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
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2020
OR
[   ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ to ______________
☐    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)
Washington91-1691604
Washington91-1691604
(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
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
Securities registered pursuant to Section 12(b) of the Act
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $.01 per shareBANRThe NASDAQ Stock Market LLC
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]No[  ]
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]No[  ]
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][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[  ]☐No[x]
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, 2017October 31, 2020
Common Stock, $.01 par value per share32,806,47335,155,639 shares
Non-voting Common Stock, $.01 par value per share100,029 shares
 

1

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, 20172020 and December 31, 20162019
4
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 20172020 and 20162019
5
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 20172020 and 20162019
6
Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 20172020 and the Year Ended December 31, 20162019
7
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 20172020 and 20162019
811
Selected Notes to the Consolidated Financial Statements
1013
Item 2 – Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
4358
Comparison of Financial Condition at September 30, 20172020 and December 31, 20162019
4866
Comparison of Results of Operations for the Three and Nine Months Ended September 30, 20172020 and 20162019
5169
Asset Quality
5877
Liquidity and Capital Resources
6079
Capital Requirements
6180
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
Market Risk and Asset/Liability Management
6282
Sensitivity Analysis
6282
Item 4 – Controls and Procedures
6786
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
6887
Item 1A – Risk Factors
6887
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
6888
Item 3 – Defaults upon Senior Securities
6888
Item 4 – Mine Safety Disclosures
6888
Item 5 – Other Information
6888
Item 6 – Exhibits
6989
SIGNATURES
7191

2

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-lookingforward 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,statements. The novel coronavirus (COVID-19) pandemic, is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including further increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. Other factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to:to, the following: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in ourestimates of the adequacy of the allowance for loancredit losses and provisionprovisions for credit losses; the ability to manage 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 allowance for loan losses not being adequate to cover actual losses and require us to materially increase our reserves;delinquency rates; competitive pressures among financial services companies; changes in economic conditions in generalconsumer spending or borrowing and in Washington, Idaho, Oregon, Utah and California in particular; changes in the levels of generalspending habits; interest ratesrate 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; uncertainty regarding the future of the London Interbank Offered Rate (LIBOR), and the potential transition away from LIBOR toward new interest rate benchmarks; 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 valuesvalues; 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; 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 ourthe 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, results of safety and soundness and compliance examinations by the Board of us byGovernors of the Federal Reserve and of our bank subsidiaries bySystem, 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 toan increase our reservein reserves for loan losses, write-downwrite-downs of assets change ouror changes in regulatory capital position, or affect ourthe 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 Boardguidelines, 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; including the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act); 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, including as a result of the COVID-19 pandemic 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. Further, many of these risks and uncertainties are currently amplified by and may continue to be amplified by or may, in the future, be amplified by, the COVID-19 pandemic.  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.




3

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) (In thousands, except shares)
September 30, 20172020 and December 31, 2016
2019
ASSETSSeptember 30
2017
 December 31
2016
ASSETSSeptember 30,
2020		December 31,
2019
Cash and due from banks$192,278
 $177,083
Cash and due from banks$289,144 $234,359 
Interest bearing deposits49,488
 70,636
Interest bearing deposits416,394 73,376 
Total cash and cash equivalents241,766
 247,719
Total cash and cash equivalents705,538 307,735 
Securities—trading, amortized cost $28,663 and $30,154, respectively23,466
 24,568
Securities—available-for-sale, amortized cost $1,338,863 and $806,336, respectively1,339,057
 800,917
Securities—held-to-maturity, fair value $268,663 and $270,528, respectively264,752
 267,873
Securities—tradingSecurities—trading23,276 25,636 
Securities—available-for-sale, amortized cost $1,690,069 and $1,529,946, respectivelySecurities—available-for-sale, amortized cost $1,690,069 and $1,529,946, respectively1,758,384 1,551,557 
Securities—held-to-maturity, net of allowance for credit losses of $102 and NaN, respectively, fair value $450,806 and $237,805, respectivelySecurities—held-to-maturity, net of allowance for credit losses of $102 and NaN, respectively, fair value $450,806 and $237,805, respectively429,033 236,094 
Total securities Total securities2,210,693 1,813,287 
Equity securitiesEquity securities450,255 0 
Federal Home Loan Bank (FHLB) stock20,854
 12,506
Federal Home Loan Bank (FHLB) stock16,363 28,342 
Loans held for sale (includes $64,399 and $9,600, at fair value, respectively)71,905
 246,353
Loans held for sale (includes $153.0 million and $199.4 million, at fair value, respectively)Loans held for sale (includes $153.0 million and $199.4 million, at fair value, respectively)185,938 210,447 
Loans receivable7,774,449
 7,451,148
Loans receivable10,163,917 9,305,357 
Allowance for loan losses(89,100) (85,997)
Net loans7,685,349
 7,365,151
Allowance for credit losses - loansAllowance for credit losses - loans(167,965)(100,559)
Net loans receivableNet loans receivable9,995,952 9,204,798 
Accrued interest receivable33,837
 30,178
Accrued interest receivable48,321 37,962 
Real estate owned (REO), held for sale, net1,496
 11,081
Real estate owned (REO), held for sale, net1,795 814 
Property and equipment, net159,893
 166,481
Property and equipment, net171,576 178,008 
Goodwill244,583
 244,583
Goodwill373,121 373,121 
Other intangibles, net25,219
 30,162
Other intangibles, net23,291 29,158 
Bank-owned life insurance (BOLI)161,648
 158,936
Bank-owned life insurance (BOLI)191,755 192,088 
Deferred tax assets, net119,333
 127,694
Deferred tax assets, net64,367 59,639 
Other assets49,928
 59,466
Other assets203,110 168,632 
Total assets$10,443,086
 $9,793,668
Total assets$14,642,075 $12,604,031 
LIABILITIES   LIABILITIES
Deposits:   Deposits:
Non-interest-bearing$3,379,841
 $3,140,451
Non-interest-bearing$5,412,570 $3,945,000 
Interest-bearing transaction and savings accounts4,058,435
 3,935,630
Interest-bearing transaction and savings accounts5,887,419 4,983,238 
Interest-bearing certificates1,100,574
 1,045,333
Interest-bearing certificates915,352 1,120,403 
Total deposits8,538,850
 8,121,414
Total deposits12,215,341 10,048,641 
Advances from FHLB at fair value263,349
 54,216
Advances from FHLBAdvances from FHLB150,000 450,000 
Other borrowings103,713
 105,685
Other borrowings176,983 118,474 
Subordinated notes, netSubordinated notes, net98,114 0 
Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)97,280
 95,200
Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)109,821 119,304 
Accrued expenses and other liabilities72,604
 71,369
Accrued expenses and other liabilities200,038 227,889 
Deferred compensation40,279
 40,074
Deferred compensation45,249 45,689 
Total liabilities9,116,075
 8,487,958
Total liabilities12,995,546 11,009,997 
COMMITMENTS AND CONTINGENCIES (Note 12)
 
COMMITMENTS AND CONTINGENCIES (Note 13)COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS’ EQUITY   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, 20161,214,547
 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, 2016935
 612
Preferred stock - $0.01 par value per share, 500,000 shares authorized; 0 shares outstanding at September 30, 2020 and December 31, 2019Preferred stock - $0.01 par value per share, 500,000 shares authorized; 0 shares outstanding at September 30, 2020 and December 31, 20190 0 
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized; 35,158,568 shares issued and outstanding at September 30, 2020; 35,712,384 shares issued and outstanding at December 31, 2019Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized; 35,158,568 shares issued and outstanding at September 30, 2020; 35,712,384 shares issued and outstanding at December 31, 20191,347,612 1,373,198 
Common stock (non-voting) and paid in capital - $0.01 par value per share, 5,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2020; 39,192 shares issued and outstanding at December 31, 2019Common stock (non-voting) and paid in capital - $0.01 par value per share, 5,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2020; 39,192 shares issued and outstanding at December 31, 20190 742 
Retained earnings111,405
 95,328
Retained earnings222,959 186,838 
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 plans7,283
 7,283
Accumulated other comprehensive income (loss)124
 (3,455)
Total shareholders' equity1,327,011
 1,305,710
Total liabilities & shareholders' equity$10,443,086
 $9,793,668
Carrying value of shares held in trust for stock-based compensation plansCarrying value of shares held in trust for stock-based compensation plans(7,588)(7,507)
Liability for common stock issued to stock related compensation plansLiability for common stock issued to stock related compensation plans7,588 7,507 
Accumulated other comprehensive incomeAccumulated other comprehensive income75,958 33,256 
Total shareholders’ equityTotal shareholders’ equity1,646,529 1,594,034 
Total liabilities and shareholders’ equityTotal liabilities and shareholders’ equity$14,642,075 $12,604,031 
See Selected Notes to the Consolidated Financial Statements

4

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, 20172020 and 20162019
Three Months Ended
September 30,		 Nine Months Ended
September 30,		Three Months Ended
September 30,		Nine Months Ended
September 30,
2017
 2016
 2017
 2016
2020201920202019
INTEREST INCOME:       INTEREST INCOME:
Loans receivable$95,221
 $89,805
 $281,304
 $265,697
Loans receivable$116,716 $118,096 $350,815 $350,558 
Mortgage-backed securities6,644
 4,803
 17,529
 15,467
Mortgage-backed securities7,234 9,415 24,354 29,716 
Securities and cash equivalents3,413
 3,241
 9,976
 9,306
Securities and cash equivalents5,631 3,925 14,824 11,996 
Total interest income105,278
 97,849
 308,809
 290,470
Total interest income129,581 131,436 389,993 392,270 
INTEREST EXPENSE:       INTEREST EXPENSE:
Deposits3,189
 2,784
 9,162
 8,501
Deposits5,179 10,014 20,623 27,680 
FHLB advances569
 256
 1,142
 874
FHLB advances988 3,107 4,036 9,953 
Other borrowings84
 82
 241
 234
Other borrowings128 82 482 209 
Junior subordinated debentures1,226
 1,019
 3,494
 2,962
Junior subordinated debentures and subordinated notesJunior subordinated debentures and subordinated notes2,260 1,612 4,988 5,008 
Total interest expense5,068
 4,141
 14,039
 12,571
Total interest expense8,555 14,815 30,129 42,850 
Net interest income100,210
 93,708
 294,770
 277,899
Net interest income121,026 116,621 359,864 349,420 
PROVISION FOR LOAN LOSSES2,000
 2,000
 6,000
 4,000
Net interest income after provision for loan losses98,210
 91,708
 288,770
 273,899
PROVISION FOR CREDIT LOSSESPROVISION FOR CREDIT LOSSES13,641 2,000 64,917 6,000 
Net interest income after provision for credit lossesNet interest income after provision for credit losses107,385 114,621 294,947 343,420 
NON-INTEREST INCOME:       NON-INTEREST INCOME:
Deposit fees and other service charges13,316
 12,927
 38,739
 36,957
Deposit fees and other service charges8,742 10,331 26,091 36,995 
Mortgage banking operations4,498
 8,141
 15,854
 20,409
Mortgage banking operations16,562 6,616 40,891 15,967 
Bank-owned life insurance (BOLI)1,043
 1,333
 3,599
 3,646
Bank-owned life insurance (BOLI)1,286 1,076 4,653 3,475 
Miscellaneous1,705
 1,344
 7,062
 3,936
Miscellaneous951 2,914 5,017 5,431 
20,562
 23,745
 65,254
 64,948
27,541 20,937 76,652 61,868 
Net gain on sale of securities270
 891
 230
 531
Net gain (loss) on sale of securitiesNet gain (loss) on sale of securities644 (2)815 (29)
Net change in valuation of financial instruments carried at fair value(493) (1,124) (1,831) (1,472)Net change in valuation of financial instruments carried at fair value37 (69)(2,360)(172)
Total non-interest income20,339
 23,512
 63,653
 64,007
Total non-interest income28,222 20,866 75,107 61,667 
NON-INTEREST EXPENSE:       NON-INTEREST EXPENSE:
Salary and employee benefits48,931
 44,758
 144,014
 136,497
Salary and employee benefits61,171 59,090 184,494 169,359 
Less capitalized loan origination costs(4,331) (4,953) (13,245) (14,110)Less capitalized loan origination costs(8,517)(7,889)(25,433)(20,137)
Occupancy and equipment11,737
 10,979
 35,778
 32,419
Occupancy and equipment13,022 12,566 39,114 39,013 
Information/computer data services4,420
 4,836
 12,513
 14,607
Information/computer data services6,090 5,657 17,984 16,256 
Payment and card processing expenses5,839
 5,878
 16,651
 16,164
Payment and card processing expenses4,044 4,330 12,135 12,355 
Professional services3,349
 2,258
 12,233
 5,736
Professional and legal expensesProfessional and legal expenses2,368 2,704 6,450 7,474 
Advertising and marketing2,130
 2,282
 5,225
 6,489
Advertising and marketing1,105 2,221 3,584 5,815 
Deposit insurance1,101
 890
 3,438
 3,539
Deposit insurance expenseDeposit insurance expense1,628 (1,604)4,968 1,232 
State/municipal business and use taxes780
 956
 1,857
 2,564
State/municipal business and use taxes1,196 1,011 3,284 2,963 
REO operations240
 (21) (1,089) 513
REO operations, netREO operations, net(11)126 93 263 
Amortization of core deposit intangibles1,542
 1,724
 4,790
 5,339
Amortization of core deposit intangibles1,864 1,985 5,867 6,090 
Provision for credit losses - unfunded loan commitmentsProvision for credit losses - unfunded loan commitments1,539 0 2,356 0 
Miscellaneous6,851
 7,785
 20,432
 22,311
Miscellaneous5,285 6,435 16,841 20,230 
82,589
 77,372
 242,597
 232,068
 90,784 86,632 271,737 260,913 
Acquisition-related costs—
 1,720
 —
 10,945
COVID-19 expensesCOVID-19 expenses778 0 3,169 0 
Acquisition-related expensesAcquisition-related expenses5 676 1,483 3,125 
Total non-interest expense82,589
 79,092
 242,597
 243,013
Total non-interest expense91,567 87,308 276,389 264,038 
Income before provision for income taxes35,960
 36,128
 109,826
 94,893
Income before provision for income taxes44,040 48,179 93,665 141,049 
PROVISION FOR INCOME TAXES10,883
 12,277
 35,502
 32,312
PROVISION FOR INCOME TAXES7,492 8,602 16,694 28,426 
NET INCOME$25,077
 $23,851
 $74,324
 $62,581
NET INCOME$36,548 $39,577 $76,971 $112,623 
Earnings per common share:       Earnings per common share:
Basic$0.76
 $0.70
 $2.25
 $1.84
Basic$1.04 $1.15 $2.18 $3.24 
Diluted$0.76
 $0.70
 $2.25
 $1.83
Diluted$1.03 $1.15 $2.17 $3.23 
Cumulative dividends declared per common share$0.25
 $0.23
 $1.75
 $0.65
Cumulative dividends declared per common share$0.41 $0.41 $0.82 $1.23 
Weighted average number of common shares outstanding:       Weighted average number of common shares outstanding:
Basic32,982,532
 34,045,225
 32,966,214
 34,050,459
Basic35,193,109 34,407,462 35,285,567 34,760,607 
Diluted33,079,099
 34,124,611
 33,061,172
 34,104,875
Diluted35,316,679 34,497,994 35,524,771 34,850,006 
See Selected Notes to the Consolidated Financial Statements

5

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
For the Three and Nine Months Ended September 30, 20172020 and 20162019

Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
NET INCOME$36,548 $39,577 $76,971 $112,623 
OTHER COMPREHENSIVE INCOME, NET OF INCOME TAXES:
Unrealized holding (loss) gain on available-for-sale securities arising during the period(3,090)5,861 47,000 43,268 
Income tax benefit (expense) related to available-for-sale securities unrealized holding gain742 (1,408)(11,280)(10,385)
Reclassification for net (gain) loss on available-for-sale securities realized in earnings(125)2 (296)28 
Income tax expense (benefit) related to available-for-sale securities realized in earnings30 0 71 (7)
Changes in fair value of junior subordinated debentures related to instrument specific credit risk(208)204 9,483 674 
Income tax expense (benefit) related to junior subordinated debentures50 (49)(2,276)(162)
Other comprehensive (loss) income(2,601)4,610 42,702 33,416 
COMPREHENSIVE INCOME$33,947 $44,187 $119,673 $146,039 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2017
 2016
 2017
 2016
NET INCOME$25,077
 $23,851
 $74,324
 $62,581
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:       
Unrealized holding gain (loss) on available-for-sale securities arising during the period493
 (4,659) 5,841
 14,043
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)
Income tax expense related to available-for-sale securities realized gains97
 265
 84
 136
Other comprehensive income (loss)118
 (3,452) 3,579
 8,743
COMPREHENSIVE INCOME$25,195
 $20,399
 $77,903
 $71,324


See Selected Notes to the Consolidated Financial Statements

6

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited) (In thousands, except shares)
For the Nine Months Ended September 30, 20172020 and the Year Ended December 31, 20162019

Common Stock
and Paid in Capital		Retained EarningsAccumulated
Other Comprehensive Income		Stockholders’
Equity
SharesAmount
Balance, January 1, 201935,182,772 $1,337,436 $134,055 $7,104 $1,478,595 
Net income33,346 33,346 
Other comprehensive income, net of income tax12,790 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, 201935,152,746 $1,338,386 $152,911 $19,894 $1,511,191 
Balance, April 1, 201935,152,746 $1,338,386 $152,911 $19,894 $1,511,191 
Net income39,700 39,700 
Other comprehensive income, net of income tax16,016 16,016 
Accrual of dividends on common stock ($0.41/share)(14,354)(14,354)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered20,897 575 575 
Repurchase of common stock(600,000)(32,073)(32,073)
Balance, June 30, 201934,573,643 $1,306,888 $178,257 $35,910 $1,521,055 

Continued on next page







7

 
Common Stock
and Paid in Capital
 Retained Earnings 
Accumulated
Other
Comprehensive Loss
 Shareholders’
Equity
 Shares Amount   
Balance, January 1, 201634,242,255
 $1,261,174
 $39,615
 $(730) $1,300,059
Net income    85,385
   85,385
Other comprehensive loss, net of income tax      (2,725) (2,725)
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)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered96,382
 3,401
     3,401
Excess tax benefit on stock-based compensation  34
     34
Balance, December 31, 201633,193,387
 $1,213,837
 $95,328
 $(3,455) $1,305,710
Common Stock
and Paid in Capital		Retained EarningsAccumulated
Other Comprehensive Income		Stockholders’
Equity
SharesAmounts
Balance, July 1, 201934,573,643 $1,306,888 $178,257 $35,910 $1,521,055 
Net income39,577 39,577 
Other comprehensive income, net of income tax4,610 4,610 
Accrual of dividends on common stock ($0.41/share)(14,130)(14,130)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered(286)1,672 1,672 
Repurchase of common stock(400,000)(21,849)(21,849)
Balance, September 30, 201934,173,357 $1,286,711 $203,704 $40,520 $1,530,935 

Common Stock
and Paid in Capital		Retained EarningsAccumulated
Other Comprehensive Income		Stockholders’
Equity
SharesAmounts
Balance, October 1, 201934,173,357 $1,286,711 $203,704 $40,520 $1,530,935 
Net income33,655 33,655 
Other comprehensive loss, net of income tax(7,264)(7,264)
Accrual of dividends on common stock ($1.41/share)(50,521)(50,521)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered(132)2,029 2,029 
Issuance of shares for acquisition1,578,351 85,200 85,200 
Balance, December 31, 201935,751,576 $1,373,940 $186,838 $33,256 $1,594,034 

Continued on next page
8

Common Stock
and Paid in Capital		Retained EarningsAccumulated
Other Comprehensive Income		Stockholders’
Equity
Balance, January 1, 201733,193,387
 $1,213,837
 $95,328
 $(3,455) $1,305,710
SharesRetained EarningsAmountAccumulated
Other Comprehensive Income		Stockholders’
Equity
Balance, January 1, 2020Balance, January 1, 202035,751,576 $33,256 $1,594,034 
New credit standard (Topic 326) - impact in year of adoptionNew credit standard (Topic 326) - impact in year of adoption(11,215)(11,215)
Net income    74,324
   74,324
Net income16,882 16,882 
Other comprehensive income, net of income tax      3,579
 3,579
Other comprehensive income, net of income tax46,823 46,823 
Accrual of dividends on common stock ($1.75/share cumulative)    (58,247)   (58,247)
Accrual of dividends on common stock ($0.41/share)Accrual of dividends on common stock ($0.41/share)(14,583)(14,583)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrenderedAmortization of stock-based compensation related to restricted stock grants, net of shares surrendered(24,337)1,534 1,534 
Repurchase of common stock(25,000) (1,400)     (1,400)Repurchase of common stock(624,780)(31,775)(31,775)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered86,397
 3,045
     3,045
Balance, September 30, 201733,254,784
 $1,215,482
 $111,405
 $124
 $1,327,011
Balance, March 31, 2020Balance, March 31, 202035,102,459 $1,343,699 $177,922 $80,079 $1,601,700 

Common Stock
and Paid in Capital		Retained EarningsAccumulated
Other Comprehensive Income		Stockholders’
Equity
SharesAmount
Balance, April 1, 202035,102,459 $1,343,699 $177,922 $80,079 $1,601,700 
Net income23,541 23,541 
Other comprehensive loss, net of income tax(1,520)(1,520)
Adjustment to previously accrued dividends(15)(15)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered55,440 1,397 1,397 
Balance, June 30, 202035,157,899 $1,345,096 $201,448 $78,559 $1,625,103 


Continued on next page
9

Common Stock
and Paid in Capital		Retained EarningsAccumulated
Other Comprehensive Income		Stockholders’
Equity
SharesAmount
Balance, July 1, 202035,157,899 $1,345,096 $201,448 $78,559 $1,625,103 
Net income36,548 36,548 
Other comprehensive loss, net of income tax(2,601)(2,601)
Accrual of dividends on common stock ($0.41/share)(15,037)(15,037)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered669 2,516 2,516 
Balance, September 30, 202035,158,568 $1,347,612 $222,959 $75,958 $1,646,529 

See Selected Notes to the Consolidated Financial Statements

10

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
For the Nine Months Ended September 30, 20172020 and 20162019
Nine Months Ended September 30,
20202019
OPERATING ACTIVITIES:
Net income$76,971 $112,623 
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation13,677 12,934 
Deferred income and expense, net of amortization(8,503)(350)
Amortization of core deposit intangibles5,867 6,090 
(Gain) loss on sale of securities(815)29 
Net change in valuation of financial instruments carried at fair value2,360 172 
Reinvested dividends – equity securities(255)0 
(Increase) decrease in deferred taxes, net(1,279)16,136 
Increase in current taxes payable1,426 3,410 
Stock-based compensation6,893 5,101 
Net change in cash surrender value of BOLI(3,721)(3,086)
Gain on sale of loans, including capitalized servicing rights(34,951)(11,834)
Loss on disposal of real estate held for sale and property and equipment, net496 1,274 
Provision for credit losses64,917 6,000 
Provision for credit losses - unfunded loan commitments2,356 0 
Provision for losses on real estate held for sale18 0 
Origination of loans held for sale(1,032,523)(756,283)
Proceeds from sales of loans held for sale1,091,984 694,259 
Net change in:
Other assets(51,796)(26,381)
Other liabilities5,040 8,398 
Net cash provided from operating activities138,162 68,492 
INVESTING ACTIVITIES:
Purchases of securities—available-for-sale(608,192)(118,823)
Principal repayments and maturities of securities—available-for-sale311,781 209,396 
Proceeds from sales of securities—available-for-sale128,939 43,114 
Purchases of securities—held-to-maturity
(215,780)(42,350)
Principal repayments and maturities of securities—held-to-maturity20,691 44,971 
Purchases of equity securities(1,060,000)0 
Proceeds from sales of equity securities610,519 0 
Loan originations, net of principal repayments(855,936)(158,754)
Purchases of loans and participating interest in loans(18)(8,608)
Proceeds from sales of other loans8,454 16,279 
Net cash paid related to branch divestiture0 (10,382)
Purchases of property and equipment(9,936)(16,738)
Proceeds from sale of real estate held for sale and sale of other property2,869 6,809 
Proceeds from FHLB stock repurchase program52,164 130,073 
Purchase of FHLB stock(40,185)(123,740)
Other3,913 1,461 
Net cash used in investing activities(1,650,717)(27,292)
FINANCING ACTIVITIES:
Increase in deposits, net2,166,700 266,129 
Proceeds from long term FHLB advances0 300,000 
Repayment of long term FHLB advances0 (100,189)
Repayment of overnight and short term FHLB advances, net(300,000)(358,000)
Increase in other borrowings, net58,508 1,019 
Net proceeds from issuance of subordinated notes98,027 0 
Cash dividends paid(79,655)(42,073)
Taxes paid related to net share settlement of equity awards(1,447)(1,904)
Cash paid for the repurchase of common stock(31,775)(53,922)
Net cash provided from financing activities1,910,358 11,060 
NET CHANGE IN CASH AND CASH EQUIVALENTS397,803 52,260 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD307,735 272,196 
CASH AND CASH EQUIVALENTS, END OF PERIOD$705,538 $324,456 
 Nine Months Ended
September 30,
 2017
 2016
OPERATING ACTIVITIES:   
Net income$74,324
 $62,581
Adjustments to reconcile net income to net cash provided from operating activities:   
Depreciation10,153
 9,219
Deferred income and expense, net of amortization(1,513) 419
Amortization of core deposit intangibles4,790
 5,339
Gain on sale of securities(230) (531)
Net change in valuation of financial instruments carried at fair value1,831
 1,472
Purchases of securities—trading—
 (1,725)
Proceeds from sales of securities—trading—
 1,682
Principal repayments and maturities of securities—trading1,618
 3,527
Decrease in deferred taxes8,361
 10,747
Increase in current taxes payable2,853
 2,108
Equity-based compensation3,045
 3,129
Increase in cash surrender value of BOLI(3,046) (3,628)
Gain on sale of loans, net of capitalized servicing rights(11,653) (14,583)
Gain on disposal of real estate held for sale and property and equipment(2,438) (748)
Provision for loan losses6,000
 4,000
Provision for losses on real estate held for sale256
 804
Origination of loans held for sale(626,677) (753,714)
Proceeds from sales of loans held for sale812,778
 691,355
Net change in:   
Other assets(4,082) (20,428)
Other liabilities(144) 13,560
Net cash provided from operating activities276,226
 14,585
INVESTING ACTIVITIES:   
Purchases of securities—available-for-sale(706,911) (242,222)
Principal repayments and maturities of securities—available-for-sale135,163
 143,244
Proceeds from sales of securities—available-for-sale35,559
 233,252
Purchases of securities—held-to-maturity
(5,105) (60,344)
Principal repayments and maturities of securities—held-to-maturity6,544
 7,458
Loan originations, net of principal repayments(120,116) (34,328)
Purchases of loans and participating interest in loans(266,481) (230,778)
Proceeds from sales of other loans73,366
 193,939
Purchases of property and equipment(7,641) (9,223)
Proceeds from sale of real estate held for sale and sale of other property, net15,873
 8,021
Proceeds from FHLB stock repurchase program80,056
 70,237
Purchase of FHLB stock(88,404) (67,006)
Other327
 1,922
Net cash (used in) provided from investing activities(847,770) 14,172
FINANCING ACTIVITIES:   
Increase in deposits, net417,436
 56,904
Proceeds from long term FHLB advances150,000
 —
Repayment of long term FHLB advances(7) (70,007)
Proceeds from (repayments of) overnight and short term FHLB advances, net59,000
 (600)
(Decrease) increase in other borrowings, net(1,971) 10,586
Cash dividends paid(57,467) (20,542)
Cash paid for the repurchase of common stock(1,400) (21,098)
Net cash provided from (used in) financing activities565,591
 (44,757)
NET CHANGE IN CASH AND CASH EQUIVALENTS(5,953) (16,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD247,719
 261,917
CASH AND CASH EQUIVALENTS, END OF PERIOD$241,766
 $245,917

(Continued on next page)page

11

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Nine Months Ended September 30, 20172020 and 20162019
Nine Months Ended
September 30,
20202019
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid in cash$31,817 $45,348 
Tax refunds received27,515 18,220 
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		1,588 246 
   Dividends accrued but not paid until after period end1,179 14,679 
 Nine Months Ended
September 30,
 2017
 2016
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:   
Interest paid in cash$13,406
 $12,781
Taxes paid, net of refunds received in cash25,599
 23,751
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
    Dividends accrued but not paid until after period end8,443
 7,873


See Selected Notes to the Consolidated Financial Statements

12

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, 20172020 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 note 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 20162019 Consolidated Financial Statements and/or schedules to conform to the 20172020 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 loancredit 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 acquiredassumed 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, 20162019 filed with the SEC.SEC (2019 Form 10-K).  There have been no significant changes in our application of these accounting policies during the first nine months of 2017.2020, except for the change related to the adoption of Financial Instruments - Credit Losses (Topic 326) as described in below and Note 2.


The information included in this Form 10-Q should be read in conjunction with our Annual Report on2019 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.


As a result of the adoption of Financial Instruments—Credit Losses (Topic 326) on January 1, 2020, the Company has updated the following significant accounting policies.

Securities:Debt securities are classified as held-to-maturity when the Company has the ability and positive intent to hold them to maturity.  Debt securities classified as available-for-sale are available for future liquidity requirements and may be sold prior to maturity.  Debt securities classified as trading are also available for future liquidity requirements and may be sold prior to maturity.  Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.  Debt securities classified as held-to-maturity are carried at cost, net of the allowance for credit losses- securities, adjusted for amortization of premiums to the earliest callable date and accretion of discounts to maturity.  Debt securities classified as available-for-sale are measured at fair value.  Unrealized holding gains and losses on debt securities classified as available-for-sale are excluded from earnings and are reported net of tax as accumulated other comprehensive income (AOCI), a component of shareholders’ equity, until realized.  Debt securities classified as trading are also measured at fair value.  Unrealized holding gains and losses on securities classified as trading are included in earnings.  (See Note 9 for a more complete discussion of accounting for the fair value of financial instruments.)  Realized gains and losses on sale are computed on the specific identification method and are included in earnings on the trade date sold.

If debt securities were transferred from held-to-maturity to available-for-sale, unrealized gains or losses from the time of transfer would be accreted or amortized over the remaining life of the debt security based on the amount and timing of future estimated cash flows.  The accretion or amortization of the amount recorded in AOCI increases the carrying value of the investment and does not affect earnings.

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

13

Allowance for Credit Losses - Securities: Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. The Company’s held-to maturity portfolio contains mortgage-backed securities issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The Company’s held-to-maturity portfolio also contains municipal bonds that are typically rated by major rating agencies as Aa or better. The Company has never incurred a loss on a municipal bond, therefore the expectation of credit losses on these securities is insignificant. The Company uses industry historical credit loss information adjusted for current conditions to establish the allowance for credit losses on the municipal bond portfolio. Less than 2% of the Company’s held-to-maturity portfolio are community development bonds representing pools of one- to four-family loans. The expected credit losses on these bonds is similar to Banner’s one- to four-family residential loan portfolio.

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings.  If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized costs, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.  Projected cash flows are discounted by the current effective interest rate.  If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to AOCI.  

Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the non-collectability of an available-for-sale security is confirmed or when either of the criteria regarding intent of requirement to sell is met.

Loans Receivable:  The Banks originate residential one- to four-family and multifamily mortgage loans for both portfolio investment and sale in the secondary market.  The Banks also originate construction and land development, commercial real estate, commercial business, agricultural and consumer loans for portfolio investment.  Loans receivable not designated as held for sale are recorded at amortized cost, net of the allowance for credit losses. Amortized cost is the principal amount outstanding, net of deferred fees, discounts and premiums.  Accrued interest on loans is reported in accrued interest receivable on the consolidated statements of financial condition. Premiums, discounts and deferred loan fees are amortized to maturity using the level-yield methodology.

Loans Held for Sale. Residential one- to four-family and multifamily mortgage loans originated with the intent to be sold in the secondary market are considered held for sale. Residential one- to four-family loans under best effort delivery commitments are carried at the lower of aggregate cost or estimated market value. Residential one- to four-family loans under mandatory delivery commitments are carried at fair value in order to match changes in the value of the loans with the value of the related economic hedges on the loans. Fair values for residential mortgage loans held for sale are determined by comparing actual loan rates to current secondary market prices for similar loans. The multifamily held-for-sale loans are carried at fair value in order to match changes in the value of the loans with the value of the related economic hedges on the loans. Fair values for multifamily loans held for sale are calculated based on discounted cash flows using a discount rate that is a combination of market spreads for similar loan types added to selected index rates. Net unrealized losses on loans held for sale that are carried at lower of cost or market are recognized through the valuation allowance by charges to income.  Non-refundable fees and direct loan origination costs related to loans held for sale are recognized as part of the cost basis of the loan. Gains and losses on sales of loans held for sale are determined using the aggregate method and are recorded in the mortgage banking operations component of non-interest income.

Loans Acquired in Business Combinations: Loans acquired in business combinations are recorded at their fair value at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased credit-deteriorated or purchased non-credit-deteriorated. Purchased credit-deteriorated (PCD) loans have experienced more than insignificant credit deterioration since origination. For PCD loans, an allowance for credit losses is determined at the acquisition date using the same measurement methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The loan’s fair value grossed up for the allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through a provision for credit losses.

For purchased non-credit-deteriorated loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income over the life of the loans. While credit discounts are included in the determination of the fair value for non-credit-deteriorated loans, since these discounts are expected to be accreted over the life of the loans, they cannot be used to offset the allowance for credit losses that must be recorded at the acquisition date. As a result, an allowance for credit losses is determined at the acquisition date using the same methodology as other loans held for investment and is recognized as a provision for credit losses in the statement of operations. Any subsequent deterioration (improvement) in credit quality is recognized by recording (recapturing) a provision for credit losses.

