount Percentage Amount Percentage
Washington $ 3,515,881
45.2 % $ 3,433,617
46.1 % $ 3,415,413
46.2 %
Oregon 1,561,723
20.1
1,505,369
20.2
1,466,845
19.8
California 1,381,572
17.8
1,239,989
16.6
1,204,273
16.3
Idaho 495,041
6.4
495,992
6.7
517,607
7.0
Utah 304,740
3.9
283,890
3.8
292,088
3.9
Other 515,492
6.6
492,291
6.6
502,411
6.8
Total loans receivable $ 7,774,449
100.0 % $ 7,451,148
100.0 % $ 7,398,637
100.0 %

Loans held for sale decreased significantly to $71.9 million at September 30, 2017, compared to $246.4 million at December 31, 2016, due to sales of held-for-sale loans exceeding origination of held-for-sale loans during the first nine months of 2017. Origination of loans held for sale declined to $626.7 million for the nine months ended September 30, 2017 as compared to $753.7 million for the same period last year primarily as a result of decreased originations of one- to four-family loans reflecting reduced refinance activity due to recent interest rate increases. Loans held for sale were $123.1 million at September 30, 2016. Loans held for sale at September 30, 2017 included $47.0 million of multifamily loans and $24.9 million of one- to four-family loans.



	Mar 31, 2019				Dec 31, 2018		Mar 31, 2018		Percentage Change
	Amount		Percentage		Amount		Amount		Prior Yr End		Prior Yr Qtr
Washington	$	4,329,759	49.8	%	$	4,324,588	$	3,490,646	0.1	%	24.0	%
Oregon	1,639,427		18.9		1,636,152		1,580,278		0.2		3.7
California	1,581,654		18.2		1,596,604		1,405,411		(0.9	)	12.5
Idaho	524,705		6.0		521,026		481,972		0.7		8.9
Utah	59,940		0.7		57,318		83,637		4.6		(28.3	)
Other	557,172		6.4		548,907		514,102		1.5		8.4
Total loans receivable	$	8,692,657	100.0	%	$	8,684,595	$	7,556,046	0.1	%	15.0	%

Investment Securities: Our total investment in securities ~~increased $533.9~~decreased $47.7 million to $1.85 billion at March 31, 2019 from December 31, ~~2016 to $1.63 billion at September 30, 2017. Security purchases during the nine-month period exceeded~~2018. Securities sales, paydowns and maturities ~~reflecting~~during the ~~Company's re-leveraged balance sheet following the previously announced strategy to remain below $10 billion in assets through December 31, 2016.~~three-month period exceeded purchases. Purchases were primarily in mortgage-backed or related securities issued by government-sponsored entities. The average effective duration of Banner's securities portfolio was approximately ~~3.6~~3.0 years at ~~September 30, 2017.~~March 31, 2019. Net fair value adjustments to the portfolio of securities held for trading, which ~~are~~were included in net income, were ~~an increase~~a decrease of ~~$389,000~~$58,000 in the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2019. In addition, fair value adjustments for securities designated as available-for-sale reflected an increase of ~~$5.8~~$16.7 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019, which was included net of the associated tax expense of ~~$2.1~~$4.0 million as a component of other comprehensive income and largely occurred as a result of ~~decreased~~increased market interest rates. (See Note 84 of the Selected Notes to the Consolidated Financial Statements in this Form 10-Q.)

Deposits: Deposits, customer retail repurchase agreements and loan repayments are the major sources of our funds for lending and other investment purposes. We compete with other financial institutions and financial intermediaries in attracting deposits and we generally attract deposits within our primary market areas. Increasing core deposits (non-interest-bearing and interest-bearing transaction and savings accounts) is a fundamental element of our business strategy. Much of the focus of our branch ~~expansion over many years, including our recent acquisitions,~~strategy and current marketing efforts have been directed toward attracting additional deposit customer relationships and balances. This effort has been particularly directed towards ~~remixing our deposits away from higher cost certificates of deposit and~~ emphasizing core deposit activity in non-interest-bearing and other transaction and savings accounts. The long-term success of our deposit gathering activities is reflected not only in the growth of core deposit balances, but also in increases in the level of deposit fees, service charges and other payment processing revenues compared to prior periods. Our core deposits balance was also positively impacted by $696.3 million of core deposits acquired in the Skagit acquisition.

The following table sets forth the Company's deposits by type of deposit account as of the dates indicated (dollars in thousands):


							Percentage Change										Percentage Change
	Sep 30, 2017		Dec 31, 2016		Sep 30, 2016		Prior Yr End		Prior Year		Mar 31, 2019		Dec 31, 2018		Mar 31, 2018		Prior Yr End		Prior Year Qtr
Non-interest-bearing	$	3,379,841	$	3,140,451	$	3,190,293	7.6	%	5.9	%	$	3,676,984	$	3,657,817	$	3,383,439	0.5	%	8.7	%
Interest-bearing checking	955,486		914,484		853,594		4.5		11.9		1,174,169		1,191,016		1,043,840		(1.4	)	12.5
Regular savings accounts	1,577,292		1,523,391		1,387,123		3.5		13.7		1,865,852		1,842,581		1,637,814		1.3		13.9
Money market accounts	1,525,657		1,497,755		1,557,951		1.9		(2.1	)	1,495,948		1,465,369		1,459,614		2.1		2.5
Interest-bearing transaction & savings accounts	4,058,435		3,935,630		3,798,668		3.1		6.8		4,535,969		4,498,966		4,141,268		0.8		9.5
Total core deposits											8,212,953		8,156,783		7,524,707		0.7		9.1
Interest-bearing certificates	1,100,574		1,045,333		1,123,011		5.3		(2.0	)	1,163,276		1,320,265		1,018,355		(11.9	)	14.2
Total deposits	$	8,538,850	$	8,121,414	$	8,111,972	5.1	%	5.3	%	$	9,376,229	$	9,477,048	$	8,543,062	(1.1	)%	9.8	%

Total deposits were ~~$8.54~~$9.38 billion at ~~September 30, 2017,~~March 31, 2019, compared to ~~$8.12~~$9.48 billion at December 31, ~~2016~~2018 and ~~$8.11~~$8.54 billion a year ago. The ~~increase~~$100.8 million decrease in total deposits compared to December 31, ~~2016~~ ~~and~~ ~~September 30, 2016~~2018 reflects ~~meaningful organic growth~~a $137.9 million decrease in ~~the total balances and number of client relationships,~~brokered deposits from December 31, 2018, as well as ~~an increase~~to a lesser extent a decline in ~~brokered deposits.~~retail, or non-brokered, certificates of deposit. Non-interest-bearing account balances increased 8%1% to ~~$3.38~~$3.68 billion at ~~September 30, 2017,~~March 31, 2019, compared to ~~$3.14~~$3.66 billion at December 31, ~~2016,~~2018, and increased 6%9% compared to ~~$3.19~~$3.38 billion a year ago. Interest-bearing transaction and savings accounts increased 3%1% to ~~$4.06~~$4.54 billion at ~~September 30, 2017,~~March 31, 2019, compared to ~~$3.94~~$4.50 billion at December 31, ~~2016,~~2018, and increased 7%10% compared to ~~$3.80~~$4.14 billion a year ago. Certificates of deposit ~~increased 5%~~decreased 12% to ~~$1.10~~$1.16 billion at ~~September 30, 2017,~~March 31, 2019, compared to ~~$1.05~~$1.32 billion at December 31, ~~2016 but decreased~~2018 and increased 14% compared to ~~$1.12~~$1.02 billion a year ago. Brokered deposits totaled ~~$171.7~~$239.4 million at ~~September 30, 2017,~~March 31, 2019, compared to ~~$34.1~~$377.3 million at December 31, ~~2016~~2018 and ~~$60.3~~$169.5 million a year ago. Brokered deposits increased during ~~2017~~

2018 in connection with our leveraging strategy as higher yielding investment securities were purchased. Core deposits represented ~~87%~~88% of total deposits at ~~September 30, 2017,~~March 31, 2019, compared to 86% of total deposits ~~a year earlier.~~at December 31, 2018.

The following table presents deposits by geographic concentration at ~~September 30, 2017,~~March 31, 2019, December 31, ~~2016~~2018 and ~~September 30, 2016 (in~~March 31, 2018 (dollars in thousands):


	September 30, 2017				December 31, 2016				September 30, 2016				Mar 31, 2019				Dec 31, 2018		Mar 31, 2018		Percentage Change
	Amount		Percentage		Amount		Percentage		Amount		Percentage		Amount		Percentage		Amount		Amount		Prior Yr End		Prior Yr Qtr
Washington	$	4,654,406	54.6	%	$	4,347,644	53.6	%	$	4,283,522	52.8	%	$	5,604,567	59.8	%	$	5,674,328	$	4,766,646	(1.2	)%	17.6	%
Oregon	1,811,459		21.2		1,708,973		21.0		1,737,754		21.4		1,906,132		20.3		1,891,145		1,868,043		0.8		2.0
California	1,442,727		16.9		1,469,748		18.1		1,491,903		18.4		1,402,213		15.0		1,434,033		1,454,421		(2.2	)	(3.6	)
Idaho	465,104		5.4		447,019		5.5		435,090		5.4		463,317		4.9		477,542		453,952		(3.0	)	2.1
Utah	165,154		1.9		148,030		1.8		163,703		2.0
Total deposits	$	8,538,850	100.0	%	$	8,121,414	100.0	%	$	8,111,972	100.0	%	$	9,376,229	100.0	%	$	9,477,048	$	8,543,062	(1.1	)%	9.8	%

Borrowings: FHLB advances ~~increased~~decreased to ~~$263.3~~$418.0 million at ~~September 30, 2017~~March 31, 2019 from ~~$54.2~~$540.2 million at December 31, ~~2016~~2018 as ~~FHLB advances~~proceeds from the sale of multifamily held-for-sale loans were used to ~~fund a portion of the growth in the loan and securities portfolios.~~pay down FHLB advances. Other borrowings, consisting of retail repurchase agreements primarily related to customer cash management accounts, ~~decreased $2.0~~increased $2.7 million, or 2%, to ~~$103.7~~$121.7 million at ~~September 30, 2017,~~March 31, 2019, compared to ~~$105.7~~$119.0 million at December 31, ~~2016.~~2018. No additional junior subordinated debentures were issued or matured during the ~~nine~~three months ended ~~September 30, 2017;~~March 31, 2019; however, the estimated fair value of these instruments ~~increased~~decreased by ~~$2.1 million.~~$174,000, reflecting a decrease in LIBOR. Junior subordinated debentures totaled ~~$97.3~~$113.9 million at ~~September 30, 2017~~March 31, 2019 compared to ~~$95.2~~$114.1 million at December 31, ~~2016.~~2018.

