0000946673 banr:CommitmentstoSellLoansSecuredbyonetofourResidentialPropertiesMember 2020-03-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED~~ ~~June 30, 2019~~


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2020


☐~~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)



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

10 South First Avenue, Walla Walla, Washington 99362

(Address of principal executive offices and zip code)

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

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



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $.01 per share	BANR	The NASDAQ Stock Market LLC

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

Yes

[x]

[ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes

[x]

[ ]

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

Large accelerated filer

[x]

Accelerated filer [ ]

Non-accelerated filer [ ]

Smaller reporting company

☐

Emerging growth company

☐

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

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

Yes

☐

[x]

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 ~~July 31, 2019~~April 30, 2020

Common Stock, $.01 par value per share

~~34,534,184~~35,155,551 shares

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

~~39,192 shares~~

BANNER CORPORATION AND SUBSIDIARIES

Table of Contents



PART I – FINANCIAL INFORMATION

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

Consolidated Statements of Financial Condition as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019	4

Consolidated Statements of Operations for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	5

Consolidated Statements of Comprehensive Income for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	6

Consolidated Statements of Changes in Shareholders’ Equity for the Three ~~and Six~~ Months Ended ~~June 30, 2019~~March 31, 2020 and the Year Ended December 31, ~~2018~~2019	7

Consolidated Statements of Cash Flows for the ~~Six~~Three Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	10

Selected Notes to the Consolidated Financial Statements	12

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

Executive Overview	4856

Comparison of Financial Condition at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019	5464

Comparison of Results of Operations for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	5767

Asset Quality	6473

Liquidity and Capital Resources	6675

Capital Requirements	6776

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Market Risk and Asset/Liability Management	6877

Sensitivity Analysis	6877

Item 4 – Controls and Procedures	7382

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings	7483

Item 1A – Risk Factors	7483

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	7484

Item 3 – Defaults upon Senior Securities	7484

Item 4 – Mine Safety Disclosures	7484

Item 5 – Other Information	7484

Item 6 – Exhibits	7585

SIGNATURES	7787

Special Note Regarding Forward-Looking Statements

Certain matters in this Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, liquidity, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance and projections of financial items. These ~~forward-looking~~forward looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: ~~expected revenues, cost savings, synergies~~the effect of the novel coronavirus ("COVID-19") pandemic, including on Banner’s credit quality and business operations, as well as its impact on general economic and financial market conditions and other ~~benefits~~uncertainties resulting from the ~~proposed merger of Banner~~COVID-19 pandemic, such as the extent and AltaPacific Bancorp (AltaPacific) might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected; the requisite regulatory approvals for the proposed merger of Banner and AltaPacific may be delayed or may not be obtained (or may result in the imposition of conditions that could adversely affect the combined company or the expected benefitsduration of the ~~proposed merger);~~impact on public health, the requisite approval of AltaPacific shareholders may be delayed or may not be obtained, the other closing conditions to the merger may be delayed or may not be obtained, or the merger agreement may be terminated; business disruption may occur following or in connection with the proposed merger of BannerU.S. and ~~AltaPacific; Banner's or AltaPacific's businesses may experience disruptions due to transaction-related uncertainty or other factors making it more difficult to maintain relationships with employees,~~global economies, and consumer and corporate customers, ~~other business partners or governmental entities; the possibility that the proposed merger is more expensive to complete than anticipated,~~ including ~~as a result of unexpected factors or events; diversion of managements' attention from ongoing business operations~~economic activity, employment levels and ~~opportunities as a result of the proposed merger or otherwise;~~market liquidity; the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses and provisions for ~~loan~~credit 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 the allowance for ~~loan~~credit losses not being adequate to cover actual losses and require a material increase in ~~reserves;~~the allowance for credit losses; results of examinations by regulatory authorities, including the possibility that any such regulatory authority may, among other things, require the writing down of assets or increases in the allowance for ~~loan~~credit losses; the ability to manage loan delinquency rates; competitive pressures among financial services companies; changes in consumer spending or borrowing and spending habits; interest rate movements generally and the relative differences between short and long-term interest rates, loan and deposit interest rates, 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 values; the ability to adapt successfully to technological changes to meet customers’ needs and developments in the marketplace; the ability to access cost-effective funding; increases in premiums for deposit insurance; the ability to control operating costs and expenses; the use of estimates in determining fair value of certain assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect employees, and potential associated charges; disruptions, security breaches or other adverse events, failures or interruptions in, or attacks on, information technology systems or on the third-party vendors who perform critical processing functions; changes in financial markets; changes in economic conditions in general and in Washington, Idaho, Oregon and California in particular; secondary market conditions for loans and the ability to sell loans in the secondary market; the costs, effects and outcomes of litigation; legislation or regulatory changes or reforms, including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including changes related to Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the implementing regulations; results of safety and soundness and compliance examinations by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (the FDIC), the Washington State Department of Financial Institutions, Division of Banks, (the Washington DFI) or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require restitution or institute an informal or formal enforcement action which could require an increase in reserves for loan losses, write-downs of assets or changes in regulatory capital position, or affect the ability to borrow funds, or maintain or increase deposits, or impose additional requirements and restrictions, any of which could adversely affect liquidity and earnings; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; the inability of key third-party providers to perform their obligations; changes in accounting principles, policies or guidelines, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory and technological factors affecting operations, pricing, products and services; including the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("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. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.

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

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited) (In thousands, except shares)

~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019


ASSETS	June 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
Cash and due from banks	$	187,043		$	231,029		$	211,013		$	234,359
Interest bearing deposits	59,753			41,167			83,988			73,376
Total cash and cash equivalents	246,796			272,196			295,001			307,735
Securities—trading	25,741			25,896			21,040			25,636
Securities—available-for-sale, amortized cost $1,535,775 and $1,648,421, respectively	1,561,009			1,636,223
Securities—held-to-maturity, fair value $206,917 and $232,537, respectively	203,222			234,220
Securities—available-for-sale, amortized cost $1,544,513 and $1,529,946, respectively							1,608,224			1,551,557
Securities—held-to-maturity, net of allowance for credit losses of $98 and none, respectively, fair value $449,237 and $237,805, respectively							437,846			236,094
Total securities	1,789,972			1,896,339			2,067,110			1,813,287
Federal Home Loan Bank (FHLB) stock	34,583			31,955			20,247			28,342
Loans held for sale (includes $149.7 million and $164.8 million, at fair value, respectively)	170,744			171,031
Loans held for sale (includes $169.2 million and $199.4 million, at fair value, respectively)							182,428			210,447
Loans receivable	8,746,550			8,684,595			9,285,744			9,305,357
Allowance for loan losses	(98,254		)	(96,485		)
Allowance for credit losses - loans							(130,488		)	(100,559		)
Net loans receivable	8,648,296			8,588,110			9,155,256			9,204,798
Accrued interest receivable	40,238			38,593			40,732			37,962
Real estate owned (REO), held for sale, net	2,513			2,611			2,402			814
Property and equipment, net	171,233			171,809			175,235			178,008
Goodwill	339,154			339,154			373,121			373,121
Other intangibles, net	28,595			32,924			27,157			29,158
Bank-owned life insurance (BOLI)	178,922			177,467			193,140			192,088
Deferred tax assets, net	61,327			75,020			46,582			59,639
Other assets	135,001			74,108			202,539			168,632
Total assets	$	11,847,374		$	11,871,317		$	12,780,950		$	12,604,031
LIABILITIES
Deposits:
Non-interest-bearing	$	3,671,995		$	3,657,817		$	4,107,262		$	3,945,000
Interest-bearing transaction and savings accounts	4,546,202			4,498,966			5,175,969			4,983,238
Interest-bearing certificates	1,070,770			1,320,265			1,166,306			1,120,403
Total deposits	9,288,967			9,477,048			10,449,537			10,048,641
Advances from FHLB	606,000			540,189			247,000			450,000
Other borrowings	118,370			118,995			128,764			118,474
Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)	113,621			114,091			99,795			119,304
Accrued expenses and other liabilities	159,131			102,061			208,753			227,889
Deferred compensation	40,230			40,338			45,401			45,689
Total liabilities	10,326,319			10,392,722			11,179,250			11,009,997
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS’ EQUITY
Preferred stock - $0.01 par value per share, 500,000 shares authorized; no shares outstanding at June 30, 2019 and December 31, 2018	—			—
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized; 34,534,451shares issued and outstanding at June 30, 2019; 35,107,839 shares issued and outstanding at December 31, 2018	1,306,000			1,336,030
Common stock (non-voting) and paid in capital - $0.01 par value per share, 5,000,000 shares authorized; 39,192 shares issued and outstanding at June 30, 2019; 74,933 shares issued and outstanding at December 31, 2018	888			1,406
Preferred stock - $0.01 par value per share, 500,000 shares authorized; no shares outstanding at March 31, 2020 and December 31, 2019							—			—
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized; 35,102,459 shares issued and outstanding at March 31, 2020; 35,712,384 shares issued and outstanding at December 31, 2019							1,343,699			1,373,198
Common stock (non-voting) and paid in capital - $0.01 par value per share, 5,000,000 shares authorized; no shares issued and outstanding at March 31, 2020; 39,192 shares issued and outstanding at December 31, 2019							—			742
Retained earnings	178,257			134,055			177,922			186,838
Carrying value of shares held in trust for stock-based compensation plans	(7,324		)	(7,289		)	(7,650		)	(7,507		)
Liability for common stock issued to stock related compensation plans	7,324			7,289			7,650			7,507
Accumulated other comprehensive income	35,910			7,104			80,079			33,256
Total shareholders' equity	1,521,055			1,478,595			1,601,700			1,594,034
Total liabilities and shareholders' equity	$	11,847,374		$	11,871,317		$	12,780,950		$	12,604,031

See Selected Notes to the Consolidated Financial Statements

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

For the Three ~~and Six~~ Months Ended ~~June 30, 2019~~March 31, 2020 and ~~2018~~2019


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
INTEREST INCOME:
Loans receivable	$	117,007		$	99,853		$	232,462		$	193,875		$	118,926		$	115,455
Mortgage-backed securities	9,794			8,899			20,301			16,230			9,137			10,507
Securities and cash equivalents	4,037			3,671			8,071			7,138			3,602			4,034
Total interest income	130,838			112,423			260,834			217,243			131,665			129,996
INTEREST EXPENSE:
Deposits	9,023			4,264			17,666			7,622			8,750			8,643
FHLB advances	3,370			1,499			6,846			2,177			2,064			3,476
Other borrowings	67			49			127			119			116			60
Junior subordinated debentures	1,683			1,548			3,396			2,889			1,477			1,713
Total interest expense	14,143			7,360			28,035			12,807			12,407			13,892
Net interest income	116,695			105,063			232,799			204,436			119,258			116,104
PROVISION FOR LOAN LOSSES	2,000			2,000			4,000			4,000
Net interest income after provision for loan losses	114,695			103,063			228,799			200,436
PROVISION FOR CREDIT LOSSES													21,748			2,000
Net interest income after provision for credit losses													97,510			114,104
NON-INTEREST INCOME:
Deposit fees and other service charges	14,046			11,985			26,664			23,281			9,803			12,618
Mortgage banking operations	5,936			4,643			9,351			9,507			10,191			3,415
Bank-owned life insurance (BOLI)	1,123			933			2,399			1,785			1,050			1,276
Miscellaneous	1,713			3,388			2,517			4,426			2,639			804
	22,818			20,949			40,931			38,999			23,683			18,113
Net (loss) gain on sale of securities	(28		)	44			(27		)	48
Net gain on sale of securities													78			1
Net change in valuation of financial instruments carried at fair value	(114		)	224			(103		)	3,532			(4,596		)	11
Total non-interest income	22,676			21,217			40,801			42,579			19,165			18,125
NON-INTEREST EXPENSE:
Salary and employee benefits	55,629			51,494			110,269			101,561			59,908			54,640
Less capitalized loan origination costs	(7,399		)	(4,733		)	(12,248		)	(8,744		)	(5,806		)	(4,849		)
Occupancy and equipment	12,681			11,574			26,447			23,340			13,107			13,766
Information/computer data services	5,273			4,564			10,599			8,945			5,810			5,326
Payment and card processing expenses	4,041			3,731			8,025			7,431			4,240			3,984
Professional and legal expenses	2,336			3,838			4,770			8,266			1,919			2,434
Advertising and marketing	2,065			2,141			3,594			3,971			1,827			1,529
Deposit insurance	1,418			1,021			2,836			2,362
Deposit insurance expense													1,635			1,418
State/municipal business and use taxes	1,007			816			1,952			1,529			984			945
REO operations, net	260			(319		)	137			121			100			(123		)
Amortization of core deposit intangibles	2,053			1,382			4,105			2,764			2,001			2,052
Provision for credit losses - unfunded loan commitments													1,722			—
Miscellaneous	7,051			7,128			13,795			12,797			6,357			6,744
	86,415			82,637			174,281			164,343			93,804			87,866
COVID-19 expenses													239			—
Acquisition-related expenses	301			—			2,449			—			1,142			2,148
Total non-interest expense	86,716			82,637			176,730			164,343			95,185			90,014
Income before provision for income taxes	50,655			41,643			92,870			78,672			21,490			42,215
PROVISION FOR INCOME TAXES	10,955			9,219			19,824			17,458			4,608			8,869
NET INCOME	$	39,700		$	32,424		$	73,046		$	61,214		$	16,882		$	33,346
Earnings per common share:
Basic	$	1.14		$	1.01		$	2.09		$	1.89		$	0.48		$	0.95
Diluted	$	1.14		$	1.00		$	2.09		$	1.89		$	0.47		$	0.95
Cumulative dividends declared per common share	$	0.41		$	0.85		$	0.82		$	1.20		$	0.41		$	0.41
Weighted average number of common shares outstanding:
Basic	34,831,047			32,250,514			34,940,106			32,323,635			35,463,541			35,050,376
Diluted	34,882,359			32,331,609			35,028,881			32,422,287			35,640,463			35,172,056