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Income Recognition on Nonaccrual Loans and Securities:  Interest on loans and securities is accrued as earned unless management doubts the collectability of the asset or the unpaid interest.  Interest accruals on loans are generally discontinued when loans become 90 days past due for payment of interest or principal and the loans are then placed on nonaccrual status.  Loans are reported as past due when installment payments, interest payments, or maturity payments are past due based on contractual terms. All previously accrued but uncollected interest is written off by reversing interest income upon transfer to nonaccrual status.  For any future payments collected, interest income is recognized only upon management’s assessment that there is a strong likelihood that the full amount of a loan will be repaid or recovered.  A loan may be put on nonaccrual status sooner than this policy would dictate if, in management’s judgment, the interest may be uncollectable.  While less common, similar interest reversal and nonaccrual treatment is applied to investment securities if their ultimate collectability becomes questionable. Loans modified due to the COVID-19 pandemic are considered current if they are less than 30 days past due on the contractual payments at the time the loan modification program was put in place and therefore continue to accrue interest unless the interest is being waived.

Provision and Allowance for Credit Losses - Loans:  The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. The Banks have elected to exclude accrued interest receivable from the amortized cost basis in their estimate of the allowance for credit losses. The provision for credit losses reflects the amount required to maintain the allowance for credit losses at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves.  The Company has established systematic methodologies for the determination of the adequacy of the Company’s allowance for credit losses.  The methodologies are set forth in a formal policy and take into consideration the need for a valuation allowance for loans evaluated on a collective (pool) basis which have similar risk characteristics as well as allowances that are tied to individual loans that do not share risk characteristics.  The Company increases its allowance for credit losses by charging provisions for credit losses on its consolidated statement of operations. Losses related to specific assets are applied as a reduction of the carrying value of the assets and charged against the allowance for credit loss reserve when management believes the non-collectability of a loan balance is confirmed.  Recoveries on previously charged off loans are credited to the allowance for credit losses.  

Management estimates the allowance for credit losses using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio.  These factors include, among others, changes in the size and composition of the loan portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic conditions.

The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. In estimating the component of the allowance for credit losses for loans that share common risk characteristics, loans are pooled based on loan type and areas of risk concentration. For loans evaluated collectively, the allowance for credit losses is calculated using life of loan historical losses adjusted for economic forecasts and current conditions.

For commercial real estate, multifamily real estate, construction and land, commercial business and agricultural loans with risk rating segmentation, historical credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and risk rating. For one- to four- family residential loans, historical credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and delinquency status. These models calculate an expected life-of-loan loss percentage for each loan category by calculating the probability of default, based on the migration of loans from performing to loss by risk rating or delinquency categories using historical life-of-loan analysis and the severity of loss, based on the aggregate net lifetime losses incurred for each loan pool. For commercial real estate, commercial business, and consumer loans without risk rating segmentation, historical credit loss assumptions are estimated using a model that calculates an expected life-of-loan loss percentage for each loan category by considering the historical cumulative losses based on the aggregate net lifetime losses incurred for each loan pool. The model captures historical loss data back to the first quarter of 2008. For loans evaluated collectively, management uses economic indicators to adjust the historical loss rates so that they better reflect management’s expectations of future conditions over the remaining lives of the loans in the portfolio based on reasonable and supportable forecasts. These economic indicators are selected based on correlation to the Company’s historical credit loss experience and are evaluated for each loan category. The economic indicators evaluated include unemployment, gross domestic product, real estate price indices and growth, yield curve spreads, treasury yields, the corporate yield, the market volatility index, the Dow Jones index, the consumer confidence index, and the prime rate. Management considers various economic scenarios and forecasts when evaluating the economic indicators and probability weights the various scenarios to arrive at the forecast that most reflects management’s expectations of future conditions. The allowance for credit losses is then adjusted for the period in which those forecasts are considered to be reasonable and supportable. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, the adjustments discontinue to be applied so that the model reverts back to the historical loss rates using a straight line reversion method. Management selected an initial reasonable and supportable forecast period of 12 months with a reversion period of 12 months. Both the reasonable and supportable forecast period and the reversion period are periodically reviewed by management.

Further, for loans evaluated collectively, management also considers qualitative and environmental factors for each loan category to adjust for differences between the historical periods used to calculate historical loss rates and expected conditions over the remaining lives of the loans in the portfolio. In determining the aggregate adjustment needed management considers the financial condition of the borrowers, the nature and volume of the loans, the remaining terms and the extent of prepayments on the loans, the volume and severity of past due and classified loans as well as the value of the underlying collateral on loans in which the collateral dependent practical expedient has not been used. Management also considers the Company’s lending policies, the quality of the Company’s credit review system, the quality of the Company’s
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management and lending staff, and the regulatory and economic environments in the areas in which the Company’s lending activities are concentrated.

Loans that do not share risk characteristics with other loans in the portfolio that are individually evaluated for impairment are not included in the collective evaluation.  Factors involved in determining whether a loan should be individually evaluated include, but are not limited to, the financial condition of the borrower and the value of the underlying collateral.  Expected credit losses for loans evaluated individually are measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or when the Banks determine that foreclosure is probable, the expected credit loss is measured based on the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. As a practical expedient, the Banks measure the expected credit loss for a loan using the fair value of the collateral, if repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the Banks' assessment as of the reporting date.

In both cases, if the fair value of the collateral is less than the amortized cost basis of the loan, the Banks will recognize an allowance as the difference between the fair value of the collateral, less costs to sell (if applicable), at the reporting date and the amortized cost basis of the loan. If the fair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis will be limited to the amount previously charged-off. Subsequent changes in the expected credit losses for loans evaluated individually are included within the provision for credit losses in the same manner in which the expected credit loss initially was recognized or as a reduction in the provision that would otherwise be reported.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Banks.

Some of the Banks’ loans are reported as troubled debt restructures (TDRs).  Loans are reported as TDRs when the Banks grant a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider.  Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for a transaction of similar risk.  The allowance for credit losses on a TDR is determined using the same method as all other loans held for investment, except when the value of the concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method the allowance for credit losses is determined by discounting the expected future cash flows at the original interest rate of the loan.

The CARES Act provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. To qualify as an eligible loan under the CARES Act, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (a) 60 days after the date of termination of the national emergency by the President or (b) December 31, 2020.

Loan Origination and Commitment Fees:  Loan origination fees, net of certain specifically defined direct loan origination costs, are deferred and recognized as an adjustment of the loans’ interest yield using the level-yield method over the contractual term of each loan adjusted for actual loan prepayment experience.  Net deferred fees or costs related to loans held for sale are recognized as part of the cost basis of the loan.  Loan commitment fees are deferred until the expiration of the commitment period unless management believes there is a remote likelihood that the underlying commitment will be exercised, in which case the fees are amortized to fee income using the straight-line method over the commitment period.  If a loan commitment is exercised, the deferred commitment fee is accounted for in the same manner as a loan origination fee.  Deferred commitment fees associated with expired commitments are recognized as fee income.

Allowance for Credit Losses - unfunded loan commitments: An allowance for credit losses - unfunded loan commitments is maintained at a level that, in the opinion of management, is adequate to absorb expected credit losses associated with the contractual life of the Banks’ commitments to lend funds under existing agreements such as letters or lines of credit. The Banks use a methodology for determining the allowance for credit losses - unfunded loan commitments that applies the same segmentation and loss rate to each pool as the funded exposure adjusted for probability of funding. Draws on unfunded loan commitments that are considered uncollectible at the time funds are advanced are charged to the allowance for credit losses on off-balance sheet exposures. Provisions for credit losses - unfunded loan commitments are recognized in non-interest expense and added to the allowance for credit losses - unfunded loan commitments, which is included in other liabilities in the consolidated statements of financial condition.

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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 issued 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) 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. The amendments in this ASU leave lessor accounting largely unchanged, although certain targeted improvements were made to align lessor accounting with the lessee accounting model. This ASU simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning 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, upon the adoption of this ASU the Company expects to report increased assets and increased liabilities 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.On January 1, 2020, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,. Current GAAP requires an “incurred loss”as amended, which replaces the incurred loss methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred.incurred with an expected loss methodology that is referred to as CECL. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendmentASU 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 replacereplaces the incurred loss impairment methodology in currentprevious GAAP with CECL, a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in thisThis ASU requirerequires 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 beis 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 thisThis ASU broadenbroadens 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 infollowing table illustrates the pre-tax impact of the adoption of this ASU will be effective(in thousands):
January 1, 2020 As Reported Under Topic 326January 1, 2020 Pre-Topic 326 AdoptionImpact of Topic 326 Adoption
Assets
Held-to-maturity debt securities
U.S. Government and agency obligations$0 $0 $0 
Municipal bonds28 0 28 
Corporate bonds35 0 35 
Mortgage-backed or related securities0 0 0 
Allowance for credit losses on held-to-maturity debt securities$63 $0 $63 
Loans
Commercial real estate$27,727 $30,591 $(2,864)
Multifamily real estate2,550 4,754 (2,204)
Construction and land25,509 22,994 2,515 
Commercial business26,380 23,370 3,010 
Agricultural business3,769 4,120 (351)
One-to four-family residential11,261 4,136 7,125 
Consumer11,175 8,202 2,973 
Unallocated0 2,392 (2,392)
Allowance for credit losses on loans$108,371 $100,559 $7,812 
Liabilities
Allowance for credit losses on unfunded loan commitments$9,738 $2,716 $7,022 
Total$14,897 

The $14.9 million total increase was recorded net of tax as an $11.2 million reduction to shareholders' equity as of the adoption date. In addition to the increase in the allowance for 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. Uponcredit losses upon adoption, the Company expects a changemore variability in its quarterly provision for credit losses going forward due to the CECL model’s sensitivity to changes in the processeseconomic forecast and proceduresother factors. The Company has updated its accounting policies based on the adoption of this ASU. See Note 1 of the Notes to calculate the allowanceConsolidated Financial Statements for loan losses,additional information.

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NOTE 3: BUSINESS COMBINATION
Acquisition of AltaPacific Bancorp
On November 1, 2019, the Company completed the acquisition of 100% of the outstanding common shares of AltaPacific Bancorp (AltaPacific), the holding company for AltaPacific Bank, a California state-chartered commercial bank. AltaPacific was merged into Banner and AltaPacific Bank was merged into Banner Bank. Pursuant to the previously announced terms of the acquisition, AltaPacific shareholders received 0.2712 shares of Banner common stock in exchange for each share of AltaPacific common stock, plus cash in lieu of any fractional shares and to cancel in-the-money AltaPacific stock options. The merged banks operate as Banner Bank. The primary reason for the acquisition was to expand the Company’s presence in California by adding density within our existing geographic footprint. The acquisition provided $425.7 million in assets, $313.4 million in deposits and $332.4 million in loans to Banner.

The application of the acquisition method of accounting resulted in recognition of a CDI asset of $4.6 million and goodwill of $34.0 million. The acquired CDI has been determined to have a useful life of approximately ten years and will be amortized on an accelerated basis. Goodwill is not amortized but will be evaluated for impairment on an annual basis or more often if circumstances dictate to determine if the carrying value remains appropriate. Goodwill 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):
AltaPacific
November 1, 2019
Consideration to AltaPacific equity holders:
Cash paid$2,360 
Fair value of common shares issued85,200 
Total consideration87,560 
Fair value of assets acquired:
Cash and cash equivalents39,686 
Securities20,348 
Federal Home Loan Bank stock2,005 
Loans receivable (contractual amount of $338.2 million)332,355 
Real estate owned held for sale650 
Property and equipment3,809 
Core deposit intangible4,610 
Bank-owned life insurance11,890 
Deferred tax asset166 
Other assets10,150 
Total assets acquired425,669 
Fair value of liabilities assumed:
Deposits313,374 
Advances from FHLB40,226 
Junior subordinated debentures5,814 
Deferred compensation4,508 
Other liabilities8,154 
Total liabilities assumed372,076 
Net assets acquired53,593 
Goodwill$33,967 
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Acquired goodwill represents the premium the Company paid over the fair value of the net tangible and intangible assets acquired. The Company paid this premium for a number of reasons, including changesgrowing the Company’s customer base, acquiring assembled workforces, and expanding its presence in assumptionsexisting markets. See Note 7, Goodwill, Other Intangible Assets and estimatesMortgage Servicing Rights for the accounting for goodwill and other intangible assets.
Fair values are preliminary and subject to consider expectedrefinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available. Additional adjustments to the acquisition accounting that may be required would most likely involve loans, property and equipment, or the deferred tax asset. As of November 1, 2019, the unpaid principal balance on purchased non-credit-impaired loans was $333.5 million. The fair value of the purchased non-credit-impaired loans was $328.2 million, resulting in a discount of $5.3 million recorded on these loans, which includes $5.8 million of a credit lossesrelated discount. This discount is being accreted into income over the life of the loan versusloans on an effective yield basis.
The following table presents the current accounting practice that utilizesacquired AltaPacific purchased credit-impaired (PCI) loans as of the incurred loss model. acquisition date (in thousands):
AltaPacific
November 1, 2019
Acquired PCI loans:
Contractually required principal and interest payments$5,881 
Nonaccretable difference(1,046)
Cash flows expected to be collected4,835 
Accretable yield(683)
Fair value of PCI loans$4,152 

The new guidance may result in an increasefinancial results of the Company include the revenues and expenses produced by the acquired assets and assumed liabilities of AltaPacific since November 1, 2019. Disclosure of the amount of AltaPacific’s revenue and net income (excluding integration costs) included in the allowance for loan losses which will also reflectCompany’s consolidated statements of operations is impracticable due to 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 magnitudeintegration of the changeoperations and itsaccounting for this acquisition. The pro forma impact onof 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 amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortizedAltaPacific acquisition to the earliest call date. Under current GAAP, premiums and discounts on callable debt securities generally are amortizedhistorical financial results was determined 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 this ASU will have on the Company’s Consolidated Financial Statements.significant.


Compensation—Stock Compensation (Topic 718)
In May 2017, FASB issued ASU 2017-09, Scope of Modification Accounting. The amendments in this ASU are intended to provide clarity and reduce both (1) diversity 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. The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following are met: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an


alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to 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. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The Company's early adoption of the amendments in this ASU in the quarter ended June 30, 2017 did not have a material impact on the Company’s Consolidated Financial Statements.
19


Note 3:4:  SECURITIES


The amortized cost, gross unrealized gains and losses and estimated fair value of securities at September 30, 20172020 and December 31, 20162019 are summarized as follows (in thousands):
 September 30, 2020
 Amortized CostFair
Value
Trading:
Corporate bonds$27,203 $23,276 
$27,203 $23,276 
 September 30, 2020
 Amortized CostGross Unrealized GainsGross Unrealized LossesAllowance for Credit LossesFair
Value
Available-for-Sale:
U.S. Government and agency obligations$169,740 $1,140 $(967)$0 $169,913 
Municipal bonds257,056 15,707 (355)0 272,408 
Corporate bonds53,756 2,300 (85)0 55,971 
Mortgage-backed or related securities1,199,816 51,199 (515)0 1,250,500 
Asset-backed securities9,701 51 (160)0 9,592 
 $1,690,069 $70,397 $(2,082)$0 $1,758,384 
 September 30, 2020
 Amortized CostGross Unrealized GainsGross Unrealized LossesFair
Value		Allowance for Credit Losses
Held-to-Maturity:
U.S. Government and agency obligations$341 $10 $0 $351 $0 
Municipal bonds377,019 19,260 (593)395,686 (60)
Corporate bonds3,254 0 (13)3,241 (42)
Mortgage-backed or related securities48,521 3,007 0 51,528 0 
$429,135 $22,277 $(606)$450,806 $(102)
20

 September 30, 2017
 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses 
Fair
Value
Trading:       
U.S. Government and agency obligations$1,230
     $1,305
Municipal bonds330
     331
Corporate bonds27,089
     21,675
Equity securities14
     155
 $28,663
     $23,466
Available-for-Sale:       
U.S. Government and agency obligations$87,509
 $379
 $(303) $87,585
Municipal bonds113,794
 1,194
 (342) 114,646
Corporate bonds10,567
 79
 (44) 10,602
Mortgage-backed or related securities1,093,203
 4,103
 (4,874) 1,092,432
Asset-backed securities28,104
 157
 (54) 28,207
Equity securities5,686
 10
 (111) 5,585
 $1,338,863
 $5,922
 $(5,728) $1,339,057
Held-to-Maturity:       
U.S. Government and agency obligations$1,035
 $24
 $—
 $1,059
Municipal bonds:193,987
 4,638
 (1,015) 197,610
Corporate bonds4,265
 —
 —
 4,265
Mortgage-backed or related securities65,465
 476
 (212) 65,729
 $264,752
 $5,138
 $(1,227) $268,663


December 31, 2019
Amortized CostGross Unrealized GainsGross Unrealized LossesFair
Value
Trading:
Corporate bonds$27,203 $25,636 
$27,203 $25,636 
Available-for-Sale:
U.S. Government and agency obligations$90,468 $286 $(1,156)$89,598 
Municipal bonds101,927 5,233 (3)107,157 
Corporate bonds4,357 14 (6)4,365 
Mortgage-backed or related securities1,324,999 20,325 (3,013)1,342,311 
Asset-backed securities8,195 0 (69)8,126 
 $1,529,946 $25,858 $(4,247)$1,551,557 
Held-to-Maturity:
U.S. Government and agency obligations$385 $4 $0 $389 
Municipal bonds177,208 3,733 (2,213)178,728 
Corporate bonds3,353 0 (11)3,342 
Mortgage-backed or related securities55,148 921 (723)55,346 
$236,094 $4,658 $(2,947)$237,805 

 December 31, 2016
 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses 
Fair
Value
Trading:       
U.S. Government and agency obligations$1,230
     $1,326
Municipal bonds331
     335
Corporate bonds26,959
     21,143
Mortgage-backed or related securities1,620
     1,641
Equity securities14
     123
 $30,154
     $24,568
Available-for-Sale:       
U.S. Government and agency obligations$57,288
 $146
 $(456) $56,978
Municipal bonds110,487
 455
 (1,089) 109,853
Corporate bonds10,255
 77
 (49) 10,283
Mortgage-backed or related securities598,899
 2,064
 (6,251) 594,712
Asset-backed securities29,319
 —
 (326) 28,993
Equity securities88
 10
 —
 98
 $806,336
 $2,752
 $(8,171) $800,917
Held-to-Maturity:       
U.S. Government and agency obligations$1,065
 $—
 $(18) $1,047
Municipal bonds:196,989
 4,173
 (1,272) 199,890
Corporate bonds3,876
 —
 —
 3,876
Mortgage-backed or related securities65,943
 309
 (537) 65,715
 $267,873
 $4,482
 $(1,827) $270,528


At Accrued interest receivable on held-to-maturity debt securities was $2.9 million and $1.1 million as of September 30, 20172020 and December 31, 2016,2019, respectively, and was $6.1 million and $4.8 million on available-for-sale debt securities as of September 30, 2020 and December 31, 2019, respectively. Accrued interest receivable on securities is reported in accrued interest receivable on the consolidated statements of financial condition and is excluded from the calculation of the allowance for credit losses.

At September 30, 2020, the gross unrealized losses and the fair value for securities available-for-sale aggregated by the length of time that individual securities have been in a continuous unrealized loss position were as follows (in thousands):
September 30, 2020
Less Than 12 Months12 Months or MoreTotal
Fair
Value		Unrealized LossesFair
Value		Unrealized LossesFair
Value		Unrealized Losses
Available-for-Sale:
U.S. Government and agency obligations$3,162 $(7)$53,105 $(960)$56,267 $(967)
Municipal bonds16,636 (355)0 0 16,636 (355)
Corporate bonds11,205 (85)0 0 11,205 (85)
Mortgage-backed or related securities75,459 (500)1,558 (15)77,017 (515)
Asset-backed securities870 (16)6,469 (144)7,339 (160)
$107,332 $(963)$61,132 $(1,119)$168,464 $(2,082)

21

At December 31, 2019, the gross unrealized losses and the fair value for securities available-for-sale and held-to-maturity aggregated by the length of time that individual securities have been in a continuous unrealized loss position waswere as follows (in thousands):
December 31, 2019
Less Than 12 Months12 Months or MoreTotal
Fair
Value		Unrealized LossesFair
Value		Unrealized LossesFair
Value		Unrealized Losses
Available-for-Sale:
U.S. Government and agency obligations$2,747 $(20)$60,979 $(1,136)$63,726 $(1,156)
Municipal bonds1,902 0 494 (3)2,396 (3)
Corporate bonds594 (6)0 0 594 (6)
Mortgage-backed or related securities300,852 (2,829)33,360 (184)334,212 (3,013)
Asset-backed securities1,204 (17)5,989 (52)7,193 (69)
$307,299 $(2,872)$100,822 $(1,375)$408,121 $(4,247)
Held-to-Maturity
U.S. Government and agency obligations$0 $0 $0 $0 $0 $0 
Municipal bonds44,605 (1,889)19,017 (324)63,622 (2,213)
Corporate bonds0 0 489 (11)489 (11)
Mortgage-backed or related securities11,117 (723)0 0 11,117 (723)
$55,722 $(2,612)$19,506 $(335)$75,228 $(2,947)
 September 30, 2017
 Less Than 12 Months 12 Months or More Total
 
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)
Municipal bonds32,559
 (169) 13,023
 (173) 45,582
 (342)
Corporate bonds300
 (1) 4,814
 (43) 5,114
 (44)
Mortgage-backed or related securities437,934
 (3,417) 95,051
 (1,457) 532,985
 (4,874)
Asset-backed securities9,968
 (54) —
 —
 9,968
 (54)
Equity securities5,487
 (111) —
 —
 5,487
 (111)
 $526,094
 $(4,038) $118,568
 $(1,690) $644,662
 $(5,728)
Held-to-Maturity           
Municipal bonds$40,230
 $(903) $4,347
 $(112) $44,577
 $(1,015)
Mortgage-backed or related securities18,889
 (212) —
 —
 18,889
 (212)
 $59,119
 $(1,115) $4,347
 $(112) $63,466
 $(1,227)
            
 December 31, 2016
 Less Than 12 Months 12 Months or More Total
 
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)
Municipal bonds60,765
 (1,087) 556
 (2) 61,321
 (1,089)
Corporate bonds5,206
 (49) —
 —
 5,206
 (49)
Mortgage-backed or related securities403,431
 (5,604) 47,467
 (647) 450,898
 (6,251)
Asset-backed securities9,928
 (101) 19,064
 (225) 28,992
 (326)
 $518,373
 $(7,283) $68,099
 $(888) $586,472
 $(8,171)
Held-to-Maturity           
U.S. Government and agency obligations$1,047
 $(18) $—
 $—
 $1,047
 $(18)
Municipal bonds64,802
 (1,267) 204
 (5) 65,006
 (1,272)
Mortgage-backed or related securities42,245
 (537) —
 —
 42,245
 (537)
 $108,094
 $(1,822) $204
 $(5) $108,298
 $(1,827)


At September 30, 2017,2020, there were 22164 securities—available-for-sale with unrealized losses, compared to 24390 at December 31, 2016.2019.  At September 30, 2017,December 31, 2019, there were 3117 securities—held-to-maturity with unrealized losses, compared to 73 at December 31, 2016.losses.  Management does not believe that any individual unrealized loss as of September 30, 20172020 resulted from credit loss or December 31, 2016that any individual unrealized loss represented other-than-temporary impairment (OTTI). as of December 31, 2019.  The decline in fair market value of these securities was generally due to changes in interest rates and changes in market-desired spreads subsequent to their purchase.


There were no0 sales of securities—trading during the nine months 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. The Company did not recognize any OTTI charges2020 or recoveries on securities—trading during the nine months ended September 30, 2017 or the nine months ended September 30, 2016.2019. There were no0 securities—trading in a nonaccrual status at September 30, 20172020 or December 31, 2016.2019.  Net unrealized holding gainslosses of $389,000$2.4 million were recognized during the nine months ended September 30, 2017.


Sales2020 compared to $172,000 of securities—available-for-sale totaled $35.6 million with a resulting net gain of $230,000 forunrealized holding losses recognized during the nine months ended September 30, 2017.  Sales2019.

There were 30 sales of securities—available-for-sale totaled $233.3 million with a resulting net gain of $374,000 forduring the nine months ended September 30, 2016.2020, with a net gain of $296,000.  There were no45 sales of securities—available-for-sale during the nine months ended September 30, 2019, which resulted in a net loss of $28,000. There were 0 securities—available-for-sale in a nonaccrual status at September 30, 20172020 or December 31, 2016.2019.


There were no0 sales of securities—held-to-maturity during the nine months ended September 30, 20172020 or 2019, although there were partial calls of securities that resulted in a net loss of $1,000 for the nine months ended September 30, 2016.2019. There were no0 securities—held-to-maturity in a nonaccrual status or 30 days or more past due at September 30, 20172020 or December 31, 2016.2019.


The Company also sold Visa Class B stock during the nine months ended September 30, 2020, with a net gain of $519,000. The stock was previously carried at a zero-cost basis due to transfer restrictions and uncertainty of litigation.

The amortized cost and estimated fair value of securities at September 30, 2017,2020, 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.
22

September 30, 2017 September 30, 2020
Trading Available-for-Sale Held-to-MaturityTradingAvailable-for-SaleHeld-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
Maturing in one year or less$0 $0 $0 $0 $0 $0 
Maturing after one year through five years230
 231
 110,023
 110,293
 24,269
 24,432
Maturing after one year through five years0 0 60,411 62,725 57,360 59,541 
Maturing after five years through ten years1,200
 1,274
 265,137
 264,366
 108,739
 110,368
Maturing after five years through ten years0 0 478,140 500,140 40,458 42,822 
Maturing after ten years through twenty years17,089
 14,248
 255,076
 256,319
 88,407
 91,280
Maturing after ten years through twenty years27,203 23,276 446,834 463,236 118,611 123,188 
Maturing after twenty years10,000
 7,427
 675,990
 675,583
 42,111
 41,357
Maturing after twenty years0 0 704,684 732,283 212,706 225,255 
28,649
 23,311
 1,333,177
 1,333,472
 264,752
 268,663
Equity securities14
 155
 5,686
 5,585
 —
 —
$28,663
 $23,466
 $1,338,863
 $1,339,057
 $264,752
 $268,663
$27,203 $23,276 $1,690,069 $1,758,384 $429,135 $450,806 


The following table presents, as of September 30, 2017,2020, investment securities which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law (in thousands):
September 30, 2020
Carrying ValueAmortized CostFair
Value
Purpose or beneficiary:
State and local governments public deposits$152,148 $151,455 $161,497 
Interest rate swap counterparties29,623 28,473 29,849 
Repurchase agreements204,034 194,374 204,034 
Other2,627 2,627 2,707 
Total pledged securities$388,432 $376,929 $398,087 

The Company monitors the credit quality of held-to-maturity debt securities through the use of credit rating. Credit ratings are reviewed and updated quarterly. The following table summarizes the amortized cost of held-to-maturity debt securities by credit rating at September 30, 2020 (in thousands):
September 30, 2020
U.S. Government and agency obligationsMunicipal bondsCorporate bondsMortgage-backed or related securitiesTotal
AAA/AA/A$0 $353,648 $500 $0 $354,148 
Not Rated341 23,371 2,754 48,521 74,987 
$341 $377,019 $3,254 $48,521 $429,135 

The following table presents the activity in the allowance for credit losses for held-to-maturity debt securities by major type for the three and nine months ended September 30, 2020 (in thousands):
For the Three Months Ended September 30, 2020
U.S. Government and agency obligationsMunicipal bondsCorporate bondsMortgage-backed or related securitiesTotal
Allowance for credit losses - securities
Beginning Balance$0 $61 $41 $0 $102 
(Recapture)/Provision for credit losses0 (1)1 0 0 
Ending Balance$0 $60 $42 $0 $102 
23

 September 30, 2017
 Carrying Value Amortized Cost 
Fair
Value
Purpose or beneficiary:     
State and local governments public deposits$127,661
 $127,549
 $130,380
Interest rate swap counterparties16,172
 16,197
 16,218
Repurchase agreements127,632
 127,803
 127,797
Other3,949
 3,948
 3,888
Total pledged securities$275,414
 $275,497
 $278,283
For the Nine Months Ended September 30, 2020
U.S. Government and agency obligationsMunicipal bondsCorporate bondsMortgage-backed or related securitiesTotal
Allowance for credit losses - securities
Beginning Balance$0 $0 $0 $0 $0 
Impact of adopting ASC 3260 28 35 0 63 
Provision for credit losses0 32 7 0 39 
Ending Balance$0 $60 $42 $0 $102 



24

Note 4:5: LOANS RECEIVABLE AND THE ALLOWANCE FOR LOANCREDIT LOSSES - LOANS


LoansAs a result of the adoption of Financial Instruments - Credit Losses (Topic 326), effective January 1, 2020, the Company changed the segmentation of its loan portfolio based on the common risk characteristics used to measure the allowance for credit losses.  The following table presents the loans receivable at September 30, 20172020 and December 31, 2016 are summarized as follows2019 by class (dollars in thousands):. The presentation of loans receivable at December 31, 2019 has been updated to conform to the loan portfolio segmentation that became effective on January 1, 2020.
 September 30, 2020December 31, 2019
 AmountPercent of TotalAmountPercent of Total
Commercial real estate:    
Owner-occupied$1,049,877 10.3 $980,021 10.5 %
Investment properties1,991,258 19.6 2,024,988 21.8 
Small balance CRE597,971 5.9 613,484 6.6 
Multifamily real estate426,659 4.2 388,388 4.2 
Construction, land and land development:
Commercial construction220,285 2.2 210,668 2.3 
Multifamily construction291,105 2.9 233,610 2.5 
One- to four-family construction518,085 5.1 544,308 5.8 
Land and land development240,803 2.4 245,530 2.6 
Commercial business:
Commercial business2,343,619 23.1 1,364,650 14.7 
Small business scored763,824 7.5 772,657 8.3 
Agricultural business, including secured by farmland326,169 3.2 337,271 3.6 
One- to four-family residential771,431 7.6 925,531 9.9 
Consumer:
Consumer—home equity revolving lines of credit504,523 4.9 519,336 5.6 
Consumer—other118,308 1.1 144,915 1.6 
Total loans10,163,917 100.0 9,305,357 100.0 %
Less allowance for credit losses - loans(167,965) (100,559) 
Net loans$9,995,952  $9,204,798  

25

 September 30, 2017 December 31, 2016
 Amount Percent of Total Amount Percent of Total
Commercial real estate:       
Owner-occupied$1,369,130
 17.6% $1,352,999
 18.1%
Investment properties1,993,144
 25.6
 1,986,336
 26.7
Multifamily real estate311,706
 4.0
 248,150
 3.3
Commercial construction157,041
 2.0
 124,068
 1.7
Multifamily construction136,532
 1.8
 124,126
 1.7
One- to four-family construction399,361
 5.1
 375,704
 5.0
Land and land development: 
    
  
Residential158,384
 2.0
 170,004
 2.3
Commercial27,095
 0.4
 29,184
 0.4
Commercial business1,311,409
 16.9
 1,207,879
 16.2
Agricultural business, including secured by farmland339,932
 4.4
 369,156
 5.0
One- to four-family residential869,556
 11.2
 813,077
 10.9
Consumer:       
Consumer secured by one- to four-family535,300
 6.9
 493,211
 6.6
Consumer—other165,859
 2.1
 157,254
 2.1
Total loans7,774,449
 100.0% 7,451,148
 100.0%
Less allowance for loan losses(89,100)  
 (85,997)  
Net loans$7,685,349
  
 $7,365,151
  
The presentation of loans receivable at December 31, 2019 in the table below is based on loan segmentation as presented in the 2019 Form 10-K.

 December 31, 2019
 AmountPercent of Total
Commercial real estate:  
Owner-occupied$1,580,650 17.0 %
Investment properties2,309,221 24.8 
Multifamily real estate473,152 5.1 
Commercial construction210,668 2.3 
Multifamily construction233,610 2.5 
One- to four-family construction544,308 5.8 
Land and land development:
Residential154,688 1.7 
Commercial26,290 0.3 
Commercial business1,693,824 18.2 
Agricultural business, including secured by farmland370,549 4.0 
One- to four-family residential945,622 10.2 
Consumer:
Consumer secured by one- to four-family550,960 5.8 
Consumer—other211,815 2.3 
Total loans9,305,357 100.0 %
Less allowance for loan losses(100,559)
Net loans$9,204,798 

Loan amounts includedare net of unearned loan fees in excess of unamortized costs of $389,000$31.7 million as of September 30, 20172020 and were net of unearned fees of $5.8 million$438,000 as of December 31, 2016.2019. Net loans include net discounts on acquired loans of $23.4$17.9 million and $31.1$25.0 million as of September 30, 20172020 and December 31, 2016,2019, respectively. Net loans does not include accrued interest receivable. Accrued interest receivable on loans was $39.2 million as of September 30, 2020 and $31.8 million as of December 31, 2019 and was reported in accrued interest receivable on the consolidated statements of financial condition.