Shareholders' Equity: Total shareholders' equity increased ~~$21.3~~$32.6 million to ~~$1.33~~$1.51 billion at ~~September 30, 2017~~March 31, 2019 compared to ~~$1.31~~$1.48 billion at December 31, ~~2016.~~2018. The increase in shareholders' equity primarily reflects ~~the~~$33.3 million of year-to-date net income, ~~of $74.3~~a $12.8 million ~~and a $3.6 million improvement~~increase in accumulated other comprehensive income representing unrealized gains ~~net of tax,~~ on securities available-for-sale ~~reduced~~as well as to a lesser extent increased fair value on junior subordinated debentures, both net of tax. These increases were partially offset by the accrual of ~~$58.2~~$14.5 million of cash dividends to common ~~shareholders, which included three regular $0.25 per share quarterly dividends as well as a $1.00 per share special dividend.~~shareholders. During the ~~nine~~three months ended ~~September 30, 2017, Banner repurchased 25,000 shares of common stock as part of the publicly announced repurchase authorization, 38,160~~March 31, 2019, 25,642 shares of restricted stock were forfeited and ~~22,553~~4,384 shares were surrendered by employees to satisfy tax withholding obligations upon the vesting of restricted stock grants. (See Part II, Item 2, "Unregistered Sales of Equity Securities and Use of Proceeds" in this Form 10-Q.) Tangible common shareholders' equity, which excludes goodwill and other intangible assets, increased ~~$26.2~~$34.9 million to ~~$1.06~~$1.14 billion, or ~~10.39%~~10.04% of tangible assets at ~~September 30, 2017,~~March 31, 2019, compared to ~~$1.03~~$1.11 billion, or ~~10.83%~~9.62% of tangible assets at December 31, ~~2016.~~2018.

Comparison of Results of Operations for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018

For the quarter ended ~~September 30, 2017~~March 31, 2019, our net income was ~~$25.1~~$33.3 million, or ~~$0.76~~$0.95 per diluted ~~share. This compares~~share, compared to ~~net income of~~ $~~23.9~~28.8 million, or $~~0.70~~0.89 per diluted share, for the quarter ended ~~September 30, 2016~~March 31, 2018. ~~For the nine months ended September 30, 2017, our net income~~

~~was $74.3 million, or $2.25 per diluted share, compared to net income of $62.6 million, or $1.83 per diluted share for the same period a year earlier.~~ Our net income for the quarter ~~and nine months~~ ended ~~September 30, 2016~~March 31, 2019 was ~~negatively~~positively impacted by ~~$1.7~~growth in interest-earning assets and improved net interest margin, partially offset by increased non-interest expense including $2.1 million ~~and $10.9 million, respectively,~~ of acquisition-related ~~expenses, which net of related tax benefits reduced earnings per diluted share $0.03 and $0.21, respectively, for those periods.~~expenses.

Growth in average interest-earning assets, coupled with a ~~strong~~slightly higher net interest margin, produced increased net interest ~~income in both periods.~~income. This resulted in increases in revenues ~~from core operations~~ in the ~~quarter and nine~~three months ended ~~September 30, 2017~~March 31, 2019 compared to the same ~~periods~~period a year earlier. The results for the current quarter included the operations acquired in the Skagit acquisition which closed in the fourth quarter of 2018. Credit costs remained low in ~~both periods,~~the first quarter, while non-interest expenses ~~excluding acquisition-related expenses,~~ increased ~~meaningfully~~ compared to ~~both periods~~ a year ago. Net income for the current year was ~~solid,~~strong, representing further progress on our strategic priorities and initiatives, and produced an annualized return on average assets of ~~0.97%~~1.15% for the current ~~quarter and 0.98% for the nine months ended September 30, 2017.~~quarter.

Our earnings from core operations, which excludes net gains or losses on sales of securities, changes in the valuation of financial instruments carried at fair value, acquisition-related ~~costs,~~expenses and related tax expenses or benefits, were ~~$25.2~~$35.0 million, or ~~$0.76~~$0.99 per diluted share, for the quarter ended ~~September 30, 2017,~~March 31, 2019, compared to ~~$25.1~~$26.3 million, or ~~$0.74~~$0.81 per diluted share, for the quarter ended September 30, 2016. For the nine months ended September 30, 2017, our earnings from core operations was $75.3 million, or $2.28 per diluted share, compared with $70.2 million, or $2.06 per diluted share, for the same period a year earlier.March 31, 2018.

Net Interest Income. Net interest income increased by ~~$6.5~~$16.7 million, or 7%17%, to ~~$100.2~~$116.1 million for the quarter ended ~~September 30, 2017,~~March 31, 2019, compared to ~~$93.7~~$99.4 million for the same quarter one year earlier, as an increase of ~~$441.9 million~~$1.51 billion in the average balance of interest-earning assets produced strong growth for this key source of revenue. The growth in the average balance of interest-earning assets reflects organic growth as well as the Skagit acquisition. Net interest margin was enhanced by the amortization of acquisition accounting discounts on purchased loans received in the acquisitions, which is accreted into loan interest ~~income, as well as by net premiums on non-market-rate certificates of deposit assumed, which are amortized as a reduction to deposit interest expense.~~income. The net interest margin of ~~4.22%~~4.37% for the quarter ended ~~September 30, 2017~~March 31, 2019 was enhanced by 10seven basis points as a result of acquisition accounting ~~adjustments, primarily loan discount accretion.~~adjustments. This compares to a net interest margin of ~~4.15%~~4.35% for the quarter ended ~~September 30, 2016,~~March 31, 2018, which included 14eight basis points from acquisition accounting adjustments. The increase in net interest margin compared to a year earlier primarily reflects both higher average loan and security ~~yields.~~

~~Net interest income before provision for loan losses for~~balances and yields partially offset by increases in both the ~~nine months ended September 30, 2017 increased by $16.9 million, or 6.1%, to $294.8 million compared to $277.9 million for the same period one year earlier, as a result~~average balances and costs of a $309.6 million increase in average interest-earning assets and enhanced by an 11 basis point increase in the net interest margin. The net interest margin increased to 4.27% for the nine months ended September 30, 2017 compared to 4.16% for the same period in the prior year. The net interest margin for the nine months ended September 30, 2017 included 12 basis points of accretion acquisition accounting adjustments, compared to 15 basis points from acquisition accounting adjustments for the same period a year ago.interest-bearing liabilities.

Interest Income. Interest income for the quarter ended ~~September 30, 2017~~March 31, 2019 was ~~$105.3~~$130.0 million, compared to ~~$97.8~~$104.8 million for the same quarter in the prior year, an increase of ~~$7.4~~$25.2 million, or 8%24%. The increase in interest income occurred as a result of ~~an increase~~increases in both the average

balances and yields on ~~interest-earning assets, in particular~~ loans and mortgage-backed securities. The average balance of interest-earning assets was ~~$9.42~~$10.77 billion for the quarter ended ~~September 30, 2017,~~March 31, 2019, compared to ~~$8.98~~$9.26 billion for the same period a year earlier. The average yield on ~~average~~ interest-earning assets was ~~4.43%~~4.89% for quarter ended ~~September 30, 2017,~~March 31, 2019, compared to ~~4.34%~~4.59% for the same quarter one year earlier. The increase in yield between periods reflects a 1033 basis point increase in the average yield on loans as well as a 2529 basis point increase in the average yield on investment securities. Average loans receivable for the quarter ended ~~September 30, 2017~~March 31, 2019 increased ~~$266.3 million,~~$1.16 billion, or 4%15%, to ~~$7.75~~$8.82 billion, compared to ~~$7.48~~$7.66 billion for the same quarter in the prior year. Interest income on loans increased by ~~$5.4~~$21.4 million, or 6%23%, to ~~$95.2~~$115.5 million for the current quarter from ~~$89.8~~$94.0 million for the quarter ended ~~September 30, 2016,~~March 31, 2018, reflecting the impact of the previously mentioned increases in average loan balances and ~~in average yields on loans.~~yields. The increase in average loan yields reflects the impact of higher Prime and ~~Libor~~LIBOR rates over the last ~~year as well as changes in the loan portfolio composition.~~year. The acquisition accounting loan discount accretion and the related balance sheet impact added 12nine basis points to the current quarter loan yield, compared to 1510 basis points for the same quarter one year earlier.

The combined average balance of mortgage-backed securities, other investment securities, daily interest-bearing deposits and FHLB stock (total investment securities or combined portfolio) increased to ~~$1.67~~$1.95 billion for the quarter ended ~~September 30, 2017~~March 31, 2019 (excluding the effect of fair value adjustments), compared to ~~$1.50~~$1.60 billion for the quarter ended ~~September 30, 2016;~~March 31, 2018; and the interest and dividend income from those investments increased by ~~$2.0~~$3.7 million compared to the same quarter in the prior year. The average yield on the combined portfolio increased to ~~2.39%~~3.02% for the quarter ended ~~September 30, 2017,~~March 31, 2019, from ~~2.14%~~2.73% for the same quarter one year earlier due ~~to security purchases during 2017 having~~ higher yields ~~than~~on the securities purchased during 2019 compared to the existing portfolio. ~~The increase in security purchases early in 2017 occurred in connection with our re-leveraging strategy.~~

Interest income for the nine months ended September 30, 2017 was $308.8 million, compared to $290.5 million for the same period in the prior year, an increase of $18.3 million, or 6%. As with the quarterly results, the year-to-date results reflect a $309.6 million, or 3%, increase in the average balance of interest-earning assets as well as a 12 basis point increase in the yield on interest-earning assets.

Interest Expense. Interest expense for the quarter ended ~~September 30, 2017~~March 31, 2019 was ~~$5.1~~$13.9 million, compared to ~~$4.1~~$5.4 million for the same quarter in the prior year. The interest expense increase between periods reflects a ~~$440.9 million,~~$1.42 billion, or 5%16%, increase in the average balance of funding liabilities and a ~~four~~31 basis point increase in the average cost of all funding liabilities.

Interest expense for the nine months ended September 30, 2017 was $14.0 million, compared to $12.6 million for the same period in the prior year. As with the quarterly results, the nine-month results reflect a $314.5 million, or 4%, increase in the average balance of funding liabilities and a one basis point increase in the average cost of all funding liabilities.

Deposit interest expense increased ~~$405,000,~~$5.3 million, or ~~15%~~157%, to ~~$3.2~~$8.6 million for the quarter ended ~~September 30, 2017,~~March 31, 2019, compared to ~~$2.8~~$3.4 million for the same quarter in the prior year, primarily as a result of increases in both the average balance and the cost of interest-bearing deposits. Average deposit balances increased to ~~$8.49~~$9.36 billion for the quarter ended ~~September 30, 2017,~~March 31, 2019, from ~~$8.07~~$8.33 billion for the quarter ended ~~September 30, 2016,~~March 31, 2018, while the average rate paid on ~~deposit balances~~total deposits increased to ~~0.15%~~0.37% in the ~~third~~first quarter of ~~2017~~2019 from ~~0.14%~~0.16% for the quarter ended ~~September 30, 2016,~~March 31, 2018, primarily reflecting ~~primarily the increase~~increases in the cost of certificates of deposits as well as increases in the costs of money market and savings accounts partially offset by the increase in non-interest-bearing deposits. Deposit interest expense increased $661,000, or 8%, to $9.2 million for the nine months ended September 30, 2017, compared to $8.5 million for the same period in the prior year. Average deposit balances increased to $8.36 billion for the nine months ended September 30, 2017, from $8.01 billion for the nine months ended September 30, 2016, while the average rate paid on deposit balances increased to 0.15% in the nine months ended September 30, 2017 from 0.14% in the nine months ended September 30, 2016. The acquisition accounting amortization of deposit premiums reduced the average rate paid on deposit balances by one basis point for the quarter ended September 30, 2017 and by one basis point for the quarter ended September 30, 2016. The cost of interest-bearing deposits increased by ~~two~~34 basis points to ~~0.24%~~0.61% for the quarter ended ~~September 30, 2017~~March 31, 2019 compared to ~~0.22%~~0.27% in the same quarter a year earlier. Deposit costs are significantly affected by changes in the level of market interest rates; however, changes in the average rate paid for interest-bearing deposits frequently tend to lag changes in market interest rates, ~~and were not meaningfully impacted by~~although the increase in short-term rates following the changes in the Fed Funds target rate over the last year ~~although these did contribute~~contributed to the ~~two basis point~~ increase in the cost of ~~deposits.~~interest-bearing deposits between the periods.