See Selected Notes to the Consolidated Financial Statements

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited) (In thousands)

For the Three ~~and Six~~ Months Ended ~~June 30, 2019~~March 31, 2020 and ~~2018~~2019

Three Months Ended
June 30, Six Months Ended
June 30,
2019
2018
2019
2018
NET INCOME $ 39,700
$ 32,424
$ 73,046
$ 61,214
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:
Unrealized holding gain (loss) on available-for-sale securities arising during the period 20,751
(8,305 ) 37,407
(23,073 )
Reclassification for net loss (gain) on available-for-sale securities realized in earnings 27
(49 ) 26
(51 )
Changes in fair value of junior subordinated debentures related to instrument specific credit risk 296
(258 ) 470
(14,067 )
Income tax related to other comprehensive (loss) income (5,058 ) 2,091
(9,097 ) 8,893
Other comprehensive income (loss) 16,016
(6,521 ) 28,806
(28,298 )
COMPREHENSIVE INCOME $ 55,716
$ 25,903
$ 101,852
$ 32,916



	Three Months Ended March 31,
	2020			2019
NET INCOME	$	16,882		$	33,346
OTHER COMPREHENSIVE INCOME, NET OF INCOME TAXES:
Unrealized holding gain on available-for-sale securities arising during the period	42,178			16,656
Reclassification for net gain on available-for-sale securities realized in earnings	(78		)	(1		)
Changes in fair value of junior subordinated debentures related to instrument specific credit risk	19,509			174
Income tax expense related to other comprehensive income	(14,786		)	(4,039		)
Other comprehensive income	46,823			12,790
COMPREHENSIVE INCOME	$	63,705		$	46,136

See Selected Notes to the Consolidated Financial Statements

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited) (In thousands, except shares)

For the ~~Six~~Three Months Ended ~~June 30, 2019~~March 31, 2020 and the Year Ended December 31, ~~2018~~2019

Common Stock
and Paid in Capital
Retained Earnings
Accumulated
Other
Comprehensive (Loss) Income
Shareholders’
Equity
Shares Amount
Balance, January 1, 2018 32,726,485
$ 1,187,127
$ 90,535
$ (5,036 ) $ 1,272,626

Cumulative effect of reclassification of the instrument-specific credit risk portion of junior subordinated debentures fair value adjustments and reclassification of equity securities from available-for-sale (28,203 ) 28,203
—
Net income 28,790
28,790
Other comprehensive loss, net of income tax (21,777 ) (21,777 )
Repurchase of common stock (269,711 ) (15,359 ) (15,359 )
Accrual of dividends on common stock ($0.35/share) (11,349 ) (11,349 )
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered (33,101 ) 1,192
1,192

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

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

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

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

Continued on next page



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

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

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

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

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

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


Balance, October 1, 2018	32,402,757		$	1,175,250		$	109,942		$	(12,994	)	$	1,272,198
Balance, April 1, 2019															35,152,746		$	1,338,386		$	152,911		$	19,894	$	1,511,191

Net income						37,527						37,527								39,700					39,700
Other comprehensive income, net of income tax									20,098			20,098											16,016		16,016
Accrual of dividends on common stock ($0.38/share)						(13,414		)				(13,414		)
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 surrendered	(3,056	)	1,519									1,519			20,897		575								575
Repurchase of common stock	(325,000	)	(19,042		)							(19,042		)	(600,000	)	(32,073		)						(32,073		)
Business acquisition	3,108,071		179,709									179,709

Balance, December 31, 2018	35,182,772		$	1,337,436		$	134,055		$	7,104		$	1,478,595
Balance, June 30, 2019															34,573,643		$	1,306,888		$	178,257		$	35,910	$	1,521,055

Continued on next page



	Common Stock and Paid in Capital					Retained Earnings			Accumulated Other Comprehensive Income		Stockholders’ Equity
	Shares		Amounts			Retained Earnings			Accumulated Other Comprehensive Income		Stockholders’ Equity
Balance, July 1, 2019	34,573,643		$	1,306,888		$	178,257		$	35,910	$	1,521,055

Net income						39,577					39,577
Other comprehensive income, net of income tax									4,610		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, 2019	34,173,357		$	1,286,711		$	203,704		$	40,520	$	1,530,935

Common Stock
and Paid in Capital
Retained Earnings
Accumulated
Other Comprehensive Income

Stockholders’
Equity
Shares Amount
Balance, January 1, 2019 35,182,772
$ 1,337,436
$ 134,055
$ 7,104
$ 1,478,595

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

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



	Common Stock and Paid in Capital				Retained Earnings			Accumulated Other Comprehensive Income			Stockholders’ Equity
	Shares		Amounts		Retained Earnings			Accumulated Other Comprehensive Income			Stockholders’ Equity
Balance, October 1, 2019	34,173,357		$	1,286,711	$	203,704		$	40,520		$	1,530,935

Net income					33,655						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 acquisition	1,578,351		85,200								85,200

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

Continued on next page


Balance, April 1, 2019	35,152,746		$	1,338,386		$	152,911		$	19,894	$	1,511,191
														Common Stock and Paid in Capital					Retained Earnings				Accumulated Other Comprehensive Income				Stockholders’ Equity
														Shares		Amount
Balance, January 1, 2020														35,751,576		$	1,373,940				$	186,838			$	33,256			$	1,594,034

New credit standard (Topic 326) - impact in year of adoption																			(11,215		)						(11,215		)
Net income						39,700					39,700								16,882								16,882
Other comprehensive income, net of income tax									16,016		16,016												46,823				46,823
Accrual of dividends on common stock ($0.41/share)						(14,354		)			(14,354		)						(14,583		)						(14,583		)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered	20,897		575								575			(24,337	)	1,534											1,534
Repurchase of common stock	(600,000	)	(32,073		)						(32,073		)	(624,780	)	(31,775		)									(31,775		)

Balance, June 30, 2019	34,573,643		$	1,306,888		$	178,257		$	35,910	$	1,521,055
Balance, March 31, 2020														35,102,459		$	1,343,699		$	177,922			$	80,079			$	1,601,700

See Selected Notes to the Consolidated Financial Statements

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)

For the ~~Six~~Three Months Ended ~~June 30, 2019~~March 31, 2020 and ~~2018~~2019


	Six Months Ended June 30,						Three Months Ended March 31,
	2019			2018			2020			2019
OPERATING ACTIVITIES:
Net income	$	73,046		$	61,214		$	16,882		$	33,346
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation	8,747			7,253			4,614			4,481
Deferred income and expense, net of amortization	(647		)	(1,518		)	(1,129		)	(895		)
Amortization of core deposit intangibles	4,105			2,764			2,001			2,052
Loss (gain) on sale of securities	27			(48		)
Gain on sale of securities							(78		)	(1		)
Net change in valuation of financial instruments carried at fair value	103			(3,532		)	4,596			(11		)
Gain on branch divestiture	—			(249		)
Decrease (increase) in deferred taxes	13,693			(6,510		)
Decrease in deferred taxes, net							16,507			5,379
Increase in current taxes payable	943			5,603			2,067			7,243
Stock-based compensation	3,394			3,231			1,872			1,219
Increase in cash surrender value of BOLI	(2,382		)	(1,768		)	(1,041		)	(1,267		)
Gain on sale of loans, net of capitalized servicing rights	(6,730		)	(6,533		)
Loss (gain) on disposal of real estate held for sale and property and equipment	721			(1,858		)
Provision for loan losses	4,000			4,000
Provision for losses on real estate held for sale	—			160
Gain on sale of loans, including capitalized servicing rights							(8,363		)	(2,063		)
Loss on disposal of real estate held for sale and property and equipment							444			371
Provision for credit losses							21,748			2,000
Provision for credit losses - unfunded loan commitments							1,722			—
Origination of loans held for sale	(397,227		)	(415,790		)	(296,712		)	(134,747		)
Proceeds from sales of loans held for sale	404,244			384,215			333,094			261,978
Net change in:
Other assets	(12,131		)	1,734			(51,061		)	(1,472		)
Other liabilities	(5,911		)	1,797			5,400			(12,847		)
Net cash provided from operating activities	87,995			34,165			52,563			164,766
INVESTING ACTIVITIES:
Purchases of securities—available-for-sale	(52,525		)	(591,265		)	(143,973		)	(5,140		)
Principal repayments and maturities of securities—available-for-sale	120,638			69,853			82,760			51,910
Proceeds from sales of securities—available-for-sale	40,759			8,363			44,509			516
Purchases of securities—held-to-maturity	—			(8,469		)	(206,155		)	—
Principal repayments and maturities of securities—held-to-maturity	29,936			4,422			3,786			14,744
Loan originations, net of principal repayments	(64,641		)	(82,461		)	16,646			(8,988		)
Purchases of loans and participating interest in loans	(777		)	(2,268		)
Proceeds from sales of other loans	7,155			4,733			5,751			3,186
Net cash paid related to branch divestiture	—			(20,412		)
Purchases of property and equipment	(11,759		)	(9,925		)	(3,086		)	(3,947		)
Proceeds from sale of real estate held for sale and sale of other property, net	4,243			6,367			877			876
Proceeds from FHLB stock repurchase program	90,373			79,878			47,840			52,372
Purchase of FHLB stock	(93,000		)	(89,460		)	(39,745		)	(47,480		)
Other	947			417			(72		)	485
Net cash provided from (used in) investing activities	71,349			(630,227		)
Net cash (used in) provided from investing activities							(190,862		)	58,534
FINANCING ACTIVITIES:
(Decrease) increase in deposits, net	(188,081		)	364,890
Increase (decrease) in deposits, net							400,895			(100,819		)
Proceeds from long term FHLB advances	300,000			—			—			300,000
Repayment of long term FHLB advances	(189		)	(5		)	—			(189		)
(Repayment) proceeds from overnight and short term FHLB advances, net	(234,000		)	239,000
(Decrease) Increase in other borrowings, net	(626		)	16,598
Repayment of overnight and short term FHLB advances, net							(203,000		)	(422,000		)
Increase in other borrowings, net							10,289			2,724
Cash dividends paid	(27,906		)	(19,494		)	(50,505		)	(13,405		)
Taxes paid related to net share settlement of equity awards	(1,869		)	(1,343		)	(339		)	(269		)
Cash paid for the repurchase of common stock	(32,073		)	(15,359		)	(31,775		)	—
Net cash (used in) provided from financing activities	(184,744		)	584,287
Net cash provided from (used in) financing activities							125,565			(233,958		)
NET CHANGE IN CASH AND CASH EQUIVALENTS	(25,400		)	(11,775		)	(12,734		)	(10,658		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	272,196			261,200			307,735			272,196
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	246,796		$	249,425		$	295,001		$	261,538

Continued on next page

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited) (In thousands)

For the ~~Six~~Three Months Ended ~~June 30, 2019~~March 31, 2020 and ~~2018~~2019


	Six Months Ended June 30,				Three Months Ended March 31,
	2019		2018		2020			2019
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid in cash	$	29,892	$	11,720	$	13,014		$	13,812
Tax paid, net	13,477		8,806
Tax refunds received					(29		)	(71		)
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	154		1,419		1,588			—
Dividends accrued but not paid until after period end	14,714		27,833		15,277			14,863

See Selected Notes to the Consolidated Financial Statements

BANNER CORPORATION AND SUBSIDIARIES

SELECTED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

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

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (SEC). In preparing these financial statements, the Company has evaluated events and transactions subsequent to ~~June 30, 2019~~March 31, 2020 for potential recognition or disclosure. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC and the accounting standards for interim financial statements. Certain reclassifications have been made to the ~~2018~~2019 Consolidated Financial Statements and/or schedules to conform to the ~~2019~~2020 presentation. These reclassifications may have affected certain ratios for the prior periods. The effect of these reclassifications is considered immaterial. All significant intercompany transactions and balances have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are significant to an understanding of Banner’s financial statements. These policies relate to (i) the methodology for the recognition of interest income, (ii) determination of the provision and allowance for ~~loan~~credit 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 assumed in business combinations and subsequent recognition of related income and expense, and (vii) the valuation or recognition of deferred tax assets and liabilities. These policies and judgments, estimates and assumptions are described in greater detail in subsequent notes to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations (Critical Accounting Policies) in our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 filed with the SEC ~~(2018~~(2019 Form 10-K). There have been no significant changes in our application of these accounting policies during the first ~~six~~three months of ~~2019,~~2020, except for the change related to the adoption of Financial Instruments - Credit Losses (Topic 326) as described in below and Note 2.