Purchased credit-impaired loanscredit-deteriorated and purchased non-credit-impairednon-credit-deteriorated loans. Purchased loans, including loans 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-deteriorated (PCD) or purchased non-credit-deteriorated. There were no PCD loans acquired for the three and nine months ended September 30, 2020.
Purchased credit-impaired (PCI)loans and purchased non-credit-impaired loans. Prior to the implementation of Financial Instruments—Credit Losses (Topic 326) on January 1, 2020, acquired loans were evaluated upon acquisition and classified as either PCI or purchased non-credit-impaired. PCI loans reflectreflected credit deterioration since origination such that it iswas probable at acquisition that the Company willwould be unable to collect all contractually required payments. The outstanding contractual unpaid principal balance of PCI loans, excluding acquisition accounting adjustments, was $34.9 million at September 30, 2017 and $48.4$23.5 million at December 31, 2016.2019. The carrying balance of PCI loans was $23.2 million at September 30, 2017 and $32.3$15.9 million at December 31, 2016.2019. These loans were converted to PCD loans on January 1, 2020.
The following table presents the changes in the accretable yield for PCI loans for the three and nine months ended September 30, 2017 and 20162019 (in thousands):
Three Months Ended
September 30,		Nine Months Ended
September 30,
20192019
Balance, beginning of period$4,743 $5,216 
Accretion to interest income(423)(1,372)
Reclassifications from non-accretable difference11 487 
Balance, end of period$4,331 $4,331 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2017 2016 2017 2016
Balance, beginning of period$7,666
 $11,035
 $8,717
 $10,375
Accretion to interest income(1,720) (1,811) (5,210) (6,349)
Disposals—
 (899) (497) (1,018)
Reclassifications from non-accretable difference918
 1,120
 3,854
 6,437
Balance, end of period$6,864
 $9,445
 $6,864
 $9,445


As of September 30, 2017 and December 31, 2016,2019, the non-accretable difference between the contractually required payments and cash flows expected to be collected were $11.7 million and $15.7 million, respectively.was $7.4 million.


26

Impaired Loans and the Allowance for Loan Losses.  A  Prior to the implementation of Financial Instruments—Credit Losses (Topic 326) on January 1, 2020, a loan iswas considered impaired when, based on current information and circumstances, the Company determines it iswas probable that it willwould 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,included, but arewere not limited to, the financial condition of

the borrower, the value of the underlying collateral and the current status of the economy. Impaired loans arewere comprised of loans on nonaccrual, troubled debt restructurings (TDRs)TDRs that arewere performing under their restructured terms, and loans that arewere 90 days or more past due, but arewere still on accrual. PCI loans arewere considered performing within the scope of the purchased credit-impaired accounting guidance and arewere not included in the impaired loan tables.

27


The following tables providetable provides information on impaired loans, excluding PCI loans, with and without allowance reserves at September 30, 2017 and December 31, 2016.2019. Recorded investment includes the unpaid principal balance or the carrying amount of loans less charge-offs and net deferred loan fees (in thousands):
December 31, 2019
Unpaid Principal BalanceRecorded InvestmentRelated Allowance
Without Allowance (1)
With Allowance (2)
Commercial real estate:
Owner-occupied$4,185 $3,816 $194 $18 
Investment properties3,536 1,883 690 40 
Multifamily real estate82 85 0 0 
Multifamily construction573 98 0 0 
One- to four-family construction1,799 1,799 0 0 
Land and land development:
Residential676 340 0 0 
Commercial business25,117 4,614 19,330 4,128 
Agricultural business/farmland3,044 661 2,243 141 
One- to four-family residential7,290 5,613 1,648 41 
Consumer:
Consumer secured by one- to four-family3,081 2,712 127 5 
Consumer—other222 159 52 1 
$49,605 $21,780 $24,284 $4,374 
 September 30, 2017
 Unpaid Principal Balance Recorded Investment Related Allowance
  
Without Allowance (1)
 
With Allowance (2)
 
Commercial real estate:       
Owner-occupied$8,250
 $7,438
 $200
 $19
Investment properties7,657
 4,247
 3,208
 245
Land and land development:       
Residential1,322
 798
 193
 66
Commercial1,538
 928
 —
 —
Commercial business7,945
 7,195
 573
 52
Agricultural business/farmland8,579
 6,956
 500
 196
One- to four-family residential8,858
 2,878
 5,904
 184
Consumer:       
Consumer secured by one- to four-family1,698
 1,492
 140
 7
Consumer—other147
 71
 77
 4
 $45,994
 $32,003
 $10,795
 $773
        
 December 31, 2016
 Unpaid Principal Balance Recorded Investment Related Allowance
  
Without Allowance (1)
 
With Allowance (2)
 
Commercial real estate:       
Owner-occupied$3,786
 $3,373
 $203
 $20
Investment properties9,916
 5,565
 4,304
 408
Multifamily real estate508
 147
 349
 64
One- to four-family construction1,180
 —
 1,180
 156
Land and land development:       
Residential3,012
 750
 1,106
 219
Commercial1,608
 998
 —
 —
Commercial business3,753
 3,074
 651
 69
Agricultural business/farmland6,438
 6,354
 —
 —
One- to four-family residential11,439
 3,149
 8,026
 479
Consumer:       
Consumer secured by one- to four-family1,904
 1,721
 144
 1
Consumer—other391
 226
 166
 4
 $43,935
 $25,357
 $16,129
 $1,420


(1)Includes loans without an allowance reserve that had been individually evaluated for impairment and that evaluation concluded that no reserve was needed, and $13.5 million of homogeneous and small balance loans, as of December 31, 2019, that were collectively evaluated for impairment for which a general reserve was established.
(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 million and $10.0 million of homogenous and small balance loans as of September 30, 2017 and December 31, 2016, respectively, 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.

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

The following tables summarizetable 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 and 20162019 (in thousands):
Three Months Ended
September 30, 2019		Nine Months Ended
September 30, 2019
Average Recorded InvestmentInterest Income RecognizedAverage Recorded InvestmentInterest Income Recognized
Commercial real estate:
Owner-occupied$3,067 $0 $3,197 $4 
Investment properties2,707 10 4,406 108 
Multifamily real estate58 0 19 0 
Commercial construction439 0 1,006 0 
One- to four-family construction1,489 11 1,138 12 
Land and land development:
Residential673 0 696 0 
Commercial business3,737 9 3,767 20 
Agricultural business/farmland3,250 25 4,319 81 
One- to four-family residential6,555 49 6,484 171 
Consumer:
Consumer secured by one- to four-family2,744 6 2,645 14 
Consumer—other387 1 359 3 
$25,106 $111 $28,036 $413 
 Three Months Ended
September 30, 2017		 Three Months Ended
September 30, 2016
 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized
Commercial real estate:       
Owner-occupied$3,657
 $3
 $2,544
 $3
Investment properties8,849
 37
 19,046
 74
Multifamily real estate115
 1
 529
 27
One- to four-family construction—
 —
 1,176
 3
Land and land development:       
Residential1,095
 6
 1,964
 20
Commercial928
 —
 997
 —
Commercial business8,128
 6
 4,283
 16
Agricultural business/farmland6,196
 69
 4,973
 6
One- to four-family residential8,899
 73
 11,973
 131
Consumer:       
Consumer secured by one- to four-family1,608
 2
 1,894
 5
Consumer—other140
 1
 512
 3
 $39,615
 $198
 $49,891
 $288
        
 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 properties8,393
 124
 19,775
 224
Multifamily real estate335
 10
 518
 36
One- to four-family construction524
 27
 1,151
 56
Land and land development:       
Residential1,574
 42
 1,971
 63
Commercial950
 —
 1,005
 —
Commercial business5,838
 63
 4,470
 28
Agricultural business/farmland5,605
 131
 4,824
 19
One- to four-family residential9,602
 240
 12,193
 358
Consumer:       
Consumer secured by one- to four-family1,647
 7
 1,913
 13
Consumer—other194
 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 and December 31, 2016 (in thousands):
28
 September 30, 2017 December 31, 2016
 
Accrual
Status
 
Nonaccrual
Status
 
Total
TDRs
 Accrual
Status		 Nonaccrual
Status		 Total
TDRs
Commercial real estate:           
Owner-occupied$200
 $89
 $289
 $203
 $96
 $299
Investment properties3,207
 —
 3,207
 4,304
 —
 4,304
Multifamily real estate—
 —
 —
 349
 —
 349
One- to four-family construction—
 —
 —
 1,180
 —
 1,180
Land and land development:           
Residential193
 —
 193
 1,106
 —
 1,106
Commercial business573
 —
 573
 653
 —
 653
Agricultural business, including secured by farmland3,172
 29
 3,201
 3,125
 79
 3,204
One- to four-family residential5,182
 810
 5,992
 7,678
 843
 8,521
Consumer:           
Consumer secured by one- to four-family140
 1
 141
 143
 6
 149
Consumer—other77
 —
 77
 166
 —
 166
 $12,744
 $929
 $13,673
 $18,907
 $1,024
 $19,931



As of September 30, 20172020 and December 31, 2016,2019, the Company had TDRs of $10.4 million and $8.0 million, respectively, and commitments to advance additional funds related to TDRs up to $59,000$1.3 million and $127,000,NaN, respectively.


NoThe following table presents new TDRs that occurred during the three and nine months ended September 30, 2017 or 2016.2020 and September 30, 2019 (dollars in thousands):
 Three Months Ended September 30, 2020Nine months ended September 30, 2020
 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 business:
Commercial business0 $0 $0 2 $4,796 $4,796 
Total0 $0 $0 2 $4,796 $4,796 
 Three Months Ended September 30, 2019Nine months ended September 30, 2019
 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 properties0 $0 $0 1 $1,090 $1,090 
Commercial business:
Commercial business0 0 0 1 160 160 
Agricultural business/farmland0 0 0 1 596 596 
 0 $0 $0 3 $1,846 $1,846 

There were no0 TDRs which incurred a payment default within twelve months of the restructure date during the three and nine-month periods ended September 30, 20172020 and 2016.2019. 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.  The Company’s risk-rating and loan grading policies are reviewed and approved annually. There were no material changes in the risk-rating or loan grading system infor the nine months ended September 30, 2017.periods presented.


Risk Rating 1: ExceptionalRatings 1-5: Pass
A credit supported by exceptional financial strength, stability, and liquidity.  TheCredits with risk ratingratings of 1 is reserved forto 5 meet the Company’s top quality loans, generally reserved for investment gradedefinition of a pass risk rating. The strength of credits underwrittenvary within the pass risk ratings, ranging from a risk rated 1 being an exceptional credit to the standards of institutional credit providers.

Risk Rating 2: Excellent
A credit supported by excellent financial strength, stability and liquidity.  Thea 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 ofrated 5 being an acceptable credit whichthat requires however,a 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.

29


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 makingmake the amount and timing of any loss indeterminable.  In these situations taking the loss is inappropriate until it is clear thatthe outcome of the pending event has failed to strengthen the credit and improve the capacity to repay debt.is clear.


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 Bankbank 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.



30

The following tables present the Company’s portfolio of risk-rated loans by grade as of September 30, 2020 (in thousands). Revolving loans that are converted to term loans are treated as new originations in the table below and are presented by year of origination.
September 30, 2020
Term Loans by Year of OriginationRevolving LoansTotal Loans
By class:20202019201820172016Prior
Commercial real estate - owner occupied
Risk Rating
Pass$184,182 $166,817 $165,634 $124,766 $93,179 $228,160 $3,159 $965,897 
Special Mention0 0 1,369 2,285 0 1,616 149 5,419 
Substandard5,661 24,638 1,670 2,443 14,055 30,094 0 78,561 
Doubtful0 0 0 0 0 0 0 0 
Loss0 0 0 0 0 0 0 0 
Total Commercial real estate - owner occupied$189,843 $191,455 $168,673 $129,494 $107,234 $259,870 $3,308 $1,049,877 
Commercial real estate - investment properties
Risk Rating
Pass$190,298 $267,544 $309,233 $212,385 $281,543 $523,930 $21,201 $1,806,134 
Special Mention0 2,153 0 0 3,377 4,444 0 9,974 
Substandard12,652 10,245 23,729 59,100 26,502 38,421 4,501 175,150 
Doubtful0 0 0 0 0 0 0 0 
Loss0 0 0 0 0 0 0 0 
Total Commercial real estate - investment properties$202,950 $279,942 $332,962 $271,485 $311,422 $566,795 $25,702 $1,991,258 
Multifamily real estate
Risk Rating
Pass$62,552 $68,649 $39,634 $106,938 $45,049 $102,426 $1,411 $426,659 
Special Mention0 0 0 0 0 0 0 0 
Substandard0 0 0 0 0 0 0 0 
Doubtful0 0 0 0 0 0 0 0 
Loss0 0 0 0 0 0 0 0 
Total Multifamily real estate$62,552 $68,649 $39,634 $106,938 $45,049 $102,426 $1,411 $426,659 
31

September 30, 2020
Term Loans by Year of OriginationRevolving LoansTotal Loans
By class:20202019201820172016Prior
Commercial construction
Risk Rating
Pass$38,631 $106,658 $43,010 $6,102 $2,183 $1,143 $0 $197,727 
Special Mention698 0 0 0 0 0 0 698 
Substandard11,899 3,548 4,868 1,447 98 0 0 21,860 
Doubtful0 0 0 0 0 0 0 0 
Loss0 0 0 0 0 0 0 0 
Total Commercial construction$51,228 $110,206 $47,878 $7,549 $2,281 $1,143 $0 $220,285 
Multifamily construction
Risk Rating
Pass$62,271 $144,695 $69,367 $14,772 $0 $0 $0 $291,105 
Special Mention0 0 0 0 0 0 0 0 
Substandard0 0 0 0 0 0 0 0 
Doubtful0 0 0 0 0 0 0 0 
Loss0 0 0 0 0 0 0 0 
Total Multifamily construction$62,271 $144,695 $69,367 $14,772 $0 $0 $0 $291,105 
One- to four- family construction
Risk Rating
Pass$404,805 $87,377 $0 $0 $0 $0 $12,058 $504,240 
Special Mention9,121 623 0 0 0 0 630 10,374 
Substandard3,139 332 0 0 0 0 0 3,471 
Doubtful0 0 0 0 0 0 0 0 
Loss0 0 0 0 0 0 0 0 
Total One- to four- family construction$417,065 $88,332 $0 $0 $0 $0 $12,688 $518,085 
32

September 30, 2020
Term Loans by Year of OriginationRevolving LoansTotal Loans
By class:20202019201820172016Prior
Land and land development
Risk Rating
Pass$113,268 $65,773 $22,930 $7,930 $6,773 $5,404 $15,137 $237,215 
Special Mention0 0 0 0 0 0 0 0 
Substandard14 31 3,050 191 0 302 0 3,588 
Doubtful0 0 0 0 0 0 0 0 
Loss0 0 0 0 0 0 0 0 
Total Land and land development$113,282 $65,804 $25,980 $8,121 $6,773 $5,706 $15,137 $240,803 
Commercial business
Risk Rating
Pass$1,304,667 $263,730 $217,169 $81,266 $42,319 $78,112 $256,590 $2,243,853 
Special Mention2,071 502 8,786 834 0 43 1,142 13,378 
Substandard9,193 11,780 22,307 6,080 1,228 463 35,337 86,388 
Doubtful0 0 0 0 0 0 0 0 
Loss0 0 0 0 0 0 0 0 
Total Commercial business$1,315,931 $276,012 $248,262 $88,180 $43,547 $78,618 $293,069 $2,343,619 
Agricultural business including secured by farmland
Risk Rating
Pass$27,358 $60,931 $32,786 $24,415 $24,473 $30,603 $113,813 $314,379 
Special Mention0 0 0 810 0 537 0 1,347 
Substandard1,548 3,016 901 332 676 1,581 2,389 10,443 
Doubtful0 0 0 0 0 0 0 0 
Loss0 0 0 0 0 0 0 0 
Total Agricultural business including secured by farmland$28,906 $63,947 $33,687 $25,557 $25,149 $32,721 $116,202 $326,169 

33

The following table presents the Company’s portfolio of non-risk-rated loans by delinquency status as of September 30, 2020 (in thousands). Revolving loans that are converted to term loans are treated as new originations in the table below and are presented by year of origination.
September 30, 2020
Term Loans by Year of OriginationRevolving LoansTotal Loans
By class:20202019201820172016Prior
Small balance CRE
Past Due Category
Current$42,396 $81,636 $89,270 $78,727 $75,123 $225,523 $2,864 $595,539 
30-59 Days Past Due0 241 0 0 0 369 0 610 
60-89 Days Past Due0 0 0 622 0 0 0 622 
90 Days + Past Due0 0 0 185 0 1,015 0 1,200 
Total Small balance CRE$42,396 $81,877 $89,270 $79,534 $75,123 $226,907 $2,864 $597,971 
Small business scored
Past Due Category
Current$128,596 $154,666 $138,279 $100,654 $51,378 $70,986 $113,452 $758,011 
30-59 Days Past Due844 400 207 643 2 240 155 2,491 
60-89 Days Past Due224 35 767 63 0 151 58 1,298 
90 Days + Past Due85 106 588 713 172 250 110 2,024 
Total Small business scored$129,749 $155,207 $139,841 $102,073 $51,552 $71,627 $113,775 $763,824 
One- to four- family residential
Past Due Category
Current$68,277 $100,406 $105,335 $124,930 $65,906 $297,086 $3,880 $765,820 
30-59 Days Past Due0 35 0 0 0 195 0 230 
60-89 Days Past Due299 2 241 480 0 727 0 1,749 
90 Days + Past Due0 0 1,012 512 0 2,108 0 3,632 
Total One- to four- family residential$68,576 $100,443 $106,588 $125,922 $65,906 $300,116 $3,880 $771,431 

34

September 30, 2020
Term Loans by Year of OriginationRevolving LoansTotal Loans
By class:20202019201820172016Prior
Consumer—home equity revolving lines of credit
Past Due Category
Current$12,696 $1,983 $2,515 $3,176 $1,665 $2,945 $476,385 $501,365 
30-59 Days Past Due0 0 0 44 0 84 745 873 
60-89 Days Past Due0 0 0 0 0 14 201 215 
90 Days + Past Due0 100 54 564 329 321 702 2,070 
Total Consumer—home equity revolving lines of credit$12,696 $2,083 $2,569 $3,784 $1,994 $3,364 $478,033 $504,523 
Consumer-other
Past Due Category
Current$15,111 $16,716 $16,158 $13,500 $10,013 $20,774 $25,571 $117,843 
30-59 Days Past Due18 23 2 5 37 35 63 183 
60-89 Days Past Due44 33 0 148 0 2 26 253 
90 Days + Past Due0 0 24 0 5 0 0 29 
Total Consumer-other$15,173 $16,772 $16,184 $13,653 $10,055 $20,811 $25,660 $118,308 




35

The following table presents the Company’s portfolio of risk-rated loans and non-risk-rated loans by grade or other characteristics as of December 31, 2019 (in thousands):
December 31, 2019
By class:
Pass (Risk Ratings 1-5)(1)
Special MentionSubstandardDoubtfulLossTotal Loans
Commercial real estate:
Owner-occupied$1,546,649 $4,198 $29,803 $0 $0 $1,580,650 
Investment properties2,288,785 2,193 18,243 0 0 2,309,221 
Multifamily real estate472,856 0 296 0 0 473,152 
Commercial construction198,986 0 11,682 0 0 210,668 
Multifamily construction233,610 0 0 0 0 233,610 
One- to four-family construction530,307 12,534 1,467 0 0 544,308 
Land and land development:
Residential154,348 0 340 0 0 154,688 
Commercial26,256 0 34 0 0 26,290 
Commercial business1,627,170 31,012 35,584 58 0 1,693,824 
Agricultural business, including secured by farmland352,408 10,840 7,301 0 0 370,549 
One- to four-family residential940,424 409 4,789 0 0 945,622 
Consumer:
Consumer secured by one- to four-family547,388 0 3,572 0 0 550,960 
Consumer—other211,475 3 337 0 0 211,815 
Total$9,130,662 $61,189 $113,448 $58 $0 $9,305,357 

(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 December 31, 2019, in the commercial business category, $764.6 million of credit-scored small business loans.  As loans in these pools become non-performing, they are individually risk-rated.

36

The following table provides the amortized cost basis of collateral-dependent loans as of September 30, 2017 and December 31, 20162020 (in thousands):. Our collateral dependent loans presented in the table below have no significant concentrations by property type or location. The table below includes one commercial business banking relationship with a balance of $6.6 million.
 September 30, 2020
Real EstateAccounts ReceivableEquipmentInventoryTotal
Commercial real estate:  
Owner-occupied$1,101 $0 $0 $— $1,101 
Investment properties3,914 0 0 — 3,914 
Small Balance CRE1,206 0 0 — 1,206 
Land and land development302 0 0 — 302 
Commercial business
Commercial business2,536 2,756 2,970 652 8,914 
Small business Scored46 0 48 — 94 
Agricultural business, including secured by farmland427 0 994 — 1,421 
One- to four-family residential195 0 0 — 195 
Total$9,727 $2,756 $4,012 $652 $17,147 



37

 September 30, 2017
By class:
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
Investment properties1,978,603
 3,601
 10,940
 —
 —
 1,993,144
Multifamily real estate310,936
 —
 770
 —
 —
 311,706
Commercial construction157,041
 —
 —
 —
 —
 157,041
Multifamily construction136,532
 —
 —
 —
 —
 136,532
One- to four-family construction397,135
 —
 2,226
 —
 —
 399,361
Land and land development:           
Residential147,874
 9,374
 1,136
 —
 —
 158,384
Commercial23,202
 —
 3,893
 —
 —
 27,095
Commercial business1,241,338
 19,068
 51,003
 —
 —
 1,311,409
Agricultural business, including secured by farmland317,808
 3,390
 18,734
 —
 —
 339,932
One- to four-family residential864,053
 674
 4,829
 —
 —
 869,556
Consumer:           
Consumer secured by one- to four-family532,907
 —
 2,393
 —
 —
 535,300
Consumer—other165,444
 17
 398
 —
 —
 165,859
Total$7,612,423
 $37,120
 $124,906
 $—
 $—
 $7,774,449




 December 31, 2016
By class:
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
Investment properties1,948,822
 23,846
 13,668
 —
 —
 1,986,336
Multifamily real estate247,258
 —
 892
 —
 —
 248,150
Commercial construction124,068
 —
 —
 —
 —
 124,068
Multifamily construction124,126
 —
 —
 —
 —
 124,126
One- to four-family construction371,636
 —
 4,068
 —
 —
 375,704
Land and land development:           
Residential167,764
 —
 2,240
 —
 —
 170,004
Commercial25,090
 —
 4,094
 —
 —
 29,184
Commercial business1,148,585
 35,036
 24,258
 —
 —
 1,207,879
Agricultural business, including secured by farmland356,656
 3,335
 9,165
 —
 —
 369,156
One- to four-family residential807,837
 967
 4,273
 —
 —
 813,077
Consumer:           
Consumer secured by one- to four-family490,877
 5
 2,327
 2
 —
 493,211
Consumer—other156,547
 108
 594
 5
 —
 157,254
Total$7,282,408
 $77,691
 $91,042
 $7
 $—
 $7,451,148

(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 and December 31, 2016, in the commercial business category, $296.0 million and $225.0 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, 20172020 and December 31, 20162019 (in thousands):
 September 30, 2020
 30-59 Days
Past Due		60-89 Days
Past Due		90 Days or More
Past Due		Total
Past Due		CurrentTotal LoansNon-accrual with no Allowance
Total Non-accrual (1)
Loans 90 Days or More Past Due and Accruing
Commercial real estate:       
Owner-occupied$100 $0 $1,687 $1,787 $1,048,090 $1,049,877 $1,101 $2,067 $0 
Investment properties5,902 98 2,919 8,919 1,982,339 1,991,258 3,914 3,914 0 
Small Balance CRE610 622 1,200 2,432 595,539 597,971 1,206 1,843 0 
Multifamily real estate0 0 0 0 426,659 426,659 0 0 0 
Construction, land and land development:
Commercial construction0 0 99 99 220,186 220,285 0 98 0 
Multifamily construction0 0 0 0 291,105 291,105 0 0 0 
One- to four-family construction441 422 0 863 517,222 518,085 0 331 0 
Land and land development0 0 508 508 240,295 240,803 302 508 0 
Commercial business
Commercial business485 3,640 1,661 5,786 2,337,833 2,343,619 7,468 12,143 225 
Small business scored2,491 1,298 2,024 5,813 758,011 763,824 93 2,724 200 
Agricultural business, including secured by farmland0 0 2,023 2,023 324,146 326,169 1,422 2,066 0 
One- to four-family residential230 1,749 3,632 5,611 765,820 771,431 181 2,978 2,649 
Consumer:
Consumer—home equity revolving lines of credit873 215 2,070 3,158 501,365 504,523 0 2,835 175 
Consumer—other183 253 29 465 117,843 118,308 0 61 6 
Total$11,315 $8,297 $17,852 $37,464 $10,126,453 $10,163,917 $15,687 $31,568 $3,255 



38

September 30, 2017 December 31, 2019
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or More
Past Due
 
Total
Past Due
 Purchased Credit-Impaired 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-ImpairedCurrentTotal LoansLoans 90 Days or More Past Due and Accruing
Total Non-accrual (1)
Commercial real estate:                 Commercial real estate:       
Owner-occupied$414
 $3,156
 $3,360
 $6,930
 $7,896
 $1,354,304
 $1,369,130
 $—
 $7,438
Owner-occupied$486 $1,246 $2,889 $4,621 $8,578 $1,567,451 $1,580,650 $89 $4,069 
Investment properties—
 —
 4,136
 4,136
 7,788
 1,981,220
 1,993,144
 53
 4,194
Investment properties0 260 1,883 2,143 6,345 2,300,733 2,309,221 0 1,883 
Multifamily real estate1,101
 —
 —
 1,101
 173
 310,432
 311,706
 —
 —
Multifamily real estate239 91 0 330 7 472,815 473,152 0 85 
Commercial construction223
 —
 —
 223
 —
 156,818
 157,041
 —
 —
Commercial construction1,397 0 98 1,495 0 209,173 210,668 0 98 
Multifamily construction—
 —
 —
 —
 —
 136,532
 136,532
 —
 —
Multifamily construction0 0 0 — 0 233,610 233,610 0 0 
One-to-four-family construction—
 —
 —
 —
 794
 398,567
 399,361
 —
 —
One-to-four-family construction3,212 0 1,799 5,011 0 539,297 544,308 332 1,467 
Land and land development:                 Land and land development:       
Residential819
 —
 798
 1,617
 —
 156,767
 158,384
 —
 798
Residential0 0 340 340 0 154,348 154,688 0 340 
Commercial—
 —
 928
 928
 2,965
 23,202
 27,095
 —
 928
Commercial0 0 0 0 0 26,290 26,290 0 0 
Commercial business1,712
 371
 5,192
 7,275
 2,608
 1,301,526
 1,311,409
 51
 7,144
Commercial business2,343 1,583 3,412 7,338 368 1,686,118 1,693,824 401 23,015 
Agricultural business, including secured by farmland1,051
 —
 2,330
 3,381
 683
 335,868
 339,932
 —
 4,285
Agricultural business, including secured by farmland1,972 129 584 2,685 393 367,471 370,549 0 661 
One- to four-family residential431
 628
 2,211
 3,270
 265
 866,021
 869,556
 722
 2,878
One-to four-family residentialOne-to four-family residential3,777 1,088 2,876 7,741 74 937,807 945,622 877 3,410 
Consumer:                 Consumer:
Consumer secured by one- to four-family1,537
 220
 788
 2,545
 5
 532,750
 535,300
 76
 1,416
Consumer secured by one- to four-family1,174 327 1,846 3,347 110 547,503 550,960 398 2,314 
Consumer—other290
 173
 26
 489
 44
 165,326
 165,859
 25
 46
Consumer—other350 161 0 511 63 211,241 211,815 0 159 
Total$7,578
 $4,548
 $19,769
 $31,895
 $23,221
 $7,719,333
 $7,774,449
 $927
 $29,127
Total$14,950 $4,885 $15,727 $35,562 $15,938 $9,253,857 $9,305,357 $2,097 $37,501 


(1)     The Company did not recognize any interest income on non-accrual loans during both the nine months ended September 30, 2020 and the year ended December 31, 2019.
39

 December 31, 2016
 
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
Investment properties117
 —
 5,447
 5,564
 10,168
 1,970,604
 1,986,336
 701
 4,864
Multifamily real estate—
 —
 147
 147
 139
 247,864
 248,150
 147
 —
Commercial construction—
 —
 —
 —
 —
 124,068
 124,068
 —
 —
Multifamily construction—
 —
 —
 —
 —
 124,126
 124,126
 —
 —
One-to-four-family construction—
 —
 —
 —
 862
 374,842
 375,704
 —
 —
Land and land development:                 
Residential48
 —
 750
 798
 —
 169,206
 170,004
 —
 750
Commercial—
 —
 998
 998
 3,016
 25,170
 29,184
 —
 998
Commercial business2,314
 647
 1,591
 4,552
 3,821
 1,199,506
 1,207,879
 —
 3,074
Agricultural business, including secured by farmland360
 1,244
 2,768
 4,372
 684
 364,100
 369,156
 —
 3,229
One-to four-family residential1,793
 249
 2,110
 4,152
 274
 808,651
 813,077
 1,233
 2,263
Consumer:                 
Consumer secured by one- to four-family932
 160
 986
 2,078
 18
 491,115
 493,211
 61
 1,660
Consumer—other1,421
 154
 147
 1,722
 59
 155,473
 157,254
 11
 215
Total$8,923
 $2,454
 $17,482
 $28,859
 $32,322
 $7,389,967
 $7,451,148
 $2,153
 $20,426


The following tables provide the activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2020 (in thousands):
 For the Three Months Ended September 30, 2020
 Commercial
Real Estate		Multifamily
Real Estate		Construction and LandCommercial BusinessAgricultural BusinessOne- to Four-Family ResidentialConsumerUnallocatedTotal
Allowance for credit losses:        
Beginning balance$53,166 $3,504 $36,916 $33,870 $4,517 $12,746 $11,633 $0 $156,352 
Provision/(recapture) for credit losses6,895 (248)2,561 2,550 1,026 100 757 0 13,641 
Recoveries23 0 0 246 0 94 82 0 445 
Charge-offs(379)0 0 (1,297)(492)(72)(233)0 (2,473)
Ending balance$59,705 $3,256 $39,477 $35,369 $5,051 $12,868 $12,239 $0 $167,965 
For the Nine Months Ended September 30, 2020
 Commercial
Real Estate		Multifamily
Real Estate		Construction and LandCommercial
Business		Agricultural
Business		One- to Four-Family ResidentialConsumerUnallocatedTotal
Allowance for credit losses:        
Beginning balance$30,591 $4,754 $22,994 $23,370 $4,120 $4,136 $8,202 $2,392 $100,559 
Impact of Adopting ASC 326(2,864)(2,204)2,515 3,010 (351)7,125 2,973 (2,392)7,812 
Provision for credit losses32,213 772 13,963 14,402 64 1,470 1,994 0 64,878 
Recoveries244 0 105 821 1,772 273 238 0 3,453 
Charge-offs(479)(66)(100)(6,234)(554)(136)(1,168)0 (8,737)
Ending balance$59,705 $3,256 $39,477 $35,369 $5,051 $12,868 $12,239 $0 $167,965 

The changes in the allowance for credit losses during the three and nine months ended September 30, 2020 were primarily the result of the $13.6 million provision for credit losses recorded during the current quarter and the $64.9 million provision recording during the nine months ended September 30, 2020, mostly due to the deterioration in the economy during the current quarter and nine months ended September 30, 2020 as a result of the COVID-19 pandemic, as well as forecasted additional economic deterioration based on the reasonable and supportable economic forecast as of September 30, 2020. The current quarter provision for credit losses also reflects risk rating downgrades on loans that are considered at heightened risk due to the COVID-19 pandemic. In addition, the change for the nine months ended September 30, 2020 included a $7.8 million increase related to the adoption of Financial Instruments - Credit Losses (Topic 326).
40

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 and 20162019 (in thousands):
 For the Three Months Ended September 30, 2019
 Commercial
 Real Estate		Multifamily
Real Estate		Construction and LandCommercial BusinessAgricultural BusinessOne- to Four-Family ResidentialConsumerUnallocatedTotal
Allowance for loan losses:         
Beginning balance$26,730 $4,344 $23,554 $19,557 $3,691 $4,701 $8,452 $7,225 $98,254 
Provision/(recapture) for loan losses1,992 (61)(1,141)3,027 943 (175)258 (2,843)2,000 
Recoveries107 0 156 162 2 129 154 0 710 
Charge-offs(314)0 0 (1,599)(741)(86)(423)0 (3,163)
Ending balance$28,515 $4,283 $22,569 $21,147 $3,895 $4,569 $8,441 $4,382 $97,801 
 For the Nine Months Ended September 30, 2019
 Commercial
 Real Estate		Multifamily
Real Estate		Construction and LandCommercial
Business		Agricultural
Business		One- to Four-Family ResidentialConsumerUnallocatedTotal
Allowance for loan losses:         
Beginning balance$27,132 $3,818 $24,442 $19,438 $3,778 $4,714 $7,972 $5,191 $96,485 
Provision/(recapture) for loan losses2,244 465 (2,081)4,300 987 (461)1,355 (809)6,000 
Recoveries277 0 208 400 37 402 487 0 1,811 
Charge-offs(1,138)0 0 (2,991)(907)(86)(1,373)0 (6,495)
Ending balance$28,515 $4,283 $22,569 $21,147 $3,895 $4,569 $8,441 $4,382 $97,801 
 September 30, 2019
 Commercial
Real Estate		Multifamily
Real Estate		Construction and LandCommercial BusinessAgricultural BusinessOne- to Four-Family ResidentialConsumerUnallocatedTotal
Allowance for loan losses:
Individually evaluated for impairment$60 $0 $0 $48 $132 $42 $6 $0 $288 
Collectively evaluated for impairment28,455 4,283 22,569 21,078 3,710 4,527 8,435 4,382 97,439 
Purchased credit-impaired loans0 0 0 21 53 0 0 0 74 
Total allowance for loan losses$28,515 $4,283 $22,569 $21,147 $3,895 $4,569 $8,441 $4,382 $97,801 
Loan balances:         
Individually evaluated for impairment$4,246 $0 $1,220 $618 $2,282 $3,745 $241 $0 $12,352 
Collectively evaluated for impairment3,598,482 399,808 1,083,083 1,618,366 387,827 943,653 779,222 0 8,810,441 
Purchased credit impaired loans11,513 6 0 407 396 77 176 0 12,575 
Total loans$3,614,241 $399,814 $1,084,303 $1,619,391 $390,505 $947,475 $779,639 $0 $8,835,368 
41
 For the Three 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$24,232
 $1,562
 $27,312
 $19,126
 $3,808
 $2,010
 $3,987
 $6,549
 $88,586
Provision for loan losses(236) 63
 2,037
 (555) 1,141
 22
 117
 (589) 2,000
Recoveries19
 —
 73
 577
 1
 8
 98
 —
 776
Charge-offs(584) —
 —
 (491) (1,001) —
 (186) —
 (2,262)
Ending balance$23,431
 $1,625
 $29,422
 $18,657
 $3,949
 $2,040
 $4,016
 $5,960
 $89,100
                  