Average total borrowings were ~~$422.1~~$792.5 million for the quarter ended ~~September 30, 2017,~~March 31, 2019, compared to ~~$403.4~~$396.9 million for the same quarter one year earlier and the average rate paid on total borrowings for the quarter ended ~~September 30, 2017~~March 31, 2019 increased to ~~1.77%~~2.69% from ~~1.34%~~2.13% for the same quarter one year earlier. The increase in the average total borrowings balance ~~from~~for the quarter ended ~~September 30, 2017~~March 31, 2019 from the same period a year earlier was primarily due to a ~~$13.4~~$378.7 million increase in average FHLB advances. Interest expense on total borrowings increased to ~~$1.9~~$5.2 million for the quarter ended ~~September 30, 2017~~March 31, 2019 from ~~$1.4~~$2.1 million for the quarter ended September 30, 2016. Average total borrowings were $387.2 million for the nine months ended September 30, 2017, compared to $427.3 million for the same period one year earlier, while the average rate paid on total borrowings for the nine months ended September 30, 2017 increased to 1.68% from 1.27% for the same period in 2016 reflecting three changes to the Fed Funds target rate over the last year. The decrease in the average balance was due to a $45.1 million decrease in average FHLB advances, slightly offset by a $5.0 million increase in average other borrowings, which reflects our funding a larger portion of the balance sheet with deposits.March 31, 2018.

Analysis of Net Interest Spread. The following tables present for the periods indicated our condensed average balance sheet information, together with interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities with additional comparative data on our operating performance (dollars in thousands):


	Three Months Ended September 30, 2017						Three Months Ended September 30, 2016						Three Months Ended March 31, 2019						Three Months Ended March 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⁾		Average Balance		Interest and Dividends		Yield/ Cost ⁽³⁾
Interest-earning assets:
Held for sale loans													$	98,005	$	1,121	4.64	%	$	58,669	$	681	4.71	%
Mortgage loans	$	6,086,554	$	75,020	4.89	%	$	5,843,381	$	70,223	4.78	%	6,833,933		88,602		5.26		6,006,530		73,665		4.97
Commercial/agricultural loans	1,520,946		17,992		4.69		1,495,611		17,373		4.62		1,703,503		22,812		5.43		1,456,303		17,423		4.85
Consumer and other loans	140,758		2,209		6.23		142,977		2,209		6.15		183,451		2,920		6.46		140,627		2,253		6.50
Total loans ⁽¹⁾	7,748,258		95,221		4.88		7,481,969		89,805		4.78		8,818,892		115,455		5.31		7,662,129		94,022		4.98
Mortgage-backed securities	1,129,256		6,644		2.33		920,560		4,803		2.08		1,392,118		10,507		3.06		1,057,878		7,331		2.81
Other securities	473,808		3,192		2.67		472,159		3,050		2.57		484,134		3,479		2.91		462,947		3,090		2.71
Interest-bearing deposits with banks	51,607		159		1.22		86,868		98		0.45		44,757		289		2.62		64,512		231		1.45
FHLB stock	16,961		62		1.45		16,413		93		2.25		31,761		266		3.40		16,549		146		3.58
Total investment securities	1,671,632		10,057		2.39		1,496,000		8,044		2.14		1,952,770		14,541		3.02		1,601,886		10,798		2.73
Total interest-earning assets	9,419,890		105,278		4.43		8,977,969		97,849		4.34		10,771,662		129,996		4.89		9,264,015		104,820		4.59
Non-interest-earning assets	888,388						913,991						1,031,591						805,503
Total assets	$	10,308,278					$	9,891,960					$	11,803,253					$	10,069,518
Deposits:
Interest-bearing checking accounts	$	946,585	218		0.09		$	837,930	188		0.09		$	1,153,949	475		0.17		$	1,003,929	246		0.10
Savings accounts	1,557,475		538		0.14		1,371,911		449		0.13		1,854,123		1,920		0.42		1,601,671		627		0.16
Money market accounts	1,534,867		653		0.17		1,564,906		749		0.19		1,490,326		2,251		0.61		1,442,685		666		0.19
Certificates of deposit	1,151,725		1,780		0.61		1,173,630		1,398		0.47		1,253,613		3,997		1.29		998,738		1,819		0.74
Total interest-bearing deposits	5,190,652		3,189		0.24		4,948,377		2,784		0.22		5,752,011		8,643		0.61		5,047,023		3,358		0.27
Non-interest-bearing deposits	3,300,185		—		—		3,120,279		—		—		3,605,922		—		—		3,282,686		—		—
Total deposits	8,490,837		3,189		0.15		8,068,656		2,784		0.14		9,357,933		8,643		0.37		8,329,709		3,358		0.16
Other interest-bearing liabilities:
FHLB advances	165,586		569		1.36		152,198		256		0.67		534,238		3,476		2.64		155,540		677		1.77
Other borrowings	116,297		84		0.29		111,016		82		0.29		118,008		60		0.21		101,111		70		0.28
Junior subordinated debentures	140,212		1,226		3.47		140,212		1,019		2.89		140,212		1,713		4.95		140,212		1,342		3.88
Total borrowings	422,095		1,879		1.77		403,426		1,357		1.34		792,458		5,249		2.69		396,863		2,089		2.13
Total funding liabilities	8,912,932		5,068		0.23		8,472,082		4,141		0.19		10,150,391		13,892		0.56		8,726,572		5,447		0.25
Other non-interest-bearing liabilities ⁽²⁾	67,918						68,566						151,937						65,978
Total liabilities	8,980,850						8,540,648						10,302,328						8,792,550
Shareholders’ equity	1,327,428						1,351,312						1,500,925						1,276,968
Total liabilities and shareholders’ equity	$	10,308,278					$	9,891,960					$	11,803,253					$	10,069,518
Net interest income/rate spread			$	100,210	4.20	%			$	93,708	4.15	%			$	116,104	4.33	%			$	99,373	4.34	%
Net interest margin					4.22	%					4.15	%					4.37	%					4.35	%
Additional Key Financial Ratios:
Return on average assets					0.97	%					0.96	%					1.15	%					1.16	%
Return on average equity					7.49						7.02						9.01						9.14
Average equity / average assets					12.88						13.66						12.72						12.68
Average interest-earning assets / average interest-bearing liabilities					167.83						167.76						164.59						170.17
Average interest-earning assets / average funding liabilities					105.69						105.97						106.12						106.16
Non-interest income / average assets					0.78						0.95						0.62						0.86
Non-interest expense / average assets					3.18						3.18						3.09						3.29
Efficiency ratio ⁽⁴⁾					68.51						67.47						67.06						67.67
Adjusted efficiency ratio ⁽⁵⁾					66.26						63.61						63.32						67.42


⁽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 FHLB advances and junior subordinated debentures.


⁽³⁾	Yields and costs have not been adjusted for the effect of tax-exempt interest.


⁽⁴⁾	Non-interest expense divided by the total of net interest income (before provision for loan losses) and non-interest income.

⁽⁵⁾

Adjusted non-interest expense divided by ~~adjusted revenue. Adjusted~~ revenue ~~excludes net gain (loss) on sale of securities and fair value adjustments. Adjusted non-interest expense excludes acquisition related costs, amortization of CDI, net gain (loss)~~ from ~~OREO operations, and Washington B&O taxes.~~core operations. These represent non-GAAP financial measures. See the non-GAAP reconciliation tables above under ~~Executive~~"Executive Overview—Non-GAAP Financial Measures."

Nine months ended September 30, 2017 Nine Months Ended September 30, 2016

Average
Balance
Interest and Dividends
Yield/
Cost ⁽³⁾

Average
Balance
Interest and Dividends
Yield/
Cost ⁽³⁾
Interest-earning assets:
Mortgage loans $ 6,059,476
$ 222,028
4.90 % $ 5,755,988
$ 207,881
4.82 %
Commercial/agricultural loans 1,496,549
52,717
4.71
1,490,757
51,213
4.59
Consumer and other loans 139,181
6,559
6.30
141,570
6,603
6.23
Total loans ⁽¹⁾
7,695,206
281,304
4.89
7,388,315
265,697
4.80
Mortgage-backed securities 1,013,913
17,529
2.31
976,267
15,467
2.12
Other securities 466,572
9,420
2.70
450,142
8,752
2.60
Interest-bearing deposits with banks 46,022
392
1.14
95,406
300
0.42
FHLB stock 15,666
164
1.40
17,614
254
1.93
Total investment securities 1,542,173
27,505
2.38
1,539,429
24,773
2.15
Total interest-earning assets 9,237,379
308,809
4.47
8,927,744
290,470
4.35
Non-interest-earning assets 902,435
903,957

Total assets $ 10,139,814
$ 9,831,701

Deposits:
Interest-bearing checking accounts $ 923,757
627
0.09
$ 853,818
570
0.09
Savings accounts 1,556,075
1,588
0.14
1,336,259
1,303
0.13
Money market accounts 1,530,675
1,994
0.17
1,587,500
2,421
0.20
Certificates of deposit 1,147,387
4,953
0.58
1,248,781
4,207
0.45
Total interest-bearing deposits 5,157,894
9,162
0.24
5,026,358
8,501
0.23
Non-interest-bearing deposits 3,203,033
—
—
2,980,027
—
—
Total deposits 8,360,927
9,162
0.15
8,006,385
8,501
0.14
Other interest-bearing liabilities:
FHLB advances 133,365
1,142
1.14
178,468
874
0.65
Other borrowings 113,664
241
0.28
108,632
234
0.29
Junior subordinated debentures 140,212
3,494
3.33
140,212
2,962
2.82
Total borrowings 387,241
4,877
1.68
427,312
4,070
1.27
Total funding liabilities 8,748,168
14,039
0.21
8,433,697
12,571
0.20
Other non-interest-bearing liabilities ⁽²⁾
60,895
64,825

Total liabilities 8,809,063
8,498,522

Shareholders’ equity 1,330,751
1,333,179

Total liabilities and shareholders’ equity $ 10,139,814
$ 9,831,701

Net interest income/rate spread $ 294,770
4.26 % $ 277,899
4.15 %
Net interest margin 4.27 % 4.16 %
Additional Key Financial Ratios:
Return on average assets 0.98 % 0.85 %
Return on average equity 7.47
6.27
Average equity / average assets 13.12
13.56
Average interest-earning assets / average interest-bearing liabilities 166.59
163.70
Average interest-earning assets / average funding liabilities 105.59
105.86
Non-interest income / average assets 0.84
0.87
Non-interest expense / average assets 3.20
3.30
Efficiency ratio ⁽⁴⁾
67.68
71.08
Adjusted efficiency ratio ⁽⁵⁾
65.84
65.23



⁽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 FHLB advances and junior subordinated debentures.~~


⁽³⁾	~~Yields and costs have not been adjusted for the effect of tax-exempt interest.~~


⁽⁴⁾	~~Non-interest expense divided by the total of net interest income (before provision for loan losses) and non-interest income.~~

⁽⁵⁾

Adjusted non-interest expense divided by adjusted revenue. Adjusted revenue excludes net gain (loss) on sale of securities and fair value adjustments. Adjusted non-interest expense excludes acquisition related costs, amortization of CDI, net gain (loss) from OREO operations, and Washington B&O taxes. These represent non-GAAP financial measures. See the non-GAAP reconciliation tables above under Executive Overview—Non-GAAP Financial Measures.

Provision and Allowance for Loan Losses.