On July 25, 2019, Banner and AltaPacific Bancorp, Inc. (“AltaPacific”), the holding company for AltaPacific Bank, a California state-chartered commercial bank, announced that they have entered into a definitive merger agreement pursuant to which Banner will acquire AltaPacific in an all-stock transaction, subject to the terms and conditions set forth therein. Under the merger agreement, AltaPacific will merge with and into Banner, and immediately thereafter AltaPacific Bank will merge with and into Banner Bank. The combined company will have approximately $12.2 billion in assets. See Note 17 for additional information on the transaction.

The information included in this Form 10-Q should be read in conjunction with our ~~2018~~2019 Form 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, net of the allowance for credit losses- securities. Debt securities classified as held-to-maturity are carried at cost, adjusted for amortization of premiums to the earliest callable date and accretion of discounts to 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 and are reported in other assets.

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 small. 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 specific identification 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.

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 management and lending staff, and the regulatory and economic environments in the areas in which the Company’s lending activities are concentrated.

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. Borrowers are considered current under the CARES Act if they are less than 30 days past due on their contractual payments at the time a modification program is implemented.

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.

Note 2: ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED

~~Leases (Topic 842)~~

~~In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02,~~ ~~Leases (Topic 842)~~. The amendments in this ASU require lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date; a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. In July 2018, FASB issued ASU No. 2018-11, ~~Targeted Improvements~~. The amendments in this ASU provide entities with an additional (and optional) transition method to adopt the new leases standard. The Company adopted the requirements of Topic 842 effective January 1, 2019. The Company elected the transition option provided in ASU No. 2018-11 and applied the modified retrospective approach for leases that existed as of January 1, 2019, or were entered into thereafter. The Company elected certain relief options for practical expedients: the option to not separate lease and non-lease components and instead to account for them as a single lease component, and the option to not recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e. lease terms of twelve months or less). In addition, the Company elected the package of practical expedients in transition, which permitted us to not reassess our prior conclusions pertaining to lease identification, lease classification, and initial direct costs on leases that commenced prior to our adoption of the new standard. In connection with the adoption of this ASU, as of January 1, 2019, the Company recorded a $56 million right-of-use asset and a $59 million lease liability on its Consolidated Statements of Financial Condition.

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 ASU affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial asset not excluded from the scope that have the contractual right to receive cash. The ASU replaces the incurred loss impairment methodology in ~~current~~previous GAAP with CECL, a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses ~~will be~~is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This ASU broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. ~~This ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.~~ The ~~Company is still evaluating~~following table illustrates the ~~effects~~pre-tax impact of the adoption of this ASU ~~will have on the Company’s Consolidated Financial Statements.~~ (in thousands):



	January 1, 2020 As Reported Under Topic 326		January 1, 2020 Pre-Topic 326 Adoption		Impact of Topic 326 Adoption
Assets
Held-to-maturity debt securities
U.S. Government and agency obligations	$	—	$	—	$	—
Municipal bonds	28		—		28
Corporate bonds	35		—		35
Mortgage-backed or related securities	—		—		—
Allowance for credit losses on held-to-maturity debt securities	$	63	$	—	$	63

Loans
Commercial real estate	$	27,727	$	30,591	$	(2,864	)
Multifamily real estate	2,550		4,754		(2,204		)
Construction and land	25,509		22,994		2,515
Commercial business	26,380		23,370		3,010
Agricultural business	3,769		4,120		(351		)
One-to four-family residential	11,261		4,136		7,125
Consumer	11,175		8,202		2,973
Unallocated	—		2,392		(2,392		)
Allowance for credit losses on loans	$	108,371	$	100,559	$	7,812

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

Total					$	14,897

The ~~Company has formed~~$14.9 million total increase was recorded net of tax as an ~~internal committee~~$11.2 million reduction to ~~oversee the project, engaged a third-party vendor to assist with the project and has completed its gap analysis phase~~shareholders' equity as of the ~~project.~~adoption date. In addition ~~the Company has selected a second third-party vendor~~ to ~~assist with building and developing~~ the required models and has completed the initial build out of the required models. The Company has also selected a different third-party to provide a reasonable and supportable forecast. The Company is in the process of incorporating the reasonable and supportable forecast and qualitative factors into the models. Upon adoption, the Company expects changes in the processes and procedures used to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. The new guidance may result in an increase in the allowance for ~~loan~~credit losses ~~which will also reflect the new requirement to include the nonaccretable principal differences on purchased credit-impaired loans; however,~~upon adoption, the Company ~~is still~~expects more variability in its quarterly provision for credit losses going forward due to the CECL model’s sensitivity to changes in the ~~process~~economic forecast and other factors. The Company has updated its accounting policies based on the adoption of ~~determining the magnitude~~this ASU. See Note 1 of the ~~change and its impact on~~Notes to the Consolidated Financial ~~Statements. In addition, the current accounting policy and procedures~~Statements for ~~other-than-temporary impairment on investment securities available-for-sale will be replaced with an allowance approach.~~

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

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

~~Derivatives and Hedging (Topic 815)~~

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

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

In August 2018, FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU broaden the scope of ASC Subtopic 350-40 to include costs incurred to implement a hosting arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred, consistent with the accounting for costs for internal-use software. The amendments in this ASU result in consistent capitalization of implementation costs of a hosting arrangement that is a service contract and implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. ~~This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.~~ The ~~amendments in~~Company adopted this ASU ~~should be applied either retrospectively to all implementation costs incurred after the date~~effective January 1, 2020. The adoption of ~~adoption. Adoption of~~this ASU ~~2018-15 is~~did not ~~expected to~~ have a material impact on the Company’s Consolidated Financial Statements.

Fair Value Measurement (Topic 820)

In August 2018, FASB issued ASU 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The ASU removes, modifies and adds disclosure requirements in Topic 820. The following disclosure requirements were removed: 1) the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2) the policy for timing of transfers between levels, and 3) the valuation processes for Level 3 fair value measurements. This ASU modified disclosure requirements by requiring: that the measurement uncertainty disclosure communicates information about the uncertainty in measurement as of the reporting date. The following disclosure requirements were added: 1) changes in unrealized gains and losses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period, and 2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The ~~amendments in~~Company adopted this ASU ~~are~~ effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. An entity is permitted to early adopt any removed or modified disclosures upon issuanceJanuary 1, 2020. The adoption of this ASU ~~and delay adoption of the additional disclosures until their effective date. Adoption of ASU 2018-13 is~~did not ~~expected to~~ have a material impact on the Company’s Consolidated Financial Statements.

NOTE 3: BUSINESS COMBINATION

Acquisition of ~~Skagit~~AltaPacific Bancorp ~~Inc.~~

~~Effective as of the close of business on~~ On November 1, ~~2018,~~2019, the Company ~~acquired~~completed the acquisition of 100% of the outstanding common shares of ~~Skagit~~AltaPacific Bancorp ~~Inc. (“Skagit”) and its wholly-owned subsidiary, Skagit~~(AltaPacific), the holding company for AltaPacific Bank, a ~~Washington State chartered~~California state-chartered commercial ~~bank headquartered in Burlington, Washington, with 11 branches serving markets along the I-5 corridor from Seattle to the Canadian border. On that date, Skagit~~bank. AltaPacific was merged ~~with and~~ into Banner and ~~Skagit~~AltaPacific Bank was merged ~~with and~~ into Banner Bank. Pursuant to the previously announced terms of the ~~merger, the equity holders of Skagit~~acquisition, AltaPacific shareholders received ~~an aggregate of 3.1 million~~0.2712 shares of Banner ~~voting~~common stock in exchange for each share of AltaPacific common stock, plus cash in lieu of any fractional shares and to cancel ~~Skagit~~in-the-money AltaPacific stock ~~options,~~options. The merged banks operate as Banner Bank. The primary reason for ~~total consideration paid of $180.0 million.~~the acquisition was to expand the Company's presence in California by adding density within our existing geographic footprint. The acquisition provided ~~$915.8~~$425.7 million in assets, ~~$810.2~~$313.4 million in deposits and ~~$632.4~~$332.4 million in loans to Banner.

The application of the acquisition method of accounting resulted in recognition of a CDI asset of ~~$16.4~~$4.6 million and goodwill of ~~$96.5~~$34.0 million. The acquired CDI has been determined to have a useful life of approximately ~~nine~~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):


	Skagit				AltaPacific
	November 1, 2018				November 1, 2019
Consideration to Skagit equity holders:
Consideration to AltaPacific equity holders:
Cash paid			$	329		$	2,360
Fair value of common shares issued			179,709			85,200
Total consideration			$	180,038		87,560

Fair value of assets acquired:
Cash and cash equivalents	$	19,167			39,686
Securities	210,326				20,348
Loans receivable (contractual amount of $645.6 million)	632,374
Federal Home Loan Bank stock					2,005
Loans receivable (contractual amount of $338.2 million)					332,355
Real estate owned held for sale	2,593				650
Property and equipment	15,788				3,809
Core deposit intangible	16,368				4,610
Bank-owned life insurance					11,890
Deferred tax asset	95				166
Other assets	19,110				10,150
Total assets acquired	915,821				425,669

Fair value of liabilities assumed:
Deposits	810,209				313,374
Advances from FHLB					40,226
Junior subordinated debentures					5,814
Deferred compensation					4,508
Other liabilities	22,069				8,154
Total liabilities assumed	832,278				372,076

Net assets acquired			83,543			53,593
Goodwill			$	96,495		$	33,967

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

Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available. Additional adjustments to the acquisition accounting that may be required would most likely involve loans, property and equipment, or the deferred tax asset. As of November 1, ~~2018,~~2019, the unpaid principal balance on purchased non-credit-impaired loans was ~~$637.4~~$333.5 million. The fair value of the purchased non-credit-impaired loans was ~~$625.2~~$328.2 million, resulting in a discount of ~~$12.2~~$5.3 million recorded on these loans, which includes ~~$7.9~~$5.8 million of a credit related discount. This discount is being accreted into income over the life of the loans on an effective yield basis.

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


	Skagit			AltaPacific
	November 1, 2018			November 1, 2019
Acquired PCI loans:
Contractually required principal and interest payments	$	9,897		$	5,881
Nonaccretable difference	(1,915		)	(1,046		)
Cash flows expected to be collected	7,982			4,835
Accretable yield	(995		)	(683		)
Fair value of PCI loans	$	6,987		$	4,152

The ~~operating~~financial results of the Company include the ~~operating results~~revenues and expenses produced by the acquired assets and assumed liabilities of ~~Skagit for the period~~AltaPacific since November 1, ~~2018.~~2019. Disclosure of the amount of ~~Skagit’s~~AltaPacific's revenue and net income (excluding integration costs) included in the Company’s ~~Consolidated Statements~~consolidated statements of ~~Operations~~operations is impracticable due to the integration of the operations and accounting for this acquisition. The pro forma impact of the ~~Skagit~~AltaPacific acquisition to the historical financial results was determined to not be significant.

Note 4: SECURITIES

The amortized cost, gross unrealized gains and losses and estimated fair value of securities at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 are summarized as follows (in thousands):

June 30, 2019
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses
Fair
Value
Trading:
Corporate bonds $ 27,203
$ 25,741
$ 27,203
$ 25,741
Available-for-Sale:
U.S. Government and agency obligations $ 125,597
$ 437
$ (966 ) $ 125,068
Municipal bonds 106,379
4,549
(18 ) 110,910
Corporate bonds 4,557
12
(8 ) 4,561
Mortgage-backed or related securities 1,291,166
22,751
(1,484 ) 1,312,433
Asset-backed securities 8,076
2
(41 ) 8,037
$ 1,535,775
$ 27,751
$ (2,517 ) $ 1,561,009
Held-to-Maturity:
U.S. Government and agency obligations $ 388
$ 6
$ —
$ 394
Municipal bonds 148,580
3,538
(629 ) 151,489
Corporate bonds 3,668
—
(12 ) 3,656
Mortgage-backed or related securities 50,586
821
(29 ) 51,378
$ 203,222
$ 4,365
$ (670 ) $ 206,917



	March 31, 2020
	Amortized Cost		Fair Value
Trading:
Corporate bonds	$	27,203	$	21,040
	$	27,203	$	21,040

December 31, 2018
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses
Fair
Value
Trading:
Corporate bonds $ 27,203
$ 25,896
$ 27,203
$ 25,896
Available-for-Sale:
U.S. Government and agency obligations $ 151,012
$ 149
$ (2,049 ) $ 149,112
Municipal bonds 116,548
1,806
(532 ) 117,822
Corporate bonds 3,556
—
(61 ) 3,495
Mortgage-backed or related securities 1,355,258
5,210
(16,607 ) 1,343,861
Asset-backed securities 22,047
6
(120 ) 21,933
$ 1,648,421
$ 7,171
$ (19,369 ) $ 1,636,223
Held-to-Maturity:
U.S. Government and agency obligations $ 1,006
$ 14
$ (1 ) $ 1,019
Municipal bonds 176,663
1,727
(2,578 ) 175,812
Corporate bonds 3,736
—
(13 ) 3,723
Mortgage-backed or related securities 52,815
66
(898 ) 51,983
$ 234,220
$ 1,807
$ (3,490 ) $ 232,537