 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 losses2,716
 254
 (6,010) 4,489
 2,113
 (460) 488
 2,410
 6,000
Recoveries353
 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
 
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
Collectively evaluated for impairment23,168
 1,625
 29,348
 18,605
 3,753
 1,856
 4,005
 5,960
 88,320
Purchased credit-impaired loans—
 —
 7
 —
 —
 —
 —
 —
 7
Total allowance for loan losses$23,431
 $1,625
 $29,422
 $18,657
 $3,949
 $2,040
 $4,016
 $5,960
 $89,100
Loan balances:                 
Individually evaluated for impairment$13,866
 $—
 $1,871
 $5,899
 $6,495
 $5,182
 $218
 $—
 $33,531
Collectively evaluated for impairment3,332,724
 311,533
 872,783
 1,302,902
 332,754
 864,109
 700,892
 —
 7,717,697
Purchased credit-impaired loans15,684
 173
 3,759
 2,608
 683
 265
 49
 —
 23,221
Total loans$3,362,274
 $311,706
 $878,413
 $1,311,409
 $339,932
 $869,556
 $701,159
 $—
 $7,774,449

 For the Three 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$20,149
 $1,515
 $31,861
 $17,758
 $2,891
 $2,204
 $3,743
 $1,197
 $81,318
Provision for loan losses(337) (79) 1,269
 (1,351) 80
 (404) 348
 2,474
 2,000
Recoveries34
 —
 673
 433
 (138) 482
 73
 —
 1,557
Charge-offs—
 —
 —
 (333) —
 (92) (230) —
 (655)
Ending balance$19,846
 $1,436
 $33,803
 $16,507
 $2,833
 $2,190
 $3,934
 $3,671
 $84,220
                  
 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
Recoveries98
 —
 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
 
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
Collectively evaluated for impairment19,014
 1,371
 33,374
 16,453
 2,833
 1,734
 3,928
 3,671
 82,378
Purchased credit-impaired loans—
 —
 33
 —
 —
 —
 —
 —
 33
Total allowance for loan losses$19,846
 $1,436
 $33,803
 $16,507
 $2,833
 $2,190
 $3,934
 $3,671
 $84,220
Loan balances:                 
Individually evaluated for impairment$16,630
 $351
 $4,137
 $2,026
 $2,758
 $8,270
 $315
 $—
 $34,487
Collectively evaluated for  impairment3,214,042
 266,274
 789,037
 1,181,558
 379,710
 838,328
 656,527
 —
 7,325,476
Purchased credit impaired loans28,544
 258
 4,153
 4,264
 807
 301
 347
 —
 38,674
Total loans$3,259,216
 $266,883
 $797,327
 $1,187,848
 $383,275
 $846,899
 $657,189
 $—
 $7,398,637

Note 5:6:  REAL ESTATE OWNED, NET


The following table presents the changes in REO for the three and nine months ended September 30, 20172020 and 20162019 (in thousands):
 Three Months Ended
September 30,		Nine Months Ended
September 30,
 2020201920202019
Balance, beginning of the period$2,400 $2,513 $814 $2,611 
Additions from loan foreclosures0 48 1,588 109 
Proceeds from dispositions of REO(707)(2,333)(805)(2,483)
Gain (loss) on sale of REO120 0 216 (9)
Valuation adjustments in the period(18)— (18)— 
Balance, end of the period$1,795 $228 $1,795 $228 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2017 2016 2017 2016
Balance, beginning of the period$2,427
 $6,147
 $11,081
 $11,627
Additions from loan foreclosures—
 156
 46
 534
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 REO30
 281
 1,953
 981
Valuation adjustments in the period—
 (168) (256) (804)
Balance, end of the period$1,496
 $4,717
 $1,496
 $4,717


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, theThe Company had none and $917,000, respectively,$725,000 of foreclosed one- to four-family residential real estate properties held as REO.REO at September 30, 2020 and $48,000 at December 31, 2019. The recorded investment in one- to four-family residential loans in the process of foreclosure was $2.0 million$403,000 at September 30, 20172020 compared with $715,000$1.5 million at December 31, 2016.2019.


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


Goodwill and Other Intangible Assets:  At September 30, 2017,2020, intangible assets are comprised of goodwill CDI, and favorable leasehold intangibles (LHI)CDI acquired in business combinations. Goodwill represents the excess of the purchase considerationsconsideration 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. Banner has identified one reporting unit for purposes of evaluating goodwill for impairment. At December 31, 2016,September 30, 2020, 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 adjustmentsIf adverse economic conditions or the recent decrease in our stock price and market capitalization as a result of the COVID-19 pandemic were to goodwill in 2016 relate to changesbe deemed sustained in the preliminaryfuture rather than temporary, it may significantly affect the fair value of our 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.may trigger impairment charges.


CDI represents the value of transaction-related deposits and the value of the customer relationships associated with the deposits. At December 31, 2018 intangible assets also included favorable leasehold intangibles (LHI). LHI representsrepresented 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. LHI was reclassified to the right of use lease asset in connection with the adoption of Lease Topic 842 on January 1, 2019. The Company amortizes CDI and LHIassets 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 months ended September 30, 20172020 and the year ended December 31, 20162019 (in thousands):
 GoodwillCDILHITotal
Balance, December 31, 2018$339,154 $32,699 $225 $372,078 
Additions through acquisitions(1)
33,967 4,610 0 38,577 
Amortization— (8,151)0 (8,151)
Adjustments(2)
— — (225)(225)
Balance, December 31, 2019373,121 29,158 0 402,279 
Amortization— (5,867)0 (5,867)
Balance, September 30, 2020$373,121 $23,291 $0 $396,412 
(1) The additions to Goodwill and CDI in 2019 relate to the acquisition of AltaPacific.
(2) The adjustment to LHI represents a reclassification to the right-of-use lease asset in connection with the implementation of Lease Topic 842.
42

 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, 2016244,583
 29,701
 461
 274,745
Amortization—
 (4,790) (153) (4,943)
Balance, September 30, 2017$244,583
 $24,911
 $308
 $269,802



The following table presents the estimated amortization expense with respect to CDI as of September 30, 2020 for the periods indicated (in thousands):
Estimated Amortization
Remainder of 2020$1,865 
20216,571 
20225,317 
20233,814 
20242,659 
Thereafter3,065 
 $23,291 
  Estimated Amortization
Remainder of 2017 $1,542
2018 5,609
2019 4,889
2020 4,169
2021 3,448
Thereafter 5,254
  $24,911


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, 20172020 and 2016,2019, 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$2.61 billion and $2.05$2.48 billion at September 30, 20172020 and December 31, 2016,2019, respectively.  Custodial accounts maintained in connection with this servicing totaled $22.5$3.4 million and $10.3$12.0 million at September 30, 20172020 and December 31, 2016,2019, respectively.


An analysis of our mortgage servicing rights for the three and nine months ended September 30, 20172020 and 20162019 is presented below (in thousands):
 Three Months Ended
September 30,		Nine Months Ended
September 30,
 2020201920202019
Balance, beginning of the period$14,424 $13,998 $14,148 $14,638 
Additions—amounts capitalized2,426 1,167 6,030 2,524 
Additions—through purchase40 36 141 105 
Amortization (1)
(2,075)(1,404)(5,504)(3,470)
Balance, end of the period (2)
$14,815 $13,797 $14,815 $13,797 

(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 0 valuation allowance as of September 30, 2020 and 2019.

43
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2017 2016 2017 2016
Balance, beginning of the period$14,985
 $14,276
 $15,249
 $13,354
Additions—amounts capitalized826
 1,652
 2,477
 4,371
Amortization (1)
(1,057) (1,102) (2,972) (2,899)
Balance, end of the period (2)
$14,754
 $14,826
 $14,754
 $14,826


(1)
Amortization of mortgage servicing rights is recorded as a reduction of loan servicing income and any unamortized balance is fully amortized if the loan repays in full.
(2)
There was no valuation allowance as of September 30, 2017 and 2016.


Note 7:8:  DEPOSITS


Deposits consisted of the following at September 30, 20172020 and December 31, 20162019 (in thousands):
 September 30, 2020December 31, 2019
Non-interest-bearing accounts$5,412,570 $3,945,000 
Interest-bearing checking1,434,224 1,280,003 
Regular savings accounts2,332,287 1,934,041 
Money market accounts2,120,908 1,769,194 
Total interest-bearing transaction and saving accounts5,887,419 4,983,238 
Certificates of deposit:
Certificates of deposit less than or equal to $250,000723,225 936,940 
Certificates of deposit greater than $250,000192,127 183,463 
Total certificates of deposit(1)
915,352 1,120,403 
Total deposits$12,215,341 $10,048,641 
Included in total deposits:  
Public fund transaction and savings accounts$259,929 $244,418 
Public fund interest-bearing certificates54,219 35,184 
Total public deposits$314,148 $279,602 
Total brokered deposits$0 $202,884 
 September 30, 2017 December 31, 2016
Non-interest-bearing accounts$3,379,841
 $3,140,451
Interest-bearing checking955,486
 914,484
Regular savings accounts1,577,292
 1,523,391
Money market accounts1,525,657
 1,497,755
Total interest-bearing transaction and saving accounts4,058,435
 3,935,630
Certificates of deposit:   
Certificates of deposit less than or equal to $250,000945,161
 884,403
Certificates of deposit greater than $250,000155,413
 160,930
Total certificates of deposit(1)
1,100,574
 1,045,333
Total deposits$8,538,850
 $8,121,414
Included in total deposits: 
  
Public fund transaction and savings accounts$194,519
 $221,765
Public fund interest-bearing certificates26,543
 25,650
Total public deposits$221,062
 $247,415
Total brokered deposits$171,718
 $34,074


(1)     Certificates of deposit include $101,000 and $269,000 of acquisition premiums at September 30, 2020 and December 31, 2019, respectively.
(1)
Certificates of deposit include $30,000 and $426,000 of acquisition premiums at September 30, 2017 and December 31, 2016, respectively.


At September 30, 20172020 and December 31, 2016,2019, the Company had certificates of deposit of $159.9$197.6 million and $165.4$189.0 million, respectively, that were equal to or greater than $250,000.


Scheduled maturities and weighted average interest rates of certificate accountscertificates of deposit at September 30, 20172020 are as follows (dollars in thousands):
 September 30, 2017
 Amount Weighted Average Rate
Maturing in one year or less$808,770
 0.51%
Maturing after one year through two years107,060
 0.69
Maturing after two years through three years137,253
 1.26
Maturing after three years through four years27,870
 1.08
Maturing after four years through five years17,208
 1.21
Maturing after five years2,413
 1.05
Total certificates of deposit$1,100,574
 0.65%
September 30, 2020
AmountWeighted Average Rate
Maturing in one year or less$694,530 0.93 %
Maturing after one year through two years123,003 1.47 
Maturing after two years through three years71,727 1.25 
Maturing after three years through four years13,041 2.17 
Maturing after four years through five years10,999 1.31 
Maturing after five years2,052 1.00 
Total certificates of deposit$915,352 1.05 %

44

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, 20172020 and December 31, 2016,2019, whether or not measured at fair value in the Consolidated Statements of Financial Condition (in(dollars in thousands):
 September 30, 2020December 31, 2019
 LevelCarrying
Value		Estimated
Fair Value		Carrying
Value		Estimated
Fair Value
Assets:    
Cash and cash equivalents1$705,538 $705,538 $307,735 $307,735 
Securities—trading323,276 23,276 25,636 25,636 
Securities—available-for-sale21,758,384 1,758,384 1,551,557 1,551,557 
Securities—held-to-maturity2426,380 448,051 233,241 234,952 
Securities—held-to-maturity32,755 2,755 2,853 2,853 
Loans held for sale2185,938 186,544 210,447 210,670 
Loans receivable310,163,917 10,091,600 9,305,357 9,304,340 
Equity securities1450,255 450,255 0 0 
FHLB stock316,363 16,363 28,342 28,342 
Bank-owned life insurance1191,755 191,755 192,088 192,088 
Mortgage servicing rights314,815 17,954 14,148 22,611 
Derivatives:
Interest rate swaps243,506 43,506 15,202 15,202 
Interest rate lock and forward sales commitments2,310,473 10,473 1,108 1,108 
Liabilities:    
Demand, interest checking and money market accounts28,967,702 8,967,702 6,994,197 6,994,197 
Regular savings22,332,287 2,332,287 1,934,041 1,934,041 
Certificates of deposit2915,352 921,332 1,120,403 1,117,921 
FHLB advances2150,000 153,661 450,000 452,720 
Other borrowings2176,983 176,983 118,474 118,474 
Subordinated notes, net398,114 98,114 0 0 
Junior subordinated debentures3109,821 109,821 119,304 119,304 
Derivatives:
Interest rate swaps223,927 23,927 10,966 10,966 
Interest rate lock and forward sales commitments21,510 1,510 674 674 
   September 30, 2017 December 31, 2016
 Level 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Assets:         
Cash and cash equivalents1 $241,766
 $241,766
 $247,719
 $247,719
Securities—trading2,3 23,466
 23,466
 24,568
 24,568
Securities—available-for-sale2 1,339,057
 1,339,057
 800,917
 800,917
Securities—held-to-maturity2,3 264,752
 268,663
 267,873
 270,528
Loans held for sale2 71,905
 72,018
 246,353
 246,815
Loans receivable3 7,774,449
 7,666,707
 7,451,148
 7,337,608
FHLB stock3 20,854
 20,854
 12,506
 12,506
Bank-owned life insurance1 161,648
 161,648
 158,936
 158,936
Mortgage servicing rights3 14,754
 18,312
 15,249
 16,740
Derivatives:  

 

 

 

Interest rate swaps2 7,186
 7,186
 8,330
 8,330
Interest rate lock and forward sales commitments2 664
 664
 482
 482
Liabilities:   
  
  
  
Demand, interest checking and money market accounts2 5,860,984
 5,860,984
 5,552,690
 5,552,690
Regular savings2 1,577,292
 1,577,292
 1,523,391
 1,523,391
Certificates of deposit2 1,100,574
 1,082,829
 1,045,333
 1,028,866
FHLB advances2 263,349
 263,349
 54,216
 54,216
Other borrowings2 103,713
 103,713
 105,685
 105,685
Junior subordinated debentures3 97,280
 97,280
 95,200
 95,200
Derivatives:  

 

 

 

Interest rate swaps2 7,186
 7,186
 8,330
 8,330
Interest rate lock and forward sales commitments2 115
 115
 289
 289


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
45

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, 20172020 and December 31, 20162019 (in thousands):
 September 30, 2020
 Level 1Level 2Level 3Total
Assets:    
Securities—trading    
Corporate bonds (Trust Preferred Securities)$0 $0 $23,276 $23,276 
Securities—available-for-sale    
U.S. Government and agency obligations0 169,913 0 169,913 
Municipal bonds0 272,408 0 272,408 
Corporate bonds0 55,971 0 55,971 
Mortgage-backed or related securities0 1,250,500 0 1,250,500 
Asset-backed securities0 9,592 0 9,592 
 0 1,758,384 0 1,758,384 
Loans held for sale0 152,996 0 152,996 
Equity securities450,255 0 0 450,255 
Derivatives    
Interest rate swaps0 43,506 0 43,506 
Interest rate lock and forward sales commitments0 2,019 8,454 10,473 
$450,255 $1,956,905 $31,730 $2,438,890 
Liabilities:    
Junior subordinated debentures$0 $0 $109,821 $109,821 
Derivatives    
Interest rate swaps0 23,927 0 23,927 
Interest rate lock and forward sales commitments0 1,510 0 1,510 
 $0 $25,437 $109,821 $135,258 
46

September 30, 2017 December 31, 2019
Level 1 Level 2 Level 3 Total Level 1Level 2Level 3Total
Assets:       Assets:    
Securities—trading       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
Corporate bonds (Trust Preferred Securities)$0 $0 $25,636 $25,636 
Equity securities—
 155
 —
 155
—
 1,791
 21,675
 23,466
Securities—available-for-sale       Securities—available-for-sale    
U.S. Government and agency obligations—
 87,585
 —
 87,585
U.S. Government and agency obligations0 89,598 0 89,598 
Municipal bonds—
 114,646
 —
 114,646
Municipal bonds0 107,157 0 107,157 
Corporate bonds—
 10,602
 —
 10,602
Corporate bonds0 4,365 0 4,365 
Mortgage-backed or related securities—
 1,092,432
 —
 1,092,432
Mortgage-backed securitiesMortgage-backed securities0 1,342,311 0 1,342,311 
Asset-backed securities—
 28,207
 —
 28,207
Asset-backed securities0 8,126 0 8,126 
Equity securities—
 5,585
 —
 5,585
—
 1,339,057
 —
 1,339,057
 0 1,551,557 0 1,551,557 
       
Loans held for sale—
 64,399
 —
 64,399
Loans held for sale0 199,397 0 199,397 
       
Derivatives       Derivatives    
Interest rate swaps—
 7,186
 —
 7,186
Interest rate swaps0 15,202 0 15,202 
Interest rate lock and forward sales commitments—
 664
 —
 664
Interest rate lock and forward sales commitments0 317 791 1,108 
$—
 $1,413,097
 $21,675
 $1,434,772
 $0 $1,766,473 $26,427 $1,792,900 
       
Liabilities:       Liabilities:    
Advances from FHLB$—
 $263,349
 $—
 $263,349
Junior subordinated debentures, net of unamortized deferred issuance costs—
 —
 97,280
 97,280
Junior subordinated debentures, net of unamortized deferred issuance costs$0 $0 $119,304 $119,304 
Derivatives       Derivatives    
Interest rate swaps—
 7,186
 —
 7,186
Interest rate swaps0 10,966 0 10,966 
Interest rate lock and forward sales commitments—
 115
 —
 115
Interest rate lock and forward sales commitments0 674 0 674 
$—
 $270,650
 $97,280
 $367,930
 $0 $11,640 $119,304 $130,944 


 December 31, 2016
 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
 —
 3,425
 21,143
 24,568
Securities—available-for-sale       
U.S. Government and agency obligations—
 56,978
 —
 56,978
Municipal bonds—
 109,853
 —
 109,853
Corporate bonds—
 10,283
 —
 10,283
Mortgage-backed securities—
 594,712
 —
 594,712
Asset-backed securities—
 28,993
 —
 28,993
Equity securities—
 98
 —
 98
 —
 800,917
 —
 800,917
        
Loans held for sale—
 9,600
 —
 9,600
        
Derivatives       
Interest rate swaps—
 8,330
 —
 8,330
Interest rate lock and forward sales commitments—
 482
 —
 482
 $—
 $822,754
 $21,143
 $843,897
        
Liabilities:       
Advances from FHLB$—
 $54,216
 $—
 $54,216
Junior subordinated debentures, net of unamortized deferred issuance costs—
 —
 95,200
 95,200
Derivatives       
Interest rate swaps—
 8,330
 —
 8,330
Interest rate lock and forward sales commitments—
 289
 —
 289
 $—
 $62,835
 $95,200
 $158,035


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)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: Equity Securities: Equity securities at September 30, 2020 are invested in a money market mutual fund. 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 isthese securities are based upon the discounted value of contractual cash flows.  The discount rate is determined using currenton daily quoted market rates on comparable instruments.prices.


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.an income approach technique. 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 validatingvalidate 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.
47


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-SheetOff-Balance Sheet Items: Off-balance-sheet 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, 20172020 and December 31, 2016.2019.  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'sCompany’s assets and liabilities classified as Level 3 and measured at fair value on a recurring and non-recurring basis at September 30, 20172020 and December 31, 2016:2019:
Weighted Average Rate / Range
Financial InstrumentsValuation TechniquesUnobservable InputsSeptember 30, 2020December 31, 2019
Corporate bonds (TPS securities)Discounted cash flowsDiscount rate4.73 %5.91 %
Junior subordinated debenturesDiscounted cash flowsDiscount rate4.73 %5.91 %
Loans individually evaluatedCollateral valuationsDiscount to appraised value0.0% to 20.0%0.0% to 20.0%
REOAppraisalsDiscount to appraised value48.52 %58.50 %
Interest rate lock commitmentsPricing modelPull-through rate87.05 %89.61 %
      Weighted Average Rate / Range
Financial Instruments Valuation Techniques Unobservable Inputs September 30, 2017 December 31, 2016
Corporate Bonds (TPS securities) Discounted cash flows Discount rate 6.33% 6.00%
Junior subordinated debentures Discounted cash flows Discount rate 6.33% 6.00%
Impaired loans Collateral Valuations Discount to appraised value 8.5% to 9.0%
 n/a
REO Appraisals Discount to appraised value 17.0% to 42.0%
 0% to 45%


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'sBanner’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'sCompany’s junior subordinated debentures at fair value as of September 30, 2017,2020, or the passage of time, will result in negative fair value adjustments. At September 30, 2017,2020, the discount rate utilized was based on a credit spread of 500450 basis points and three-month LIBOR of 13323 basis points.


Interest rate lock commitments: The fair value of the interest rate lock commitments is based on secondary market sources adjusted for an estimated pull-through rate. The pull-through rate is based on historical loan closing rates for similar interest rate lock commitments. An increase or decrease in the pull-through rate would have a corresponding, positive or negative fair value adjustment.
48

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, 20172020 and 20162019 (in thousands):
Three Months EndedNine Months Ended
September 30, 2020September 30, 2020
 Level 3 Fair Value InputsLevel 3 Fair Value Inputs
 TPS SecuritiesBorrowings—Junior Subordinated DebenturesInterest rate lock and forward sales commitmentsTPS SecuritiesBorrowings—
Junior
Subordinated
Debentures		Interest rate lock and forward sales commitments
Beginning balance$23,239 $109,613 $5,816 $25,636 $119,304 $791 
Total gains or losses recognized    
Assets gains (losses)37 — 2,638 (2,360)— 7,663 
Liabilities losses (gains)— 208 — — (9,483)— 
Ending balance at September 30, 2020$23,276 $109,821 $8,454 $23,276 $109,821 $8,454 
Three Months EndedNine Months Ended
September 30, 2019September 30, 2019
 Level 3 Fair Value InputsLevel 3 Fair Value Inputs
 TPS SecuritiesBorrowings—Junior Subordinated DebenturesInterest rate lock and forward sales commitmentsTPS SecuritiesBorrowings—
Junior
Subordinated
Debentures		Interest rate lock and forward sales commitments
Beginning balance$25,741 $113,621 $1,373 $25,896 $114,091 $273 
Total gains or losses recognized    
Assets (losses) gains(69)— 33 (224)— 1,133 
Liabilities gains— (204)— — (674)— 
Ending balance at September 30, 2019$25,672 $113,417 $1,406 $25,672 $113,417 $1,406 
 Three Months Ended Nine Months Ended
 September 30, 2017 September 30, 2017
 Level 3 Fair Value Inputs Level 3 Fair Value Inputs
 TPS Securities Borrowings—Junior Subordinated Debentures TPS Securities 
Borrowings—
Junior
Subordinated
Debentures
Beginning balance$21,568
 $96,852
 $21,143
 $95,200
Total gains or losses recognized       
Assets gains107
 —
 532
 —
Liabilities losses—
 428
 —
 2,080
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 gains280
 —
 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


The Company has elected to continue to recognize the interestInterest income and dividends from the TPS securities reclassified to fair valueare 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 beis measured based on contractual interest rates and reported in interest expense.  The change in fair market value of these financial instruments has beenthe junior subordinated debentures, which represents changes in instrument specific credit risk, is recorded as a component of non-interestin other comprehensive income. See Note 14, Derivatives and Hedging, for detail on gains and losses on Level 3 interest rate lock commitments.


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, 20172020 and December 31, 20162019 (in thousands):
 September 30, 2020
 Level 1Level 2Level 3Total
Loans individually evaluated$0 $0 $12,131 $12,131 
REO0 0 1,795 1,795 
 December 31, 2019
 Level 1Level 2Level 3Total
Impaired loans$0 $0 $14,853 $14,853 
REO0 0 814 814 

49
 September 30, 2017
 Level 1 Level 2 Level 3 Total
Impaired loans$—
 $7,494
 $—
 $7,494
REO—
 —
 1,496
 1,496
        
 December 31, 2016
 Level 1 Level 2 Level 3 Total
REO$—
 $—
 $11,081
 $11,081


The following table presents the losses resulting from non-recurring fair value adjustments for the three and nine months ended September 30, 20172020 and 20162019 (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Loans individually evaluated$(492)$0 $(2,492)$(425)
REO0 0 0 0 
Total loss from non-recurring measurements$(492)$0 $(2,492)$(425)
  Three months ended September 30, Nine months ended September 30,
  2017 2016 2017 2016
Impaired loans $(1,584) $(128) $(2,059) $(182)
REO —
 (168) (256) (599)
Total loss from non-recurring measurements $(1,584) $(296) $(2,315) $(781)


ImpairedLoans individually evaluated: Expected credit losses for loans: Impaired loans evaluated individually are measured based on the present value of expected future cash flows discounted at the loan'sloan’s original effective interest rate or as a practical expedient, atwhen the loan's observable market price orBank determines that foreclosure is probable, the expected credit loss is measured based on the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. As a practical expedient, the Bank measures the expected credit loss for a loan using the fair value of the collateral, if repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the Bank’s assessment as of the reporting date. In both cases, if the fair value of the collateral is less than the amortized cost basis of the loan, isthe Bank will recognize an allowance as the difference between the fair value of the collateral, dependent.less costs to sell (if applicable), at the reporting date and the amortized cost basis of the loan. If this practical expedient is used, the impaired loans are consideredfair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis will be held at fair value. Subsequentlimited to the amount previously charged-off by the subsequent changes in the value of impairedexpected credit losses for loans evaluated individually are included within the provision for loancredit losses in the same manner in which impairmentthe expected credit loss 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, 2017,2020, the Company had an insignificant amount$275,000 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 IdahoMontana 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.


50

The following table presents the balances of the Company’s tax credit investments and related unfunded commitments at September 30, 20172020 and December 31, 20162019 (in thousands):

September 30, 2020December 31, 2019
Tax credit investments$34,113 $29,620 
Unfunded commitments—tax credit investments20,572 20,235 
 September 30, 2017 December 31, 2016
Tax credit investments$4,058
 $4,654
Unfunded commitments—tax credit investments$638
 $665


The following table presents other information related to the Company's tax credit investments for the three and nine months ended September 30, 20172020 and 20162019 (in thousands):
Three Months Ended September 30,Nine Months Ended
September 30,
2020201920202019
Tax credits and other tax benefits recognized$981 $494 $2,943 $1,482 
Tax credit amortization expense included in provision for income taxes849 405 2,507 1,215 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2017 2016 2017 2016
Tax credits and other tax benefits recognized$285
 $284
 $855
 $852
Tax credit amortization expense included in provision for income taxes$199
 $168
 597
 504


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 and nine months ended September 30, 2020 and 2019 (in thousands, except shares and per share data):
 Three Months Ended
September 30,		Nine Months Ended
September 30,
 2020201920202019
Net income$36,548 $39,577 $76,971 $112,623 
Basic weighted average shares outstanding35,193,109 34,407,462 35,285,567 34,760,607 
Plus unvested restricted stock123,570 90,532 239,204 89,399 
Diluted weighted shares outstanding35,316,679 34,497,994 35,524,771 34,850,006 
Earnings per common share    
Basic$1.04 $1.15 $2.18 $3.24 
Diluted$1.03 $1.15 $2.17 $3.23 

 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 outstanding32,982,532
 34,045,225
 32,966,214
 34,050,459
Plus unvested restricted stock96,567
 79,386
 94,958
 54,416
Diluted weighted shares outstanding33,079,099
 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.

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'sCompany’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, the Company had granted 270,961 shares of restricted stock from the 2012 Restricted Stock Plan (as amended and restated), of which 242,972 shares had vested and 27,989 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, 372,5122020, 299,937 restricted stock shares and 34,975407,131 restricted stock units have been granted under the 2014 Plan of which 81,148296,633 restricted stock shares and 20,967172,036 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 September 30, 2020, 0 shares and 362,514 restricted stock units have been granted under the 2018 Plan none of which have vested.
51


The expense associated with all restricted stock grants (including restricted stock shares and restricted stock units) was $1.6$2.5 million and $4.2$6.9 million for the three and nine-monthnine month periods ended September 30, 20172020 and $1.4was $1.6 million and $4.0$5.1 million for the three and nine-monthnine month periods ended September 30, 2016,2019, respectively. Unrecognized compensation expense for these awards as of September 30, 20172020 was $9.8$15.5 million and will be amortized over the next 34 months.2.83 years.


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
September 30, 2020December 31, 2019
Commitments to extend credit$3,144,860 $3,051,681 
Standby letters of credit and financial guarantees15,677 14,298 
Commitments to originate loans114,040 39,676 
Risk participation agreement40,968 41,022 
Derivatives also included in Note 14:
Commitments to originate loans held for sale282,025 66,196 
Commitments to sell loans secured by one- to four-family residential properties109,994 70,895 
Commitments to sell securities related to mortgage banking activities259,000 239,320 
 Contract or Notional Amount
 September 30, 2017 December 31, 2016
Commitments to extend credit$2,339,558
 $2,204,795
Standby letters of credit and financial guarantees15,432
 17,694
Commitments to originate loans64,263
 69,833
Risk participation agreement11,516
 7,488
    
Derivatives also included in Note 13:   
Commitments to originate loans held for sale68,976
 69,487
Commitments to sell loans secured by one- to four-family residential properties39,848
 36,907
Commitments to sell securities related to mortgage banking activities100,500
 44,000


In addition to the commitments disclosed in the table above, the Company is committed to funding its’ unfunded tax credit investments (see Note 10, Income Taxes). During 2019, the Company entered into an agreement to invest $10 million in a limited partnership. The Company had funded $1.8 million of the commitment, with $8.2 million of the commitment remaining to be funded at September 30, 2020, compared to $467,000 of the commitment funded, with $9.5 million to be funded at December 31, 2019.

Commitments to extend credit are agreements to lend to a 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 reserveCompany’s allowance for credit losses - unfunded loan commitments was $2.4 million and $3.6 million at September 30, 20172020 and December 31, 2016,2019 was $12.1 million and $2.7 million, respectively.


Standby letters of credit are conditional commitments issued to guarantee a customer’s performance or payment to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Through the acquisition of AmericanWest Bank, 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 BankCompany 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 ourthe Company’s 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 no0counterparty default losses on forward contracts during the three and nine months ended September 30, 20172020 or September 30, 2016.2019. Market risk with respect to forward contracts arises principally from changes in the value of
52

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, 2017.2020.


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 BankBanks 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'sCompany’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 rateCompany’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 ratefixed-rate loans is to effectively convert the fixed ratefixed-rate received to a floating rate. The Company has hedged exposure to changes in the fair value of certain fixed ratefixed-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 ratefixed-rate loan by entering into an interest rate swap with a dealer counterparty. Banner Bank receives fixed ratefixed-rate payments from the customers on the loans and makes similar fixed ratefixed-rate payments to the dealer counterparty on the swaps in exchange for variable ratevariable-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, 20172020 and December 31, 2016,2019, the notional values or contractual amounts and fair values of the Company'sCompany’s derivatives designated in hedge relationships were as follows (in thousands):
Asset DerivativesLiability Derivatives
September 30, 2020December 31, 2019September 30, 2020December 31, 2019
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$427 $15 $3,567 $220 $427 $15 $3,567 $220 
 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


(1)    Included in Loans receivable on the consolidated statements of financial condition.
(1)
Included in Loans receivable on the Consolidated Statements of Financial Condition.
(2)
Included in Other liabilities 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 ratevariable-rate loan and enters into an interest rate swap in which the client locks in a fixed rate and the Bank receives a variable ratevariable-rate payment in exchange for a fixed-rate payment. The
53

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 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 hedgehedges 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 asat specific prices and dates.


As of September 30, 20172020 and December 31, 2016,2019, the notional values or contractual amounts and fair values of the Company'sCompany’s derivatives not designated in hedge relationships were as follows (in thousands):
Asset DerivativesLiability Derivatives
September 30, 2020December 31, 2019September 30, 2020December 31, 2019
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$419,497 $43,491 $371,957 $14,982 $419,497 $23,912 $371,957 $10,746 
Mortgage loan commitments224,834 8,454 50,755 791 79,412 516 65,855 190 
Forward sales contracts109,994 2,019 70,895 317 259,000 994 239,320 484 
$754,325 $53,964 $493,607 $16,090 $757,909 $25,422 $677,132 $11,420 
 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$303,500
 $6,655
 $309,936
 $7,670
 $303,500
 $6,655
 $309,936
 $7,670
Mortgage loan commitments46,351
 265
 42,296
 30
 22,625
 115
 27,191
 174
Forward sales contracts140,348
 399
 71,192
 452
 —
 —
 9,715
 115
 $490,199
 $7,319
 $423,424
 $8,152
 $326,125
 $6,770
 $346,842
 $7,959


(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 $1.5 million at September 30, 2020 and $347,000 at December 31, 2019), which are included in Loans receivable.
(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 at September 30, 2017 and $822,000 at December 31, 2016), which are included in Loans receivable.
(2)
Included in Other liabilities on the Consolidated Statements of Financial Condition.