The provision for loan losses reflects the amount required to maintain the allowance for loan losses at an appropriate level based upon management’s evaluation of the adequacy of general and specific loss reserves, trends in delinquencies and net charge-offs and current economic conditions. During the ~~quarter and nine~~three months ended ~~September 30, 2017,~~March 31, 2019, we recorded a provision for loans losses of $2.0 million, ~~and $6.0 million, respectively, primarily as a result of loan growth and the renewal of acquired loans out of the discounted loan portfolios,~~ compared to a$2.5 million during the fourth quarter of 2018, and $2.0 million ~~and~~during the same quarter a ~~$4.0 million loan loss provision recorded in the third quarter and nine months of 2016, respectively.~~year ago. We continue to maintain an ~~appropriately significant~~appropriate allowance for loan losses at ~~September 30, 2017,~~March 31, 2019, reflecting growth in the related portfolio and current economic conditions.

In accordance with acquisition accounting, loans acquired from acquisitions were recorded at their estimated fair value, which resulted in a net discount to the loans contractual amounts, of which a portion reflects a discount for possible credit losses. Credit discounts are included in the determination of fair value and as a result no allowance for loan and lease losses is recorded for acquired loans at the acquisition ~~date. Although~~date, although the discount recorded on the acquired loans is not reflected in the allowance for loan losses, or related allowance coverage ~~ratios, we believe it should be considered when comparing the current ratios to similar ratios in periods prior to the recent acquisitions.~~ratios. The discount on acquired loans was ~~$23.4~~$24.2 million at ~~September 30, 2017~~March 31, 2019 compared to ~~$25.8 million at June 30, 2017, $31.1~~$25.7 million at December 31, ~~2016~~2018 and ~~$34.9~~$19.4 million at ~~September 30, 2016.~~March 31, 2018.

Net loan charge-offs were ~~$1.5~~$1.2 million for the quarter ended ~~September 30, 2017~~March 31, 2019 compared to net recoveries of ~~$902,000~~$1.2 million for the same quarter in the prior year. ~~For the first nine months of 2017 we recorded net charge offs of $2.9 million compared to net recoveries of $2.2 million in 2016.~~ The allowance for loan losses was ~~$89.1~~$97.3 million at ~~September 30, 2017~~March 31, 2019 compared to ~~$86.0~~$96.5 million at December 31, ~~2016~~2018 and ~~$84.2~~$92.2 million at ~~September 30, 2016.~~March 31, 2018. Included in our allowance at ~~September 30, 2017~~March 31, 2019 was an unallocated portion of ~~$6.0~~$7.5 million, which is based upon our evaluation of various factors that are not directly measured in the determination of the formula and specific allowances. The allowance for loan losses as a percentage of total loans (loans receivable excluding allowance for loan losses) was ~~1.15%~~1.12% at ~~September 30, 2017,~~March 31, 2019, compared to ~~1.15%~~1.11% at December 31, ~~2016~~2018 and ~~1.14%~~1.22% at ~~September 30, 2016.~~ March 31, 2018.

We believe that the allowance for loan losses as of ~~September 30, 2017~~March 31, 2019 was adequate to absorb the known and inherent risks of loss in the loan portfolio at that date. We believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, although there can be no assurance that these estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of the allowance for loan losses is subject to review by bank regulators as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of information available to them at the time of their examination.

Non-interest Income. The following table presents the key components of non-interest income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 (dollars in thousands):


	Three months ended September 30,											Nine months ended September 30,											Three months ended March 31,
	2017			2016			Change Amount			Change Percent		2017			2016			Change Amount			Change Percent		2019		2018		Change Amount			Change Percent
Deposit fees and other service charges	$	13,316		$	12,927		$	389		3.0	%	$	38,739		$	36,957		$	1,782		4.8	%	$	12,618	$	11,296	$	1,322		11.7	%
Mortgage banking operations	4,498			8,141			(3,643		)	(44.7	)	15,854			20,409			(4,555		)	(22.3	)	3,415		4,864		(1,449		)	(29.8	)
Bank owned life insurance	1,043			1,333			(290		)	(21.8	)	3,599			3,646			(47		)	(1.3	)	1,276		853		423			49.6
Miscellaneous	1,705			1,344			361			26.9		7,062			3,936			3,126			79.4		804		1,037		(233		)	(22.5	)
	20,562			23,745			(3,183		)	(13.4	)	65,254			64,948			306			0.5		18,113		18,050		63			0.3
Net gain (loss) on sale of securities	270			891			(621		)	(69.7	)	230			531			(301		)	(56.7	)
Net gain on sale of securities																							1		4		(3		)	(75.0	)
Net change in valuation of financial instruments carried at fair value	(493		)	(1,124		)	631			(56.1	)	(1,831		)	(1,472		)	(359		)	24.4		11		3,308		(3,297		)	(99.7	)
Total non-interest income	$	20,339		$	23,512		$	(3,173	)	(13.5	)%	$	63,653		$	64,007		$	(354	)	(0.6	)%	$	18,125	$	21,362	$	(3,237	)	(15.2	)%

Non-interest income ~~which includes changes in the valuation of financial instruments carried at fair value, net gain or loss on sale of securities, and non-interest revenues from core operations,~~ was ~~$20.3~~$18.1 million for the quarter ended ~~September 30, 2017,~~March 31, 2019, compared to ~~$23.5~~$21.4 million for the same quarter ~~in the prior year, and was $63.7 million for the nine months ended September 30, 2017, compared to $64.0 million for the same period~~ in the prior year. Our non-interest income for the quarter ended ~~September 30, 2017~~March 31, 2019 included a ~~$493,000~~$11,000 net ~~loss~~gain for fair value adjustments

and a ~~$270,000~~ net gain of $1,000 on sale of securities. ~~By contrast, for~~For the quarter ended ~~September 30, 2016,~~March 31, 2018, fair value adjustments resulted in a net ~~loss~~gain of ~~$1.1~~$3.3 million and we had a net gain of ~~$891,000~~$4,000 on sale of securities. ~~Our non-interest income for the nine months ended September 30, 2017 included a $1.8 million~~The net ~~loss~~gain for fair value adjustments ~~and a $230,000 net gain on sale~~recognized for the quarter ended March 31, 2018 was due to an increase in the value of ~~securities. During the nine months ended September 30, 2016, fair value adjustments resulted~~certain securities in ~~a net loss of $1.5 million and we recognized a $531,000 gain on sale of securities.~~our held-for-trading portfolio. For a more detailed discussion of our fair value adjustments, please refer to Note 89 in the Selected Notes to the Consolidated Financial Statements in this Form 10-Q.

Excluding the fair value adjustments and net gain on sale of securities, non-interest income from core operations decreased by $3.2 million, or 13%, to $20.6 million for the quarter ended September 30, 2017, compared to $23.7 million for the quarter ended September 30, 2016, and increased $306,000, to $65.3 million for the nine months ended September 30, 2017, compared to $64.9 million for the nine months ended September 30, 2016. Deposit fees and other service charges increased by ~~$389,000,~~$1.3 million, or 3%12%, for the quarter ended ~~September 30, 2017~~ ~~and~~ ~~$1.8 million,~~ or 5%, ~~for the nine months ended September 30, 2017~~March 31, 2019 compared to the same ~~periods~~period a year ago reflecting growth in the number of deposit accounts resulting in increased transaction ~~activity. Miscellaneous income for~~activity, including deposits acquired in the nine months ended September 30, 2017 included a one-time gain of $2.5 million on the sale of a single loan that had been acquired a number of years ago as a partial settlement on a non-performing credit relationship and was carried at a significant discount to its contractual amount and eventual sales price.Skagit acquisition. Mortgage banking revenues, including gains on one- to four-family and multifamily loan sales and loan servicing fees, decreased ~~$3.6~~$1.4 million for the quarter ended ~~September 30, 2017 and decreased $4.6 million for the nine months ended September 30, 2017~~March 31, 2019 compared to the same ~~periods~~period a year ago. Gains on multifamily loans decreased $818,000 for the quarter ended March 31, 2019 compared to the same period a year ago, reflecting lower originations of held-for-sale multifamily loans as well as lower spreads on loans sold. Sales of one- to four-family loans in the current quarter resulted in gains of ~~$3.7~~$2.9 million compared to ~~$6.4~~ $4.2

million in the same period a year ~~ago, and $12.0 million for the nine months ended September 30, 2017 compared to $15.9 million for the same period a year~~ ago. ~~The decrease was due to a decline in spreads on one- to four-family loan originations and sales during the current quarter.~~ Home purchase activity accounted for ~~77%~~80% of ~~third~~first quarter 2019 one- to four-family mortgage banking loan originations as compared to ~~65%~~72% for the ~~third~~first quarter last year. ~~Sales of multifamily loans in~~Bank owned life insurance income increased $423,000 for the ~~current~~ quarter ~~resulted in gains of $268,000~~ended March 31, 2019 compared to ~~$1.4 million of gains in~~ the ~~same~~first quarter alast year ~~ago, and $2.1 million for the nine months ended September 30, 2017 compared to $3.1 million for the same period a year ago. The decline in multifamily gain on sale income was~~ due to ~~a combination~~$338,000 of declining market spreads on sold loans in the current quarter and the transition to fair value accounting in connection with a forward sales hedging program for multifamily held for sale loans in second quarter of 2017.death benefit income.

Non-interest Expense. The following table represents key elements of non-interest expense for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 (dollars in thousands):


	For the Three Months Ended September 30,											For the Nine Months Ended September 30,											For the Three Months Ended March 31,
	2017			2016			Change Amount			Change Percent		2017			2016			Change Amount			Change Percent		2019			2018			Change Amount			Change Percent
Salaries and employee benefits	$	48,931		$	44,758		$	4,173		9.3	%	$	144,014		$	136,497		$	7,517		5.5	%	$	54,640		$	50,067		$	4,573		9.1	%
Less capitalized loan origination costs	(4,331		)	(4,953		)	622			(12.6	)	(13,245		)	(14,110		)	865			(6.1	)	(4,849		)	(4,011		)	(838		)	20.9
Occupancy and equipment	11,737			10,979			758			6.9		35,778			32,419			3,359			10.4		13,766			11,766			2,000			17.0
Information/computer data services	4,420			4,836			(416		)	(8.6	)	12,513			14,607			(2,094		)	(14.3	)	5,326			4,381			945			21.6
Payment and card processing expenses	5,839			5,878			(39		)	(0.7	)	16,651			16,164			487			3.0		3,984			3,700			284			7.7
Professional services	3,349			2,258			1,091			48.3		12,233			5,736			6,497			113.3
Professional and legal expenses																							2,434			4,428			(1,994		)	(45.0	)
Advertising and marketing	2,130			2,282			(152		)	(6.7	)	5,225			6,489			(1,264		)	(19.5	)	1,529			1,830			(301		)	(16.4	)
Deposit insurance	1,101			890			211			23.7		3,438			3,539			(101		)	(2.9	)	1,418			1,341			77			5.7
State/Municipal business and use taxes	780			956			(176		)	(18.4	)	1,857			2,564			(707		)	(27.6	)
State/municipal business and use taxes																							945			713			232			32.5
REO operations	240			(21		)	261			(1,242.9	)	(1,089		)	513			(1,602		)	(312.3	)	(123		)	439			(562		)	(128.0	)
Amortization of core deposit intangibles	1,542			1,724			(182		)	(10.6	)	4,790			5,339			(549		)	(10.3	)	2,052			1,382			670			48.5
Miscellaneous	6,851			7,785			(934		)	(12.0	)	20,432			22,311			(1,879		)	(8.4	)	6,744			5,670			1,074			18.9
	82,589			77,372			5,217			6.7		242,597			232,068			10,529			4.5		87,866			81,706			6,160			7.5
Acquisition related costs	—			1,720			(1,720		)	(100.0	)	—			10,945			(10,945		)	(100.0	)
Acquisition-related expenses																							2,148			—			2,148
Total non-interest expense	$	82,589		$	79,092		$	3,497		4.4	%	$	242,597		$	243,013		$	(416	)	(0.2	)%	$	90,014		$	81,706		$	8,308		10.2	%

Non-interest expenses increased by ~~$3.5~~$8.3 million, to ~~$82.6~~$90.0 million for the quarter ended ~~September 30, 2017,~~March 31, 2019, compared to ~~$79.1~~$81.7 million for the quarter ended ~~September 30, 2016.~~March 31, 2018. The increase was primarily ~~related~~due to ~~increased salaries~~increases in salary and employee benefits and ~~professional services~~the acquisition-related expenses ~~including costs~~ incurred for ~~enhanced regulatory requirements attributable~~the Skagit merger.