	March 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Allowance for Credit Losses		Fair Value
Available-for-Sale:
U.S. Government and agency obligations	$	82,197	$	520	$	(954	)	$	—	$	81,763
Municipal bonds	171,486		9,726		(173		)	—		181,039
Corporate bonds	30,094		1,101		(209		)	—		30,986
Mortgage-backed or related securities	1,252,606		54,711		(518		)	—		1,306,799
Asset-backed securities	8,130		—		(493		)	—		7,637
	$	1,544,513	$	66,058	$	(2,347	)	$	—	$	1,608,224



	March 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Allowance for Credit Losses
Held-to-Maturity:
U.S. Government and agency obligations	$	373	$	8	$	—		$	381	$	—
Municipal bonds	380,483		10,830		(2,292		)	389,021		61
Corporate bonds	3,325		—		(10		)	3,315		37
Mortgage-backed or related securities	53,763		2,769		(12		)	56,520		—
	$	437,944	$	13,607	$	(2,314	)	$	449,237	$	98



	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair 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 bonds	101,927		5,233		(3		)	107,157
Corporate bonds	4,357		14		(6		)	4,365
Mortgage-backed or related securities	1,324,999		20,325		(3,013		)	1,342,311
Asset-backed securities	8,195		—		(69		)	8,126
	$	1,529,946	$	25,858	$	(4,247	)	$	1,551,557
Held-to-Maturity:
U.S. Government and agency obligations	$	385	$	4	$	—		$	389
Municipal bonds	177,208		3,733		(2,213		)	178,728
Corporate bonds	3,353		—		(11		)	3,342
Mortgage-backed or related securities	55,148		921		(723		)	55,346
	$	236,094	$	4,658	$	(2,947	)	$	237,805

Accrued interest receivable on held-to-maturity debt securities was $2.8 million and $1.1 million as of March 31, 2020 and December 31, 2019, respectively, and was $5.8 million and $4.8 million on available-for-sale debt securities as of March 31, 2020 and December 31, 2019, respectively. Accrued interest receivable on securities is reported in accrued interest receivable on the consolidated statements of financial condition and is excluded from the calculation of the allowance for credit losses.

At ~~June 30, 2019~~March 31, 2020, the gross unrealized losses and the fair value for securities available-for-sale aggregated by the length of time that individual securities have been in a continuous unrealized loss position were as follows (in thousands):



	March 31, 2020
	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	$	2,575	$	(18	)	$	56,531	$	(936	)	$	59,106	$	(954	)
Municipal bonds	11,767		(173		)	—		—			11,767		(173		)
Corporate bonds	4,148		(209		)	—		—			4,148		(209		)
Mortgage-backed or related securities	42,545		(487		)	7,218		(31		)	49,763		(518		)
Asset-backed securities	1,371		(53		)	5,871		(440		)	7,242		(493		)
	$	62,406	$	(940	)	$	69,620	$	(1,407	)	$	132,026	$	(2,347	)

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

June 30, 2019
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 $ —
$ —
$ 71,611
$ (966 ) $ 71,611
$ (966 )
Municipal bonds 493
(3 ) 3,230
(15 ) 3,723
(18 )
Corporate bonds 352
(1 ) 1,798
(7 ) 2,150
(8 )
Mortgage-backed or related securities 73,934
(483 ) 207,659
(1,001 ) 281,593
(1,484 )
Asset-backed securities 7,314
(40 ) 229
(1 ) 7,543
(41 )
$ 82,093
$ (527 ) $ 284,527
$ (1,990 ) $ 366,620
$ (2,517 )
Held-to-Maturity
Municipal bonds $ —
$ —
$ 23,378
$ (629 ) $ 23,378
$ (629 )
Corporate bonds —
—
488
(12 ) 488
(12 )
Mortgage-backed or related securities 2,211
(1 ) 6,128
(28 ) 8,339
(29 )
$ 2,211
$ (1 ) $ 29,994
$ (669 ) $ 32,205
$ (670 )

December 31, 2018
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 $ 75,885
$ (1,240 ) $ 50,508
$ (809 ) $ 126,393
$ (2,049 )
Municipal bonds 6,422
(54 ) 27,231
(478 ) 33,653
(532 )
Corporate bonds 3,199
(56 ) 295
(5 ) 3,494
(61 )
Mortgage-backed or related securities 316,074
(2,939 ) 571,989
(13,668 ) 888,063
(16,607 )
Asset-backed securities 10,582
(24 ) 9,913
(96 ) 20,495
(120 )
$ 412,162
$ (4,313 ) $ 659,936
$ (15,056 ) $ 1,072,098
$ (19,369 )
Held-to-Maturity
U.S. Government and agency obligations $ 145
$ (1 ) $ —
$ —
$ 145
$ (1 )
Municipal bonds 29,898
(274 ) 44,637
(2,304 ) 74,535
(2,578 )
Corporate bonds —
—
487
(13 ) 487
(13 )
Mortgage-backed or related securities 10,761
(220 ) 30,035
(678 ) 40,796
(898 )
$ 40,804
$ (495 ) $ 75,159
$ (2,995 ) $ 115,963
$ (3,490 )



	December 31, 2019
	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	$	2,747	$	(20	)	$	60,979	$	(1,136	)	$	63,726	$	(1,156	)
Municipal bonds	1,902		—			494		(3		)	2,396		(3		)
Corporate bonds	594		(6		)	—		—			594		(6		)
Mortgage-backed or related securities	300,852		(2,829		)	33,360		(184		)	334,212		(3,013		)
Asset-backed securities	1,204		(17		)	5,989		(52		)	7,193		(69		)
	$	307,299	$	(2,872	)	$	100,822	$	(1,375	)	$	408,121	$	(4,247	)
Held-to-Maturity
U.S. Government and agency obligations	$	—	$	—		$	—	$	—		$	—	$	—
Municipal bonds	44,605		(1,889		)	19,017		(324		)	63,622		(2,213		)
Corporate bonds	—		—			489		(11		)	489		(11		)
Mortgage-backed or related securities	11,117		(723		)	—		—			11,117		(723		)
	$	55,722	$	(2,612	)	$	19,506	$	(335	)	$	75,228	$	(2,947	)

At ~~June 30, 2019,~~March 31, 2020, there were ~~105~~59 securities—available-for-sale ~~with unrealized losses, compared to 271 at December 31, 2018. At June 30, 2019, there were 14 securities—held-to-maturity~~ with unrealized losses, compared to 90 at December 31, ~~2018.~~2019. At December 31, 2019, there were 17 securities—held-to-maturity with unrealized losses. Management does not believe that any individual unrealized loss as of ~~June 30, 2019~~March 31, 2020 resulted from credit loss or ~~December 31, 2018~~that any individual unrealized loss represented other-than-temporary impairment (OTTI). as of December 31, 2019. The decline in fair market value of these securities was generally due to changes in interest rates and changes in market-desired spreads subsequent to their purchase.

There were no0 sales of securities—trading during the ~~six-month periods~~three months ended ~~June 30, 2019~~March 31, 2020 or ~~2018.~~2019. There were no0 securities—trading in a nonaccrual status at ~~June 30, 2019~~March 31, 2020 or December 31, ~~2018.~~2019. Net unrealized holding losses of ~~$103,000~~$4.6 million were recognized during the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 compared to ~~$3.4 million~~$58,000 of net unrealized ~~holdings gains~~holding losses recognized during the ~~six~~three months ended ~~June 30, 2018.~~March 31, 2019.

There were 3610 sales of securities—available-for-sale during the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, with a net ~~loss~~gain of ~~$26,000.~~$78,000. There ~~were nine sales~~was 1 sale of securities—available-for-sale during the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, which ~~together with partial calls of securities~~ resulted in a net gain of ~~$51,000 for the six months ended June 30, 2018.~~$1,000. There were no0 securities—available-for-sale in a nonaccrual status at ~~June 30, 2019~~March 31, 2020 or December 31, ~~2018.~~

2019.

There were no0 sales of securities—held-to-maturity during the six-month period ended June 30, 2019 or 2018, although there were partial calls of securities that resulted in a net loss of $1,000 for the six-months ended June 30, 2019 and a net gain of $2,000 for the sixthree months ended ~~June 30, 2018.~~March 31, 2020 or 2019. There were no0 securities—held-to-maturity in a nonaccrual status or 30 days or more past due at ~~June 30, 2019~~March 31, 2020 or December 31, ~~2018.~~2019.

The amortized cost and estimated fair value of securities at ~~June 30, 2019,~~March 31, 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.


	June 30, 2019												March 31, 2020
	Trading				Available-for-Sale				Held-to-Maturity				Trading				Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturing in one year or less	$	—	$	—	$	2,554	$	2,556	$	4,602	$	4,604	$	—	$	—	$	2,500	$	2,496	$	807	$	808
Maturing after one year through five years	—		—		57,247		58,238		63,805		64,663		—		—		66,644		68,453		59,949		61,827
Maturing after five years through ten years	—		—		393,053		404,449		43,943		45,457		—		—		352,386		370,139		44,006		46,085
Maturing after ten years through twenty years	27,203		25,741		178,802		183,689		58,805		60,672		27,203		21,040		265,561		277,549		124,627		126,785
Maturing after twenty years	—		—		904,119		912,077		32,067		31,521		—		—		857,422		889,587		208,555		213,732
	$	27,203	$	25,741	$	1,535,775	$	1,561,009	$	203,222	$	206,917	$	27,203	$	21,040	$	1,544,513	$	1,608,224	$	437,944	$	449,237

The following table presents, as of ~~June 30, 2019~~March 31, 2020, investment securities which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law (in thousands):


	June 30, 2019						March 31, 2020
	Carrying Value		Amortized Cost		Fair Value		Carrying Value		Amortized Cost		Fair Value
Purpose or beneficiary:
State and local governments public deposits	$	136,556	$	136,217	$	139,723	$	155,588	$	154,453	$	160,654
Interest rate swap counterparties	15,560		15,494		15,741		28,049		26,923		28,432
Repurchase agreements	144,625		142,411		144,625		153,285		147,608		153,286
Other	2,721		2,721		2,698		2,665		2,665		2,733
Total pledged securities	$	299,462	$	296,843	$	302,787	$	339,587	$	331,649	$	345,105

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 March 31, 2020 (in thousands):



	March 31, 2020
	U.S. Government and agency obligations		Municipal bonds		Corporate bonds		Mortgage-backed or related securities		Total
AAA/AA/A	$	—	$	348,662	$	500	$	—	$	349,162
BBB/BB/B	—		—		—		—		—
Not Rated	373		31,821		2,825		53,763		88,782
	$	373	$	380,483	$	3,325	$	53,763	$	437,944

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



	Three Months Ended March 31, 2020
	U.S. Government and agency obligations		Municipal bonds		Corporate bonds		Mortgage-backed or related securities		Total
Allowance for credit losses - securities
Beginning Balance	$	—	$	—	$	—	$	—	$	—
Impact of adopting ASC 326	—		28		35		—		63
Provision for credit losses	—		33		2		—		35
Securities charged-off	—		—		—		—		—
Recoveries	—		—		—		—		—
Ending Balance	$	—	$	61	$	37	$	—	$	98

Note 5: LOANS RECEIVABLE AND THE ALLOWANCE FOR ~~LOAN~~CREDIT LOSSES - LOANS

As a result of the adoption of Financial Instruments - Credit Losses (Topic 326), effective January 1, 2020, the Company changed the segmentation of its loan portfolio based on the common risk characteristics used to measure the allowance for credit losses. The following table presents the loans receivable at March 31, 2020 and December 31, 2019 by class (dollars in thousands). The presentation of loans receivable at December 31, 2019 has been updated to conform to the loan portfolio segmentation that became effective on January 1, 2020.



	March 31, 2020					December 31, 2019
	Amount			Percent of Total		Amount			Percent of Total
Commercial real estate:
Owner-occupied	$	1,024,089		11.0	%	$	980,021		10.5	%
Investment properties	2,007,537			21.6		2,024,988			21.8
Small balance CRE	591,783			6.4		613,484			6.6
Multifamily real estate	400,206			4.3		388,388			4.2
Construction, land and land development:
Commercial construction	205,476			2.2		210,668			2.3
Multifamily construction	250,410			2.7		233,610			2.5
One- to four-family construction	534,956			5.8		544,308			5.8
Land and land development	232,506			2.5		245,530			2.6
Commercial business:
Commercial business	1,357,817			14.6		1,364,650			14.7
Small business scored	807,539			8.7		772,657			8.3
Agricultural business, including secured by farmland	330,257			3.6		337,271			3.6
One- to four-family residential	881,387			9.5		925,531			9.9
Consumer:
Consumer—home equity revolving lines of credit	521,618			5.6		519,336			5.6
Consumer—other	140,163			1.5		144,915			1.6
Total loans	9,285,744			100.0	%	9,305,357			100.0	%
Less allowance for credit losses - loans	(130,488		)			(100,559		)
Net loans	$	9,155,256				$	9,204,798

~~Loans~~

The presentation of loans receivable at ~~June 30,~~December 31, 2019 ~~and~~ ~~December 31, 2018~~ ~~are summarized~~in the table below is based on loan segmentation as ~~follows (dollars~~presented in ~~thousands):~~the 2019 Form 10-K.