(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, 20172020 and 20162019 were as follows (in thousands):
Location on Consolidated
Statements of Operations		Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
Mortgage loan commitmentsMortgage banking operations$2,639 $(80)$7,664 $1,020 
Forward sales contractsMortgage banking operations258 47 (779)(195)
$2,897 $(33)$6,885 $825 
 
Location on Consolidated
Statements of Operations
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
  2017 2016 2017 2016
Mortgage loan commitmentsMortgage banking operations $50
 $(376) $235
 $516
Forward sales contractsMortgage banking operations (398) 315
 (654) (297)
   $(348) $(61) $(419) $219



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, 20172020 or December 31, 2016,2019, it could have been required to settle its obligations under the agreements at the termination value. As of September 30, 20172020 and December 31, 2016,2019, the termination value of derivatives in a net liability position related to these agreements was $4.5$54.9 million and $7.6$15.2 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$45.4 million and $29.3$28.1 million as of September 30, 20172020 and December 31, 2016,2019, 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. In addition, some of interest rate swap derivatives between Banner Bank and the dealer counterparties are cleared through central

54


clearing houses. These clearing houses characterize the variation margin payments as settlements of the derivative's market exposure and not as collateral. The variation margin is treated as an adjustment to our cash collateral, as well as a corresponding adjustment to our derivative liability. As of September 30, 2020 and December 31, 2019, the variation margin adjustment was a negative adjustment of $19.7 million and $4.3 million, respectively.

The following tables illustratepresent additional information related to the potential effect of the Company'sCompany’s derivative master netting arrangements,contracts, by type of financial instrument, as of September 30, 2020 and December 31, 2019 (in thousands):
September 30, 2020
Gross Amounts of Financial Instruments Not Offset in the Consolidated Statements of Financial Condition
Gross Amounts RecognizedAmounts offset
in the Statement
of Financial Condition		Net Amounts
in the Statement
of Financial Condition		Netting Adjustment Per Applicable Master Netting AgreementsFair Value
of Financial Collateral
in the Statement
of Financial Condition		Net Amount
Derivative assets
Interest rate swaps$43,506 $0 $43,506 $0 $0 $43,506 
$43,506 $0 $43,506 $0 $0 $43,506 
Derivative liabilities
Interest rate swaps$43,653 $(19,726)$23,927 $0 $(23,730)$197 
$43,653 $(19,726)$23,927 $0 $(23,730)$197 
December 31, 2019
Gross Amounts of Financial Instruments Not Offset in the Consolidated Statements of Financial Condition
Gross Amounts RecognizedAmounts offset
in the Statement
of Financial Condition		Net Amounts
in the Statement
of Financial Condition		Netting Adjustment Per Applicable Master Netting AgreementsFair Value
of Financial Collateral
in the Statement
of Financial Condition		Net Amount
Derivative assets
Interest rate swaps$15,242 $(40)$15,202 $0 $0 $15,202 
$15,242 $(40)$15,202 $0 $0 $15,202 
Derivative liabilities
Interest rate swaps$15,242 $(4,276)$10,966 $0 $(15,209)$(4,243)
$15,242 $(4,276)$10,966 $0 $(15,209)$(4,243)

55

NOTE 15: REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregation of Revenue:

Deposit fees and other service charges for the three and nine months ended September 30, 2020 and 2019 are summarized as follows (in thousands):
Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
Deposit service charges$3,904 $4,931 $12,269 $14,347 
Debit and credit card interchange fees5,207 5,480 14,762 22,682 
Debit and credit card expense(2,134)(1,991)(6,272)(6,389)
Merchant services income3,584 3,659 9,252 9,860 
Merchant services expense(2,839)(2,960)(7,378)(7,941)
Other service charges1,020 1,212 3,458 4,436 
Total deposit fees and other service charges$8,742 $10,331 $26,091 $36,995 

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 transaction is charged to the Banks cardholders’ card. Direct expenses associated with the credit and debit card are recorded as a net reduction against the 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 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 Company'sdollar 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 104 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.

56

Lease Position as of September 30, 2020 and December 31, 2019

The table below presents the lease right-of-use assets and lease liabilities recorded on the balance sheet at September 30, 2020 and December 31, 2019 (dollars in thousands):
Classification on the Balance SheetSeptember 30, 2020December 31, 2019
Assets
Operating right-of-use lease assetsOther assets$58,114 $61,766 
Liabilities
Operating lease liabilitiesAccrued expenses and other liabilities$61,869 $65,818 
Weighted-average remaining lease term
Operating leases5.9 years6.2 years
Weighted-average discount rate
Operating leases3.4 %3.7 %

Lease Costs

The table below presents certain information related to the lease costs for operating leases for the three and nine months ended September 30, 2020 and 2019 (in thousands):
Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
Operating lease cost (1)
$4,104 $3,818 $12,517 $11,650 
Short-term lease cost (1)
28 62 78 284 
Variable lease cost (1)
619 623 2,169 1,751 
Less sublease income (1)
(235)(228)(716)(696)
Total lease cost$4,516 $4,275 $14,048 $12,989 

(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 were $4.1 million and $12.5 million for the three and nine months ended September 30, 2020 and were $3.8 million and $11.5 million for the three and nine months ended September 30, 2019, respectively. The Company recorded right-of-use lease assets in exchange for operating lease liabilities of $4.1 million and $7.6 million for the three and nine months ended September 30, 2020 and of $8.8 million and $72.5 million for the three and nine months ended September 30, 2019, respectively.

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Undiscounted Cash Flows

The table below reconciles the undiscounted cash flows for each of the next five years beginning with 2020 and the total of the remaining years to the operating lease liabilities recorded on the Consolidated Statements of Financial Condition asPosition (in thousands):
Operating Leases
Remainder of 2020$4,147 
202115,739 
202212,830 
20239,813 
20247,848 
Thereafter18,012 
Total minimum lease payments68,389 
Less: amount of lease payments representing interest(6,520)
Lease obligations$61,869 

As of September 30, 20172020 and December 31, 2016 (in thousands):2019, the Company had 0 undiscounted lease payments under an operating lease that had not yet commenced.


 September 30, 2017
       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
Derivative assets           
Interest rate swaps$7,186
 $—
 $7,186
 $(1,148) $—
 $6,038
 $7,186
 $—
 $7,186
 $(1,148) $—
 $6,038
            
Derivative liabilities           
Interest rate swaps$7,186
 $—
 $7,186
 $(1,148) $(4,461) $1,577
 $7,186
 $—
 $7,186
 $(1,148) $(4,461) $1,577
            
 December 31, 2016
       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
Derivative assets           
Interest rate swaps$8,330
 $—
 $8,330
 $(362) $—
 $7,968
 $8,330
 $—
 $8,330
 $(362) $—
 $7,968
            
Derivative liabilities           
Interest rate swaps$8,330
 $—
 $8,330
 $(362) $(7,557) $411
 $8,330
 $—
 $8,330
 $(362) $(7,557) $411


NOTE 14: SUBSEQUENT EVENT

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

Under the terms of the purchase and assumption agreement, the sale included approximately $255 million in loans, $160 million in deposits and all of Banner Bank’s seven Utah branches located in Provo, Orem, Salem, Springville, South Jordan, Salt Lake City and Woods Cross. The sale also included $3.9 million 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 was $13.8 million based on average deposits at closing. The net gain recorded on the sale was approximately $12 million.



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, its 1822020, it had 167 branch offices and 1218 loan production offices located in Washington, Oregon, California, UtahIdaho and Idaho.  On October 9, 2017, Banner Bank announced that it had completed the sale of its seven Utah branches and related operations.Utah.  Islanders Bank is a Washington-chartered commercial bank and conducts its business from three locations in San Juan County, Washington.  On July 22, 2020, Banner announced plans to merge Islanders Bank into Banner Bank, regulatory approvals for the merger was received in October 2020, and the merger is expected to be completed in the first quarter of 2021. 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, 2017,2020, we had total consolidated assets of $10.44$14.64 billion, total loans of $7.77$10.16 billion, total deposits of $8.54$12.22 billion and total shareholders’ equity of $1.33$1.65 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'sCorporation’s successful execution of its super community bank model and strategic initiatives hashave delivered solid profitabilitycore operating results and growth. We continue to execute on our goals to maintain the Company's moderate risk profile as well as to develop and continue strong earnings momentum.profitability. Highlights of this success have included maintaining strongsolid asset quality, outstanding client acquisition and account growth, which have resulted in increased non-interest-bearingcore deposit balances and strong revenue generation while maintaining the Company’s moderate risk profile.

Our financial results for the quarter ended September 30, 2020 reflect the impact of the COVID-19 pandemic which resulted in a substantial reduction in business activity or the closing of businesses in all the western states in which Banner operates. Banner is continuing to offer payment and financial relief programs for borrowers impacted by COVID-19. These programs include initial loan payment deferrals or interest-only payments for up to 90 days, waived late fees, and, on a more limited basis, waived interest and temporarily suspended foreclosure proceedings. Deferred loans are re-evaluated at the end of the initial deferral period and will either return to the original loan terms or could be eligible for an additional deferral period for up to 90 days. In addition, Banner has entered into payment forbearance agreements with other customers for periods of up to six months. Year to date, Banner has deferred payment or waived interest on 3,370 loans totaling $1.09 billion. Through September 30, 2020 the deferral period had ended for approximately 78%, or $849.7 million of these loans, leaving $239.6 million still on deferral. Of the loans still on deferral, 107 loans totaling $160.4 million have received a second deferral. Since these loans were performing loans that were current on their payments prior to COVID-19, these modifications are not considered to be troubled debt restructurings through September 30, 2020 pursuant to applicable accounting and regulatory guidance. In addition, the U.S. Small Business Administration (SBA) provided assistance to small businesses impacted by COVID-19 through the Paycheck Protection Program (PPP), which is designed to provide near term relief to help small businesses sustain operations.  Banner offered small businesses
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loans to clients in its service area through this program.  As of September 30, 2020, Banner had funded 9,103 applications totaling $1.15 billion of loans in its service area through the PPP program. The deadline for PPP loan applications to the SBA was August 8, 2020. Banner is preparing to process applications for loan forgiveness in the fourth quarter of 2020. Banner will continue to assist small businesses with other borrowing options as they become available.

Banner has taken various steps to help protect customers and staff by limiting branch activities to appointment only and use of drive-up facilities, and by encouraging the use of digital and electronic banking channels, all the while adjusting for evolving State and Federal stay-at-home guidelines. In select markets on a test basis, Banner has begun taking steps to resume more normal branch activities with specific guidelines in place to provide for the safety of its clients and personnel. To further the well-being of staff and customers, Banner implemented measures to allow employees to work from core operations.home to the extent practicable. To facilitate this approach, Banner purchased additional computer equipment for staff and enhanced the Company’s network capabilities with several upgrades. These expenses plus other expenses incurred in response to the COVID-19 pandemic resulted in $778,000 of related costs during the quarter ended September 30, 2020.


For the quarter ended September 30, 2017,2020, our net income was $25.1$36.5 million, or $0.76$1.03 per diluted share, compared to net income of $23.9$39.6 million, or $0.70$1.15 per diluted share, for the quarter ended September 30, 2016. For2019. The current quarter was positively impacted by an increase in the nine monthsgain on sale spread on one- to four-family held for sale loans as well as decreased funding costs, which were primarily offset by increases in the provision for credit losses, deposit insurance expense and salary and employee benefits. The year-over-year increase in deposit insurance reflects a FDIC credit of $2.7 million for previously paid deposit insurance premiums which resulted in a net deposit insurance benefit of $1.6 million for the quarter 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 was negatively impacted by $1.7 million 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 expenses2019. The increase in the quarter or nine months ended September 30, 2017.

Highlightsprovision for credit losses for the current quarter included additional client acquisition, solid asset quality, strong revenues from core operations, and growth in loans and core deposits. Comparedcompared to the same quarter a year ago we had a significant increase in net interest income, reflectingprimarily reflected expected lifetime credit losses due to the organic growthCOVID-19 pandemic based upon the financial conditions and economic outlook that existed as of the Company.September 30, 2020.


Our operating results depend primarily on our net interest income, which is the difference between interest income on interest-earning assets, consisting primarily of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of customer deposits, FHLB advances, other borrowings, subordinated notes, and junior subordinated debentures. Net interest income is primarily a function of our interest rate spread, which is the difference between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, as well as a function of the average balances of interest-earning assets, interest-bearing liabilities and non-interest-bearing funding sources including non-interest-bearing deposits. Our net interest income increased $6.5$4.4 million, or 7%4%, to $100.2$121.0 million for the quarter ended September 30, 2017,2020, compared to $93.7$116.6 million for the same quarter one year earlier. This increase in net interest income reflects the organicis a result of growth in earning assetstotal loans receivable and a continued strong net interest margin.core deposits, partially offset by lower yields on interest-earning assets. The growth in total loans receivable and core deposits was largely as the result of the origination of the PPP loans during the second and third quarter of 2020.


Our net income is 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 servicing fees, 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 quarter of 20172020 increased $3.3$11.8 million, or 3%9%, to $120.5$149.2 million, compared to $117.2$137.5 million for the same period a year earlier, largely as a result of increasedincreases in both net interest income as well as increased deposit fees and service charges.non-interest 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$28.2 million for the quarter ended September 30, 2017,2020, compared to $23.5$20.9 million for the quarter ended September 30, 2016.2019.

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.


Our non-interest expense increased in the third quarter of 20172020 compared to a year earlier largely as a result of costs incurredthe higher salary and employee benefits due to additional staffing related to enhanced regulatory requirements attributable to compliancethe operations acquired from the acquisition of AltaPacific on November 1, 2019 and risk management infrastructure build-outnormal salary and wage adjustments, as a result of crossing the $10 billion asset threshold.  There were no acquisition-related expenseswell as an increase in the current quarterdeposit insurance expense compared to $1.7 million in the same quarter a year ago.ago as discussed above. In addition the provision for credit losses - unfunded loan commitments was $1.5 million in the third quarter of 2020 compared to none in the same quarter last year. Non-interest expense was $82.6$91.6 million for the quarter ended September 30, 2017,2020, compared to $79.1$87.3 million for the same quarter a year earlier.


Although ourWe recorded a $13.6 million provision for credit quality metrics continuelosses - loans in the quarter ended September 30, 2020, compared to reflect our moderate risk profile, we recorded a $2.0 million provision for loan losses infor the quarter ended September 30, 2017, primarily2019 due to loan growth and the renewal of acquired loans outeconomic impact of the discounted loan portfolios,COVID-19 pandemic. The provision for the current quarter primarily reflects expected lifetime credit losses due to the COVID-19 pandemic based upon the financial conditions and economic outlook that existed as well as net charge-offs during the quarter, compared to a $2.0 million loan loss provision recorded in the third quarter a year ago.of September 30, 2020. The allowance for loancredit losses - loans at September 30, 20172020 was $89.1$168.0 million, representing 296%482% of non-performing loans. Non-performing loans were $30.1compared to $100.6 million, or 254% of non-performing loans at December 31, 2019. In addition to the allowance for credit losses - loans, Banner maintains an allowance for credit losses - unfunded loan commitments which was $12.1 million at September 30, 2017,2020 compared to $22.6$2.7 million at December 31, 20162019. Non-performing loans were $34.8 million at September 30, 2020, compared to $39.6 million at December 31, 2019 and $27.3$18.3 million a year earlier. (See Note 4,5, Loans Receivable and the Allowance for LoanCredit Losses, as well as “Asset Quality” below in this Form 10-Q.)


During 2016 our strategy wasOn June 30, 2020, Banner issued and sold in an underwritten offering $100.0 million aggregate principal amount of 5.000% Fixed-to-Floating Rate Subordinated Notes due 2030 (Subordinated Notes) at a public offering price equal to maintain assets below $10.0 billion through December 31, 2016. Remaining below $10.0 billion in assets through100% of the year end hadaggregate principal amount of the beneficial effect of delaying the adverse impact on our future operating results from certain enhanced regulatory compliance requirements and the Durbin Amendment cap on interchange fees. Beginning in early 2017, we renewed our strategy of funding additional investment securities purchases/interest-earning assets with deposits and borrowings to leverage our capital,Notes, resulting in a $649.4 million increase in total assets during the first nine monthsnet proceeds, after underwriting discounts and offering expenses, of 2017, further enhancing our revenue growth.approximately $98.1 million.


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*Non-GAAP financial measures: Non-interestNet 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, COVID-19 expenses, amortization of CDI, REO operations and in certain periods, acquisition-related costsstate/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, 20172020 and 2016”2019” 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,
2020201920202019
ADJUSTED REVENUE
Net interest income$121,026 $116,621 $359,864 $349,420 
Total non-interest income28,222 20,866 75,107 61,667 
Total GAAP revenue149,248 137,487 434,971 411,087 
Exclude net (gain) loss on sale of securities(644)2 (815)29 
Exclude change in valuation of financial instruments carried at fair value(37)69 2,360 172 
Adjusted Revenue (non-GAAP)$148,567 $137,558 $436,516 $411,288 
For the Three Months Ended
September 30,		For the Nine Months Ended
September 30,
2020201920202019
ADJUSTED EARNINGS
Net income (GAAP)$36,548 $39,577 $76,971 $112,623 
Exclude net (gain) loss on sale of securities(644)2 (815)29 
Exclude change in valuation of financial instruments carried at fair value(37)69 2,360 172 
Exclude acquisition-related expenses5 676 1,483 3,125 
Exclude COVID-19 expenses778 — 3,169 — 
Exclude related tax benefit(24)(49)(1,476)(668)
Total adjusted earnings (non-GAAP)$36,626 $40,275 $81,692 $115,281 
Diluted earnings per share (GAAP)$1.03 $1.15 $2.17 $3.23 
Diluted adjusted earnings per share (non-GAAP)$1.04 $1.17 $2.30 $3.31 
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 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 income20,339
 23,512
 63,653
 64,007
Total GAAP revenue120,549
 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 value493
 1,124
 1,831
 1,472
Revenue from core operations (non-GAAP)$120,772
 $117,453
 $360,024
 $342,847
For the Three Months Ended
September 30,		For the Nine Months Ended
September 30,
2020201920202019
ADJUSTED EFFICIENCY RATIO
Non-interest expense (GAAP)$91,567 $87,308 $276,389 $264,038 
Exclude acquisition-related expenses(5)(676)(1,483)(3,125)
Exclude COVID-19 expenses(778)— (3,169)— 
Exclude CDI amortization(1,864)(1,985)(5,867)(6,090)
Exclude state/municipal tax expense(1,196)(1,011)(3,284)(2,963)
Exclude REO operations11 (126)(93)(263)
Adjusted non-interest expense (non-GAAP)$87,735 $83,510 $262,493 $251,597 
Net interest income (GAAP)$121,026 $116,621 $359,864 $349,420 
Non-interest income (GAAP)28,222 20,866 75,107 61,667 
Total revenue149,248 137,487 434,971 411,087 
Exclude net (gain) loss on sale of securities(644)2 (815)29 
Exclude net change in valuation of financial instruments carried at fair value(37)69 2,360 172 
Adjusted revenue (non-GAAP)$148,567 $137,558 $436,516 $411,288 
Efficiency ratio (GAAP)61.35 %63.50 %63.54 %64.23 %
Adjusted efficiency ratio (non-GAAP)59.05 %60.71 %60.13 %61.17 %



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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 value493
 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
September 30,		 For the Nine Months Ended
September 30,
 2017 2016 2017 2016
EARNINGS FROM CORE OPERATIONS:       
Net income (GAAP)$25,077
 $23,851
 $74,324
 $62,581
Exclude net gain on sale of securities(270) (891) (230) (531)
Exclude change in valuation of financial instruments carried at fair value493
 1,124
 1,831
 1,472
Exclude acquisition related costs—
 1,720
 —
 10,945
Exclude related tax benefit(80) (703) (576) (4,261)
Total earnings from core operations (non-GAAP)$25,220
 $25,101
 $75,349
 $70,206
Diluted earnings per share (GAAP)$0.76
 $0.70
 $2.25
 $1.83
Diluted core earnings per share (non-GAAP)$0.76
 $0.74
 $2.28
 $2.06
ADJUSTED EFFICIENCY RATIO       
Non-interest expense (GAAP)$82,589
 $79,092
 $242,597
 $243,013
Exclude acquisition-related costs—
 (1,720) —
 (10,945)
Exclude CDI amortization(1,542) (1,724) (4,790) (5,339)
Exclude Business and Occupancy (B&O) tax expense(780) (956) (1,857) (2,564)
Exclude REO gain (loss)(240) 21
 1,089
 (513)
Adjusted non-interest expense (non-GAAP)$80,027
 $74,713
 $237,039
 $223,652
        
Net interest income (GAAP)$100,210
 $93,708
 $294,770
 $277,899
Non-interest income (GAAP)20,339
 23,512
 63,653
 64,007
Total revenue120,549
 117,220
 358,423
 341,906
Exclude net gain on sale of securities(270) (891) (230) (531)
Exclude net change in valuation of financial instruments carried at fair value493
 1,124
 1,831
 1,472
Adjusted revenue (non-GAAP)$120,772
 $117,453
 $360,024
 $342,847
        
Efficiency ratio (GAAP)68.51% 67.47% 67.68% 71.08%
Adjusted efficiency ratio (non-GAAP)66.26% 63.61% 65.84% 65.23%




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
September 30, 2020December 31, 2019September 30, 2019
Shareholders’ equity (GAAP)$1,646,529 $1,594,034 $1,530,935 
   Exclude goodwill and other intangible assets, net396,412 402,279 365,764 
Tangible common shareholders’ equity (non-GAAP)$1,250,117 $1,191,755 $1,165,171 
Total assets (GAAP)$14,642,075 $12,604,031 $12,097,842 
   Exclude goodwill and other intangible assets, net396,412 402,279 365,764 
Total tangible assets (non-GAAP)$14,245,663 $12,201,752 $11,732,078 
Common shareholders’ equity to total assets (GAAP)11.25 %12.65 %12.65 %
Tangible common shareholders’ equity to tangible assets (non-GAAP)8.78 %9.77 %9.93 %
TANGIBLE COMMON SHAREHOLDERS’ EQUITY PER SHARE
Tangible common shareholders’ equity (non-GAAP)$1,250,117 $1,191,755 $1,165,171 
Common shares outstanding at end of period35,158,568 35,751,576 34,173,357 
Common shareholders’ equity (book value) per share (GAAP)$46.83 $44.59 $44.80 
Tangible common shareholders’ equity (tangible book value) per share (non-GAAP)$35.56 $33.33 $34.10 
TANGIBLE COMMON SHAREHOLDERS' EQUITY TO TANGIBLE ASSETS     
September 30, 2017 December 31, 2016 September 30, 2016
Shareholders’ equity (GAAP)$1,327,011
 $1,305,710
 $1,331,271
   Exclude goodwill and other intangible assets, net269,802
 274,745
 276,517
Tangible common shareholders’ equity (non-GAAP)$1,057,209
 $1,030,965
 $1,054,754
Total assets (GAAP)$10,443,086
 $9,793,668
 $9,841,028
   Exclude goodwill and other intangible assets, net269,802
 274,745
 276,517
Total tangible assets (non-GAAP)$10,173,284
 $9,518,923
 $9,564,511
Common shareholders’ equity to total assets (GAAP)12.71% 13.33% 13.53%
Tangible common shareholders’ equity to tangible assets (non-GAAP)10.39% 10.83% 11.03%
      
TANGIBLE COMMON SHAREHOLDERS' EQUITY PER SHARE     
Tangible common shareholders' equity (non-GAAP)$1,057,209
 $1,030,965
 $1,054,754
Common shares outstanding at end of period33,254,784
 33,193,387
 33,867,311
Common shareholders' equity (book value) per share (GAAP)$39.90
 $39.34
 $39.31
Tangible common shareholders' equity (tangible book value) per share (non-GAAP)$31.79
 $31.06
 $31.14


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 loancredit 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, 2016.2019 except for the change related to the adoption of Financial Instruments - Credit Losses (Topic 326) as described below and in Notes 1 and 2 to the Consolidated Financial Statements.  For
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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. Loans modified due to the COVID-19 pandemic are considered current if they are less than 30 days past due on the contractual payments at the time the loan modification program was put in place and therefore continue to accrue interest unless the interest is being waived.


Provision and Allowance for Loan Losses:  Credit Losses - Loans: (Note 4)5) The methodology for determining the allowance for credit losses - loans is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for credit losses. Among the material estimates required to establish the allowance for credit losses - loans are: a reasonable and supportable forecast; a reasonable and supportable forecast period and the reversion period; value of collateral; strength of guarantors; the amount and timing of future cash flows for loans individually evaluated; and determination of the qualitative loss factors. All of these estimates are susceptible to significant change. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. The Banks have elected to exclude accrued interest receivable from the amortized cost basis in their estimate of the allowance for credit losses. The provision for loancredit losses reflects the amount required to maintain the allowance for credit losses at an appropriate level based upon management’s evaluation of the adequacy of generalcollective and specificindividual loss reserves.  We haveThe Company has established systematic methodologies for the determination of the adequacy of ourthe Company’s allowance for loancredit losses.  The methodologies are set forth in a formal policy and take into consideration the need for an overall generala valuation allowance for loans evaluated on a collective (pool) basis which have similar risk characteristics as well as specific allowances that are tied to individual problem loans.  We increase ourloans that do not share risk characteristics.  The Company increases its allowance for loancredit losses by charging provisions for probable loancredit losses against our income.

The allowance for loan losses is maintained at a level sufficient to provide for probable losses based on evaluating known and inherent risks in the loan portfolio and upon our continuing analysisits consolidated statement 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 lossesoperations. Losses related to specific assets are applied as a reduction of the carrying value of the assets and charged immediately against the allowance for credit loss reserve when management believes the uncollectibility of a loan loss reserve.balance is confirmed.  Recoveries on previously charged off loans are credited to the allowance for loancredit 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

Management estimates the allowance for loancredit losses may be necessary dueusing relevant information, from internal and external sources, relating to economic, operating, regulatorypast events, current conditions, and other conditions beyond our control.reasonable and supportable forecasts. The adequacyallowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of general and specific reserves isthe loan based on our continuing evaluationevaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio.  These factors include, among others, changes in the size and composition of the pertinentloan portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic conditions.

The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. In estimating the component of the allowance for credit losses for loans that share common risk characteristics, loans are pooled based on loan type and areas of risk concentration. For loans evaluated collectively, the allowance for credit losses is calculated using life of loan historical losses adjusted for economic forecasts and current conditions.

For commercial real estate, multifamily real estate, construction and land, commercial business and agricultural loans with risk rating segmentation, historical credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and risk rating. For one- to four- family residential loans, historical credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and delinquency status. These models calculate an expected life-of-loan loss percentage for each loan category by calculating the probability of default, based on the migration of loans from performing to loss by risk rating or delinquency categories using historical life-of-loan analysis and the severity of loss, based on the aggregate net lifetime losses incurred for each loan pool. For commercial real estate, commercial business, and consumer loans without risk rating segmentation, historical credit loss assumptions are estimated using a model that calculates an expected life-of-loan loss percentage for each loan category by considering the historical cumulative losses based on the aggregate net lifetime losses incurred for each loan pool. The model captures historical loss data back to the first quarter of 2008. For loans evaluated collectively, management uses economic indicators to adjust the historical loss rates so that they better reflect management’s expectations of future conditions over the remaining lives of the loans in the portfolio based on reasonable and supportable forecasts. These economic indicators are selected based on correlation to the Company’s historical credit loss experience and are evaluated for each loan category. The economic indicators evaluated include unemployment, gross domestic product, real estate price indices and growth, yield curve spreads, treasury yields, the corporate yield, the market volatility index, the Dow Jones index, the consumer confidence index, and the prime rate. Management considers various economic scenarios and forecasts when evaluating the economic indicators and probability weights the various scenarios to arrive at the forecast that most reflects management’s expectations of future conditions. The allowance for credit losses is then adjusted for the period in which those forecasts are considered to be reasonable and supportable. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, the adjustments discontinue to be applied so that the model reverts back to the historical loss rates using a straight line reversion method. Management selected an initial reasonable
63

and supportable forecast period of 12 months with a reversion period of 12 months. Both the reasonable and supportable forecast period and the reversion period are periodically reviewed by Management.

Further, for loans evaluated collectively, management also considers qualitative and environmental factors for each loan category to adjust for differences between the historical periods used to calculate historical loss rates and expected conditions over the remaining lives of the loans in the portfolio. In determining the aggregate adjustment needed management considers the financial condition of the borrowers, the nature and volume of the loans, the remaining terms and the extent of prepayments on the loans, the volume and severity of past due and classified loans as well as the value of the underlying collateral on loans in which the collateral dependent practical expedient has not been used. Management also considers the Company’s lending policies, the quality of the loan portfolio as well as individualCompany’s credit 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 tosystem, the contractual termsquality of the loan agreement.Company’s management and lending staff, and the regulatory and economic environments in the areas in which the Company’s lending activities are concentrated.

Loans that do not share risk characteristics with other loans in the portfolio are individually evaluated for impairment and are not included in the collective evaluation.  Factors involved in determining impairmentwhether a loan should be individually evaluated include, but are not limited to, the financial condition of the borrower and the value of the underlying collateral less selling costs and the current status of the economy.  Impairedcollateral.  Expected credit losses for loans evaluated individually are measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or as a practical expedient, atwhen the loan’s observable market price orBanks determine that foreclosure is probable, the expected credit loss is measured based on the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. As a practical expedient, the Banks measure the expected credit loss for a loan using the fair value of the collateral, if repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the Banks' assessment as of the reporting date.

In both cases, if the fair value of the collateral is less than the amortized cost basis of the loan, isthe Banks will recognize an allowance as the difference between the fair value of the collateral, dependent.less costs to sell (if applicable), at the reporting date and the amortized cost basis of the loan. If the fair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis will be limited to the amount previously charged-off. Subsequent changes in the value of impairedexpected credit losses for loans evaluated individually are included within the provision for loancredit losses in the same manner in which impairmentthe expected credit loss initially was recognized or as a reduction in the provision that would otherwise be reported.  Large groups

Expected credit losses are estimated over the contractual term of smaller-balance homogeneousthe loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Banks.

Some of the Banks’ loans are collectively evaluatedreported as troubled debt restructures (TDRs).  Loans are reported as TDRs when the Banks grant a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider.  Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for impairment.  Loans that are collectively evaluateda transaction of similar risk.  The allowance for impairment include residential real estate and consumercredit losses on a TDR is determined using the same method as all other 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 evaluatedheld for impairment.  

Our methodology for assessinginvestment, except when the appropriatenessvalue of the concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method the allowance for loancredit losses consistsis determined by discounting the expected future cash flows at the original interest rate of several key elements,the loan. The Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) provided guidance around the modification of loans as a result of the COVID-19 pandemic, which include specific allowances, an allocated formula allowanceoutlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and an unallocated allowance.  Lossesregulatory guidance if they are less than 30 days past due 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 ustheir contractual payments at the time the financial statements are prepared.  The formula allowancea modification program 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.implemented.


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

Loans Acquired in the Selected Business Combinations:(Notes to the Consolidated Financial Statements.

Acquired Loans:(Note 4)Purchased loans, including loans3 and 5)Loans acquired in business combinations are recorded at their fair value at the acquisition date. Credit discountsEstablishing the fair value of acquired loans involves a significant amount of judgment, including determining the credit discount based upon historical data adjusted for current economic conditions and other factors. If any of these assumptions are included ininaccurate actual credit losses could vary significantly from the determinationcredit discount used to calculate the fair value of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date.acquired loans. Acquired loans are evaluated upon acquisition and classified as either purchased credit-impairedcredit-deteriorated or purchased non-credit-impaired.non-credit-deteriorated. Purchased credit-impaired (PCI)credit-deteriorated (PCD) loans reflecthave experienced more than insignificant credit deterioration since origination such that itorigination. For PCD loans, an allowance for credit losses is probabledetermined at the acquisition thatdate using the Company will

be unablesame methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to collect all contractually required payments.individual loans. The accountingloan’s fair value grossed up for PCI loansthe allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is periodically updated for changes in cash flow expectations, and reflected ina noncredit discount or premium, which is amortized into interest income over the life of the loans as accretable yield. Any subsequent decreases in expected cash flows attributableloan. Subsequent changes to the allowance for credit deteriorationlosses are recognized by recordingrecorded through a provision for loancredit losses.


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For purchased non-credit-impairednon-credit-deteriorated loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income over the life of the loans. While credit discounts are included in the determination of the fair value for non-credit-deteriorated loans, since these discounts are expected to be accreted over the life of the loans, they cannot be used to offset the allowance for credit losses that must be recorded at the acquisition date. As a result, an allowance for credit losses is determined at the acquisition date using the same methodology as other loans held for investment and is recognized as a provision for credit losses. Any subsequent deterioration (improvement) in credit quality is recognized by recording (recapturing) a provision for loancredit losses.