Salary and employee benefits expenses increased to $54.6 million for the three months ended March 31, 2019, compared to $50.1 million for the three months ended March 31, 2018, primarily reflecting additional staffing related to the ~~build-out~~build out of the Company's ~~compliance~~risk infrastructure and ~~risk management infrastructure as a result~~operations acquired from the acquisition of crossing the $10 billion asset threshold. There were no acquisition-related expenses in the current quarter, compared to $1.7 million of acquisition-related costs in the third quarter of 2016. For the nine months ended September 30, 2017, non-interest expenses decreased by $416,000, to $242.6 million compared to $243.0 million for the nine months ended September 30, 2016. The

~~decrease in the nine-month period primarily reflected $10.9 million of acquisition-related costs in the 2016 period, partially offset by costs related to the enhanced regulatory requirements~~Skagit on November 1, 2018 and ~~increased compensation~~normal salary and ~~occupancy expenses.~~

~~Salaries~~wage adjustments. Occupancy and ~~employee benefits~~equipment expense increased ~~$4.2~~$2.0 million, to ~~$48.9~~$13.8 million for the quarter ended ~~September 30, 2017, compared to $44.8 million~~March 31, 2019, reflecting the operations acquired from the Skagit acquisition. Information data services expenses increased $945,000 for the quarter ended September 30, 2016, primarily reflecting the incremental staffing associated with the build-out of the Company's compliance and risk management infrastructure and annual salary merit increases. For similar reasons salary and employee benefits increased to $144.0 million for the nine months ended September 30, 2017,March 31, 2019 compared to $136.5 million for the nine months ended September 30, 2016. Occupancy and equipment expense increased $758,000, to $11.7 million for the quarter ended September 30, 2017 and increased $3.4 million for the nine months ended September 30, 2017, compared to the same periods in the prior year. The increase in occupancy and equipment expense primarily reflects increased equipment depreciation associated with equipment purchased for acquired locations and increased seasonal building repair and maintenance. Information and computer data services decreased $416,000 for the quarter ended September 30, 2017 and $2.1 million for the nine months ended September 30, 2017, compared to the same periods in the prior year. Professional services expense increased $1.1 million for the quarter ended September 30, 2017 and $6.5 million for the nine months ended September 30, 2017, compared to the same periods in the prior year, reflecting increased consulting services related to enhanced regulatory requirements attributable to our compliance and risk management infrastructure build-out. REO operations had a net loss of $240,000 for the quarter ended September 30, 2017, compared to a net gain of $21,000 in the same prior-year period. REO operations had a net gain of $1.1 million ~~for the~~ nine months ended September 30, 2017 compared to a net loss in the same prior-year period, largely due to a $2.0 million gain on the sale of an REO property during the first nine months of 2017. Miscellaneous expenses for the nine months ended September 30, 2017 included charges of $856,000 for customer refunds of certain deposit service fees charged in prior years compared to a similar $1.4 million charge in the same period in the prior ~~year.~~year reflecting incremental costs as the Company continued to grow. Professional services decreased $2.0 million for the quarter ended March 31, 2019 compared to the same period in the prior year reflecting lower consulting costs as a result of completing the build out of the risk management infrastructure. Miscellaneous expense increased $1.1 million, to $6.7 million for the ~~nine months~~quarter ended ~~September 30, 2017 was offset by the release of~~March 31, 2019, reflecting a ~~$1.2 million reserve for possible losses~~$676,000 write-down on ~~an unfunded commitment for~~ a ~~single credit relationship that was terminated.~~former administration building.

Income Taxes. InFor the quarter ended ~~September 30, 2017~~March 31, 2019, we recognized ~~$10.9~~$8.9 million in income tax expense for an effective tax rate of ~~30.3%~~21.0%, which reflects our normal statutory tax rate reduced by the effect of tax-exempt income, certain tax credits, and tax benefits related to restricted stock vesting as well as annual adjustments related to filing of our federal and state income tax returns. The tax benefits related to restricted stock vesting reduced the effective tax rate for the nine months ended September 30, 2017 by 0.3% as a result of the adoption of ASU No. 2016-09.vesting. Our normal, expected statutory income tax rate is ~~37.2%~~23.7%, representing a blend of the statutory federal income tax rate of ~~35.0%~~21.0% and apportioned effects of the state income tax rates. For the quarter ended ~~September 30, 2016,~~March 31, 2018, we recognized ~~$12.3~~$8.2 million in income tax expense for an effective tax rate of ~~34.0%~~22.3%. For the nine months ended September 30, 2017, we recognized $35.5 million in income tax expense for an effective tax rate of 32.3% compared to $32.3 million in income tax expense for an effective rate of 34.1% for the nine months ended September 30, 2016. For more discussion on our income taxes, please refer to Note 910 in the Selected Notes to the Consolidated Financial Statements in this report on Form 10-Q.

Asset Quality

Achieving and maintaining a moderate risk profile by employing appropriate underwriting standards, avoiding excessive asset concentrations and aggressively managing troubled assets has been and will continue to be a primary focus for us. As a result, current asset quality metrics are at historically favorable levels and are unlikely to meaningfully improve. Our reserve levels are adequate and reflect current market conditions. In addition, our impairment analysis and charge-off actions reflect current appraisals and valuation estimates. We actively engage our borrowers to resolve problem assets and effectively manage the real estate owned as a result of foreclosures.

Non-Performing Assets: Non-performing assets ~~decreased~~increased to ~~$31.7~~$22.0 million, or ~~0.30%~~0.19% of total assets, at ~~September 30, 2017,~~March 31, 2019, from ~~$33.8~~$18.9 million, or ~~0.35%~~0.16% of total assets, at December 31, ~~2016,~~2018, and ~~$32.2~~decreased compared to $23.5 million, or ~~0.33%~~0.23% of total assets, at ~~September 30, 2016.~~March 31, 2018. Our allowance for loan losses was ~~$89.1~~$97.3 million, or ~~296%~~504% of non-performing loans at ~~September 30, 2017,~~March 31, 2019, compared to ~~$86.0~~$96.5 million, or ~~381%~~616% of non-performing loans at December 31, ~~2016~~2018 and ~~$84.2~~$92.2 million, or ~~309%~~410% of non-performing loans at ~~September 30, 2016. We believe our~~March 31, 2018. Our level of non-performing loans and assets ~~is manageable and that we have sufficient capital and human resources~~continues to ~~manage the collection of our non-performing assets in an orderly fashion.~~be manageable. The primary components of the ~~$31.7~~$22.0 million in non-performing assets were ~~$29.1~~$18.6 million in nonaccrual

loans, ~~$927,000~~$683,000 in loans more than 90 days delinquent and still accruing interest, and ~~$1.6~~$2.7 million in REO and other repossessed ~~assets.~~assets, the majority of which were acquired in the Skagit acquisition.

Loans are reported as restructured when we grant concessions to a borrower experiencing financial difficulties that we would not otherwise consider. As a result of these concessions, restructured loans or TDRs are impaired as the Banks will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement. If any restructured 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 restructured loan(s) would be reclassified as nonaccrual. At ~~September 30, 2017,~~March 31, 2019, we had ~~$12.7~~$13.0 million of restructured loans currently performing under their restructured repayment terms.

Loans acquired in merger transactions with deteriorated credit quality are accounted for as purchased credit-impaired pools. Typically this would include loans that were considered non-performing or restructured as of the acquisition date. Accordingly, subsequent to acquisition, loans included in the purchased credit-impaired pools are not reported as non-performing loans based upon their individual performance status, so the categories of nonaccrual, impaired and 90 ~~day~~days past due and accruing do not include any purchased credit-impaired loans. Purchased credit-impaired loans were ~~$23.2~~$13.3 million at ~~September 30, 2017,~~March 31, 2019, compared to ~~$32.3~~$14.4 million at December 31, ~~2016~~2018 and ~~$38.7~~$19.3 million at ~~September 30, 2016.~~

March 31, 2018.

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


	September 30, 2017			December 31, 2016			September 30, 2016			March 31, 2019			December 31, 2018			March 31, 2018
Nonaccrual Loans: ⁽¹⁾
Secured by real estate:
Commercial	$	11,632		$	8,237		$	12,776		$	5,734		$	4,088		$	6,877
Multifamily	—			—			30
Construction and land	1,726			1,748			1,747			3,036			3,188			984
One- to four-family	2,878			2,263			3,414			1,538			1,544			2,815
Commercial business	7,144			3,074			2,765			3,614			2,936			3,037
Agricultural business, including secured by farmland	4,285			3,229			3,755			2,507			1,751			6,120
Consumer	1,462			1,875			1,385			2,181			1,241			1,237
	29,127			20,426			25,872			18,610			14,748			21,070
Loans more than 90 days delinquent, still on accrual:
Secured by real estate:
Commercial	53			701			—
Multifamily	—			147			147
One- to four-family	722			1,233			852			640			658			591
Commercial business	51			—			—			1			1			1
Agricultural business, including secured by farmland										—			—			820
Consumer	101			72			425			42			247			7
	927			2,153			1,424			683			906			1,419
Total non-performing loans	30,054			22,579			27,296			19,293			15,654			22,489
REO, net ⁽²⁾	1,496			11,081			4,717			2,611			2,611			328
Other repossessed assets held for sale	145			166			164			50			592			694
Total non-performing assets	$	31,695		$	33,826		$	32,177		$	21,954		$	18,857		$	23,511

Total non-performing loans to loans before allowance for loan losses	0.39		%	0.30		%	0.37		%	0.22		%	0.18		%	0.30		%
Total non-performing loans to total assets	0.29		%	0.23		%	0.28		%	0.16		%	0.13		%	0.22		%
Total non-performing assets to total assets	0.30		%	0.35		%	0.33		%	0.19		%	0.16		%	0.23		%

Restructured loans performing under their restructured terms ⁽³⁾	$	12,744		$	18,907		$	17,649		$	13,036		$	13,422		$	14,264

Loans 30-89 days past due and on accrual ⁽⁴⁾	$	9,619		$	11,571		$	12,668		$	28,972		$	25,108		$	23,557


⁽¹⁾	Includes ~~$929,000~~$1.4 million of nonaccrual restructured loans at ~~September 30, 2017. For the quarter ended September 30, 2017, interest income was reduced by $629,000 as the result of nonaccrual loan activity.~~March 31, 2019.