June 30, 2019 December 31, 2018
Amount Percent of Total Amount Percent of Total
Commercial real estate:
Owner-occupied $ 1,433,995
16.4 % $ 1,430,097
16.4 %
Investment properties 2,116,306
24.2
2,131,059
24.5
Multifamily real estate 402,241
4.6
368,836
4.2
Commercial construction 172,931
2.0
172,410
2.0
Multifamily construction 189,160
2.2
184,630
2.1
One- to four-family construction 503,061
5.7
534,678
6.2
Land and land development:

Residential 187,180
2.1
188,508
2.2
Commercial 27,470
0.3
27,278
0.3
Commercial business 1,598,788
18.3
1,483,614
17.1
Agricultural business, including secured by farmland 380,805
4.3
404,873
4.7
One- to four-family residential 944,617
10.8
973,616
11.2
Consumer:
Consumer secured by one- to four-family 575,658
6.6
568,979
6.6
Consumer—other 214,338
2.5
216,017
2.5
Total loans 8,746,550
100.0 % 8,684,595
100.0 %
Less allowance for loan losses (98,254 )
(96,485 )
Net loans $ 8,648,296

$ 8,588,110



	December 31, 2019
	Amount			Percent of Total
Commercial real estate:
Owner-occupied	$	1,580,650		17.0	%
Investment properties	2,309,221			24.8
Multifamily real estate	473,152			5.1
Commercial construction	210,668			2.3
Multifamily construction	233,610			2.5
One- to four-family construction	544,308			5.8
Land and land development:
Residential	154,688			1.7
Commercial	26,290			0.3
Commercial business	1,693,824			18.2
Agricultural business, including secured by farmland	370,549			4.0
One- to four-family residential	945,622			10.2
Consumer:
Consumer secured by one- to four-family	550,960			5.8
Consumer—other	211,815			2.3
Total loans	9,305,357			100.0	%
Less allowance for loan losses	(100,559		)
Net loans	$	9,204,798

Loan amounts are net of unearned loan fees in excess of unamortized costs of ~~$847,000~~$451,000 as of ~~June 30, 2019~~March 31, 2020 and ~~$1.4 million~~$438,000 as of December 31, ~~2018.~~2019. Net loans include net discounts on acquired loans of ~~$22.6~~$22.2 million and ~~$25.7~~$25.0 million as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. Net loans does not include accrued interest receivable. Accrued interest receivable on loans was $32.0 million as of March 31, 2020 and $31.8 million as of December 31, 2019 and was reported in accrued interest receivable on the consolidated statements of financial condition.

Purchased ~~credit-impaired loans~~credit deteriorated and purchased ~~non-credit-impaired~~non-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 months ended March 31, 2020.

Purchased credit-impaired loans and purchased non-credit-impaired loans. Prior to the implementation of Financial Instruments—Credit Losses (Topic 326) on January 1, 2020, acquired loans were evaluated upon acquisition and classified as either purchased credit-impaired (PCI) or purchased non-credit-impaired. PCI loans ~~reflect~~reflected credit deterioration since origination such that it iswas probable at acquisition that the Company ~~will~~would be unable to collect all contractually required payments. The outstanding contractual unpaid principal balance of PCI loans, excluding acquisition accounting adjustments, was ~~$20.2 million at June 30, 2019 and $22.0~~$23.5 million at December 31, ~~2018.~~2019. The carrying balance of PCI loans was ~~$12.9 million at June 30, 2019 and $14.4~~$15.9 million at December 31, ~~2018.~~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 six~~ months ended ~~June 30,~~March 31, 2019 ~~and 2018~~ (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2019			2018			2019			2018			2019
Balance, beginning of period	$	4,778		$	6,288		$	5,216		$	6,520		$	5,216
Accretion to interest income	(456		)	(734		)	(949		)	(1,831		)	(493		)
Disposals	—			—			—			58			—
Reclassifications from non-accretable difference	421			555			476			1,362			55
Balance, end of period	$	4,743		$	6,109		$	4,743		$	6,109		$	4,778

As of ~~June 30, 2019 and~~ December 31, ~~2018,~~2019, the non-accretable difference between the contractually required payments and cash flows expected to be collected was ~~$6.2 million and $7.1 million, respectively.~~$7.4 million.

Impaired Loans and the Allowance for Loan Losses. APrior 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 ~~will~~would be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Factors involved in determining impairment ~~include,~~included, but ~~are~~were not limited to, the financial condition of

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

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


	June 30, 2019								December 31, 2019
	Unpaid Principal Balance		Recorded Investment				Related Allowance		Unpaid Principal Balance		Recorded Investment				Related Allowance
			Without Allowance ⁽¹⁾		With Allowance ⁽²⁾						Without Allowance ⁽¹⁾		With Allowance ⁽²⁾
Commercial real estate:
Owner-occupied	$	3,171	$	2,792	$	200	$	20	$	4,185	$	3,816	$	194	$	18
Investment properties	2,961		1,612		699		44		3,536		1,883		690		40
Multifamily real estate									82		85		—		—
Multifamily construction	1,079		605		—		—		573		98		—		—
One- to four-family construction	1,181		1,181		—		—		1,799		1,799		—		—
Land and land development:
Residential	1,026		690		—		—		676		340		—		—
Commercial business	4,393		2,984		550		21		25,117		4,614		19,330		4,128
Agricultural business/farmland	3,903		1,359		2,320		147		3,044		661		2,243		141
One- to four-family residential	6,513		4,188		2,307		58		7,290		5,613		1,648		41
Consumer:
Consumer secured by one- to four-family	3,269		2,983		130		5		3,081		2,712		127		5
Consumer—other	430		344		59		2		222		159		52		1
	$	27,926	$	18,738	$	6,265	$	297	$	49,605	$	21,780	$	24,284	$	4,374

	December 31, 2018
	Unpaid Principal Balance		Recorded Investment				Related Allowance
			Without Allowance ⁽¹⁾		With Allowance ⁽²⁾
Commercial real estate:
Owner-occupied	$	3,193	$	2,768	$	200	$	19
Investment properties	7,287		1,320		5,606		226
Multifamily real estate	1,901		1,427		—		—
One- to four-family construction	919		919		—		—
Land and land development:
Residential	1,134		798		—		—
Commercial	44		44		—		—
Commercial business	4,014		2,937		391		16
Agricultural business/farmland	4,863		1,751		2,561		96
One- to four-family residential	6,724		4,314		2,358		51
Consumer:
Consumer secured by one- to four-family	1,622		1,438		133		6
Consumer—other	112		49		62		2
	$	31,813	$	17,765	$	11,311	$	416

⁽¹⁾

Includes loans without an allowance reserve that ~~have~~had been individually evaluated for impairment and that evaluation concluded that no reserve was needed, and ~~$10.3~~$13.5 million ~~and $9.0 million, respectively,~~ of ~~homogenous~~homogeneous and small balance loans, as of ~~June 30, 2019 and~~ December 31, ~~2018,~~2019, that ~~are~~were collectively evaluated for impairment for which a general reserve ~~has been~~was established.


⁽²⁾	Loans with a specific allowance reserve ~~have been~~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 summarize~~table summarizes our average recorded investment and interest income recognized on impaired loans by loan class for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 ~~and 2018~~ (in thousands):


	Three Months Ended June 30, 2019				Three Months Ended June 30, 2018				Three Months Ended March 31, 2019
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial real estate:
Owner-occupied	$	3,072	$	2	$	3,544	$	2	$	3,451	$	2
Investment properties	3,283		22		7,561		75		7,227		76
Commercial construction	1,153		—		—		—		1,427		—
One- to four-family construction	1,006		1		314		—		919		—
Land and land development:
Residential	690		—		1,582		10		726		—
Commercial business	3,762		6		3,206		5		3,803		5
Agricultural business/farmland	4,590		29		4,357		23		5,117		27
One- to four-family residential	6,449		57		8,226		59		6,446		65
Consumer:
Consumer secured by one- to four-family	3,129		3		1,360		3		2,063		5
Consumer—other	372		1		141		1		319		1
	$	27,506	$	121	$	30,291	$	178	$	31,498	$	181

	Six Months Ended June 30, 2019				Six Months Ended June 30, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial real estate:
Owner-occupied	$	3,261	$	4	$	4,464	$	5
Investment properties	5,255		98		8,767		158
Commercial construction	1,290		—		—		—
One- to four-family construction	963		1		459		4
Land and land development:
Residential	708		—		1,190		10
Commercial business	3,782		11		3,606		12
Agricultural business/farmland	4,854		56		6,733		56
One- to four-family residential	6,448		122		8,559		160
Consumer:
Consumer secured by one- to four-family	2,596		8		1,375		5
Consumer—other	345		2		145		2
	$	29,502	$	302	$	35,298	$	412

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~~ ~~June 30, 2019~~ ~~and December 31, 2018 (in thousands):~~

June 30, 2019 December 31, 2018

Accrual
Status

Nonaccrual
Status

Total
TDRs
Accrual
Status Nonaccrual
Status Total
TDRs
Commercial real estate:
Owner-occupied $ —
$ 273
$ 273
$ 200
$ 78
$ 278
Investment properties 699
1,077
1,776
5,606
—
5,606
Commercial business 550
—
550
391
—
391
Agricultural business, including secured by farmland 2,320
—
2,320
2,561
—
2,561
One- to four-family residential 2,836
202
3,038
4,469
239
4,708
Consumer:
Consumer secured by one- to four-family 130
—
130
133
—
133
Consumer—other 59
—
59
62
—
62
$ 6,594
$ 1,552
$ 8,146
$ 13,422
$ 317
$ 13,739

As of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company had TDRs of $13.1 million and $8.0 million, respectively, and commitments to advance additional funds related to TDRs up to ~~$49,000~~$1.2 million and ~~none,~~NaN, respectively.

The following table presents new TDRs that occurred during the three ~~and six~~ months ended ~~June 30, 2019. No new TDRs occurred during the three~~March 31, 2020 and ~~six months ended June 30, 2018~~March 31, 2019 (dollars in thousands):


											Three months ended March 31, 2020
											Number of Contracts	Pre- modification Outstanding Recorded Investment		Post- modification Outstanding Recorded Investment
Recorded Investment
Commercial business:
Commercial business											2	4,796		4,796
Total											2	$	4,796	$	4,796


	Three months ended June 30, 2019					Six months ended June 30, 2019					Three months ended March 31, 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		Number of Contracts	Pre- modification Outstanding Recorded Investment		Post- modification Outstanding Recorded Investment
Recorded Investment
Commercial real estate
Investment properties	—	$	—	$	—	1	$	1,090	$	1,090	1	1,090		1,090
Commercial business	1	160		160		1	160		160
Agricultural business/farmland	1	596		596		1	596		596
Total	2	$	756	$	756	3	$	1,846	$	1,846
											1	$	1,090	$	1,090

There were no TDRs which incurred a payment default within twelve months of the restructure date during the ~~three and six-month~~three-month periods ended ~~June 30, 2019~~March 31, 2020 and ~~2018.~~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 ~~six months ended June 30, 2019.~~periods presented.

Risk ~~Rating 1: Exceptional~~Ratings 1-5: Pass

~~A credit supported by exceptional financial strength, stability, and liquidity. The~~Credits with risk ~~rating~~ratings of 1 ~~is reserved for~~to 5 meet the ~~Company’s top quality loans, generally reserved for investment grade~~definition of a pass risk rating. The strength of credits ~~underwritten~~vary 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. The~~a risk ~~rating of 2 is reserved for very strong and highly stable customers with ready access to alternative financing sources.~~

~~Risk Rating 3: Strong~~

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

~~Risk Rating 4: Acceptable~~

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

~~Risk Rating 5: Watch~~

~~A credit with the characteristics of~~rated 5 being an acceptable credit ~~which~~that 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.

Risk Rating 7: Substandard

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

Risk Rating 8: Doubtful

A credit with an extremely high probability of loss is risk rated 8. These credits have all the same critical weaknesses that are found in a substandard loan; however, the weaknesses are elevated to the point that based upon current information, collection or liquidation in full is improbable. While some loss on doubtful credits is expected, pending events may ~~strengthen a credit making~~make the amount and timing of any loss indeterminable. In these situations taking the loss is inappropriate until ~~it is clear that~~the 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 bank asset is risk rated 9. Losses should be taken in the accounting period in which the credit is determined to be uncollectible. Taking a loss does not mean that a credit has absolutely no recovery or salvage value but, rather, it is not practical or desirable to defer writing off the credit, even though partial recovery may occur in the future.

The following tables present the Company’s portfolio of risk-rated loans by grade as of March 31, 2020 (in thousands). Revolving loans that are converted to term loans are treated as new originations in the table below and are presented by year of origination.