Goodwill: (Note 6)7) Goodwill represents the excess of the purchase considerationsconsideration 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 stepused to identify the existence of impairment and the amount of impairment loss and compares the reporting unit'sunit’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, thenan 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 allocatesallocated 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 anunit. The impairment loss would be recognized as a charge to earnings. The Company performed its annual goodwill impairment test during the fourth quarter of 2019 and determined based on its qualitative analysis that is was more likely than not that the fair value of the reporting unit was not less than its carrying value, such that the Company’s goodwill was not considered impaired. Due to the current market conditions as a result of the COVID-19 pandemic, the Company performed a qualitative assessment of goodwill as of September 30, 2020 and determined that it was more likely than not that the fair value of the reporting unit was not less than the carrying value at September 30, 2020. Changes in the economic environment, operations of the reporting unit or other adverse events could result in future impairment charges which could have a material adverse impact on the Company’s operating results.


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 managementmanagement. 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 “moremore likely than not”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.

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Comparison of Financial Condition at September 30, 20172020 and December 31, 20162019


General:  Total assets increased $649.4 million,$2.04 billion, to $10.44$14.64 billion at September 30, 2017,2020, from $9.79$12.60 billion at December 31, 2016. 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, 2016.2019. The increase was largely the result of increasesan increase in securitiesretail deposits during the second and loans which were primarily funded by increases in depositsthird quarters of 2020, as well as FHLB advances to a lesser extent.  the origination of PPP loans.


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 $323.3Total loans receivable increased $858.6 million increase in portfolio loans during the nine months ended September 30, 2017,2020, primarily reflecting increased commercial business loan balances due to PPP loan originations and, to a lesser extent, increased commercial real estate, multifamily real estate and multifamily construction multifamily, one- to four-familyloan balances, partially offset by decreased commercial line of credit utilization, one-to-four family, and consumer lending partially offset byloan balances and to a lesser extended decreases in one-to-four family construction, land and land development and agricultural loan balances due to lower demand for certain loan types as a result of the COVID-19 pandemic as well seasonal and other market factors resulting in decreased agricultural loan balances.factors. At September 30, 2017,2020, our loan portfolioloans receivable totaled $7.77$10.16 billion compared to $7.45$9.31 billion at December 31, 20162019 and $7.40$8.84 billion at September 30, 2016.2019. The growth over the year ago period includes the impact of the acquisition of AltaPacific during the fourth quarter of 2019 which included $332.4 million of portfolio loans.


The following table sets forth the composition of the Company'sCompany’s loans receivable by type of loan as of the dates indicated (dollars in thousands):
Percentage Change
Sep 30, 2020Dec 31, 2019Sep 30, 2019Prior Year EndPrior Year
Commercial real estate:
Owner-occupied$1,049,877 $980,021 $883,233 7.1 %18.9 %
Investment properties1,991,258 2,024,988 1,867,593 (1.7)6.6 
Small balance CRE597,971 613,484 609,620 (2.5)(1.9)
Multifamily real estate426,659 388,388 314,447 9.9 35.7 
Construction, land and land development:
Commercial construction220,285 210,668 190,532 4.6 15.6 
Multifamily construction291,105 233,610 214,878 24.6 35.5 
One- to four-family construction518,085 544,308 507,674 (4.8)2.1 
Land and land development240,803 245,530 250,681 (1.9)(3.9)
Commercial business:
Commercial business1,193,651 1,364,650 1,277,089 (12.5)(6.5)
SBA PPP1,149,968 — — — — 
Small business scored763,824 772,657 769,538 (1.1)(0.7)
Agricultural business, including secured by farmland326,169 337,271 355,994 (3.3)(8.4)
One- to four-family residential771,431 925,531 908,988 (16.6)(15.1)
Consumer:
Consumer—home equity revolving lines of credit504,523 519,336 534,876 (2.9)(5.7)
Consumer—other118,308 144,915 150,225 (18.4)(21.2)
Total loans receivable$10,163,917 $9,305,357 $8,835,368 9.2 %15.0 %
       Percentage Change
 Sep 30, 2017 Dec 31, 2016 Sep 30, 2016 Prior Yr End Prior Year
Commercial real estate:         
Owner occupied$1,369,130
 $1,352,999
 $1,340,577
 1.2 % 2.1 %
Investment properties1,993,144
 1,986,336
 1,918,639
 0.3
 3.9
Multifamily real estate311,706
 248,150
 266,883
 25.6
 16.8
Commercial construction157,041
 124,068
 135,487
 26.6
 15.9
Multifamily construction136,532
 124,126
 105,669
 10.0
 29.2
One- to four-family construction399,361
 375,704
 363,586
 6.3
 9.8
Land and land development:         
Residential158,384
 170,004
 162,029
 (6.8) (2.2)
Commercial27,095
 29,184
 30,556
 (7.2) (11.3)
Commercial business1,311,409
 1,207,879
 1,187,848
 8.6
 10.4
Agricultural business including secured by farmland339,932
 369,156
 383,275
 (7.9) (11.3)
One- to four-family real estate869,556
 813,077
 846,899
 6.9
 2.7
Consumer:         
Consumer secured by one- to four-family real estate535,300
 493,211
 497,643
 8.5
 7.6
Consumer-other165,859
 157,254
 159,546
 5.5
 4.0
Total loans receivable$7,774,449
 $7,451,148
 $7,398,637
 4.3 % 5.1 %


Our commercial real estate loans for both owner-occupied, and investment properties, and small balance CRE totaled $3.36$3.64 billion, or 43%36% of our loan portfolio at September 30, 2017.2020. In addition, multifamily residential real estate loans totaled $311.7$426.7 million and comprised 4% of our loan portfolio. Commercial real estate loans increased by $22.9$20.6 million during the first nine months of 2017,2020 while multifamily real estate loans increased by $63.6$38.3 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, multifamily, and residential construction, land and land development loans, which totaled $878.4 million,$1.27 billion, or 11%12% of our loan portfolio at September 30, 2017. Our residential2020, compared to $1.23 billion at December 31, 2019 and $1.16 billion at September 30, 2019. Residential construction loans are a significant component of construction lending. Originations for residential construction loans havebalances decreased $26.2 million, or 5%, to $518.1 million at September 30, 2020 compared to $544.3 million at December 31, 2019 and increased in recent years as builders have expanded production and experienced strong sales in many markets where we operate.$10.4 million, or 2%, compared to $507.7 million at September 30, 2019. We have also experienced a meaningful increase in originations oforiginate 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 million, or 2%, to $557.7 million at September 30, 2017 compared to $545.7 million at December 31, 2016 and increased $32.1 million, or 6%, compared to $525.6 million at September 30, 2016. Residential construction, residential land and land development loans represented approximately 7%5% of our total loan portfolio at September 30, 2017.2020.

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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$160.2 million at September 30, 2017.2020. Our commercial and agricultural business loans increased $74.3$959.0 million or 5%, to $1.65$3.43 billion at September 30, 2017,2020, compared to $1.58$2.47 billion at December 31, 2016,2019, and increased $80.2 million,$1.03 billion, or 5%43%, compared to $1.57$2.40 billion at September 30, 2016, in each comparison primarily reflecting2019. The increase reflects growth in SBA PPP loans during the first nine months of 2020, offset partially by declines in commercial business loans partially offset by decreasedline of credit utilization, a decline in new loan production and seasonal decreases in agricultural loan balances. Commercial and agricultural business loans represented approximately 21%34% of our portfolio at September 30, 2017.2020.


Our one- to four-family real estate loan originations have been relatively strong, 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.declined during the current 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-

familyfour-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, 2017,2020, our outstanding balancesbalance of one- to four-family real estate loans retained in our portfolio increased $56.5decreased $154.1 million, or 7%, to $869.6$771.4 million, compared to $813.1$925.5 million at December 31, 2016,2019, and increased $22.7decreased $137.6 million, or 3%15%, compared to $846.9$909.0 million at September 30, 20162019. The decrease in one-to-four family real estate loans during 2020 reflects portfolio loans being refinanced and sold as a result of an increase in the amount of loans originatedheld for the portfolio compared to loans sold in the secondary market.sale loans. One- to four-family real estate loans represented 11%8% of our loan portfolio at September 30, 2017.2020.


Our consumer loan activity is primarily directed at meeting demand from our existing deposit customers. At September 30, 2017,2020, consumer loans, including consumer loans secured by one- to four-family residences, increased $50.7home equity revolving lines of credit, decreased $41.4 million to $701.2$622.8 million, compared to $650.5$664.3 million at December 31, 2016,2019, and increased $44.0decreased $62.3 million compared to $657.2$685.1 million at September 30, 2016. Consumer2019.

The following table shows loan origination (excluding loans held for sale) activity for the three and nine months ended September 30, 2020 and September 30, 2019 (in thousands):
 Three Months EndedNine months ended
Sep 30, 2020Sep 30, 2019Sep 30, 2020Sep 30, 2019
Commercial real estate$74,400 $106,690 $262,524 $263,872 
Multifamily real estate2,664 27,522 19,219 51,089 
Construction and land412,463 303,151 1,073,031 903,119 
Commercial business:
Commercial business128,729 208,277 495,869 612,187 
SBA PPP24,848 — 1,176,018 — 
Agricultural business16,990 10,993 64,544 59,670 
One-to four- family residential32,733 27,184 88,311 81,733 
Consumer132,100 99,823 326,110 280,062 
Total loan originations (excluding loans held for sale)$824,927 $783,640 $3,505,626 $2,251,732 

The origination table above includes loan participations and loan purchases. There were $18,000 of loan purchases during the nine months ended September 30, 2020 and $8.6 million of loan purchases during the nine months ended September 30, 2019.

Loans held for sale decreased to $185.9 million at September 30, 2020, compared to $210.4 million at December 31, 2019, as the sales of held-for-sale loans exceeded originations of held-for-sale loans during the nine months ended September 30, 2020. Loans held for sale were $244.9 million at September 30, 2019. Originations of loans held for sale increased to $1.03 billion for the nine months ended September 30, 2020 compared to $756.3 million for the same period last year, primarily due to increased refinance activity for one- to four-family residential mortgage loans, partially offset by lower originations of multifamily held for sale loans. The volume of one- to four-family residential mortgage loans sold was $824.0 million during 2017 largely as a result of a successful campaignthe nine months ended September 30, 2020, compared to $450.8 million in the second quartersame period a year ago. During the nine months ended September 30, 2020, we sold $231.4 million in multifamily loans compared to generate additional home equity lines$229.3 million for the same period last year. Loans held for sale at September 30, 2020 included $60.8 million of credit.multifamily loans and $125.2 million of one- to four-family loans compared to $144.9 million of multifamily loans and $100.0 million of one- to four-family loans at September 30, 2019.


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The following table presents loans by geographic concentration at September 30, 2017,2020, December 31, 20162019 and September 30, 2016 (in2019 (dollars in thousands):
Sep 30, 2020Dec 31, 2019Sep 30, 2019Percentage Change
AmountPercentageAmountAmountPrior Year EndPrior Year Qtr
Washington$4,767,113 46.8 %$4,364,764 $4,313,972 9.2 %10.5 %
California2,316,739 22.8 2,129,789 1,729,208 8.8 34.0 
Oregon1,858,465 18.3 1,650,704 1,615,192 12.6 15.1 
Idaho576,983 5.7 530,016 552,523 8.9 4.4 
Utah76,314 0.8 60,958 62,197 25.2 22.7 
Other568,303 5.6 569,126 562,276 (0.1)1.1 
Total loans receivable$10,163,917 100.0 %$9,305,357 $8,835,368 9.2 %15.0 %
 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%
Oregon1,561,723
 20.1
 1,505,369
 20.2
 1,466,845
 19.8
California1,381,572
 17.8
 1,239,989
 16.6
 1,204,273
 16.3
Idaho495,041
 6.4
 495,992
 6.7
 517,607
 7.0
Utah304,740
 3.9
 283,890
 3.8
 292,088
 3.9
Other515,492
 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.

Investment Securities: Our total investment in securities increased $533.9$397.4 million from December 31, 2016 to $1.63$2.21 billion at September 30, 2017. Security purchases during the nine-month period2020 from December 31, 2019. Securities purchased increased as we deployed excess balance sheet liquidity and market spreads for certain securities widened and exceeded sales, paydowns and maturities reflectingduring the Company's re-leveraged balance sheet following the previously announced strategy to remain below $10 billion in assets through December 31, 2016.nine-month period ended September 30, 2020. 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 3.64.0 years at September 30, 2017.2020. Net fair value adjustments to the portfolio of securities held for trading, which arewere included in net income, were an increasea decrease of $389,000$2.4 million in the nine months ended September 30, 2017.2020 primarily as the result of increased market spreads on certain types of securities. In addition, fair value adjustments for securities designated as available-for-sale reflected an increase of $5.8$47.0 million for the nine months ended September 30, 2017,2020, which was included net of the associated tax expense of $2.1$11.3 million as a component of other comprehensive income, and largely occurred as a result of decreased market interest rates. (See Note 84 of the Selected Notes to the Consolidated Financial Statements in this Form 10-Q.) Equity securities, comprised of investments in a money market mutual fund, totaled $450.3 million at September 30, 2020 compared to none at December 31, 2019 and September 30, 2019.


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.



The following table sets forth the Company'sCompany’s deposits by type of deposit account as of the dates indicated (dollars in thousands):
Percentage Change
Sep 30, 2020Dec 31, 2019Sep 30, 2019Prior Year EndPrior Year Quarter
Non-interest-bearing$5,412,570 $3,945,000 $3,885,210 37.2 %39.3 %
Interest-bearing checking1,434,224 1,280,003 1,209,826 12.0 18.5 
Regular savings accounts2,332,287 1,934,041 1,863,839 20.6 25.1 
Money market accounts2,120,908 1,769,194 1,551,305 19.9 36.7 
Interest-bearing transaction & savings accounts5,887,419 4,983,238 4,624,970 18.1 27.3 
Total core deposits11,299,989 8,928,238 8,510,180 26.6 32.8 
Interest-bearing certificates915,352 1,120,403 1,218,591 (18.3)(24.9)
Total deposits$12,215,341 $10,048,641 $9,728,771 21.6 %25.6 %
       Percentage Change
 Sep 30, 2017 Dec 31, 2016 Sep 30, 2016 Prior Yr End Prior Year
Non-interest-bearing$3,379,841
 $3,140,451
 $3,190,293
 7.6% 5.9 %
Interest-bearing checking955,486
 914,484
 853,594
 4.5
 11.9
Regular savings accounts1,577,292
 1,523,391
 1,387,123
 3.5
 13.7
Money market accounts1,525,657
 1,497,755
 1,557,951
 1.9
 (2.1)
Interest-bearing transaction & savings accounts4,058,435
 3,935,630
 3,798,668
 3.1
 6.8
Interest-bearing certificates1,100,574
 1,045,333
 1,123,011
 5.3
 (2.0)
Total deposits$8,538,850
 $8,121,414
 $8,111,972
 5.1% 5.3 %


Total deposits were $8.54$12.22 billion at September 30, 2017,2020, compared to $8.12$10.05 billion at December 31, 20162019 and $8.11$9.73 billion a year ago. The $2.17 billion increase in total deposits compared to December 31, 20162019 primarily reflects a $2.37 billion increase in core deposits. The increase in total deposits from year end was due primarily to PPP loan funds deposited into customer accounts andSeptember 30, 2016 reflects meaningful organic growth in the total balances and number of client relationships, as well as an increase in brokered deposits.customer deposit accounts due to changes in spending habits during the COVID-19 pandemic. The year-over-year increase in deposits also included $313.4 million in deposits acquired in the AltaPacific acquisition which closed in the fourth quarter of 2019. Non-interest-bearing account balances increased 8%37% to $3.38$5.41 billion at September 30, 2017,2020, compared to $3.14$3.95 billion at December 31, 2016,2019, and increased 6% 39%
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compared to $3.19$3.89 billion a year ago. Interest-bearing transaction and savings accounts increased 3%18% to $4.06$5.89 billion at September 30, 2017,2020, compared to $3.94$4.98 billion at December 31, 2016,2019, and increased 7%27% compared to $3.80$4.62 billion a year ago. Certificates of deposit increased 5%decreased 18% to $1.10 billion$915.4 million at September 30, 2017,2020, compared to $1.05$1.12 billion at December 31, 2016 but2019 and decreased compared to $1.12$1.22 billion a year ago. BrokeredWe had no brokered deposits totaled $171.7 million at September 30, 2017,2020, compared to $34.1$202.9 million in brokered deposits at December 31, 20162019 and $60.3$299.5 million a year ago. Brokered deposits increased during 2017 in connection with our leveraging strategy as higher yielding investment securities were purchased. Core deposits represented 87%93% of total deposits at September 30, 2017,2020 compared to 86%89% of total deposits a year earlier.at December 31, 2019.


The following table presents deposits by geographic concentration at September 30, 2017,2020, December 31, 20162019 and September 30, 2016 (in2019 (dollars in thousands):
Sep 30, 2020Dec 31, 2019Sep 30, 2019Percentage Change
AmountPercentageAmountAmountPrior Year EndPrior Year Quarter
Washington(1)
$6,820,329 55.8 %$5,861,809 $5,833,547 16.4 %16.9 %
Oregon2,486,760 20.4 2,006,163 1,990,155 24.0 25.0 
California2,254,681 18.4 1,698,289 1,429,939 32.8 57.7 
Idaho653,571 5.4 482,380 475,130 35.5 37.6 
Total deposits$12,215,341 100.0 %$10,048,641 $9,728,771 21.6 %25.6 %
 September 30, 2017 December 31, 2016 September 30, 2016
 Amount Percentage Amount Percentage Amount Percentage
Washington$4,654,406
 54.6% $4,347,644
 53.6% $4,283,522
 52.8%
Oregon1,811,459
 21.2
 1,708,973
 21.0
 1,737,754
 21.4
California1,442,727
 16.9
 1,469,748
 18.1
 1,491,903
 18.4
Idaho465,104
 5.4
 447,019
 5.5
 435,090
 5.4
Utah165,154
 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%
(1)Includes brokered deposits.


Borrowings: FHLB advances increaseddecreased to $263.3$150.0 million at September 30, 20172020 from $54.2$450.0 million at December 31, 20162019 as FHLB advancescore deposits were used to fund a portion of the growth in loans and the loan and securities portfolios. Other borrowings, consisting of retail repurchase agreements primarily related to customer cash management accounts, decreased $2.0increased $58.5 million, or 2%49%, to $103.7$177.0 million at September 30, 2017,2020, compared to $105.7$118.5 million at December 31, 2016.2019. On June 30, 2020, Banner issued and sold in an underwritten offer the Subordinated Notes, resulting in net proceeds, after underwriting discounts and offering expenses, of $98.1 million. No additional junior subordinated debentures were issued or matured during the nine months ended September 30, 2017;2020; however, the estimated fair value of these instruments increaseddecreased by $2.1 million.$9.5 million, reflecting wider market spreads. Junior subordinated debentures totaled $97.3$109.8 million at September 30, 20172020 compared to $95.2$119.3 million at December 31, 2016.2019.


Shareholders' Equity: Total shareholders'shareholders’ equity increased $21.3$52.5 million to $1.33$1.65 billion at September 30, 20172020 compared to $1.31$1.59 billion at December 31, 2016.2019. The increase in shareholders' equity primarily reflects the$77.0 million of year-to-date net income of $74.3 million and a $3.6$42.7 million improvementincrease in accumulated other comprehensive income primarily representing the decrease in the fair value of junior subordinated debentures and the increase in unrealized gains net of tax, on securities available-for-sale, reducednet of tax. These increases were partially offset by the accrual of $58.2$29.6 million of cash dividends to common shareholders which included three regular $0.25 perand the repurchase of 624,780 shares of common stock at a total cost of $31.8 million. The share quarterly dividendsrepurchases during the nine months ended September 30, 2020 were completed prior to the COVID-19 pandemic outbreak. To preserve capital, Banner has discontinued any additional repurchase of shares until further notice and will closely monitor capital levels going forward. In addition, the adoption of CECL on January 1, 2020, resulted in a $7.8 million increase to our allowance for credit losses - loans and a $7.0 million increase to our allowance for credit losses - unfunded loan commitments. The combined increases were recorded net of tax as wellan $11.2 million reduction to shareholders’ equity as a $1.00 per share special dividend.of the adoption date. During the nine months ended September 30, 2017, Banner repurchased 25,000 shares of common stock as part of the publicly announced repurchase authorization, 38,1602020, 20,388 shares of restricted stock were forfeited and 22,55341,329 shares were surrendered by employees to satisfy tax withholding obligations upon the vesting of restricted stock grants. (See Part II, Item 2, "Unregistered“Unregistered Sales of Equity Securities and Use of Proceeds"Proceeds” in this Form 10-Q.) Tangible common shareholders'shareholders’ equity, which excludes goodwill and other intangible assets, increased $26.2$58.4 million to $1.06$1.25 billion, or 10.39%8.78% of tangible assets at September 30, 2017,2020, compared to $1.03$1.19 billion, or 10.83%9.77% of tangible assets at December 31, 2016.2019. The decrease in tangible common shareholders’ equity as a percentage of tangible assets was primarily due to the increase in tangible assets, including the PPP loans.



Comparison of Results of Operations for the Three and Nine Months Ended September 30, 20172020 and 20162019


For the quarter ended September 30, 2017,2020, our net income was $25.1$36.5 million, or $0.76$1.03 per diluted share. This comparesshare, compared to net income of $23.9$39.6 million,, or $0.70$1.15 per diluted share, for the quarter ended September 30, 2016.2019. For the nine months ended September 30, 2017,2020 our net income

was $74.3$77.0 million, or $2.25$2.17 per diluted share, compared to net income of $62.6$112.6 million, or $1.83$3.23 per diluted share for the same period a year earlier. Our net income for the quarter ended September 30, 2020 included a provision for credit losses of $13.6 million, partially offset by increased non-interest income, including $16.6 million of mortgage banking income. Our net income for the nine months ended September 30, 2020 included a provision for credit losses of $64.9 million, increased non-interest expense, including $3.2 million of COVID-19 related expenses and $1.5 million of acquisition-related expenses, partially offset by increased non-interest income, including $40.9 million of mortgage banking income. The results for the quarter and nine months ended September 30, 20162020 included the operations acquired in the AltaPacific acquisition which closed in the fourth quarter of 2019 andreflectthe impact of the COVID-19 pandemic resulting in a substantial reduction in business activity or the closing of businesses in all the western states Banner operates.

Our net income for the quarter and nine months ended September 30, 2020 was negativelypositively impacted by $1.7 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.

Growthgrowth in average interest-earning assets, coupled with a strong net interest margin,due to the acquisition of AltaPacific as well as organic growth, including the origination of PPP loans during the second and third quarter of 2020, and by decreased funding costs which produced increased net interest income. This increase combined with increased mortgage banking income in both periods. This resulted in increasesrevenues increasing for the quarter and nine months ended September 30, 2020 compared to the same periods a year
69

earlier. Banner recorded a $13.6 million provision for credit losses for the quarter ended September 30, 2020, compared to $2.0 million in revenues from core operationsthe same quarter a year ago, primarily reflecting expected lifetime credit losses due to the COVID-19 pandemic based upon the financial conditions and economic outlook that existed as of September 30, 2020. Non-interest expenses increased in the quarter and nine months ended September 30, 20172020 compared to the same periodsperiod a year earlier. Credit costs remained lowago, reflecting COVID-19 expenses as well as additional expenses associated with the ongoing operations acquired in both periods, 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, representing further progress on our strategic priorities and initiatives, and produced an annualized return on average assets of 0.97% forAltaPacific acquisition. The increase in the current quarter and 0.98% for the nine months ended September 30, 2017.2020 compared to the same period a year ago also reflects a FDIC credit of $2.7 million for previously paid deposit insurance premiums which resulted in a net deposit insurance benefit of $1.6 million for the quarter ended September 30, 2019.


Our adjusted earnings, from core operations, which excludes net gainsgain or lossesloss on sales of securities, changes in the valuation of financial instruments carried at fair value, acquisition-related costs,expenses, COVID-19 expenses and related tax expenses or benefits, were $25.2$36.6 million, or $0.76$1.04 per diluted share, for the quarter ended September 30, 2017,2020, compared to $25.1$40.3 million, or $0.74$1.17 per diluted share, for the quarter ended September 30, 2016.2019. For the nine months ended September 30, 2017,2020, our adjusted earnings from core operations was $75.3were $81.7 million, or $2.28$2.30 per diluted share, compared with $70.2$115.3 million, or $2.06$3.31 per diluted share, for the same period a year earlier.


Net Interest Income. Net interest income increased by $6.5$4.4 million, or 7%4%, to $100.2$121.0 million for the quarter ended September 30, 2017,2020, compared to $93.7$116.6 million for the same quarter one year earlier, as an increase of $441.9 million$2.31 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 the origination of PPP loans and organic growth, as well as the AltaPacific 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 on a tax equivalent basis of 4.22%3.72% for the quarter ended September 30, 20172020 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 on a tax equivalent basis of 4.15%4.29% for the quarter ended September 30, 2016,2019, which included 14six basis points from acquisition accounting adjustments. The increasedecrease in net interest margin compared to a year earlier primarily reflects higherlower yields on average interest-earning assets, partially offset by decreases in the cost of funding liabilities. The lower yields on average interest-earning assets compared to a year earlier was largely due to the impact of decreases to the targeted Fed Funds Rate on floating rate loan yields indexed to prime and security yields.LIBOR rates as well as the impact of the low loan yields of the PPP loan portfolio and excess liquidity being invested in a short term money market mutual fund. The Federal Reserve reduced the targeted Fed Funds Rate by 75 basis points during the second half of 2019 and an additional 150 basis points during first quarter of 2020 to a range of 0.00% to 0.25% at September 30, 2020. The decreases in the costs of funding liabilities compared to a year earlier were also largely due to the impact of decreases to the targeted Fed Funds Rate, although the pace of decline in the cost of funding liabilities typically lags the effect on the yield earned on interest-earning assets primarily because offer rates on interest bearing deposit accounts reprice more slowly than loans for a given change in market rates.


Net interest income before provision for loan losses for the nine months ended September 30, 20172020 increased by $16.9$10.4 million, or 6.1%3%, to $294.8$359.9 million compared to $277.9$349.4 million for the same period one year earlier, as a result of a $309.6 million$1.65 billion increase in average interest-earning assets and enhanced by an 11 basis point increasethe decreases in the net interest margin.cost of funding liabilities. The net interest margin increasedon a tax equivalent basis decreased to 4.27%3.93% for the nine months ended September 30, 20172020 compared to 4.16%4.38% for the same period in the prior year.year, as a result of lower yields on earnings assets. The net interest margin included eight basis points of accretion acquisition accounting adjustments for the nine months ended September 30, 2017 included 122020 and six basis points of accretion acquisition accounting adjustments compared to 15 basis points from acquisition accounting adjustments for the same period a year ago.nine months ended September 30, 2019.


Interest Income. Interest income for the quarter ended September 30, 20172020 was $105.3$129.6 million, compared to $97.8$131.4 million for the same quarter in the prior year, an increasea decrease of $7.4$1.9 million, or 8%1%.  The increasedecrease in interest income occurred as a result of an increasethe decrease in the yield on interest-earning assets, partially offset by increases in the average balances and yields on interest-earning assets, in particularbalance of both loans and mortgage-backedinvestment securities. The average balance of interest-earning assets was $9.42$13.21 billion for the quarter ended September 30, 2017,2020, compared to $8.98$10.90 billion for the same period a year earlier. The average yield on average interest-earning assets was 4.43%3.98% for quarter ended September 30, 2017,2020, compared to 4.34%4.83% for the same quarter one year earlier. The increasedecrease in yield between periods reflects a 1077 basis point increasedecrease in the average yield on loans as well as a 25and an 85 basis point increasedecrease in the average yield on investment securities. Average loans receivable for the quarter ended September 30, 20172020 increased $266.3 million,$1.49 billion, or 4%17%, to $7.75$10.50 billion, compared to $7.48$9.01 billion for the same quarter in the prior year. Interest income on loans increaseddecreased by $5.4$1.4 million, or 6%1%, to $95.2$116.7 million for the current quarter from $89.8$118.1 million for the quarter ended September 30, 2016,2019, reflecting the impact of the previously mentioned increasesdecrease in average loan balances and in average yields on loans.yields.  The increasedecrease in average loan yields reflects the impact of higher Prime and Liborlower interest rates over the last year as well as changes in the impact of the low loan portfolio composition.yields for the PPP loan portfolio. The acquisition accounting loan discount accretion and the related balance sheet impact added 12nine basis points to the current quarter loan yield, compared to 15seven basis points for the same quarter one year earlier.


The combined average balance of mortgage-backed securities, other investment securities, equity securities, daily interest-bearing deposits and FHLB stock (total investment securities or combined portfolio) increased to $1.67$2.70 billion for the quarter ended September 30, 20172020 (excluding the effect of fair value adjustments), compared to $1.50$1.89 billion for the quarter ended September 30, 2016;2019; and the interest and dividend income from those investments increased by $2.0 million$475,000 compared to the same quarter in the prior year. The average yield on the combined portfolio increaseddecreased to 2.39%2.04% for the quarter ended September 30, 2017,2020, from 2.14%2.89% for the same quarter one year earlier due to security purchases during 2017 having higher yields thanearlier. The decrease in yield reflects the existing portfolio. The increaseoverall decline in security purchases earlymarket interest rates as well as the investment of excess liquidity in 2017 occurred in connection with our re-leveraging strategy.a short term money market mutual fund.


Interest income for the nine months ended September 30, 20172020 was $308.8$390.0 million, compared to $290.5$392.3 million for the same period in the prior year, an increasea decrease of $18.3 million, or 6%. As with the quarterly results, the year-to-date$2.3 million. The nine months results reflect a $309.6 million, or 3%, increaseincreases in the average balancebalances of interest-earning assets as well as a 12 basis point increaseloans and investment securities, offset by the decrease in the yield on interest-earning assets.


70

Interest Expense. Interest expense for the quarter ended September 30, 20172020 was $5.1$8.6 million, compared to $4.1$14.8 million for the same quarter in the prior year. The interest expense increasedecrease between periods reflects a $440.9 million,30 basis point decrease in the average cost of all funding liabilities, partially offset by a $2.37 billion, or 5%23%, increase in the average balance of funding liabilities and a four basis point increase in the average cost of all funding liabilities.



Interest expense for the nine months ended September 30, 20172020 was $14.0$30.1 million, compared to $12.6$42.9 million for the same period in the prior year. As with the quarterly results, the nine-monthnine month results reflect a $314.5 million,22 basis point decrease in the average cost of all funding liabilities, partially offset by a $1.69 billion or 4%17%, 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,decreased $4.8 million, or 15%48%, to $3.2$5.2 million for the quarter ended September 30, 2017,2020, compared to $2.8$10.0 million for the same quarter in the prior year, primarily as a result of increasesa decrease in the cost of deposits, partially offset by an increase in the average balancebalances. The average rate paid on total deposits decreased to 0.17% in the third quarter of 2020 from 0.42% for the quarter ended September 30, 2019, primarily reflecting decreases in the costs of interest-bearing checking, money market, savings, and certificates of deposit accounts, as well as an increase in the percentage of core deposits. The cost of interest-bearing deposits.deposits decreased by 38 basis points to 0.31% for the quarter ended September 30, 2020 compared to 0.69% in the same quarter a year earlier. Average deposit balances increased to $8.49$12.07 billion for the quarter ended September 30, 2017,2020, from $8.07$9.53 billion for the quarter ended September 30, 2016, while the average rate paid on deposit balances increased to 0.15% in the third quarter of 2017 from 0.14% for the quarter ended September 30, 2016, reflecting primarily the increase in the cost of certificates of deposits partially offset by the increase in non-interest-bearing deposits. 2019.

Deposit interest expense increased $661,000,decreased $7.1 million or 8%25%, to $9.2$20.6 million for the nine months ended September 30, 2017,2020, compared to $8.5$27.7 million for the same period in the prior year. Average deposit balances increased to $8.36$11.23 billion for the nine months ended September 30, 2017,2020, from $8.01$9.39 billion for the same period a year earlier, while the average rate paid on deposits decreased to 0.25% in the nine months ended September 30, 2020 from 0.39% in the nine months ended September 30, 2019. The cost of interest-bearing deposits decreased by 23 basis points to 0.42% for the nine months ended September 30, 2016, while the average rate paid on deposit balances increased2020 compared to 0.15%0.65% in the nine months ended September 30, 2017 from 0.14%same period a year earlier.

The decrease 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 increasedbetween the periods was driven by two basis points to 0.24% for the quarter ended September 30, 2017 compared to 0.22%market and competitive factors as a result of decreases 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 the increase in short-term rates following changes in thetarget Fed Funds target rateRate over the last year, although these did contribute to the two basis point increase in the cost of deposits.year.


Average total borrowings were $422.1$575.6 million for the quarter ended September 30, 2017,2020, compared to $403.4$738.7 million for the same quarter one year earlier and the average rate paid on total borrowings for the quarter ended September 30, 2017 increased2020 decreased to 1.77%2.33% from 1.34%2.58% for the same quarter one year earlier. The increasedecrease in the average balance fromtotal borrowings for the quarter ended September 30, 20172020 from the same period a year earlier was primarily due to a $13.4$326.4 million decrease in average FHLB advances. The decrease in average FHLB advances was partially offset by the previously mentioned issuance of the subordinated notes and an increase in average FHLB advances.other borrowings due to increases in retail repurchase agreements primarily related to customer cash management accounts. Interest expense on total borrowings increaseddecreased to $1.9$3.4 million for the quarter ended September 30, 20172020 from $1.4$4.8 million for the quarter ended September 30, 2016. Average2019.