⁽²⁾

Real estate acquired by us as a result of foreclosure or by deed-in-lieu of foreclosure is classified as REO until it is sold. When property is acquired, it is recorded at the estimated fair value of the property, less expected selling ~~costs, or the carrying value of the defaulted loan.~~costs. Subsequent to foreclosure, the property is carried at the lower of the foreclosed amount or net realizable value. Upon receipt of a new appraisal and market analysis, the carrying value is written down through the establishment of a specific reserve to the anticipated sales price, less selling and holding costs.


⁽³⁾	These loans were performing under their restructured repayment terms at ~~September 30, 2017.~~March 31, 2019.

⁽⁴⁾Includes purchased credit-impaired loans.

In addition to the non-performing loans and purchased credit-impaired loans as of ~~September 30, 2017,~~March 31, 2019, we had other classified loans with an aggregate outstanding balance of ~~$86.4~~$47.5 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.

REO: REO ~~decreased $9.6 million, to $1.5~~was $2.6 million at ~~September 30, 2017, compared to $11.1 million at~~March 31, 2019 and December 31, ~~2016.~~2018. The following table shows REO activity for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~September 30, 2016:~~March 31, 2018 (in thousands):


	Three Months Ended						Nine Months Ended						Three Months Ended
	Sep 30, 2017			Sep 30, 2016			Sep 30, 2017			Sep 30, 2016			Mar 31, 2019		Mar 31, 2018
Balance, beginning of period	$	2,427		$	6,147		$	11,081		$	11,627		$	2,611	$	360
Additions from loan foreclosures	—			156			46			534			—		128
Additions from acquisitions	—			—			—			400
Additions from capitalized costs	—			—			54			—
Proceeds from dispositions of REO	(961		)	(1,699		)	(11,382		)	(8,021		)
Gain on sale of REO	30			281			1,953			981
Valuation adjustments in the period	—			(168		)	(256		)	(804		)	—		(160		)
Balance, end of period	$	1,496		$	4,717		$	1,496		$	4,717		$	2,611	$	328

From time to time, non-recurring fair value adjustments to REO are recorded to reflect partial write-downs based on an observable market price or current appraised value of property. The individual carrying values of these assets are reviewed for impairment at least annually and any additional impairment charges are expensed to operations.

Liquidity and Capital Resources

Our primary sources of funds are deposits, borrowings, proceeds from loan principal and interest payments and sales of loans, and the maturity of and interest income on mortgage-backed and investment securities. While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, competition and our pricing strategies.

Our primary investing activity is the origination and purchase of loans and, in certain periods, the purchase of securities. During the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~September 30, 2016,~~March 31, 2018, our loan originations, including originations of loans held for sale, exceeded our loan repayments by ~~$746.8~~$143.7 million and ~~$788.0~~$176.6 million, respectively. ~~During those periods we purchased loans and~~There were no loan ~~participations~~purchases during the three months ended March 31, 2019 compared to loan purchases of ~~$266.5~~$1.3 million ~~and $230.8 million, respectively.~~during the three months ended March 31, 2018. This activity was funded primarily by ~~sales of loans~~increased core deposits and ~~increased deposits in 2017 and primarily from~~ the sale of loans in ~~2016.~~2019. During the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~September 30, 2016,~~March 31, 2018, we received proceeds of ~~$886.1~~$265.2 million and ~~$885.3~~$126.2 million, respectively, from the sale of loans. Securities purchased during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~September 30, 2016~~March 31, 2018 totaled ~~$712.0~~$5.1 million and ~~$304.3~~$543.2 million, respectively, and securities repayments, maturities and sales in those periods were ~~$178.9~~$67.2 million and ~~$389.2~~$31.2 million, respectively.

Our primary financing activity is gathering deposits. ~~Increases in all deposit categories contributed to total~~Total deposits ~~increasing~~decreased by ~~$417.4~~$100.8 million during the first ~~nine~~three months of ~~2017~~2019, as a $157.0 million decrease in certificate of deposits, primarily brokered deposits, was partially offset by a $56.2 million increase in core deposits.. Certificates of deposit are generally more vulnerable to competition and more price sensitive than other retail deposits and our pricing of those deposits varies significantly based upon our liquidity management strategies at any point in time. At ~~September 30, 2017~~,March 31, 2019, certificates of deposit amounted to ~~$1.10~~$1.16 billion, or ~~13%~~12% of our total deposits, including ~~$808.8~~$868.4 million which were scheduled to mature within one year. While no assurance can be given as to future periods, historically, we have been able to retain a significant amount of our deposits as they mature.

FHLB advances ~~(excluding fair value adjustments)~~decreased $122.2 million to $418.0 million during the first three months of 2019. Other borrowings increased ~~$209.1~~$2.7 million to $121.7 million at March 31, 2019 from $119.0 million at December 31, ~~2016 to $263.3 million at September 30, 2017. Other borrowings decreased $2.0 million from December 31, 2016 to $103.7 million at September 30, 2017.~~2018.

We must maintain an adequate level of liquidity to ensure the availability of sufficient funds to accommodate deposit withdrawals, to support loan growth, to satisfy financial commitments and to take advantage of investment opportunities. During the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~,2018, we used our sources of funds primarily to fund loan commitments and purchase securities. At ~~September 30, 2017,~~March 31, 2019, we had outstanding loan commitments totaling ~~$2.50~~$2.99 billion, ~~including~~primarily relating to undisbursed loans in process and unused credit ~~lines totaling $2.42 billion.~~lines. While representing potential growth in the loan portfolio and lending activities, this level of commitments is proportionally consistent with our historical experience and does not represent a departure from normal operations.

We generally maintain sufficient cash and readily marketable securities to meet short-term liquidity needs; however, our primary liquidity management practice to supplement deposits is to increase or decrease short-term borrowings. We maintain credit facilities with the FHLB-Des Moines, which at ~~September 30, 2017~~March 31, 2019 provided for advances that in the aggregate would equal the lesser of ~~35%~~45% of Banner Bank’s assets or adjusted qualifying collateral (subject to a sufficient level of ownership of FHLB stock), up to a total possible credit line of ~~$3.47~~$5.21 billion, and 35% of Islanders Bank’s assets or adjusted qualifying collateral, up to a total possible credit line of ~~$93.7~~$97.0 million. Advances under these credit facilities ~~(excluding fair value adjustments)~~ totaled ~~$263.2~~$418.0 million at ~~September 30, 2017.~~March 31, 2019. In addition, Banner Bank has been approved for participation in the ~~FRBSF’s~~ Borrower-In-Custody (BIC) ~~program.~~

program by the Federal Reserve Bank of San Francisco (FRBSF). Under this program Banner Bank had available lines of credit of approximately ~~$1.19~~$1.16 billion as of ~~September 30, 2017,~~March 31, 2019, 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 ~~September 30, 2017~~March 31, 2019 or December 31, ~~2016.~~2018. Management believes it has adequate resources and funding potential to meet our foreseeable liquidity requirements.

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 ~~September 30, 2017~~,March 31, 2019, the Company on an unconsolidated basis had liquid assets of ~~$69.1~~$42.9 million.

As noted below, Banner Corporation and its subsidiary banks continued to maintain capital levels significantly in excess of the requirements to be categorized as “Well-Capitalized” under applicable regulatory standards. During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019, total shareholders' equity increased ~~$21.3~~$32.6 million, to ~~$1.33~~$1.51 billion. At ~~September 30, 2017,~~March 31, 2019, tangible common shareholders’ equity, which excludes ~~other~~ goodwill and other intangible assets, was ~~$1.06~~$1.14 billion, or ~~10.39%~~10.04% of tangible assets. See the discussion and reconciliation of non-GAAP financial information in the Executive Overview section of Management’s Discussion and Analysis of Financial Condition and Results of Operation in this Form 10-Q for more detailed information with respect to tangible common shareholders’ equity. Also, see the capital requirements discussion and table below with respect to our regulatory capital positions.

Capital Requirements

Banner Corporation is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended (BHCA), and the regulations of the Federal Reserve. Banner Bank 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, both Banner Corporation and the Banks ~~now have~~are required to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital of more than 2.5% above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This new capital conservation buffer requirement began to be phased in starting in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented to an amount equal to 2.5% of risk-weighted assets in January 2019. As of September 30, 2017, the conservation buffer was 1.25%. At ~~September 30, 2017,~~March 31, 2019, Banner Corporation and the Banks each exceeded all regulatory capital requirements. (See Item 1, “Business–Regulation,” and Note 16 of the Notes to the Consolidated Financial Statements included in the ~~2016~~2018 Form 10-K for additional information regarding regulatory capital requirements for Banner Corporation and the Banks.)

The actual regulatory capital ratios calculated for Banner Corporation, Banner Bank and Islanders Bank as of ~~September 30, 2017~~March 31, 2019, along with the minimum capital amounts and ratios, were as follows (dollars in thousands):


	Actual				Minimum to be Categorized as "Adequately Capitalized"				Minimum to be Categorized as “Well-Capitalized”				Actual				Minimum to be Categorized as "Adequately Capitalized"				Minimum to be Categorized as “Well-Capitalized”
	Amount		Ratio		Amount		Ratio		Amount		Amount		Amount		Ratio		Amount		Ratio		Amount		Amount
Banner Corporation—consolidated
Total capital to risk-weighted assets	$	1,239,520	13.52	%	$	733,633	8.00	%	$	917,041	10.00	%	$	1,323,711	13.55	%	$	781,580	8.00	%	$	976,975	10.00	%
Tier 1 capital to risk-weighted assets	1,147,971		12.52		550,224		6.00		550,224		6.00		1,223,804		12.53		586,185		6.00		586,185		6.00
Tier 1 leverage capital to average assets	1,147,971		11.49		399,595		4.00		n/a		n/a		1,223,804		10.73		456,375		4.00		n/a		n/a
Common equity tier 1 capital	1,023,702		11.16		412,668		4.50		n/a		n/a		1,087,804		11.13		439,639		4.50		n/a		n/a
Banner Bank
Total capital to risk-weighted assets	1,089,048		12.14		717,580		8.00		896,974		10.00		1,236,021		12.91		766,195		8.00		957,744		10.00
Tier 1 capital to risk-weighted assets	999,815		11.15		538,185		6.00		717,580		8.00		1,138,596		11.89		574,646		6.00		766,195		8.00
Tier 1 leverage capital to average assets	999,815		10.30		388,308		4.00		485,385		5.00		1,138,596		10.23		445,258		4.00		556,572		5.00
Common equity tier 1 capital	999,815		11.15		403,639		4.50		583,033		6.50		1,138,596		11.89		430,985		4.50		622,534		6.50
Islanders Bank
Total capital to risk-weighted assets	31,690		16.35		15,507		8.00		19,384		10.00		35,180		18.44		15,262		8.00		19,077		10.00
Tier 1 capital to risk-weighted assets	29,375		15.15		11,630		6.00		15,507		8.00		32,794		17.19		11,446		6.00		15,262		8.00
Tier 1 leverage capital to average assets	29,375		10.66		11,018		4.00		13,773		5.00		32,794		11.86		11,065		4.00		13,831		5.00
Common equity tier 1 capital	29,375		15.15		8,723		4.50		12,600		6.50		32,794		17.19		8,585		4.50		12,400		6.50