	March 31, 2020
	Term Loans by Year of Origination												Revolving Loans		Total Loans
By class:	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total Loans

Commercial real estate - owner occupied
Risk Rating
Pass	$	86,515	$	209,528	$	171,907	$	133,579	$	109,177	$	280,979	$	7,927	$	999,612
Special Mention	—		2,438		1,369		2,353		—		103		—		6,263
Substandard	—		500		—		5,805		1,295		10,614		—		18,214
Doubtful	—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—
Total Commercial real estate - owner occupied	$	86,515	$	212,466	$	173,276	$	141,737	$	110,472	$	291,696	$	7,927	$	1,024,089

Commercial real estate - investment properties
Risk Rating
Pass	$	42,548	$	296,128	$	347,941	$	309,865	$	328,239	$	631,602	$	30,284	$	1,986,607
Special Mention	—		3,360		—		—		—		976		—		4,336
Substandard	—		3,934		2,405		—		442		9,813		—		16,594
Doubtful	—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—
Total Commercial real estate - investment properties	$	42,548	$	303,422	$	350,346	$	309,865	$	328,681	$	642,391	$	30,284	$	2,007,537

Multifamily real estate
Risk Rating
Pass	$	21,907	$	72,099	$	45,457	$	102,668	$	47,554	$	108,743	$	1,778	$	400,206
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—
Total Multifamily real estate	$	21,907	$	72,099	$	45,457	$	102,668	$	47,554	$	108,743	$	1,778	$	400,206



	March 31, 2020
	Term Loans by Year of Origination												Revolving Loans		Total Loans
By class:	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total Loans

Commercial construction
Risk Rating
Pass	$	17,290	$	101,679	$	55,535	$	9,326	$	2,231	$	1,599	$	—	$	187,660
Special Mention	—		—		6,197		—		—		—		—		6,197
Substandard	—		11,521		—		—		98		—		—		11,619
Doubtful	—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—
Total Commercial construction	$	17,290	$	113,200	$	61,732	$	9,326	$	2,329	$	1,599	$	—	$	205,476

Multifamily construction
Risk Rating
Pass	$	39,395	$	115,501	$	76,925	$	12,945	$	—	$	—	$	5,644	$	250,410
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—
Total Multifamily construction	$	39,395	$	115,501	$	76,925	$	12,945	$	—	$	—	$	5,644	$	250,410

One- to four- family construction
Risk Rating
Pass	$	143,457	$	357,179	$	11,536	$	—	$	7	$	—	$	5,058	$	517,237
Special Mention	2,254		13,540		—		—		—		—		630		16,424
Substandard	—		1,295		—		—		—		—		—		1,295
Doubtful	—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—
Total One- to four- family construction	$	145,711	$	372,014	$	11,536	$	—	$	7	$	—	$	5,688	$	534,956



	March 31, 2020
	Term Loans by Year of Origination												Revolving Loans		Total Loans
By class:	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total Loans

Land and land development
Risk Rating
Pass	$	36,452	$	126,901	$	44,296	$	10,708	$	7,275	$	6,580	$	260	$	232,472
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		34		—		—		—		—		—		34
Doubtful	—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—
Total Land and land development	$	36,452	$	126,935	$	44,296	$	10,708	$	7,275	$	6,580	$	260	$	232,506

Commercial business
Risk Rating
Pass	$	74,684	$	284,798	$	228,436	$	98,502	$	52,755	$	89,037	$	466,294	$	1,294,506
Special Mention	65		1,314		5,021		1,472		4,846		5,091		8,635		26,444
Substandard	2,904		2,199		7,548		3,934		293		949		19,040		36,867
Doubtful	—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—
Total Commercial business	$	77,653	$	288,311	$	241,005	$	103,908	$	57,894	$	95,077	$	493,969	$	1,357,817

Agricultural business including secured by farmland
Risk Rating
Pass	$	17,928	$	64,309	$	35,934	$	26,835	$	27,403	$	35,133	$	102,965	$	310,507
Special Mention	—		1,328		—		919		676		1,418		—		4,341
Substandard	625		5,523		5,974		191		62		707		2,327		15,409
Doubtful	—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—
Total Agricultural business including secured by farmland	$	18,553	$	71,160	$	41,908	$	27,945	$	28,141	$	37,258	$	105,292	$	330,257

The following table presents the Company’s portfolio of non-risk-rated loans by delinquency status as of March 31, 2020 (in thousands). Revolving loans that are converted to term loans are treated as new originations in the table below and are presented by year of origination.



	March 31, 2020
	Term Loans by Year of Origination												Revolving Loans		Total Loans
By class:	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total Loans

Small balance CRE
Past Due Category
Current	$	3,076	$	72,221	$	91,455	$	75,742	$	80,463	$	265,178	$	1,189	$	589,324
30-59 Days Past Due	—		380		382		—		—		738		—		1,500
60-89 Days Past Due	—		—		—		—		—		396		—		396
90 Days + Past Due	—		—		—		340		—		223		—		563
Total Small balance CRE	$	3,076	$	72,601	$	91,837	$	76,082	$	80,463	$	266,535	$	1,189	$	591,783

Small business scored
Past Due Category
Current	$	49,408	$	176,863	$	161,438	$	115,884	$	60,448	$	85,896	$	151,905	$	801,842
30-59 Days Past Due	31		459		215		977		68		325		466		2,541
60-89 Days Past Due	—		184		150		197		55		—		5		591
90 Days + Past Due	—		243		568		715		610		152		277		2,565
Total Small business scored	$	49,439	$	177,749	$	162,371	$	117,773	$	61,181	$	86,373	$	152,653	$	807,539

One- to four- family residential
Past Due Category
Current	$	10,298	$	119,074	$	141,540	$	156,046	$	77,252	$	357,521	$	4,801	$	866,532
30-59 Days Past Due	559		4,107		639		1,615		264		5,215		—		12,399
60-89 Days Past Due	21		—		—		—		—		82		—		103
90 Days + Past Due	358		—		607		45		—		1,343		—		2,353
Total One- to four- family residential	$	11,236	$	123,181	$	142,786	$	157,706	$	77,516	$	364,161	$	4,801	$	881,387



	March 31, 2020
	Term Loans by Year of Origination												Revolving Loans		Total Loans
By class:	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total Loans

Consumer—home equity revolving lines of credit
Past Due Category
Current	$	14,227	$	2,053	$	1,774	$	2,137	$	1,223	$	3,840	$	493,903	$	519,157
30-59 Days Past Due	—		—		—		—		—		14		664		678
60-89 Days Past Due	—		—		—		—		—		267		—		267
90 Days + Past Due	—		—		—		520		297		158		541		1,516
Total Consumer—home equity revolving lines of credit	$	14,227	$	2,053	$	1,774	$	2,657	$	1,520	$	4,279	$	495,108	$	521,618

Consumer-other
Past Due Category
Current	$	7,199	$	22,156	$	21,985	$	18,571	$	12,885	$	26,316	$	30,214	$	139,326
30-59 Days Past Due	102		21		174		78		100		95		78		648
60-89 Days Past Due	—		30		29		17		—		10		54		140
90 Days + Past Due	—		—		—		—		49		—		—		49
Total Consumer-other	$	7,301	$	22,207	$	22,188	$	18,666	$	13,034	$	26,421	$	30,346	$	140,163

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

June 30, 2019
By class:
Pass (Risk Ratings 1-5)⁽¹⁾
Special Mention Substandard Doubtful Loss Total Loans
Commercial real estate:
Owner-occupied $ 1,409,358
$ 7,880
$ 16,757
$ —
$ —
$ 1,433,995
Investment properties 2,107,989
—
8,317
—
—
2,116,306
Multifamily real estate 401,810
—
431
—
—
402,241
Commercial construction 160,616
—
12,315
—
—
172,931
Multifamily construction 189,160
—
—
—
—
189,160
One- to four-family construction 502,142
—
919
—
—
503,061
Land and land development:
Residential 186,490
—
690
—
—
187,180
Commercial 27,434
—
36
—
—
27,470
Commercial business 1,549,519
21,832
27,359
78
—
1,598,788
Agricultural business, including secured by farmland 368,172
7,109
5,524
—
—
380,805
One- to four-family residential 940,607
434
3,576
—
—
944,617
Consumer:
Consumer secured by one- to four-family 571,458
—
4,200
—
—
575,658
Consumer—other 213,777
6
555
—
—
214,338
Total $ 8,628,532
$ 37,261
$ 80,679
$ 78
$ —
$ 8,746,550


	December 31, 2018												December 31, 2019
By class:	Pass (Risk Ratings 1-5)⁽¹⁾		Special Mention		Substandard		Doubtful		Loss		Total Loans		Pass (Risk Ratings 1-5)⁽¹⁾		Special Mention		Substandard		Doubtful		Loss		Total Loans
Commercial real estate:
Owner-occupied	$	1,396,721	$	6,963	$	26,413	$	—	$	—	$	1,430,097	$	1,546,649	$	4,198	$	29,803	$	—	$	—	$	1,580,650
Investment properties	2,122,621		—		8,438		—		—		2,131,059		2,288,785		2,193		18,243		—		—		2,309,221
Multifamily real estate	368,262		—		574		—		—		368,836		472,856		—		296		—		—		473,152
Commercial construction	159,167		11,816		1,427		—		—		172,410		198,986		—		11,682		—		—		210,668
Multifamily construction	184,630		—		—		—		—		184,630		233,610		—		—		—		—		233,610
One- to four-family construction	533,759		—		919		—		—		534,678		530,307		12,534		1,467		—		—		544,308
Land and land development:
Residential	187,710		—		798		—		—		188,508		154,348		—		340		—		—		154,688
Commercial	27,200		—		78		—		—		27,278		26,256		—		34		—		—		26,290
Commercial business	1,436,733		7,661		39,133		87		—		1,483,614		1,627,170		31,012		35,584		58		—		1,693,824
Agricultural business, including secured by farmland	392,318		4,214		8,341		—		—		404,873		352,408		10,840		7,301		—		—		370,549
One- to four-family residential	969,011		499		4,106		—		—		973,616		940,424		409		4,789		—		—		945,622
Consumer:
Consumer secured by one- to four-family	564,001		—		4,978		—		—		568,979		547,388		—		3,572		—		—		550,960
Consumer—other	215,706		9		302		—		—		216,017		211,475		3		337		—		—		211,815
Total	$	8,557,839	$	31,162	$	95,507	$	87	$	—	$	8,684,595	$	9,130,662	$	61,189	$	113,448	$	58	$	—	$	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 ~~June 30, 2019 and~~ December 31, ~~2018,~~2019, in the commercial business category, ~~$744.8~~$764.6 million ~~and $590.9 million, respectively,~~ of credit-scored small business loans. As loans in these pools become non-performing, they are individually risk-rated.

The following table provides the amortized cost basis of collateral-dependent loans as of March 31, 2020 (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 banking relationship with a balance of $14.7 million.



	March 31, 2020
	Real Estate		Accounts Receivable		Equipment		Inventory		Total
Commercial real estate:
Owner-occupied	$	1,838	$	—	$	—	$	—	$	1,838
Investment properties	3,421		—		—		—		3,421
Small Balance CRE	1,367		—		—		—		1,367
Multifamily real estate	—		—		—		—		—
Construction, land and land development:
Commercial construction	—		—		—		—		—
Multifamily construction	—		—		—		—		—
One- to four-family construction	964		—		—		—		964
Land and land development	—		—		—		—		—
Commercial business
Commercial business	2,851		11,344		4,597		1,215		20,007
Small business Scored	48		—		49		—		97
Agricultural business, including secured by farmland	—		—		—		—		—
One- to four-family residential	868		—		—		—		868
Consumer:
Consumer—home equity revolving lines of credit	—		—		—		—		—
Consumer—other	—		—		—		—		—
Total	$	11,357	$	11,344	$	4,646	$	1,215	$	28,562

The following tables provide additional detail on the age analysis of the Company’s past due loans as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 (in thousands):


	June 30, 2019																		March 31, 2020
	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		Current		Total Loans		Non-accrual with no Allowance		Total Non-accrual ⁽¹⁾		Loans 90 Days or More Past Due and Accruing
Commercial real estate:
Owner-occupied	$	1,024	$	146	$	2,474	$	3,644	$	8,413	$	1,421,938	$	1,433,995	$	—	$	2,991	$	1,209	$	—	$	1,837	$	3,046	$	1,021,043	$	1,024,089	$	1,837	$	2,243	$	—
Investment properties	148		—		1,612		1,760		3,301		2,111,245		2,116,306		—		1,612		607		—		3,888		4,495		2,003,042		2,007,537		3,420		3,863		24
Small Balance CRE																			1,500		396		563		2,459		589,324		591,783		1,222		2,406		—
Multifamily real estate	91		—		—		91		6		402,144		402,241		—		—		—		—		—		—		400,206		400,206		—		—		—
Construction, land and land development:
Commercial construction	—		—		605		605		—		172,326		172,931		—		605		11,521		—		1,505		13,026		192,450		205,476		—		98		1,407
Multifamily construction	—		—		—		—		—		189,160		189,160		—		—		—		—		—		—		250,410		250,410		—		—		—
One-to-four-family construction	—		2,454		1,181		3,635		—		499,426		503,061		262		919
Land and land development:
Residential	—		—		690		690		—		186,490		187,180		—		690
Commercial	—		—		—		—		—		27,470		27,470		—		—
One- to four-family construction																			1,027		—		964		1,991		532,965		534,956		964		1,295		—
Land and land development																			1,783		—		—		1,783		230,723		232,506		—		—		—
Commercial business	8,982		895		2,211		12,088		526		1,586,174		1,598,788		1		2,983
Commercial business																			4,849		537		1,508		6,894		1,350,923		1,357,817		198		21,737		—
Small business scored																			2,541		591		2,565		5,697		801,842		807,539		98		3,290		77
Agricultural business, including secured by farmland	131		30		1,359		1,520		414		378,871		380,805		—		1,359		580		2,083		894		3,557		326,700		330,257		—		495		461
One- to four-family residential	826		1,496		3,219		5,541		87		938,989		944,617		995		2,665		12,399		103		2,353		14,855		866,532		881,387		865		3,045		1,089
Consumer:
Consumer secured by one- to four-family	1,324		346		2,233		3,903		113		571,642		575,658		66		2,917
Consumer—home equity revolving lines of credit																			678		267		1,516		2,461		519,157		521,618		—		1,713		320
Consumer—other	558		129		255		942		85		213,311		214,338		31		313		648		140		49		837		139,326		140,163		—		99		—
Total	$	13,084	$	5,496	$	15,839	$	34,419	$	12,945	$	8,699,186	$	8,746,550	$	1,355	$	17,054	$	39,342	$	4,117	$	17,642	$	61,101	$	9,224,643	$	9,285,744	$	8,604	$	40,284	$	3,378