Interest expense on total borrowings were $387.2decreased to $9.5 million for the nine months ended September 30, 2017,2020 from $15.2 million for the nine months ended September 30, 2019. Average total borrowings were $614.8 million for the nine months ended September 30, 2020, compared to $427.3$769.3 million for the same period onea year earlier whileand the average rate paid on total borrowings for the nine months ended September 30, 2017 increased2020 decreased to 1.68%2.07% from 1.27%2.64% for the same period in 2016 reflecting three changes to the Fed Funds target rate over the last year.a year earlier. The decrease in the average balance was primarily due to a $45.1$271.3 million decrease in average FHLB advances, slightly offset bycoupled with a $5.0 million increase34 basis point decrease in the average other borrowings, which reflects our funding a larger portioncost of the balance sheet with deposits.FHLB advances.



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):
71

Three Months Ended September 30, 2017 Three Months Ended September 30, 2016 Three Months Ended September 30, 2020Three Months Ended September 30, 2019
Average Balance Interest and Dividends 
Yield/
   Cost (3)
 Average Balance Interest and Dividends 
Yield/
   Cost (3)
 Average BalanceInterest and Dividends
Yield/
   Cost (3)
Average BalanceInterest and Dividends
Yield/
   Cost (3)
Interest-earning assets:           Interest-earning assets:      
Held for sale loansHeld for sale loans$161,385 $1,535 3.78 %$154,529 $1,607 4.13 %
Mortgage loans$6,086,554
 $75,020
 4.89% $5,843,381
 $70,223
 4.78%Mortgage loans7,339,181 88,011 4.77 6,872,426 90,268 5.21 
Commercial/agricultural loans1,520,946
 17,992
 4.69
 1,495,611
 17,373
 4.62
Commercial/agricultural loans2,862,291 26,396 3.67 1,809,397 24,319 5.33 
Consumer and other loans140,758
 2,209
 6.23
 142,977
 2,209
 6.15
Consumer and other loans140,493 2,195 6.22 173,342 2,791 6.39 
Total loans (1)(3)
7,748,258
 95,221
 4.88
 7,481,969
 89,805
 4.78
10,503,350 118,137 4.47 9,009,694 118,985 5.24 
Mortgage-backed securities1,129,256
 6,644
 2.33
 920,560
 4,803
 2.08
Mortgage-backed securities1,250,759 7,333 2.33 1,358,448 9,484 2.77 
Other securities473,808
 3,192
 2.67
 472,159
 3,050
 2.57
Other securities884,916 6,036 2.71 414,994 3,378 3.23 
Equity securitiesEquity securities379,483 186 0.19 — — — 
Interest-bearing deposits with banks51,607
 159
 1.22
 86,868
 98
 0.45
Interest-bearing deposits with banks171,894 123 0.28 82,836 489 2.34 
FHLB stock16,961
 62
 1.45
 16,413
 93
 2.25
FHLB stock16,363 163 3.96 29,400 378 5.10 
Total investment securities1,671,632
 10,057
 2.39
 1,496,000
 8,044
 2.14
Total investment securities (3)
Total investment securities (3)
2,703,415 13,841 2.04 1,885,678 13,729 2.89 
Total interest-earning assets9,419,890
 105,278
 4.43
 8,977,969
 97,849
 4.34
Total interest-earning assets13,206,765 131,978 3.98 10,895,372 132,714 4.83 
Non-interest-earning assets888,388
     913,991
    Non-interest-earning assets1,259,816   1,078,621   
Total assets$10,308,278
     $9,891,960
    Total assets$14,466,581   $11,973,993   
Deposits:           Deposits:      
Interest-bearing checking accounts$946,585
 218
 0.09
 $837,930
 188
 0.09
Interest-bearing checking accounts$1,413,085 321 0.09 $1,194,633 621 0.21 
Savings accounts1,557,475
 538
 0.14
 1,371,911
 449
 0.13
Savings accounts2,251,294 813 0.14 1,854,967 2,244 0.48 
Money market accounts1,534,867
 653
 0.17
 1,564,906
 749
 0.19
Money market accounts2,096,037 1,224 0.23 1,542,264 2,944 0.76 
Certificates of deposit1,151,725
 1,780
 0.61
 1,173,630
 1,398
 0.47
Certificates of deposit966,028 2,821 1.16 1,155,710 4,205 1.44 
Total interest-bearing deposits5,190,652
 3,189
 0.24
 4,948,377
 2,784
 0.22
Total interest-bearing deposits6,726,444 5,179 0.31 5,747,574 10,014 0.69 
Non-interest-bearing deposits3,300,185
 —
 —
 3,120,279
 —
 —
Non-interest-bearing deposits5,340,688 — — 3,786,143 — — 
Total deposits8,490,837
 3,189
 0.15
 8,068,656
 2,784
 0.14
Total deposits12,067,132 5,179 0.17 9,533,717 10,014 0.42 
Other interest-bearing liabilities:           Other interest-bearing liabilities:      
FHLB advances165,586
 569
 1.36
 152,198
 256
 0.67
FHLB advances150,000 988 2.62 476,435 3,107 2.59 
Other borrowings116,297
 84
 0.29
 111,016
 82
 0.29
Other borrowings177,628 128 0.29 122,035 82 0.27 
Junior subordinated debentures140,212
 1,226
 3.47
 140,212
 1,019
 2.89
Junior subordinated debentures and subordinated notesJunior subordinated debentures and subordinated notes247,944 2,260 3.63 140,212 1,612 4.56 
Total borrowings422,095
 1,879
 1.77
 403,426
 1,357
 1.34
Total borrowings575,572 3,376 2.33 738,682 4,801 2.58 
Total funding liabilities8,912,932
 5,068
 0.23
 8,472,082
 4,141
 0.19
Total funding liabilities12,642,704 8,555 0.27 10,272,399 14,815 0.57 
Other non-interest-bearing liabilities (2)
67,918
     68,566
    
Other non-interest-bearing liabilities (2)
193,256   163,809   
Total liabilities8,980,850
     8,540,648
    Total liabilities12,835,960   10,436,208   
Shareholders’ equity1,327,428
     1,351,312
    Shareholders’ equity1,630,621   1,537,785   
Total liabilities and shareholders’ equity$10,308,278
     $9,891,960
    Total liabilities and shareholders’ equity$14,466,581   $11,973,993   
Net interest income/rate spread  $100,210
 4.20%   $93,708
 4.15%
Net interest margin    4.22%     4.15%
Net interest income/rate spread (tax equivalent)Net interest income/rate spread (tax equivalent) $123,423 3.71 % $117,899 4.26 %
Net interest margin (tax equivalent)Net interest margin (tax equivalent)  3.72 %  4.29 %
Reconciliation to reported net interest income:Reconciliation to reported net interest income:
Adjustments for taxable equivalent basisAdjustments for taxable equivalent basis(2,397)(1,278)
Net interest income and marginNet interest income and margin$121,026 3.65 %$116,621 4.25 %
Additional Key Financial Ratios:           Additional Key Financial Ratios:
Return on average assets    0.97%     0.96%Return on average assets1.01 %1.31 %
Return on average equity    7.49
     7.02
Return on average equity8.92 10.21 
Average equity / average assets    12.88
     13.66
Average equity / average assets11.27 12.84 
Average interest-earning assets / average interest-bearing liabilities    167.83
     167.76
Average interest-earning assets / average interest-bearing liabilities  180.86   167.98 
Average interest-earning assets / average funding liabilities    105.69
     105.97
Average interest-earning assets / average funding liabilities104.46 106.06 
Non-interest income / average assets    0.78
     0.95
Non-interest income / average assets0.78 0.69 
Non-interest expense / average assets    3.18
     3.18
Non-interest expense / average assets2.52 2.89 
Efficiency ratio (4)
    68.51
     67.47
Efficiency ratio (4)
61.35 63.50 
Adjusted efficiency ratio (5)
    66.26
     63.61
Adjusted efficiency ratio (5)
59.05 60.71 
(1)
(1)Average balances include loans accounted for on a nonaccrual basis and loans 90 days or more past due.  Amortization of net deferred loan fees/costs is included with interest on loans.
(2)Average other non-interest-bearing liabilities include fair value adjustments related to junior subordinated debentures.
(3)Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $1.4 million and $889,000 for the three months ended September 30, 2020 and September 30, 2019, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $976,000 and $389,000 for the three months ended September 30, 2020 and September 30, 2019, respectively.
(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. These represent non-GAAP financial measures. See the non-GAAP reconciliation tables above under “Executive Overview—Non-GAAP Financial Measures.”
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.
72

            
 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 loans1,496,549
 52,717
 4.71
 1,490,757
 51,213
 4.59
Consumer and other loans139,181
 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 securities1,013,913
 17,529
 2.31
 976,267
 15,467
 2.12
Other securities466,572
 9,420
 2.70
 450,142
 8,752
 2.60
Interest-bearing deposits with banks46,022
 392
 1.14
 95,406
 300
 0.42
FHLB stock15,666
 164
 1.40
 17,614
 254
 1.93
Total investment securities1,542,173
 27,505
 2.38
 1,539,429
 24,773
 2.15
Total interest-earning assets9,237,379
 308,809
 4.47
 8,927,744
 290,470
 4.35
Non-interest-earning assets902,435
     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 accounts1,556,075
 1,588
 0.14
 1,336,259
 1,303
 0.13
Money market accounts1,530,675
 1,994
 0.17
 1,587,500
 2,421
 0.20
Certificates of deposit1,147,387
 4,953
 0.58
 1,248,781
 4,207
 0.45
Total interest-bearing deposits5,157,894
 9,162
 0.24
 5,026,358
 8,501
 0.23
Non-interest-bearing deposits3,203,033
 —
 —
 2,980,027
 —
 —
Total deposits8,360,927
 9,162
 0.15
 8,006,385
 8,501
 0.14
Other interest-bearing liabilities:           
FHLB advances133,365
 1,142
 1.14
 178,468
 874
 0.65
Other borrowings113,664
 241
 0.28
 108,632
 234
 0.29
Junior subordinated debentures140,212
 3,494
 3.33
 140,212
 2,962
 2.82
Total borrowings387,241
 4,877
 1.68
 427,312
 4,070
 1.27
Total funding liabilities8,748,168
 14,039
 0.21
 8,433,697
 12,571
 0.20
Other non-interest-bearing liabilities (2)
60,895
     64,825
    
Total liabilities8,809,063
     8,498,522
    
Shareholders’ equity1,330,751
     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.

 Nine months ended September 30, 2020Nine months ended September 30, 2019
 Average
Balance		Interest and Dividends
Yield/
Cost (3)
Average
Balance		Interest and Dividends
Yield/
Cost (3)
Interest-earning assets:      
Held for sale loans$155,571 $4,506 3.87 %$100,273 $3,295 4.39 %
Mortgage loans7,321,206 268,244 4.89 6,835,861 269,588 5.27 
Commercial/agricultural loans2,450,234 74,555 4.06 1,761,222 72,086 5.47 
Consumer and other loans151,968 7,151 6.29 178,792 8,545 6.39 
Total loans(1)(3)
10,078,979 354,456 4.70 8,876,148 353,514 5.32 
Mortgage-backed securities1,297,020 24,652 2.54 1,368,081 29,785 2.91 
Other securities710,967 15,205 2.86 449,030 10,894 3.24 
Equity securities165,395 309 0.25 — — — 
Interest-bearing deposits with banks159,065 688 0.58 60,655 1,118 2.46 
FHLB stock19,822 785 5.29 30,679 1,031 4.49 
Total investment securities (3)
2,352,269 41,639 2.36 1,908,445 42,828 3.00 
Total interest-earning assets12,431,248 396,095 4.26 10,784,593 396,342 4.91 
Non-interest-earning assets1,232,997   1,053,180   
Total assets$13,664,245   $11,837,773   
Deposits:      
Interest-bearing checking accounts$1,352,369 1,164 0.11 $1,175,521 1,660 0.19 
Savings accounts2,133,780 3,566 0.22 1,853,671 6,283 0.45 
Money market accounts1,940,096 5,228 0.36 1,510,293 7,851 0.70 
Certificates of deposit1,069,145 10,665 1.33 1,171,363 11,886 1.36 
Total interest-bearing deposits6,495,390 20,623 0.42 5,710,848 27,680 0.65 
Non-interest-bearing deposits4,738,559 — — 3,682,047 — — 
Total deposits11,233,949 20,623 0.25 9,392,895 27,680 0.39 
Other interest-bearing liabilities:      
FHLB advances236,949 4,036 2.28 508,247 9,953 2.62 
Other borrowings195,977 482 0.33 120,847 209 0.23 
Junior subordinated debentures and subordinated notes181,886 4,988 3.66 140,212 5,008 4.78 
Total borrowings614,812 9,506 2.07 769,306 15,170 2.64 
Total funding liabilities11,848,761 30,129 0.34 10,162,201 42,850 0.56 
Other non-interest-bearing liabilities (2)
197,912   155,771   
Total liabilities12,046,673   10,317,972   
Shareholders’ equity1,617,572   1,519,801   
Total liabilities and shareholders’ equity$13,664,245   $11,837,773   
Net interest income/rate spread (tax equivalent) $365,966 3.92 % $353,492 4.35 %
Net interest margin (tax equivalent)  3.93 %  4.38 %
Reconciliation to reported net interest income:
Adjustments for taxable equivalent basis(6,102)(4,072)
Net interest income and margin$359,864 3.87 %$349,420 4.33 %
Additional Key Financial Ratios:
Return on average assets0.75 %1.27 %
Return on average equity6.36 9.91 
Average equity / average assets11.84 12.84 
Average interest-earning assets / average interest-bearing liabilities  174.84   166.42 
Average interest-earning assets / average funding liabilities104.92 106.12 
Non-interest income / average assets0.73 0.70 
Non-interest expense / average assets2.70 2.98 
Efficiency ratio (4)
63.54 64.23 
Adjusted efficiency ratio (5)
60.13 61.17 

73

Provision and Allowance for LoanCredit Losses. Management estimates the allowance for credit losses using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio.  These factors include, among others, changes in the size and composition of the loan portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic conditions. The following table sets forth an analysis of our allowance for credit losses - loans for the periods indicated (dollars in thousands):

ADDITIONAL FINANCIAL INFORMATION     
(dollars in thousands)     
 
  Quarters Ended
Nine Months Ended
CHANGE IN THESep 30, 2020June 30, 2020Sep 30, 2019Sep 30, 2020Sep 30, 2019
ALLOWANCE FOR CREDIT LOSSES - LOANS
     
Balance, beginning of period$156,352 $130,488 $98,254 $100,559 $96,485 
Beginning balance adjustment for adoption of Topic 326— — — 7,812 — 
Provision for credit losses - loans13,641 29,524 2,000 64,878 6,000 
Recoveries of loans previously charged off:
Commercial real estate23 54 107 244 277 
Construction and land— 105 156 105 208 
One- to four-family real estate94 31 129 273 402 
Commercial business246 370 162 821 400 
Agricultural business, including secured by farmland— 22 2 1,772 37 
Consumer82 60 154 238 487 
 445 642 710 3,453 1,811 
Loans charged off:
Commercial real estate(379)— (314)(479)(1,138)
Multifamily real estate— — — (66)— 
Construction and land— (100)— (100)— 
One- to four-family real estate(72)— (86)(136)(86)
Commercial business(1,297)(3,553)(1,599)(6,234)(2,991)
Agricultural business, including secured by farmland(492)(62)(741)(554)(907)
Consumer(233)(587)(423)(1,168)(1,373)
 (2,473)(4,302)(3,163)(8,737)(6,495)
Net (charge-offs)/recoveries(2,028)(3,660)(2,453)(5,284)(4,684)
Balance, end of period$167,965 $156,352 $97,801 $167,965 $97,801 
Net charge-offs / Average loans receivable(0.019)%(0.036)%(0.027)%(0.052)%(0.053)%

The provision for loancredit losses - loans reflects the amount required to maintain the allowance for loancredit losses - loans at an appropriate level based upon management’s evaluation of the adequacy of generalcollective and specificindividual loss reserves, trends in delinquencies and net charge-offs and current economic conditions.reserves. During the quarter and ninethree months ended September 30, 2017,2020, we recorded a provision for loanscredit losses of $13.6 million, compared to provision for credit losses of $29.5 million during the prior quarter and $2.0 million during the quarter a year ago. The increased provisions for loan credit losses for the current and $6.0 million, respectively,preceding quarters primarily as a result of loan growthreflect expected lifetime credit losses based upon current economic conditions and the renewalpotential effects from higher forecasted unemployment rates and lower gross domestic product, as well as the impact on other economic metrics from COVID-19 included in our reasonable and supportable forecastas of acquiredSeptember 30, 2020 and June 30, 2020, respectively. In addition, the current quarter provision for credit losses also reflects risk rating downgrades on loans outthat are considered at heightened risk due to the COVID-19 pandemic. Future assessments of the discounted loan portfolios, comparedexpected credit losses will not only be impacted by changes to a $2.0 millionthe reasonable and a $4.0 million loan loss provision recordedsupportable forecast, but will also include an updated assessment of qualitative factors, as well as consideration of any required changes in the third quarterreasonable and nine months of 2016, respectively. We continue to maintain an appropriately significantsupportable forecast reversion period. No allowance for loan lossescredit losses-loans was recorded on the $1.15 billion balance of PPP loans at September 30, 2017, reflecting growth in2020 as these loans are fully guaranteed by the related portfolio and current economic conditions.SBA.

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 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. The discount on acquired loans was $23.4 million at September 30, 2017 compared to $25.8 million at June 30, 2017, $31.1 million at December 31, 2016 and $34.9 million at September 30, 2016.


Net loan charge-offs were $1.5$2.0 million for the quarter ended September 30, 20172020 compared to net recoveriesloan charge-offs of $902,000$2.5 million for the same quarter in the prior year. For the first nine months of 2017ended September 30, 2020, we recorded net charge offscharge-offs of $2.9$5.3 million compared to net recoveriescharge-offs of $2.2$4.7 million in 2016.for the same period a year earlier. The allowance for loancredit losses - loans was $89.1$168.0 million at September 30, 20172020 compared to $86.0$156.4 million at December 31, 2016June 30, 2020 and $84.2$97.8 million at September 30, 2016. Included in our allowance at September 30, 2017 was an unallocated portion of $6.0 million, which is based upon our evaluation of various factors that are not directly measured in the determination of the formula and specific allowances.2019. The allowance for loancredit losses - loans as a percentage of total loans (loans receivable excluding allowance for loan losses) was 1.15%1.65% at September 30, 2017,2020 as compared to 1.15%1.52% at December 31, 2016June 30, 2020 and 1.14%1.11% at September 30, 2016.  

We believe that2019. The increase in the allowance for credit losses - loans as a percentage of loans reflects the adoption of Financial Instruments - Credit Losses (Topic 326) as well as the increased provision for credit losses - loans recorded during the current and prior quarters, primarily as the result of forecasted credit deterioration due to the COVID-19 pandemic.
74


The provision for credit losses - unfunded loan commitments reflects the amount required to maintain the allowance for credit losses as of September 30, 2017 was adequate to absorb the known and inherent risks of loss in the- unfunded loan portfoliocommitments at that date. We believe the estimates and assumptions used in our determinationan appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves. The following table sets forth an analysis of our allowance for credit losses - unfunded loan commitments for the periods indicated (dollars in thousands):
 
  Quarters Ended
Nine Months Ended
CHANGE IN THESep 30, 2020Sep 30, 2019Sep 30, 2020Sep 30, 2019
ALLOWANCE FOR CREDIT LOSSES - UNFUNDED LOAN COMMITMENTS    
Balance, beginning of period$10,555 $2,599 $2,716 $2,599 
Beginning balance adjustment for adoption of Topic 326— — 7,022 — 
Provision for credit losses - unfunded loan commitments1,539 — 2,356 — 
Balance, end of period$12,094 $2,599 $12,094 $2,599 

The allowance are reasonable, although there can be no assurance that these estimates and assumptions will not be proven incorrectfor credit losses - unfunded loan commitments was $12.1 million at September 30, 2020 compared to $2.6 million at September 30, 2019. The increase 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 credit losses - unfunded loan commitments reflects the adoption of Financial Instruments - Credit Losses (Topic 326) as well as the increased provision for credit losses - unfunded loan commitments recorded during the quarter and nine months ended September 30, 2020. During the three months ended September 30, 2020, we recorded a provision for credit losses - unfunded loan commitments of $1.5 million, compared to none during the quarter a year ago. During the nine months ended September 30, 2020, we recorded a provision for credit losses - unfunded loan commitments of $2.4 million, compared to a provision for loan losses is subjectof none during the same period a year earlier. The provision for credit losses - unfunded loan commitments for the current quarter was primarily the result of risk rating downgrades on construction, acquisition and development and land loan commitments and the provision for loan credit losses - unfunded loan commitments for the nine months ended September 30, 2020 was primarily due to review by bank regulatorshigher forecasted unemployment rates, as partwell as other economic metrics due to the impacts of the routine examination process, which may resultCOVID-19 in the establishment of additional reserves based upon their judgment of information available to them at the time of their examination.our reasonable and supportable forecast.


Non-interest Income. The following table presents the key components of non-interest income for the three and nine months ended September 30, 20172020 and 20162019 (dollars in thousands):
Three months ended September 30,Nine months ended September 30,
20202019Change AmountChange Percent20202019Change AmountChange Percent
Deposit fees and other service charges$8,742 $10,331 $(1,589)(15.4)%$26,091 $36,995 $(10,904)(29.5)%
Mortgage banking operations16,562 6,616 9,946 150.3 40,891 15,967 24,924 156.1 
Bank owned life insurance1,286 1,076 210 19.5 4,653 3,475 1,178 33.9 
Miscellaneous951 2,914 (1,963)(67.4)5,017 5,431 (414)(7.6)
27,541 20,937 6,604 31.5 76,652 61,868 14,784 23.9 
Net gain on sale of securities644 (2)646 nm815 (29)844 nm
Net change in valuation of financial instruments carried at fair value37 (69)106 (153.6)(2,360)(172)(2,188)nm
Total non-interest income$28,222 $20,866 $7,356 35.3 $75,107 $61,667 $13,440 21.8 
 Three months ended September 30, Nine months ended September 30,
 2017 2016 Change Amount Change Percent 2017 2016 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 %
Mortgage banking operations4,498
 8,141
 (3,643) (44.7) 15,854
 20,409
 (4,555) (22.3)
Bank owned life insurance1,043
 1,333
 (290) (21.8) 3,599
 3,646
 (47) (1.3)
Miscellaneous1,705
 1,344
 361
 26.9
 7,062
 3,936
 3,126
 79.4
 20,562
 23,745
 (3,183) (13.4) 65,254
 64,948
 306
 0.5
Net gain (loss) on sale of securities270
 891
 (621) (69.7) 230
 531
 (301) (56.7)
Net change in valuation of financial instruments carried at fair value(493) (1,124) 631
 (56.1) (1,831) (1,472) (359) 24.4
Total non-interest income$20,339
 $23,512
 $(3,173) (13.5)% $63,653
 $64,007
 $(354) (0.6)%


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$28.2 million for the quarter ended September 30, 2017,2020, compared to $23.5$20.9 million for the same quarter in the prior year, and was $63.7$75.1 million for the nine months ended September 30, 2017,2020, compared to $64.0$61.7 million for the same period in the prior year. Our non-interest income for the quarter ended September 30, 20172020 included a $493,000$37,000 net lossgain for fair value adjustments

and a $270,000 net gain of $644,000 on sales of securities, primarily as a result of the gain recognized on the sale of securities. By contrast, forour Visa Class B shares. For the quarter ended September 30, 2016,2019, fair value adjustments resulted in a net loss of $1.1 million$69,000 and we had a net gainloss of $891,000$2,000 on sale of securities. Our non-interest income for the nine months ended September 30, 20172020 included a $1.8$2.4 million net loss for fair value adjustments and a $230,000$815,000 net gain on sale of securities. During the nine months ended September 30, 2016,2019, fair value adjustments resulted in a net loss of $1.5 million$172,000 and we recognizedhad a $531,000 gain$29,000 net loss on sale of securities. 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 adjustmentsDeposit fees and net gain on sale of securities, non-interest income from core operationsother service charges decreased by $3.2$1.6 million, or 13%15%, to $20.6 million for the quarter ended September 30, 2017, compared to $23.72020, and $10.9 million, for the quarter ended September 30, 2016, and increased $306,000, to $65.3 millionor 29%, for the nine months ended September 30, 2017,2020, compared to $64.9 millionthe same periods a year ago. The decrease in deposit fees and other service charges was primarily a result of reduced transaction deposit account activity since the start of the COVID-19 pandemic. The decrease in deposit fees and other services charges for the nine months ended September 30, 2016. Deposit fees and other service charges increased by $389,000, or 3%, for the quarter ended September 30, 2017 and $1.8 million, or 5%, for the nine months ended September 30, 20172020 compared to the same periodsperiod a year ago reflecting growthalso reflected fee waivers in response to the COVID-19 pandemic in the numbersecond quarter of deposit accounts resulting in increased transaction activity. Miscellaneous income for2020 and the nine months ended September 30, 2017 included a one-time gainimpact of $2.5 millionBanner becoming subject to the Durbin Amendment 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.July 1, 2019. Mortgage banking revenues, including gains on one- to four-family and multifamily loan sales and loan
75

servicing fees, decreased $3.6increased $9.9 million for the quarter ended September 30, 20172020 and decreased $4.6$24.9 million for the nine months ended September 30, 20172020, compared to the same periods a year ago. SalesGains on sales of multifamily loans in the current quarter resulted in income of $1.1 million for the quarter ended September 30, 2020, compared to $1.0 million for the same period a year ago and, $1.4 million for the nine months ended September 30, 2020, compared to $1.5 million for the same period a year ago. Gains on sales of one- to four-family loans in the current quarter resulted in gainsincome of $3.7$15.7 million for the quarter ended September 30, 2020, compared to $6.4$5.3 million in the same period a year ago, and $12.0$39.6 million for the nine months ended September 30, 20172020, compared to $15.9$12.8 million for the same period a year ago. The decrease washigher mortgage banking revenue reflected an increase in residential mortgage held-for-sale loan production due to a declineincreased refinance activity reflecting lower market interest rates as well as an increase in spreadsthe gain on sale spread on one- to four-family loan originations and salesheld for sale loans during the current quarter.quarter compared to the same periods a year ago. Home purchase activity accounted for 77%56% of third quarter one- to four-family mortgage banking loan originations as compared to 65%during both the quarters ended September 30, 2020 and September 30, 2019. The increase in bank owned life insurance income for the third quarter last year. Sales of multifamily loans in the current quarter resulted in gains of $268,000 compared to $1.4 million of gains in the same quarter a year ago, and $2.1 million for the nine months ended September 30, 20172020 compared to $3.1 millionthe same periods a year ago was due to a death benefit gain. The decrease in miscellaneous income for the quarter ended September 30, 2020 compared to the same period a year ago. The decline in multifamily gainago was a result of lower gains on sale income was duethe sales of SBA loans as well as a loss related to a combinationthe disposition of declining market spreads on sold loans inassets during 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.quarter.


Non-interest Expense.  The following table represents key elements of non-interest expense for the three and nine months ended September 30, 20172020 and 20162019 (dollars in thousands):
Three months ended September 30,Nine months ended September 30,
20202019Change AmountChange Percent20202019Change AmountChange Percent
Salaries and employee benefits$61,171 $59,090 $2,081 3.5 %$184,494 $169,359 $15,135 8.9 %
Less capitalized loan origination costs(8,517)(7,889)(628)8.0 (25,433)(20,137)(5,296)26.3 
Occupancy and equipment13,022 12,566 456 3.6 39,114 39,013 101 0.3 
Information/computer data services6,090 5,657 433 7.7 17,984 16,256 1,728 10.6 
Payment and card processing expenses4,044 4,330 (286)(6.6)12,135 12,355 (220)(1.8)
Professional and legal expenses2,368 2,704 (336)(12.4)6,450 7,474 (1,024)(13.7)
Advertising and marketing1,105 2,221 (1,116)(50.2)3,584 5,815 (2,231)(38.4)
Deposit insurance expense1,628 (1,604)3,232 (201.5)4,968 1,232 3,736 303.2 
State/municipal business and use taxes1,196 1,011 185 18.3 3,284 2,963 321 10.8 
REO operations(11)126 (137)(108.7)93 263 (170)(64.6)
Amortization of core deposit intangibles1,864 1,985 (121)(6.1)5,867 6,090 (223)(3.7)
Provision for credit losses - unfunded loan commitments1,539 — 1,539 nm2,356 — 2,356 nm
Miscellaneous5,285 6,435 (1,150)(17.9)16,841 20,230 (3,389)(16.8)
90,784 86,632 4,152 4.8 271,737 260,913 10,824 4.1 
COVID-19 expenses778 — 778 nm3,169 — 3,169 nm
Acquisition-related expenses5 676 (671)(99.3)1,483 3,125 (1,642)(52.5)
Total non-interest expense$91,567 $87,308 $4,259 4.9 %$276,389 $264,038 $12,351 4.7 %
 For the Three Months Ended September 30, For the Nine Months Ended September 30,
 2017 2016 Change Amount Change Percent 2017 2016 Change Amount Change Percent
Salaries and employee benefits$48,931
 $44,758
 $4,173
 9.3 % $144,014
 $136,497
 $7,517
 5.5 %
Less capitalized loan origination costs(4,331) (4,953) 622
 (12.6) (13,245) (14,110) 865
 (6.1)
Occupancy and equipment11,737
 10,979
 758
 6.9
 35,778
 32,419
 3,359
 10.4
Information/computer data services4,420
 4,836
 (416) (8.6) 12,513
 14,607
 (2,094) (14.3)
Payment and card processing expenses5,839
 5,878
 (39) (0.7) 16,651
 16,164
 487
 3.0
Professional services3,349
 2,258
 1,091
 48.3
 12,233
 5,736
 6,497
 113.3
Advertising and marketing2,130
 2,282
 (152) (6.7) 5,225
 6,489
 (1,264) (19.5)
Deposit insurance1,101
 890
 211
 23.7
 3,438
 3,539
 (101) (2.9)
State/Municipal business and use taxes780
 956
 (176) (18.4) 1,857
 2,564
 (707) (27.6)
REO operations240
 (21) 261
 (1,242.9) (1,089) 513
 (1,602) (312.3)
Amortization of core deposit intangibles1,542
 1,724
 (182) (10.6) 4,790
 5,339
 (549) (10.3)
Miscellaneous6,851
 7,785
 (934) (12.0) 20,432
 22,311
 (1,879) (8.4)
 82,589
 77,372
 5,217
 6.7
 242,597
 232,068
 10,529
 4.5
Acquisition related costs—
 1,720
 (1,720) (100.0) —
 10,945
 (10,945) (100.0)
Total non-interest expense$82,589
 $79,092
 $3,497
 4.4 % $242,597
 $243,013
 $(416) (0.2)%


Non-interest expenses increased by $3.5$4.3 million, to $82.6$91.6 million for the quarter ended September 30, 2017,2020, compared to $79.1$87.3 million for the quarter ended September 30, 2016. The increase was primarily related to increased salaries and employee benefits and professional services expenses, including costs incurred for enhanced regulatory requirements attributable to the build-out of the Company's compliance and risk management infrastructure as a result 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 2016.2019. For the nine months ended September 30, 2017,2020, non-interest expenses decreasedexpense increased by $416,000,$12.4 million, to $242.6$276.4 million compared to $243.0$264.0 million for the same period last year. The increases in both periods were primarily due to increases in salaries and employee benefits, deposit insurance expenses and provision for credit losses – unfunded loan commitments, partially offset by increases in capitalized loan origination costs. In addition, the quarter and nine months ended September 30, 2020 included $778,000 and $3.2 million of COVID-19 expenses, respectively. We expect to see COVID-19 expenses continue in the following quarters depending on the duration of the current pandemic.

Salary and employee benefits expenses increased $2.1 million to $61.2 million for the quarter ended September 30, 2020, compared to $59.1 million for the quarter ended September 30, 2019, primarily reflecting additional staffing related to the operations acquired from the acquisition of AltaPacific on November 1, 2019 as well as normal salary and wage adjustments. These increases were partially offset by lower self insurance medical expenses during the current period as well as a $1.6 million expense recognized in the third quarter of 2019 as a result of a decrease in the discount rate the Company used to calculate its liability associated with deferred compensation plans For similar reasons, salary and employee benefits expenses increased to $184.5 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 and increased compensation and occupancy expenses.

Salaries and employee benefits expense increased $4.2 million, to $48.9 million for the quarter ended September 30, 2017,2020, compared to $44.8 million 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
76

$169.4 million for the nine months ended September 30, 2017, compared to $136.52019. Capitalized loan origination costs increased $628,000 for the quarter ended September 30, 2020, and $5.3 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, 2017,2020, compared to the same periods in the prior year. TheThis increase reflects the increase in occupancy and equipment expenseloan originations, primarily reflects increased equipment depreciation associated with equipment purchased for acquired locations and increased seasonal building repair and maintenance.PPP loans. Information and computer data services decreased $416,000expenses increased $433,000 for the quarter ended September 30, 20172020 and $2.1$1.7 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, 2017,2020, compared to the same periods in the prior year, reflecting increased consulting services relatedincremental costs as the Company continued to enhanced regulatory requirements attributable to our compliancegrow. Professional and risk management infrastructure build-out. REO operations had a net loss of $240,000legal expenses decreased $336,000 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 $1.12020, and $1.0 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 years2020, compared to a similar $1.4 million charge in the same periodperiods in the prior year. Miscellaneous expenseyear, reflecting a reduction in audit expenses due to the timing of accounting and audit work as well as decreased legal matters. Advertising and marketing expenses decreased $1.1 million for the quarter ended September 30, 2020, and $2.2 million for the nine months ended September 30, 2017 was offset by2020, compared to the releasesame periods in the prior year, reflecting a curtailment of a $1.2direct mail and marketing campaigns in response to the COVID-19 pandemic. The provision for credit losses - unfunded loan commitments increased $1.5 million reserve for possible losses on an unfunded commitment for a single credit relationship that was terminated.