ITEM 3 – Quantitative and Qualitative Disclosures About Market Risk

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 deposit liabilities. Additional interest rate risk results from mismatched repricing indices and formula (basis risk and yield curve risk), and product caps and floors and early repayment or withdrawal provisions (option risk), which may be contractual or market driven, that are generally more favorable to customers than to us. An exception to this generalization is the beneficial effect of interest rate floors on a ~~substantial~~ portion of our performing floating-rate loans, which help us maintain higher loan yields in periods when market interest rates decline significantly. ~~However, in~~We are currently experiencing 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~~period of September 30, 2017, our loans with interest rate floors totaled approximately $2.48 billion and had a weighted average floor rate of 4.65% compared to a current average note rate of 4.98%. An additional source of interest rate risk isrising rates after a prolonged period of ~~exceptionally~~historically low ~~market interest rates. Because interest-bearing~~ deposit ~~costs have been reduced~~costs. The cost of deposits may increase more quickly than the yield on our earning assets as we continue to nominal levels, there is very little possibility that they will be significantly further reduced and our non-interest-bearing deposits are an increasingly significant percentage of total deposits. By contrast, if market rates remain very low, loan and securities yields will likely decline as longer-term instruments mature or are repaid. Asoperate in a ~~result, a prolonged period of very low interest rates would likely result~~higher rate environment causing compression in ~~compression of our~~the Banks' net interest ~~margin. While this pressure on~~margin and a reduction in the ~~margin may be mitigated by changes in~~amount of net interest income revenue we generate. 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 ~~particularly increases in non-interest-bearing deposits, a prolonged period of low interest rates will present a very difficult operating environment for most banks, including us.~~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 and oversight by 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 ~~September 30, 2017~~March 31, 2019, 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):


	Estimated Increase (Decrease) in															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					Net Interest Income Next 12 Months					Net Interest Income Next 24 Months					Economic Value of Equity
+400	$	16,033		4.1	%	$	41,051		5.2	%	$	(404,651	)	(18.6	)%	$	1,687		0.4	%	$	24,269		2.6	%	$	(192,294	)	(7.2	)%
+300	15,994			4.0		41,118			5.2		(290,960		)	(13.3	)	9,180			2.0		36,868			3.9		(97,255		)	(3.6	)
+200	12,833			3.2		33,865			4.3		(167,514		)	(7.7	)	11,219			2.4		37,346			4.0		(16,853		)	(0.6	)
+100	7,922			2.0		21,163			2.7		(62,648		)	(2.9	)	8,453			1.8		26,213			2.8		27,678			1.0
0	—			—		—			—		—			—		—			—		—			—		—			—
-25	(3,955		)	(1.0	)	(10,599		)	(1.3	)	6,211			0.3
-50	(9,999		)	(2.5	)	(25,996		)	(3.3	)	6,592			0.3		(9,954		)	(2.1	)	(26,817		)	(2.9	)	(58,161		)	(2.2	)
-100																(21,765		)	(4.7	)	(59,248		)	(6.3	)	(139,991		)	(5.2	)


⁽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 ~~1.00%~~2.25% and ~~1.25%~~2.50%.

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 adjustable-rate mortgage 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.

The following table presents our interest sensitivity gap between interest-earning assets and interest-bearing liabilities at ~~September 30, 2017~~March 31, 2019 (dollars in thousands). The 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 ~~September 30, 2017~~March 31, 2019, total interest-earning assets maturing or repricing within one year exceeded total interest-bearing liabilities maturing or repricing in the same time period by ~~$2.04~~$2.48 billion, representing a one-year cumulative gap to total assets ratio of ~~19.53%~~21.17%. Management is aware of the sources of interest rate risk and in its opinion actively monitors and manages it to the extent possible. The interest rate risk indicators and interest sensitivity gaps as of ~~September 30, 2017~~March 31, 2019 are within our internal policy guidelines and management considers that our current level of interest rate risk is reasonable.


	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			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	$	599,365		$	46,101		$	79,413		$	10,482		$	4,961		$	—		$	740,322		$	689,621		$	109,176		$	89,922		$	17,802		$	5,186		$	2,979		$	914,686
Fixed-rate mortgage loans	260,668			157,127			443,507			330,246			416,212			13,573			1,621,333			322,500			175,471			559,570			422,581			481,556			22,775			1,984,453
Adjustable-rate mortgage loans	903,066			318,582			997,826			780,430			296,735			5,599			3,302,238			924,590			375,335			1,187,257			726,081			203,031			187			3,416,481
Fixed-rate mortgage-backed securities	75,138			64,592			267,163			223,946			376,878			98,195			1,105,912			85,233			73,889			273,920			238,748			474,321			98,708			1,244,819
Adjustable-rate mortgage-backed securities	69,764			8,828			5,159			4,063			2,890			—			90,704			152,901			6,221			24,578			36,330			16,169			—			236,199
Fixed-rate commercial/agricultural loans	116,920			81,596			206,242			65,435			25,383			4,686			500,262			134,384			105,278			243,584			77,136			69,628			24,913			654,923
Adjustable-rate commercial/agricultural loans	877,177			21,354			63,562			32,820			14,261			—			1,009,174			903,000			23,679			66,766			39,620			23,971			—			1,057,036
Consumer and other loans	399,238			70,061			106,515			21,563			17,998			34,803			650,178			483,035			55,900			95,193			24,397			14,807			40,090			713,422
Investment securities and interest-earning deposits	119,404			15,633			100,189			60,617			92,751			60,658			449,252			107,065			6,230			59,568			63,371			94,305			67,287			397,826
Total rate sensitive assets	3,420,740			783,874			2,269,576			1,529,602			1,248,069			217,514			9,469,375			3,802,329			931,179			2,600,358			1,646,066			1,382,974			256,939			10,619,845
Interest-bearing liabilities: ⁽²⁾
Regular savings	208,388			106,713			341,425			239,725			344,703			336,338			1,577,292			250,692			130,877			417,138			290,322			408,240			368,583			1,865,852
Interest checking accounts	146,046			61,990			201,764			144,321			207,270			194,095			955,486			164,439			72,656			240,399			176,621			264,105			255,948			1,174,168
Money market deposit accounts	196,942			129,258			401,501			266,201			337,316			194,440			1,525,658			170,173			113,236			363,722			254,074			349,018			245,726			1,495,949
Certificates of deposit	545,925			263,044			244,362			44,933			2,280			—			1,100,544			630,039			238,761			269,088			23,494			2,368			—			1,163,750
FHLB advances	113,005			150,006			24			28			84			202			263,349			118,000			100,000			200,000			—			—			—			418,000
Other borrowings	5,000			—			—			—			—			—			5,000
Junior subordinated debentures	140,212			—			—			—			—			—			140,212			140,212			—			—			—			—			—			140,212
Retail repurchase agreements	98,714			—			—			—			—			—			98,714			121,719			—			—			—			—			—			121,719
Total rate sensitive liabilities	1,454,232			711,011			1,189,076			695,208			891,653			725,075			5,666,255			1,595,274			655,530			1,490,347			744,511			1,023,731			870,257			6,379,650
Excess (deficiency) of interest-sensitive assets over interest-sensitive liabilities	$	1,966,508		$	72,863		$	1,080,500		$	834,394		$	356,416		$	(507,561	)	$	3,803,120		$	2,207,055		$	275,649		$	1,110,011		$	901,555		$	359,243		$	(613,318	)	$	4,240,195
Cumulative excess of interest-sensitive assets	$	1,966,508		$	2,039,371		$	3,119,871		$	3,954,265		$	4,310,681		$	3,803,120		$	3,803,120		$	2,207,055		$	2,482,704		$	3,592,715		$	4,494,270		$	4,853,513		$	4,240,195		$	4,240,195
Cumulative ratio of interest-earning assets to interest-bearing liabilities	235.23		%	194.19		%	193.01		%	197.65		%	187.24		%	167.12		%	167.12		%	238.35		%	210.30		%	196.03		%	200.19		%	188.10		%	166.46		%	166.46		%
Interest sensitivity gap to total assets	18.83		%	0.70		%	10.35		%	7.99		%	3.41		%	(4.86		)%	36.42		%	18.82		%	2.35		%	9.46		%	7.69		%	3.06		%	(5.23		)%	36.15		%
Ratio of cumulative gap to total assets	18.83		%	19.53		%	29.87		%	37.86		%	41.28		%	36.42		%	36.42		%	18.82		%	21.17		%	30.63		%	38.32		%	41.38		%	36.15		%	36.15		%

(Footnotes on following page)

Footnotes for Table of Interest Sensitivity Gap

⁽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, 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 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 ~~$(1.2)~~$(1.15) billion, or ~~(11.20)~~(9.81)% of total assets at ~~September 30, 2017.~~March 31, 2019. Interest-bearing liabilities for this table exclude certain non-interest-bearing deposits which are included in the average balance calculations in the table contained in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Comparison of Results of Operations for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018” of this report on Form ~~10-Q~~.10-Q.

ITEM 4 – Controls and Procedures

The management of Banner Corporation is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934 (Exchange Act). A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that its objectives are met. Also, because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. As a result of these inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Further, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

(a)

Evaluation of Disclosure Controls and Procedures: An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management as of the end of the period covered by this report. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of ~~September 30, 2017~~March 31, 2019, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.


(b)	Changes in Internal Controls Over Financial Reporting: In the quarter ended ~~September 30, 2017~~March 31, 2019, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1 – Legal Proceedings

In the normal course of business, we have various legal proceedings and other contingent matters outstanding. These proceedings and the associated legal claims are often contested and the outcome of individual matters is not always predictable. These claims and counter claims typically arise during the course of collection efforts on problem loans or with respect to actions to enforce liens on properties in which we hold a security interest, although we also periodically are subject to claims related to employment matters. We are not a party to any pending legal proceedings that management believes would have a material adverse effect on our financial condition or operations.

ITEM 1A – Risk Factors

There have been no material changes in the risk factors previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2016 (File No. 0-26584).~~2018.

ITEM 2 – Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable.

(b) Not applicable.

(c) The following table provides information about repurchases of common stock by the Company during the quarter ended ~~September 30, 2017:~~March 31, 2019:

Period Total Number of Common Shares Purchased Average Price Paid per Common Share Total Number of Shares Purchased as Part of Publicly Announced Plan Maximum Number of Remaining Shares that May be Purchased as Part of Publicly Announced Authorization
July 1, 2017 - July 31, 2017 104
$ 56.70
—
1,658,245
August 1, 2017 - August 31, 2017 62
58.14
—
1,658,245
September 1, 2017 - September 30, 2017 25,224
56.08
25,000
1,633,245
Total for quarter 25,390
56.08
25,000
1,633,245



Period	Total Number of Common Shares Purchased	Average Price Paid per Common Share		Total Number of Shares Purchased as Part of Publicly Announced authorization	Maximum Number of Remaining Shares that May be Purchased as Part of Publicly Announced Authorization
January 1, 2019 - January 31, 2019	35	$	54.79	—	1,296,549
February 1, 2019 - February 28, 2019	3,313	61.29		—	1,296,549
March 1, 2019 - March 31, 2019	1,036	62.18		—	1,757,637
Total for quarter	4,384	61.45		—	1,757,637

Employees surrendered ~~390~~4,384 shares to satisfy tax withholding obligations upon the vesting of restricted stock ~~grants.~~grants during the three months ended March 31, 2019.

On March ~~31, 2017,~~27, 2019, the Company announced that its Board of Directors had renewed its authorization to repurchase up to 5% of the Company's common stock, or ~~1,658,245~~1,757,637 of the Company's outstanding shares. Under the authorization, shares may be repurchased by the Company in open market purchases. The extent to which the Company repurchases its shares and the timing of such repurchases will depend upon market conditions and other corporate considerations.

ITEM 3 – Defaults upon Senior Securities

Not Applicable.

ITEM 4 – Mine Safety Disclosures

Not Applicable.

ITEM 5 – Other Information

Not Applicable.