December 31, 2018

30-59 Days
Past Due

60-89 Days
Past Due

90 Days or More
Past Due

Total
Past Due
Purchased Credit-Impaired Current Total Loans Loans 90 Days or More Past Due and Accruing Non-accrual
Commercial real estate:
Owner-occupied $ 785
$ 519
$ 2,223
$ 3,527
$ 8,531
$ 1,418,039
$ 1,430,097
$ —
$ 2,768
Investment properties 91
498
934
1,523
3,462
2,126,074
2,131,059
—
1,320
Multifamily real estate 317
—
—
317
138
368,381
368,836
—
—
Commercial construction —
—
1,427
1,427
—
170,983
172,410
—
1,427
Multifamily construction —
—
—
—
—
184,630
184,630
—
—
One-to-four-family construction 4,781
1,078
919
6,778
137
527,763
534,678
—
919
Land and land development:
Residential 450
—
798
1,248
—
187,260
188,508
—
798
Commercial 34
—
44
78
—
27,200
27,278
—
44
Commercial business 3,982
1,305
1,756
7,043
1,028
1,475,543
1,483,614
1
2,936
Agricultural business, including secured by farmland 343
1,518
1,601
3,462
493
400,918
404,873
—
1,751
One-to four-family residential 5,440
1,790
1,657
8,887
101
964,628
973,616
658
1,544
Consumer:
Consumer secured by one- to four-family 1,136
765
706
2,607
432
565,940
568,979
238
1,201
Consumer—other 911
385
9
1,305
91
214,621
216,017
9
40
Total $ 18,270
$ 7,858
$ 12,074
$ 38,202
$ 14,413
$ 8,631,980
$ 8,684,595
$ 906
$ 14,748



	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		Total Non-accrual ⁽¹⁾
Commercial real estate:
Owner-occupied	$	486	$	1,246	$	2,889	$	4,621	$	8,578	$	1,567,451	$	1,580,650	$	89	$	4,069
Investment properties	—		260		1,883		2,143		6,345		2,300,733		2,309,221		—		1,883
Multifamily real estate	239		91		—		330		7		472,815		473,152		—		85
Commercial construction	1,397		—		98		1,495		—		209,173		210,668		—		98
Multifamily construction	—		—		—		—		—		233,610		233,610		—		—
One-to-four-family construction	3,212		—		1,799		5,011		—		539,297		544,308		332		1,467
Land and land development:
Residential	—		—		340		340		—		154,348		154,688		—		340
Commercial	—		—		—		—		—		26,290		26,290		—		—
Commercial business	2,343		1,583		3,412		7,338		368		1,686,118		1,693,824		401		23,015
Agricultural business, including secured by farmland	1,972		129		584		2,685		393		367,471		370,549		—		661
One-to four-family residential	3,777		1,088		2,876		7,741		74		937,807		945,622		877		3,410
Consumer:
Consumer secured by one- to four-family	1,174		327		1,846		3,347		110		547,503		550,960		398		2,314
Consumer—other	350		161		—		511		63		211,241		211,815		—		159
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 three months ended March 31, 2020 and the year ended December 31, 2019.

The following table provides the activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2020 (in thousands):



	For the Three Months Ended March 31, 2020
	Commercial Real Estate			Multifamily Real Estate			Construction and Land		Commercial Business			Agricultural Business			One- to Four-Family Residential			Consumer			Unallocated		Total
Allowance for credit losses:
Beginning balance	$	30,591		$	4,754		$	22,994	$	23,370		$	4,120		$	4,136		$	8,202		$	2,392	$	100,559
Impact of Adopting Topic 326	(2,864		)	(2,204		)	2,515		3,010			(351		)	7,125			2,973					7,812
Provision/(recapture) for credit losses	1,545			321			8,708		6,447			(1,006		)	539			5,159			—		21,713
Recoveries	167			—			—		205			1,750			148			96			—		2,366
Charge-offs	(100		)	(66		)	—		(1,384		)	—			(64		)	(348		)	—		(1,962		)
Ending balance	$	29,339		$	2,805		$	34,217	$	31,648		$	4,513		$	11,884		$	16,082		$	—	$	130,488

The changes in the allowance for credit losses during the three months ended March 31, 2020 were primarily the result of the $21.7 million provision for credit losses recorded during the current quarter, mostly due to the deterioration in the economy during the current quarter as a result of the COVID-19 pandemic, as well as forecasted additional future economic deterioration based on the reasonable and supportable economic forecast as of March 31, 2020. In addition, the change for the current quarter included a $7.8 million increase related to the adoption of Financial Instruments - Credit Losses (Topic 326).

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 six~~ months ended ~~June 30,~~March 31, 2019 ~~and~~ ~~2018~~ (in thousands):

For the Three Months Ended June 30, 2019

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 $ 27,091
$ 4,020
$ 23,713
$ 18,662
$ 3,596
$ 4,711
$ 7,980
$ 7,535
$ 97,308
Provision for loan losses (117 ) 324
(189 ) 1,482
222
(240 ) 828
(310 ) 2,000
Recoveries 149
—
30
215
35
230
223
—
882
Charge-offs (393 ) —
—
(802 ) (162 ) —
(579 ) —
(1,936 )
Ending balance $ 26,730
$ 4,344
$ 23,554
$ 19,557
$ 3,691
$ 4,701
$ 8,452
$ 7,225
$ 98,254

For the Six Months Ended June 30, 2019

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 $ 27,132
$ 3,818
$ 24,442
$ 19,438
$ 3,778
$ 4,714
$ 7,972
$ 5,191
$ 96,485
Provision for loan losses 252
526
(940 ) 1,273
44
(286 ) 1,097
2,034
4,000
Recoveries 170
—
52
238
35
273
333
—
1,101
Charge-offs (824 ) —
—
(1,392 ) (166 ) —
(950 ) —
(3,332 )
Ending balance $ 26,730
$ 4,344
$ 23,554
$ 19,557
$ 3,691
$ 4,701
$ 8,452
$ 7,225
$ 98,254

June 30, 2019

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 $ 64
$ —
$ —
$ 21
$ 147
$ 58
$ 7
$ —
$ 297
Collectively evaluated for impairment 26,666
4,344
23,554
19,513
3,487
4,643
8,445
7,225
97,877
Purchased credit-impaired loans —
—
—
23
57
—
—
—
80
Total allowance for loan losses $ 26,730
$ 4,344
$ 23,554
$ 19,557
$ 3,691
$ 4,701
$ 8,452
$ 7,225
$ 98,254

Loan balances:
Individually evaluated for impairment $ 4,352
$ —
$ 2,166
$ 550
$ 3,058
$ 3,582
$ 964
$ —
$ 14,672
Collectively evaluated for impairment 3,534,235
402,235
1,077,636
1,597,712
377,333
940,948
788,834
—
8,718,933
Purchased credit-impaired loans 11,714
6
—
526
414
87
198
—
12,945
Total loans $ 3,550,301
$ 402,241
$ 1,079,802
$ 1,598,788
$ 380,805
$ 944,617
$ 789,996
$ —
$ 8,746,550


	For the Three Months Ended June 30, 2018																										For the Three Months Ended March 31, 2019
	Commercial Real Estate			Multifamily Real Estate		Construction and Land			Commercial Business			Agricultural Business			One- to Four-Family Residential			Consumer			Unallocated			Total			Commercial Real Estate			Multifamily Real Estate		Construction and Land			Commercial Business			Agricultural Business			One- to Four-Family Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	23,461		$	2,592	$	28,766		$	19,885		$	2,999		$	3,779		$	5,514		$	5,211		$	92,207		$	27,132		$	3,818	$	24,442		$	19,438		$	3,778		$	4,714		$	7,972		$	5,191	$	96,485
Provision for loan losses	1,035			1,126		(1,743		)	(469		)	451			(203		)	264			1,539			2,000
Provision/(recapture) for loan losses																											369			202		(751		)	(209		)	(178		)	(46		)	269			2,344		2,000
Recoveries	216			—		11			100			41			356			106			—			830			21			—		22			23			—			43			110			—		219
Charge-offs	(299		)	—		—			(375		)	(329		)	—			(159		)	—			(1,162		)	(431		)	—		—			(590		)	(4		)	—			(371		)	—		(1,396		)
Ending balance	$	24,413		$	3,718	$	27,034		$	19,141		$	3,162		$	3,932		$	5,725		$	6,750		$	93,875		$	27,091		$	4,020	$	23,713		$	18,662		$	3,596		$	4,711		$	7,980		$	7,535	$	97,308

	For the Six Months Ended June 30, 2018
	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	$	22,824		$	1,633	$	27,568		$	18,311		$	4,053		$	2,055		$	3,866		$	8,718		$	89,028
Provision for loan losses	320			2,085		(719		)	1,454			(596		)	1,247			2,177			(1,968		)	4,000
Recoveries	1,568			—		185			270			41			646			218			—			2,928
Charge-offs	(299		)	—		—			(894		)	(336		)	(16		)	(536		)	—			(2,081		)
Ending balance	$	24,413		$	3,718	$	27,034		$	19,141		$	3,162		$	3,932		$	5,725		$	6,750		$	93,875


	June 30, 2018																		March 31, 2019
	Commercial Real Estate		Multifamily Real Estate		Construction and Land		Commercial Business		Agricultural Business		One- to Four-Family Residential		Consumer		Unallocated		Total		Commercial Real Estate		Multifamily Real Estate		Construction and Land		Commercial Business		Agricultural Business		One- to Four-Family Residential		Consumer		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment	$	278	$	—	$	—	$	13	$	59	$	108	$	10	$	—	$	468	$	240	$	—	$	—	$	12	$	66	$	59	$	8	$	—	$	385
Collectively evaluated for impairment	24,135		3,718		27,034		19,095		3,043		3,824		5,715		6,750		93,314		26,851		4,020		23,713		18,627		3,472		4,652		7,972		7,535		96,842
Purchased credit-impaired loans	—		—		—		33		60		—		—		—		93		—		—		—		23		58		—		—		—		81
Total allowance for loan losses	$	24,413	$	3,718	$	27,034	$	19,141	$	3,162	$	3,932	$	5,725	$	6,750	$	93,875	$	27,091	$	4,020	$	23,713	$	18,662	$	3,596	$	4,711	$	7,980	$	7,535	$	97,308


Loan balances:
Individually evaluated for impairment	$	8,998	$	—	$	750	$	369	$	3,298	$	4,789	$	205	$	—	$	18,409	$	9,806	$	—	$	2,988	$	514	$	4,110	$	4,116	$	193	$	—	$	21,727
Collectively evaluated for impairment	3,155,917		330,220		976,435		1,310,601		333,015		835,560		706,512		—		7,648,260		3,545,162		387,014		1,093,159		1,523,166		368,781		963,370		776,948		—		8,657,600
Purchased credit impaired loans	12,605		164		3,255		1,454		396		121		68		—		18,063		11,805		128		—		618		431		95		253		—		13,330
Total loans	$	3,177,520	$	330,384	$	980,440	$	1,312,424	$	336,709	$	840,470	$	706,785	$	—	$	7,684,732	$	3,566,773	$	387,142	$	1,096,147	$	1,524,298	$	373,322	$	967,581	$	777,394	$	—	$	8,692,657

Note 6: REAL ESTATE OWNED, NET

The following table presents the changes in REO for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 and ~~2018~~2019 (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2019			2018			2019			2018			2020		2019
Balance, beginning of the period	$	2,611		$	328		$	2,611		$	360		$	814	$	2,611
Additions from loan foreclosures	61			393			61			521			1,588		—
Proceeds from dispositions of REO	(150		)	(314		)	(150		)	(314		)
Gain on sale of REO	(9		)	66			(9		)	66
Valuation adjustments in the period	—			—			—			(160		)
Balance, end of the period	$	2,513		$	473		$	2,513		$	473		$	2,402	$	2,611

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. The Company had ~~$61,000~~$727,000 of foreclosed one- to four-family residential real estate properties held as REO at ~~June 30, 2019~~March 31, 2020 and ~~none~~$48,000 at December 31, ~~2018.~~2019. The recorded investment in one- to four-family residential loans in the process of foreclosure was ~~$1.8 million~~$313,000 at ~~June 30, 2019~~March 31, 2020 compared with ~~$1.2~~$1.5 million at December 31, ~~2018.~~2019.