Income Taxes. In the quarter ended September 30, 2017,2020, compared to the quarter ended September 30, 2019, primarily reflecting risk rating downgrades. The provision for credit losses - unfunded loan commitments increased $2.4 million for the nine months ended September 30, 2020, compared to the same period in the prior year, primarily due to higher forecasted unemployment rates, as well as other economic metrics due to the impacts of COVID-19 in our reasonable and supportable forecast. Deposit insurance expense for the three and nine months ended September 30, 2019 includes an FDIC credit of $2.7 million for previously paid deposit insurance premiums which resulted in a net deposit insurance benefit of $1.6 million for the quarter ended September 30, 2019. Miscellaneous expenses decreased $1.2 million for the quarter ended September 30, 2020, and $3.4 million for the nine months ended September 30, 2020, compared to the same periods in the prior year, reflecting a reduction in employee travel, conferences and training expenses.

Income Taxes. For the quarter ended September 30, 2020, we recognized $10.9$7.5 million in income tax expense for an effective tax rate of 30.3%17.0%, 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%23.5%, 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, 2016,2019, we recognized $12.3$8.6 million in income tax expense for an effective tax rate of 34.0%17.9%. For the nine months ended September 30, 2017,2020, we recognized $35.5$16.7 million in income tax expense for an effective tax rate of 32.3%17.8%, compared to $32.3$28.4 million in income tax expense for an effective rate of 34.1%20.2% for the nine months ended September 30, 2016.2019. 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 maintainingMaintaining 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 reflectallowance for credit losses reflects current market conditions as well as forecasted future economic 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 ownedREO as a result of foreclosures.


Non-Performing Assets:  Non-performing assets decreased to $31.7$36.7 million, or 0.30%0.25% of total assets, at September 30, 2017,2020, from $33.8$40.5 million, or 0.35%0.32% of total assets, at December 31, 2016,2019, and $32.2increased compared to $18.6 million, or 0.33%0.15% of total assets, at September 30, 2016.2019. The increase in non-performing loans year-over-year was largely due to one commercial banking relationship totaling $6.6 million moving to nonaccrual status. Our allowance for loancredit losses - loans was $89.1$168.0 million, or 296%482% of non-performing loans at September 30, 2017, compared to $86.02020 and our allowance for loan losses was $100.6 million, or 381%254% of non-performing loans at December 31, 20162019 and $84.2$97.8 million, or 309%536% of non-performing loans at September 30, 2016.2019.  In addition to the allowance for credit losses - loans, the Company maintains an allowance for credit losses - unfunded loan commitments which was $12.1 million at September 30, 2020 compared to $2.7 million at December 31, 2019 and $2.6 million at September 30, 2019. We believe our level of non-performing loans and assets iscontinues to be manageable and that we have sufficient capital and human resources to manage the collection of our non-performing assets in an orderly fashion.at September 30, 2020. The primary components of the $31.7$36.7 million in non-performing assets were $29.1$31.6 million in nonaccrual loans, $927,000$3.3 million in loans more than 90 days delinquent and still accruing interest, and $1.6$1.8 million in REO and other repossessed assets.


Loans are reported as restructuredTDRs 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, 2017,2020, we had $12.7$5.8 million of restructured loans currently performing under their restructured repayment terms.


LoansBanner is continuing to offer payment and financial relief programs for borrowers impacted by COVID-19. These programs include initial loan payment deferrals or interest-only payments for up to 90 days, waived late fees, and, on a more limited basis, waived interest and temporarily suspended foreclosure proceedings. Deferred loans are re-evaluated at the end of the initial deferral period and will either return to the original loan terms or could be eligible for an additional deferral period for up to 90 days. In addition, Banner has entered into payment forbearance agreements with other customers for periods of up to six months. Year to date, Banner has deferred payment or waived interest on 3,370 loans totaling $1.09 billion. Through September 30, 2020, the deferral period had ended for approximately 78%, or $849.7 million of these loans, leaving $239.6 million still on deferral. Of the loans still on deferral, 107 loans totaling $160.4 million have received a second deferral. Since these loans were performing loans that were current on their payments prior to the COVID-19 pandemic, these modifications are not considered to be troubled debt restructurings through September 30, 2020 pursuant to applicable accounting and regulatory guidance.

Prior to the implementation of Financial Instruments—Credit Losses (Topic 326) on January 1, 2020, loans acquired in merger transactions with deteriorated credit quality arewere 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 arewere not reported as non-performing loans based upon their individual performance status, so the loan categories of
77

nonaccrual, impaired and 90 daydays past due and accruing dodid not include any purchased credit-impaired loans. Purchased credit-impaired loans were $23.2$15.9 million at December 31, 2019 and $12.6 million at September 30, 2017, compared to $32.3 million at December 31, 2016 and $38.7 million at September 30, 2016.



2019.
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, 2020December 31, 2019September 30, 2019
Nonaccrual Loans: (1)
   
Secured by real estate:   
Commercial$7,824 $5,952 $5,092 
Multifamily— 85 87 
Construction and land937 1,905 1,318 
One- to four-family2,978 3,410 3,007 
Commercial business14,867 23,015 3,035 
Agricultural business, including secured by farmland2,066 661 757 
Consumer2,896 2,473 2,473 
 31,568 37,501 15,769 
Loans more than 90 days delinquent, still on accrual:   
Secured by real estate:   
Commercial— 89 89 
Construction and land— 332 1,141 
One- to four-family2,649 877 652 
Commercial business425 401 358 
Agricultural business, including secured by farmland— — — 
Consumer181 398 247 
 3,255 2,097 2,487 
Total non-performing loans34,823 39,598 18,256 
REO, net (2)
1,795 814 228 
Other repossessed assets held for sale37 122 115 
Total non-performing assets$36,655 $40,534 $18,599 
Total non-performing loans to loans before allowance for credit losses
/ allowance for loan losses		0.34 %0.43 %0.21 %
Total non-performing loans to total assets0.24 %0.31 %0.15 %
Total non-performing assets to total assets0.25 %0.32 %0.15 %
Restructured loans performing under their restructured terms (3)
$5,790 $6,466 $6,721 
Loans 30-89 days past due and on accrual (4)
$18,158 $20,178 $11,496 
 September 30, 2017 December 31, 2016 September 30, 2016
Nonaccrual Loans: (1)
     
Secured by real estate:     
Commercial$11,632
 $8,237
 $12,776
Multifamily—
 —
 30
Construction and land1,726
 1,748
 1,747
One- to four-family2,878
 2,263
 3,414
Commercial business7,144
 3,074
 2,765
Agricultural business, including secured by farmland4,285
 3,229
 3,755
Consumer1,462
 1,875
 1,385
 29,127
 20,426
 25,872
Loans more than 90 days delinquent, still on accrual: 
  
  
Secured by real estate: 
  
  
Commercial53
 701
 —
Multifamily—
 147
 147
One- to four-family722
 1,233
 852
Commercial business51
 —
 —
Consumer101
 72
 425
 927
 2,153
 1,424
Total non-performing loans30,054
 22,579
 27,296
REO, net (2)
1,496
 11,081
 4,717
Other repossessed assets held for sale145
 166
 164
Total non-performing assets$31,695
 $33,826
 $32,177
      
Total non-performing loans to loans before allowance for loan losses0.39% 0.30% 0.37%
Total non-performing loans to total assets0.29% 0.23% 0.28%
Total non-performing assets to total assets0.30% 0.35% 0.33%
      
Restructured loans performing under their restructured terms (3)
$12,744
 $18,907
 $17,649
      
Loans 30-89 days past due and on accrual (4)
$9,619
 $11,571
 $12,668


(1)
Includes $929,000 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.
(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. 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.
(4) (1)Includes purchased$4.6 million of nonaccrual TDR loans at September 30, 2020. For the nine months ended September 30, 2020, interest income was reduced by $1.7 million as a result of nonaccrual loan activity, which includes the reversal of $507,000 of accrued interest as of the date the loan was placed on nonaccrual. There was no interest income recognized on nonaccrual loans for the nine months ended September 30, 2020.
(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. 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 the dates indicated.
(4)Purchased credit-impaired loans.loans are included at December 31, 2019 and September 30, 2019.


In addition to the non-performing loans and purchased credit-impaired loans as of September 30, 2017,2020, we had other classified loans with an aggregate outstanding balance of $86.4$386.3 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.



78


The following table presents the Company’s portfolio of risk-rated loans and non-risk-rated loans by grade (in thousands):

 September 30, 2020December 31, 2019September 30, 2019
  
Pass$9,699,098 $9,130,662 $8,702,171 
Special Mention41,575 61,189 19,989 
Substandard423,244 113,448 113,150 
Doubtful— 58 58 
Total$10,163,917 $9,305,357 $8,835,368 



The increase in substandard loans during the nine months ended September 30, 2020 primarily reflects Banner proactively downgrading loans in industries the most at risk due to COVID-19.



REO: REO decreased $9.6 million, to $1.5was $1.8 million at September 30, 2017,2020 and compared to $11.1 millionwith $814,000 at December 31, 2016.2019. The following table shows REO activity for the three and nine months ended September 30, 20172020 and September 30, 2016:2019 (in thousands):
 Three Months EndedNine months ended
Sep 30, 2020Sep 30, 2019Sep 30, 2020Sep 30, 2019
Balance, beginning of period$2,400 $2,513 $814 $2,611 
Additions from loan foreclosures— 48 1,588 109 
Proceeds from dispositions of REO(707)(2,333)(805)(2,483)
Gain (loss) on sale of REO120 — 216 (9)
Valuation adjustments in the period(18)— (18)— 
Balance, end of period$1,795 $228 $1,795 $228 
 Three Months Ended Nine Months Ended
 Sep 30, 2017 Sep 30, 2016 Sep 30, 2017 Sep 30, 2016
Balance, beginning of period$2,427
 $6,147
 $11,081
 $11,627
Additions from loan foreclosures—
 156
 46
 534
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 REO30
 281
 1,953
 981
Valuation adjustments in the period—
 (168) (256) (804)
Balance, end of period$1,496
 $4,717
 $1,496
 $4,717


From time to time, non-recurringNon-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 months ended September 30, 20172020 and September 30, 2016,2019, our loan originations, including originations of loans held for sale, exceeded our loan repayments by $746.8 million$1.89 billion and $788.0$915.0 million, respectively. During those periods we purchased loansThere were $18,000 loan purchases during the nine months ended September 30, 2020 and loan participations of $266.5$8.6 million and $230.8 million, respectively.during the nine months ended September 30, 2019. This activity was funded primarily by sales of loansincreased core deposits and increased deposits in 2017 and primarily from the sale of loans in 2016.2020. During the nine months ended September 30, 20172020 and September 30, 2016,2019, we received proceeds of $886.1 million$1.10 billion and $885.3$710.5 million, respectively, from the sale of loans. Securities purchased during the nine months ended September 30, 20172020 and September 30, 20162019 totaled $712.0$824.0 million and $304.3$161.2 million, respectively, and securities repayments, maturities and sales in those periods were $178.9$461.4 million and $389.2$297.5 million, respectively.
  
Our primary financing activity is gathering deposits. Increases in all deposit categories contributed to totalTotal deposits increasingincreased by $417.4 million$2.17 billion during the first nine months of 2017. 2020, as core deposits increased by $2.37 billion and certificates of deposits, primarily brokered deposits, decreased by $205.1 million.The increase in total deposits during the first nine months of 2020 was due primarily to PPP loan funds deposited into customer accounts, fiscal stimulus payments, and an increase in average deposit account balances due to customer’s maintaining a higher level of liquidity during the COVID-19 pandemic. 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, 2017,2020, certificates of deposit amounted to $1.10 billion,$915.4 million, or 13%7% of our total deposits, including $808.8$694.5 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 depositscertificates of deposit as they mature.


FHLB advances (excluding fair value adjustments)decreased $300.0 million to $150.0 million during the first nine months of 2020. Other borrowings increased $209.1$58.5 million from December 31, 2016 to $263.3$177.0 million at September 30, 2017. Other borrowings decreased $2.02020 from $118.5 million fromat December 31, 2016 to $103.7 million at September 30, 2017.2019.


We must maintain an adequate level of liquidity to ensure the availability of sufficient funds to accommodate deposit withdrawals, to support loan growth, to satisfy financial commitments and to take advantage of investment opportunities. During the nine months ended
79

September 30, 20172020 and 2016,2019, we used our sources of funds primarily to fund loan commitments and purchase securities. At September 30, 2017,2020, we had outstanding loan commitments totaling $2.50$3.60 billion, includingprimarily 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 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 billion, and 35%45% of Islanders Bank’s assets or adjusted qualifying collateral.  At September 30, 2020, under these credit facilities based on pledged collateral, up to a total possibleBanner Bank had $2.36 billion of available credit linecapacity and Islanders Bank $29.8 million of $93.7 million.available credit capacity. Advances under these credit facilities (excluding fair value adjustments) totaled $263.2$150.0 million at September 30, 2017.2020. 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, based on pledged collateral, Banner Bank had available lines of credit of approximately $1.19 billion$989.9 million as of September 30, 2017, subject to certain collateral requirements, namely the collateral type and risk rating of

eligible pledged loans.2020.  We had no funds borrowed from the FRBSF at September 30, 20172020 or December 31, 2016.  Management believes2019.  Additionally, the Federal Reserve recently established the Paycheck Protection Program Liquidity Facility (PPPLF) to bolster the effectiveness of the PPP. As of September 30, 2020, Banner Bank was approved to utilize the PPPLF. Banner Bank may utilize the PPPLF pursuant to which it has adequate resourceswill pledge PPP loans at face value as collateral to obtain FRB non-recourse advances. Banner Bank utilized and funding potential to meet our foreseeable liquidity requirements.repaid outstanding advances from the PPPLF during the quarter ended June 30, 2020. There were no borrowings outstanding under this program during the quarter ended September 30, 2020.

Banner Corporation is a separate legal entity from the Banks and, on a stand-alone level, must provide for its own liquidity and pay its own operating expenses and cash dividends. Banner'sBanner Corporation’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, 2017,2020, the Company on an unconsolidated basis had liquid assets of $69.1$127.1 million. On June 30, 2020, Banner issued and sold in an underwritten offer of the Subordinated Notes, resulting in net proceeds, after underwriting discounts and offering expenses, of $98.1 million.  The Subordinated Notes qualify as Tier 2 capital for regulatory capital purposes.


As noted below, Banner Corporation and its subsidiary banks continued to maintain capital levels significantly in excess of the requirements to be categorized as “Well-Capitalized” under applicable regulatory standards.  During the nine months ended September 30, 2017,2020, total shareholders'shareholders’ equity increased $21.3$52.5 million, to $1.33$1.65 billion.  At September 30, 2017,2020, tangible common shareholders’ equity, which excludes other goodwill and other intangible assets, was $1.06$1.25 billion, or 10.39%8.78% 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 haveare required to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital of more than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses 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%.bonuses. At September 30, 2017,2020, Banner Corporation and the Banks each exceeded all regulatory capital requirements. (See Item 1, “Business–Regulation,” and Note 1615 of the Notes to the Consolidated Financial Statements included in the 20162019 Form 10-K for additional information regarding regulatory capital requirements for Banner Corporation and the Banks.)

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The actual regulatory capital ratios calculated for Banner Corporation, Banner Bank and Islanders Bank as of September 30, 2017,2020, along with the minimum capital amounts and ratios, were as follows (dollars in thousands):
 ActualMinimum to be Categorized as “Adequately Capitalized”Minimum to be Categorized as “Well-Capitalized”
 AmountRatioAmountRatioAmountAmount
Banner Corporation—consolidated      
Total capital to risk-weighted assets$1,574,737 14.65 %$859,979 8.00 %$1,074,974 10.00 %
Tier 1 capital to risk-weighted assets1,340,173 12.47 644,985 6.00 644,985 6.00 
Tier 1 leverage capital to average assets1,340,173 9.56 560,816 4.00 n/an/a
Common equity tier 1 capital1,196,673 11.13 483,738 4.50 n/an/a
Banner Bank      
Total capital to risk-weighted assets1,409,158 13.34 845,076 8.00 1,056,344 10.00 
Tier 1 capital to risk-weighted assets1,276,928 12.09 633,807 6.00 845,076 8.00 
Tier 1 leverage capital to average assets1,276,928 9.31 548,867 4.00 686,083 5.00 
Common equity tier 1 capital1,276,928 12.09 475,355 4.50 686,624 6.50 
Islanders Bank      
Total capital to risk-weighted assets29,516 15.14 15,594 8.00 19,493 10.00 
Tier 1 capital to risk-weighted assets27,077 13.89 11,696 6.00 15,594 8.00 
Tier 1 leverage capital to average assets27,077 8.15 13,289 4.00 16,611 5.00 
Common equity tier 1 capital27,077 13.89 8,772 4.50 12,671 6.50 

81
  Actual Minimum to be Categorized as "Adequately Capitalized" Minimum to be Categorized as “Well-Capitalized”
  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%
Tier 1 capital to risk-weighted assets 1,147,971
 12.52
 550,224
 6.00
 550,224
 6.00
Tier 1 leverage capital to average assets 1,147,971
 11.49
 399,595
 4.00
 n/a
 n/a
Common equity tier 1 capital 1,023,702
 11.16
 412,668
 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
Tier 1 capital to risk-weighted assets 999,815
 11.15
 538,185
 6.00
 717,580
 8.00
Tier 1 leverage capital to average assets 999,815
 10.30
 388,308
 4.00
 485,385
 5.00
Common equity tier 1 capital 999,815
 11.15
 403,639
 4.50
 583,033
 6.50
Islanders Bank            
Total capital to risk-weighted assets 31,690
 16.35
 15,507
 8.00
 19,384
 10.00
Tier 1 capital to risk-weighted assets 29,375
 15.15
 11,630
 6.00
 15,507
 8.00
Tier 1 leverage capital to average assets 29,375
 10.66
 11,018
 4.00
 13,773
 5.00
Common equity tier 1 capital 29,375
 15.15
 8,723
 4.50
 12,600
 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 a declining interest rate environment, as loans with floors are repaid they generally are replaced with new loans which have lower interest rate floors.  As of September 30, 2017, our loans with interest rate floors totaled approximately $2.48 billion and had a weighted average floor rate of 4.65% comparedThe Company actively manages its exposure to a current average note rate of 4.98%. An additional source of interest rate risk is a prolonged period of exceptionally low market interest rates. Because interest-bearing deposit costs have been reducedthrough on-going adjustments 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. As a result, a prolonged period of very low interest rates would likely result in compression of our net interest margin. While this pressure on the margin may be mitigated by changes in 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.



82

The following table sets forth, as of September 30, 2017,2020, the estimated changes in our net interest income over one-year and two-year time horizons and the estimated changes in economic value of equity based on the indicated interest rate environments (dollars in thousands):
 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
Change (in Basis Points) in Interest Rates (1)
Net Interest Income
Next 12 Months		Net Interest Income
Next 24 Months		Economic Value of Equity
+400 $16,033
 4.1 % $41,051
 5.2 % $(404,651) (18.6)%+400$46,693 10.1 %$125,227 13.8 %$53,495 2.7 %
+300 15,994
 4.0
 41,118
 5.2
 (290,960) (13.3)+30043,756 9.5 116,910 12.9 105,063 5.3 
+200 12,833
 3.2
 33,865
 4.3
 (167,514) (7.7)+20034,447 7.5 92,748 10.2 160,469 8.0 
+100 7,922
 2.0
 21,163
 2.7
 (62,648) (2.9)+10019,916 4.3 54,059 6.0 137,123 6.9 
0 —
 —
 —
 —
 —
 —
0— — — — — — 
-25 (3,955) (1.0) (10,599) (1.3) 6,211
 0.3
-25(3,764)(0.8)(11,634)(1.3)(46,446)(2.3)
-50 (9,999) (2.5) (25,996) (3.3) 6,592
 0.3
 
(1)
(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 targeted Federal Funds Rate was between 0.00% and 0.25% at September 30, 2020.
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% and 1.25%.
 
Another (although less reliable) monitoring tool for assessing interest rate risk is gap analysis.  The matching of the repricing characteristics of assets and liabilities may be analyzed by examining the extent to which assets and liabilities are interest sensitive and by monitoring an institution’s interest sensitivity gap.  An asset or liability is said to be interest sensitive within a specific time period if it will mature or reprice within that time period.  The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated, based upon certain assumptions, to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated to mature or reprice, based upon certain assumptions, within that same time period.  A gap is considered positive when the amount of interest-sensitive assets exceeds the amount of interest-sensitive liabilities.  A gap is considered negative when the amount of interest-sensitive liabilities exceeds the amount of interest-sensitive assets.  Generally, during a period of rising rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income.  During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income.


Certain shortcomings are inherent in gap analysis.  For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market rates.  Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market rates, while interest rates on other types may lag behind changes in market rates.  Additionally, certain assets, such as 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, 20172020 (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, 2017,2020, total interest-earning assets maturing or repricing within one year exceeded total interest-bearing liabilities maturing or repricing in the same time period by $2.04$4.83 billion, representing a one-year cumulative gap to total assets ratio of 19.53%33.00%.  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, 20172020 are within our internal policy guidelines and management considers that our current level of interest rate risk is reasonable.

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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)
             
Interest-earning assets: (1)
       
Construction loans$599,365
 $46,101
 $79,413
 $10,482
 $4,961
 $—
 $740,322
Construction loans$804,392 $62,931 $116,283 $29,521 $9,537 $1,347 $1,024,011 
Fixed-rate mortgage loans260,668
 157,127
 443,507
 330,246
 416,212
 13,573
 1,621,333
Fixed-rate mortgage loans386,993 292,737 849,001 422,418 315,543 19,202 2,285,894 
Adjustable-rate mortgage loans903,066
 318,582
 997,826
 780,430
 296,735
 5,599
 3,302,238
Adjustable-rate mortgage loans1,243,376 467,926 1,222,977 564,501 88,436 36 3,587,252 
Fixed-rate mortgage-backed securities75,138
 64,592
 267,163
 223,946
 376,878
 98,195
 1,105,912
Fixed-rate mortgage-backed securities185,609 141,335 276,911 148,593 278,595 34,125 1,065,168 
Adjustable-rate mortgage-backed securities69,764
 8,828
 5,159
 4,063
 2,890
 —
 90,704
Adjustable-rate mortgage-backed securities200,366 7,156 31,209 4,105 2,963 — 245,799 
Fixed-rate commercial/agricultural loans116,920
 81,596
 206,242
 65,435
 25,383
 4,686
 500,262
Fixed-rate commercial/agricultural loans379,737 374,798 885,290 132,092 92,458 22,933 1,887,308 
Adjustable-rate commercial/agricultural loans877,177
 21,354
 63,562
 32,820
 14,261
 —
 1,009,174
Adjustable-rate commercial/agricultural loans789,523 31,584 77,160 40,007 14,558 — 952,832 
Consumer and other loans399,238
 70,061
 106,515
 21,563
 17,998
 34,803
 650,178
Consumer and other loans469,097 54,115 50,852 16,155 15,245 31,074 636,538 
Investment securities and interest-earning deposits119,404
 15,633
 100,189
 60,617
 92,751
 60,658
 449,252
Investment securities and interest-earning deposits1,018,769 33,005 64,449 114,370 321,254 117,293 1,669,140 
Total rate sensitive assets3,420,740
 783,874
 2,269,576
 1,529,602
 1,248,069
 217,514
 9,469,375
Total rate sensitive assets5,477,862 1,465,587 3,574,132 1,471,762 1,138,589 226,010 13,353,942 
Interest-bearing liabilities: (2)
             
Interest-bearing liabilities: (2)
       
Regular savings208,388
 106,713
 341,425
 239,725
 344,703
 336,338
 1,577,292
Regular savings243,237 165,366 533,273 377,212 538,498 474,700 2,332,286 
Interest checking accounts146,046
 61,990
 201,764
 144,321
 207,270
 194,095
 955,486
Interest checking accounts144,345 58,595 207,085 171,043 311,624 541,532 1,434,224 
Money market deposit accounts196,942
 129,258
 401,501
 266,201
 337,316
 194,440
 1,525,658
Money market deposit accounts241,183 139,506 461,558 338,709 503,385 436,567 2,120,908 
Certificates of deposit545,925
 263,044
 244,362
 44,933
 2,280
 —
 1,100,544
Certificates of deposit391,905 302,691 194,745 24,060 2,052 — 915,453 
FHLB advances113,005
 150,006
 24
 28
 84
 202
 263,349
FHLB advances50,000 50,000 50,000 — — — 150,000 
Other borrowings5,000
 —
 —
 —
 —
 —
 5,000
Subordinated notesSubordinated notes— — — 100,000 — — 100,000 
Junior subordinated debentures140,212
 —
 —
 —
 —
 —
 140,212
Junior subordinated debentures147,944 — — — — — 147,944 
Retail repurchase agreements98,714
 —
 —
 —
 —
 —
 98,714
Retail repurchase agreements176,983 — — — — — 176,983 
Total rate sensitive liabilities1,454,232
 711,011
 1,189,076
 695,208
 891,653
 725,075
 5,666,255
Total rate sensitive liabilities1,395,597 716,158 1,446,661 1,011,024 1,355,559 1,452,799 7,377,798 
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
Excess (deficiency) of interest-sensitive assets over interest-sensitive liabilities$4,082,265 $749,429 $2,127,471 $460,738 $(216,970)$(1,226,789)$5,976,144 
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
Cumulative excess of interest-sensitive assets$4,082,265 $4,831,694 $6,959,165 $7,419,903 $7,202,933 $5,976,144 $5,976,144 
Cumulative ratio of interest-earning assets to interest-bearing liabilities235.23% 194.19% 193.01% 197.65% 187.24% 167.12 % 167.12%Cumulative ratio of interest-earning assets to interest-bearing liabilities392.51 %328.80 %295.57 %262.38 %221.57 %181.00 %181.00 %
Interest sensitivity gap to total assets18.83% 0.70% 10.35% 7.99% 3.41% (4.86)% 36.42%Interest sensitivity gap to total assets27.88 5.12 14.53 3.15 (1.48)(8.38)40.81 
Ratio of cumulative gap to total assets18.83% 19.53% 29.87% 37.86% 41.28% 36.42 % 36.42%Ratio of cumulative gap to total assets27.88 33.00 47.53 50.68 49.19 40.81 40.81 
 
(Footnotes on following page)

84

Footnotes for Table of Interest Sensitivity Gap


(1)
(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 $(63,492), or (0.43)% of total assets at September 30, 2020.  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, 2020 and 2019” of this report on Form 10-Q.
85

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) billion, or (11.20)% of total assets at September 30, 2017.  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 and 2016” of this report on Form 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, 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.
(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, 2020, 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, 2020, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reportingother than the adoption of internal controls over financial reporting due to the implementation of FASB ASU 2016-13, Financial Instruments: Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended and commonly referred to as CECL.

86


(b)
Changes in Internal Controls Over Financial Reporting:  In the quarter ended September 30, 2017, 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 changesThe following risk factor supplements the “Risk Factors” section contained in the risk factors previously disclosed in Part 1, Item 1A of our 2019 Annual Report on Form 10-K.

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

The COVID-19 pandemic has significantly adversely affected our operations and the banking and financial services we provide, primarily to businesses and individuals in the states of Washington, Oregon, California and Idaho, all of which are under some level of government issued Stay-at-Home orders.  All of our branches and most of our deposit customers are also located in these four states. As an essential business, we continue to provide banking and financial services to our customers with drive-thru access available at the majority of our branch locations and in-person services available by appointment. In select markets on a test basis, Banner has begun taking steps to resume more normal branch activities with specific guidelines in place to provide for the safety of our clients and our personnel. In addition, we continue to provide access to banking and financial services via online banking, ATMs and telephone. If the COVID-19 pandemic worsens it could limit, or disrupt, our ability to provide banking and financial services to our customers.

In response to the Stay-at-Home Orders, currently approximately half of our employees are working remotely to enable us to continue to provide banking services to our customers. Heightened cybersecurity, information security and operational risks may result from these work-from-home arrangements. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of the COVID-19 pandemic. Further, we also rely upon our third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers. We have business continuity plans and other safeguards in place, however, there is no assurance that such plans and safeguards will be effective.

The COVID-19 pandemic has also resulted in declines in loan demand and loan originations other than through government sponsored programs such as the Paycheck Protection Program (PPP), deposit availability, market interest rates and negatively impacted many of our business and consumer borrowers’ ability to make their loan payments. Because the length of the pandemic and the efficacy of the extraordinary measures being put in place to address the economic consequences are unknown, including reductions in the targeted federal funds rate, until the pandemic subsides, we expect our net interest income and net interest margin will continue to be adversely affected in the near term, if not longer. Many of our borrowers have become unemployed or may face unemployment, and certain businesses are at risk of insolvency as revenues declined precipitously, especially in businesses related to travel, hospitality, leisure, and physical personal services. Consistent with guidance provided by banking regulators we have modified loans by providing various loan payment deferral options to our borrowers affected by the COVID-19 pandemic. Notwithstanding these modifications, these borrowers may not be able to resume making full payments on their loans once the COVID-19 pandemic is resolved. If the economic disruption from the COVID-19 pandemic continues for several months or worsens, it may result in increased loan delinquencies, adversely classified loans and loan charge-offs. As a result, our allowance for credit losses may prove to be insufficient to absorb losses in our loan portfolio, which would cause our results of operations, liquidity and financial condition to be adversely affected.

As of September 30, 2020, we hold and service a portfolio of 9,103 loans originated under the PPP with a balance of $1.15 billion.  The PPP loans are subject to the provisions of the Coronavirus Aid, Relief, and Economic Security Act of 2020 and to complex and evolving rules and guidance issued by the SBA and other government agencies.  We expect that the great majority of our PPP borrowers will seek full or partial forgiveness of their loan obligations.  We could face additional risks in our administrative capabilities to service our PPP loans, and with respect to the determination of loan forgiveness, depending on the final procedures for determining loan forgiveness.
In accordance with GAAP, we record assets acquired and liabilities assumed at their fair value with the excess of the purchase consideration over the net assets acquired resulting in the recognition of goodwill. If adverse economic conditions or the decrease in our stock price and market capitalization as a result of the pandemic were to be deemed sustained rather than temporary, it may significantly affect the fair value of our goodwill and may trigger impairment charges. Any impairment charge could have a material adverse effect on our results of operations and financial condition.

We are an entity separate and distinct from our principal subsidiary, Banner Bank, and derive substantially all of our revenue at the holding company level in the form of dividends from that subsidiary. If the COVID-19 pandemic were to materially adversely affect Banner Bank’s regulatory capital levels or liquidity, it may result in Banner Bank being unable to pay dividends to us, which may result in our not being able to pay dividends on our common stock at the same rate or at all.
87


The ultimate impact of the COVID-19 pandemic will depend on future developments, which are highly uncertain and cannot be predicted including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic. Even after the COVID-19 pandemic subsides, the U.S. economy may experience a recession, and we anticipate our business would be materially and adversely affected by a prolonged recession. To the extent the COVID-19 pandemic adversely affects our business, financial condition, liquidity or results of operations, it may also have the effect of heightening many of the other risks described in the section entitled “Risk Factors” in our 2019 Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 0-26584).and any subsequent Quarterly Reports on Form 10-Q.



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, 2017:2020:
PeriodTotal Number of Common Shares PurchasedAverage Price Paid per Common ShareTotal Number of Shares Purchased as Part of Publicly Announced authorizationMaximum Number of Remaining Shares that May be Purchased as Part of Publicly Announced Authorization
July 1, 2020 - July 31, 2020479 $36.12 — — 
August 1, 2020 - August 31, 2020— — — — 
September 1, 2020 - September 30, 2020— — — — 
Total for quarter479 36.12 — — 
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


Employees surrendered 390479 shares to satisfy tax withholding obligations upon the vesting of restricted stock grants.grants during the three months ended September 30, 2020.


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 1,658,2451,757,637 of the Company's outstanding shares. UnderThis authorization expired in March 2020.  Due to the authorization, shares may be repurchased bypandemic and market conditions the Company in open market purchases. The extenthas no current plans to which the Company repurchases its shares and the timing of such repurchases will depend upon market conditions and other corporate considerations.renew this authorization.


ITEM 3 – Defaults upon Senior Securities


Not Applicable.


ITEM 4 – Mine Safety Disclosures


Not Applicable.


ITEM 5 – Other Information


Not Applicable.



88

ITEM 6 – Exhibits

ExhibitIndex of Exhibits
ExhibitIndex of Exhibits
2.1{3{a}
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 November 12, 2014 (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{10{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)].
31.110{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)]
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)]
89

ExhibitIndex of Exhibits
10{o}
Form of Consultant Agreement Between Banner Bank and Richard B. Barton [incorporated by reference to Exhibit 10.1 included in the Registrant’s Current Report on the Form 8-K filed on September 22, 2020 (File No. 000-26584)]
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.
101101.INSInline XBRL Instance Document - The following materialsinstance document does not appear in the interactive data file because its XBRL tags are embedded within the XBRL document
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
104
The cover page from Banner Corporation’sthe Company's Quarterly Report on Form 10-Q for the quarter ended September 30 2017,, 2020, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (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.
Inline XBRL (included in Exhibit 101)

90



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, 20175, 2020/s/ Mark J. Grescovich
Mark J. Grescovich
President and Chief Executive Officer

(Principal Executive Officer)
November 6, 20175, 2020/s/ Lloyd W. BakerPeter J. Conner
Lloyd W. Baker Peter J. Conner 
Executive Vice President, Treasurer and Chief Financial Officer

(Principal Financial and Accounting Officer)











71
91