ITEM 6 – Exhibits



Exhibit	Index of Exhibits

~~2.1{~~2{a}	Agreement and Plan of Merger, dated as of ~~November 5, 2014,~~July 25, 2018, by and ~~among the Registrant, SKBHC Holdings LLC~~between Banner Corporation and ~~Starbuck Bancshares,~~Skagit Bancorp, Inc. ~~[incorporated~~(incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed with the SEC on ~~November 12, 2014~~July 27, 2018 (File No. 000-26584)].

~~2.1{b}~~	Amendment, dated as of May 18, 2015, to Agreement and Plan of Merger, dated as of November 5, 2014, by and among the Registrant, SKBHC Holdings LLC and Starbuck Bancshares, Inc. [incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on May 19, 2015 (File No. 000-26584)].

~~2.1{c}~~	Amendment No. 2, dated July 13, 2015, to that certain Agreement and Plan of Merger, dated as of November 5, 2014, by and among Banner Corporation, SKBHC Holdings LLC, Starbuck Bancshares, Inc., and Elements Merger Sub, LLC [incorporated herein by reference to Exhibit 2.1(c) to the Quarterly Report on Form 10-Q filed on November 6, 2015 (File No. 000-26584)].

~~2.1{d}~~	Agreement and Plan of Merger dated as of August 7, 2014 by and between Banner Corporation and Siuslaw Financial Group, Inc. [incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on August 8, 2014 (File No. 000-26584)]).

3{a}	Amended and Restated Articles of Incorporation of Registrant [incorporated by reference to the Registrant's Current Report on Form 8-K filed on April 29, 2010 (File No. 000-26584)].

3{b}	Articles of Amendment of Registrant (incorporated herein by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed with the SEC on June 1, 2011 (File No. 000-26584)).

3{c}	Articles of Amendment to Amended and Restated Articles of Incorporation of Registrant for non-voting common stock [incorporated by reference to the Registrant's Current Report on Form 8-K filed on March 18, 2015 (File No. 000-26584)]

3{c}d}	Amended and Restated Bylaws of Registrant [incorporated by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K filed on December 20, 2016 (File No. 000-26584)].

~~4{a}~~	Warrant to purchase shares of the Registrant's common stock dated November 21, 2008 [incorporated by reference to the Registrant's Current Report on Form 8-K filed on November 24, 2008 (File No. 000-26584)]

10{a}	Executive Salary Continuation Agreement with Gary L. Sirmon [incorporated by reference to exhibits filed with the Annual Report on Form 10-K for the year ended March 31, 1996 (File No. 000-26584)].

10{b}	Amended and Restated Employment Agreement, with Mark J. Grescovich [incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on June 4, 2013 (File No. 000-26584].

10{c}	Form of Supplemental Executive Retirement Program Agreement with Gary Sirmon, Michael K. Larsen, Lloyd W. Baker, Cynthia D. Purcell and Richard B. Barton [incorporated by reference to exhibits filed with the Annual Report on Form 10-K for the year ended December 31, 2001 and the exhibits filed with the Form 8-K on May 6, 2008 (File No. 000-26584)].

10{e}d}	Form of Employment Contract entered into with Lloyd W. Baker, Cynthia D. Purcell, Richard B. Barton and Douglas M. Bennett [incorporated by reference to exhibits filed with the Form 8-K on June 25, 2014 (File No. 000-26584)].

10{f}e}	Long-Term Incentive Plan and Form of Repricing Agreement [incorporated by reference to the exhibits filed with the Form 8-K on May 6, 2008 (File No. 000-26584)].

10{g}f}	2005 Executive Officer and Director Stock Account Deferred Compensation Plan [incorporated by reference to exhibits filed with the Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 000-26584)].

10{h}g}	Entry into an Indemnification Agreement with each of the Registrant's Directors [incorporated by reference to exhibits filed with the Form 8-K on January 29, 2010 (File No. 000-26584)].

10{i}h}	2012 Restricted Stock and Incentive Bonus Plan [incorporated by reference to Appendix B to the Registrant's Definitive Proxy Statement on Schedule 14A filed on March 19, 2013 (File No. 000-26584)].

10{j}i}	Form of Performance-Based Restricted Stock Award Agreement [incorporated by reference to Exhibit 10.1 included in the Registrant's Current Report on Form 8-K filed on June 4, 2013 (File No. 000-26584)].

10{k}j}	Form of Time-Based Restricted Stock Award Agreement [incorporated by reference to Exhibit 10.1 included in the Registrant's Current Report on Form 8-K filed on June 4, 2013 (File No. 000-26584)].

10{l}k}	2014 Omnibus Incentive Plan [incorporated by reference as Appendix C to the Registrant's Definitive Proxy Statement on Schedule 14A filed on March 24, 2014 (File No. 000-26584)] and amendments [incorporated by reference to the Form 8-K filed on March 25, 2015 (File No. 000-26584)].

10{m}l}	Forms of Equity-Based Award Agreements: Incentive Stock Option Award Agreement, Non-Qualified Stock Option Award Agreement, Restricted Stock Award Agreement, Restricted Stock Unit Award Agreement, Stock Appreciation Right Award Agreement, and Performance Unit Award Agreement [incorporated by reference to Exhibits 10.2 - 10.7 included in the Registration Statement on Form S-8 dated May 9, 2014 (File No. 333-195835)].

10{m}	2018 Omnibus Incentive Plan [incorporated by reference as Appendix D to the Registrant's Definitive Proxy Statement on Schedule 14A filed on March 23, 2018 (File No. 000-26584)]



Exhibit	Index of Exhibits
10{n}	Forms of Equity-Based Award Agreements: Incentive Stock Option Award Agreement, Non-Qualified Stock Option Award Agreement under the Banner Corporation 2018 Omnibus Incentive Plan; Director Restricted Stock Award Agreement; Director Restricted Stock Unit Award Agreement; Employee Time-based Restricted Stock Unit Award Agreement; Employee performance-based Restricted Stock Unit Award Agreement; Stock Appreciation Right Award Agreement; and Performance Unit Award Agreement [incorporated by reference to Exhibits 10.2 - 10.9 included in the Registration Statement on Form S-8 dated May 4, 2018 (File No. 333-224693)]

31.1	Certification of Chief Executive Officer pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



31.2	Certification of Chief Financial Officer pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101	The following materials from Banner Corporation’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2017,~~March 31, 2019, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated ~~Balance Sheets;~~Statements of Financial Condition; (b) Consolidated Statements of Operations; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Shareholders' Equity; (e) Consolidated Statements of Cash Flows; and (f) Selected Notes to Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	Banner Corporation

~~November 6, 2017~~May 3, 2019	/s/ Mark J. Grescovich
	Mark J. Grescovich
	President and Chief Executive Officer (Principal Executive Officer)

~~November 6, 2017~~May 3, 2019	/s/ ~~Lloyd W. Baker~~Peter J. Conner
	~~Lloyd W. Baker~~Peter J. Conner
	Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer)

7173



Balance, January 1, 2017	33,193,387		$	1,213,837		$	95,328		$	(3,455	)	$	1,305,710
Net income						74,324						74,324
Other comprehensive income, net of income tax									3,579			3,579
Accrual of dividends on common stock ($1.75/share cumulative)						(58,247		)				(58,247		)
Repurchase of common stock	(25,000	)	(1,400		)							(1,400		)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered	86,397		3,045									3,045
Balance, September 30, 2017	33,254,784		$	1,215,482		$	111,405		$	124		$	1,327,011



	Goodwill			CDI			Favorable LHI			Total
Balance, December 31, 2015	$	247,738		$	36,762		$	710		$	285,210
Amortization	—			(7,061		)	(249		)	(7,310		)
Adjustments to goodwill	(3,155		)	—			—			(3,155		)
Balance, December 31, 2016	244,583			29,701			461			274,745
Amortization	—			(4,790		)	(153		)	(4,943		)
Balance, September 30, 2017	$	244,583		$	24,911		$	308		$	269,802



NON-INTEREST INCOME FROM CORE OPERATIONS:
Total non-interest income (GAAP)	$	20,339		$	23,512		$	63,653		$	64,007
Exclude net gain on sale of securities	(270		)	(891		)	(230		)	(531		)
Exclude change in valuation of financial instruments carried at fair value	493			1,124			1,831			1,472
Total non-interest income from core operations (non-GAAP)	$	20,562		$	23,745		$	65,254		$	64,948




	Nine months ended September 30, 2017						Nine Months Ended September 30, 2016
	Average Balance		Interest and Dividends		Yield/ Cost ⁽³⁾		Average Balance		Interest and Dividends		Yield/ Cost ⁽³⁾
Interest-earning assets:
Mortgage loans	$	6,059,476	$	222,028	4.90	%	$	5,755,988	$	207,881	4.82	%
Commercial/agricultural loans	1,496,549		52,717		4.71		1,490,757		51,213		4.59
Consumer and other loans	139,181		6,559		6.30		141,570		6,603		6.23
Total loans ⁽¹⁾	7,695,206		281,304		4.89		7,388,315		265,697		4.80
Mortgage-backed securities	1,013,913		17,529		2.31		976,267		15,467		2.12
Other securities	466,572		9,420		2.70		450,142		8,752		2.60
Interest-bearing deposits with banks	46,022		392		1.14		95,406		300		0.42
FHLB stock	15,666		164		1.40		17,614		254		1.93
Total investment securities	1,542,173		27,505		2.38		1,539,429		24,773		2.15
Total interest-earning assets	9,237,379		308,809		4.47		8,927,744		290,470		4.35
Non-interest-earning assets	902,435						903,957
Total assets	$	10,139,814					$	9,831,701
Deposits:
Interest-bearing checking accounts	$	923,757	627		0.09		$	853,818	570		0.09
Savings accounts	1,556,075		1,588		0.14		1,336,259		1,303		0.13
Money market accounts	1,530,675		1,994		0.17		1,587,500		2,421		0.20
Certificates of deposit	1,147,387		4,953		0.58		1,248,781		4,207		0.45
Total interest-bearing deposits	5,157,894		9,162		0.24		5,026,358		8,501		0.23
Non-interest-bearing deposits	3,203,033		—		—		2,980,027		—		—
Total deposits	8,360,927		9,162		0.15		8,006,385		8,501		0.14
Other interest-bearing liabilities:
FHLB advances	133,365		1,142		1.14		178,468		874		0.65
Other borrowings	113,664		241		0.28		108,632		234		0.29
Junior subordinated debentures	140,212		3,494		3.33		140,212		2,962		2.82
Total borrowings	387,241		4,877		1.68		427,312		4,070		1.27
Total funding liabilities	8,748,168		14,039		0.21		8,433,697		12,571		0.20
Other non-interest-bearing liabilities ⁽²⁾	60,895						64,825
Total liabilities	8,809,063						8,498,522
Shareholders’ equity	1,330,751						1,333,179
Total liabilities and shareholders’ equity	$	10,139,814					$	9,831,701
Net interest income/rate spread			$	294,770	4.26	%			$	277,899	4.15	%
Net interest margin					4.27	%					4.16	%
Additional Key Financial Ratios:
Return on average assets					0.98	%					0.85	%
Return on average equity					7.47						6.27
Average equity / average assets					13.12						13.56
Average interest-earning assets / average interest-bearing liabilities					166.59						163.70
Average interest-earning assets / average funding liabilities					105.59						105.86
Non-interest income / average assets					0.84						0.87
Non-interest expense / average assets					3.20						3.30
Efficiency ratio ⁽⁴⁾					67.68						71.08
Adjusted efficiency ratio ⁽⁵⁾					65.84						65.23