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

Goodwill and Other Intangible Assets: At ~~June 30, 2019~~March 31, 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 consideration paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination, and is not amortized but is reviewed at least annually for impairment. Banner has identified one reporting unit for purposes of evaluating goodwill for impairment. At ~~December~~March 31, ~~2018,~~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. If adverse economic conditions or the recent decrease in our stock price and market capitalization as a result of the COVID-19 pandemic were to be deemed sustained in the future rather than temporary, it may significantly affect the fair value of our goodwill and 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 ~~represents~~represented the value ascribed to leases assumed in an acquisition in which the lease terms are favorable compared to a market lease at the date of acquisition. 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 LHI~~assets 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 ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 and the year ended December 31, ~~2018~~2019 (in thousands):


	Goodwill		CDI			LHI			Total			Goodwill		CDI			LHI			Total
Balance, December 31, 2017	$	242,659	$	22,378		$	277		$	265,314
Balance, December 31, 2018												$	339,154	$	32,699		$	225		$	372,078
Additions through acquisitions⁽¹⁾	96,495		16,368			—			112,863			33,967		4,610			—			38,577
Amortization	—		(6,047		)	(52		)	(6,099		)	—		(8,151		)	—			(8,151		)
Balance, December 31, 2018	339,154		32,699			225			372,078
Adjustments⁽²⁾												—		—			(225		)	(225		)
Balance, December 31, 2019												373,121		29,158			—			402,279
Amortization	—		(4,104		)	(8		)	(4,112		)	—		(2,001		)	—			(2,001		)
Adjustments⁽²⁾	—		—			(217		)	(217		)
Balance, June 30, 2019	$	339,154	$	28,595		$	—		$	367,749
Balance, March 31, 2020												$	373,121	$	27,157		$	—		$	400,278

⁽¹⁾The additions to ~~goodwill~~Goodwill and CDI in ~~2018~~2019 relate to the acquisition of ~~Skagit.~~AltaPacific.

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

The following table presents the estimated amortization expense with respect to CDI as of March 31, 2020for the periods indicated (in thousands):


	Estimated Amortization		Estimated Amortization
Remainder of 2019	$	3,853
2020	6,888
Remainder of 2020			$	5,730
2021	5,816		6,571
2022	4,651		5,317
2023	3,237		3,814
2024			2,659
Thereafter	4,150		3,066
	$	28,595	$	27,157

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 six~~ months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the Company did not record any impairment charges or recoveries against mortgage servicing rights. The unpaid principal balance for loans which mortgage servicing rights have been recorded totaled ~~$2.39~~$2.53 billion and ~~$2.36~~$2.48 billion at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. Custodial accounts maintained in connection with this servicing totaled ~~$16.0~~$3.4 million and ~~$11.1~~$12.0 million at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~,2019, respectively.

An analysis of our mortgage servicing rights for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 and ~~2018~~2019 is presented below (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
Balance, beginning of the period	$	14,417		$	14,617		$	14,638		$	14,738		$	14,148		$	14,638
Additions—amounts capitalized	685			863			1,357			1,684			1,420			672
Additions—through purchase	22			30			69			45			63			47
Amortization ⁽¹⁾	(1,126		)	(989		)	(2,066		)	(1,946		)	(1,354		)	(940		)
Balance, end of the period ⁽²⁾	$	13,998		$	14,521		$	13,998		$	14,521		$	14,277		$	14,417


⁽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 no0 valuation allowance as of ~~June 30, 2019~~March 31, 2020 and ~~2018.~~2019.

Note 8: DEPOSITS

Deposits consisted of the following at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 (in thousands):


	June 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Non-interest-bearing accounts	$	3,671,995	$	3,657,817	$	4,107,262	$	3,945,000
Interest-bearing checking	1,187,035		1,191,016		1,331,860		1,280,003
Regular savings accounts	1,848,048		1,842,581		1,997,265		1,934,041
Money market accounts	1,511,119		1,465,369		1,846,844		1,769,194
Total interest-bearing transaction and saving accounts	4,546,202		4,498,966		5,175,969		4,983,238
Certificates of deposit:
Certificates of deposit less than or equal to $250,000	891,312		1,143,303		972,667		936,940
Certificates of deposit greater than $250,000	179,458		176,962		193,639		183,463
Total certificates of deposit⁽¹⁾	1,070,770		1,320,265		1,166,306		1,120,403
Total deposits	$	9,288,967	$	9,477,048	$	10,449,537	$	10,048,641
Included in total deposits:
Public fund transaction and savings accounts	$	223,610	$	217,401	$	246,312	$	244,418
Public fund interest-bearing certificates	28,656		30,089		48,232		35,184
Total public deposits	$	252,266	$	247,490	$	294,544	$	279,602
Total brokered deposits	$	138,395	$	377,347	$	250,977	$	202,884


⁽¹⁾	Certificates of deposit include ~~$384,000~~$206,000 and ~~$563,000~~$269,000 of acquisition premiums at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

At ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company had certificates of deposit of ~~$184.5~~$198.6 million and ~~$180.5~~$189.0 million, respectively, that were equal to or greater than $250,000.

Scheduled maturities and weighted average interest rates of ~~certificate accounts~~certificates of deposit at ~~June 30, 2019~~March 31, 2020 are as follows (dollars in thousands):


	June 30, 2019				March 31, 2020
	Amount		Weighted Average Rate		Amount		Weighted Average Rate
Maturing in one year or less	$	766,901	1.14	%	$	887,586	1.24	%
Maturing after one year through two years	196,538		1.65		175,730		1.76
Maturing after two years through three years	81,540		1.87		76,073		1.81
Maturing after three years through four years	12,620		1.45		11,742		1.97
Maturing after four years through five years	10,778		2.24		12,652		1.97
Maturing after five years	2,393		1.14		2,523		1.14
Total certificates of deposit	$	1,070,770	1.31	%	$	1,166,306	1.37	%

Note 9: FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents estimated fair values of the Company’s financial instruments as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, whether or not measured at fair value in the Consolidated Statements of Financial Condition (dollars in thousands):


		June 30, 2019				December 31, 2018					March 31, 2020				December 31, 2019
	Level	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value		Level	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets:
Cash and cash equivalents	1	$	187,043	$	187,043	$	272,196	$	272,196	1	$	295,001	$	295,001	$	307,735	$	307,735
Securities—trading	3	25,741		25,741		25,896		25,896		3	21,040		21,040		25,636		25,636
Securities—available-for-sale	2	1,561,009		1,561,009		1,636,223		1,636,223		2	1,608,224		1,608,224		1,551,557		1,551,557
Securities—held-to-maturity	2	200,054		203,749		230,984		229,301		2	435,119		446,412		233,241		234,952
Securities—held-to-maturity	3	3,168		3,168		3,236		3,236		3	2,825		2,825		2,853		2,853
Loans held for sale	2	170,744		171,385		171,031		171,157		2	182,428		182,766		210,447		210,670
Loans receivable	3	8,746,550		8,804,689		8,684,595		8,629,450		3	9,285,744		9,272,174		9,305,357		9,304,340
FHLB stock	3	34,583		34,583		31,955		31,955		3	20,247		20,247		28,342		28,342
Bank-owned life insurance	1	178,922		178,922		177,467		177,467		1	193,140		193,140		192,088		192,088
Mortgage servicing rights	3	13,998		22,030		14,638		25,813		3	14,277		20,931		14,148		22,611
Equity securities	1	—		—		352		352
Derivatives:
Interest rate swaps	2	13,604		13,604		3,138		3,138		2	42,687		42,687		15,202		15,202
Interest rate lock and forward sales commitments	2	1,545		1,545		471		471		2,3	3,325		3,325		1,108		1,108
Liabilities:
Demand, interest checking and money market accounts	2	6,370,149		6,370,149		6,314,202		6,314,202		2	7,285,966		7,285,966		6,994,197		6,994,197
Regular savings	2	1,848,048		1,848,048		1,842,581		1,842,581		2	1,997,265		1,997,265		1,934,041		1,934,041
Certificates of deposit	2	1,070,770		1,065,200		1,320,265		1,298,238		2	1,166,306		1,173,126		1,120,403		1,117,921
FHLB advances	2	606,000		609,464		540,189		540,189		2	247,000		251,978		450,000		452,720
Other borrowings	2	118,370		118,370		118,995		118,995		2	128,764		128,764		118,474		118,474
Junior subordinated debentures	3	113,621		113,621		114,091		114,091		3	99,795		99,795		119,304		119,304
Derivatives:
Interest rate swaps	2	11,067		11,067		3,138		3,138		2	23,280		23,280		10,966		10,966
Interest rate lock and forward sales commitments	2	1,080		1,080		1,654		1,654		2	4,448		4,448		674		674

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


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


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

•

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

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

Items Measured at Fair Value on a Recurring Basis:

The following tables present financial assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy of the fair value measurements for those assets and liabilities as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 (in thousands):


	June 30, 2019								March 31, 2020
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Securities—trading
Corporate bonds (Trust Preferred Securities)	$	—	$	—	$	25,741	$	25,741	$	—	$	—	$	21,040	$	21,040
	—		—		25,741		25,741
Securities—available-for-sale
U.S. Government and agency obligations	—		125,068		—		125,068		—		81,763		—		81,763
Municipal bonds	—		110,910		—		110,910		—		181,039		—		181,039
Corporate bonds	—		4,561		—		4,561		—		30,986		—		30,986
Mortgage-backed or related securities	—		1,312,433		—		1,312,433		—		1,306,799		—		1,306,799
Asset-backed securities	—		8,037		—		8,037		—		7,637		—		7,637
	—		1,561,009		—		1,561,009		—		1,608,224		—		1,608,224

Loans held for sale	—		149,691		—		149,691		—		169,239		—		169,239

Derivatives
Interest rate swaps	—		13,604		—		13,604		—		42,687		—		42,687
Interest rate lock and forward sales commitments	—		1,545		—		1,545		—		808		2,517		3,325
	$	—	$	1,725,849	$	25,741	$	1,751,590	$	—	$	1,820,958	$	23,557	$	1,844,515

Liabilities:
Junior subordinated debentures, net of unamortized deferred issuance costs	$	—	$	—	$	113,621	$	113,621	$	—	$	—	$	99,795	$	99,795
Derivatives
Interest rate swaps	—		11,067		—		11,067		—		23,280		—		23,280
Interest rate lock and forward sales commitments	—		1,080		—		1,080		—		4,448		—		4,448
	$	—	$	12,147	$	113,621	$	125,768	$	—	$	27,728	$	99,795	$	127,523


	December 31, 2018								December 31, 2019
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Securities—trading
Corporate bonds (Trust Preferred Securities)	$	—	$	—	$	25,896	$	25,896	$	—	$	—	$	25,636	$	25,636
	—		—		25,896		25,896
Securities—available-for-sale
U.S. Government and agency obligations	—		149,112		—		149,112		—		89,598		—		89,598
Municipal bonds	—		117,822		—		117,822		—		107,157		—		107,157
Corporate bonds	—		3,495		—		3,495		—		4,365		—		4,365
Mortgage-backed securities	—		1,343,861		—		1,343,861		—		1,342,311		—		1,342,311
Asset-backed securities	—		21,933		—		21,933		—		8,126		—		8,126
	—		1,636,223		—		1,636,223		—		1,551,557		—		1,551,557

Loans held for sale	—		164,767		—		164,767		—		199,397		—		199,397
Equity securities	—		352		—		352		—		—		—		—

Derivatives
Interest rate swaps	—		3,138		—		3,138		—		15,202		—		15,202
Interest rate lock and forward sales commitments	—		471		—		471		—		317		791		1,108
	$	—	$	1,804,951	$	25,896	$	1,830,847	$	—	$	1,766,473	$	26,427	$	1,792,900

Liabilities:
Junior subordinated debentures, net of unamortized deferred issuance costs	$	—	$	—	$	114,091	$	114,091	$	—	$	—	$	119,304	$	119,304
Derivatives
Interest rate swaps	—		3,138		—		3,138		—		10,966		—		10,966
Interest rate lock and forward sales commitments	—		1,654		—		1,654		—		674		—		674
	$	—	$	4,792	$	114,091	$	118,883	$	—	$	11,640	$	119,304	$	130,944

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

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.

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.

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 validating~~validate 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.

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

~~Off-Balance-Sheet~~Off-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 ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018.~~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's assets and liabilities classified as Level 3 and measured at fair value on a recurring and non-recurring basis at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:


			Weighted Average Rate / Range						Weighted Average Rate / Range
Financial Instruments	Valuation Techniques	Unobservable Inputs	June 30, 2019		December 31, 2018		Valuation Techniques	Unobservable Inputs	March 31, 2020		December 31, 2019
Corporate bonds (TPS securities)	Discounted cash flows	Discount rate	6.32	%	6.81	%	Discounted cash flows	Discount rate	6.70	%	5.91	%
Junior subordinated debentures	Discounted cash flows	Discount rate	6.32	%	6.81	%	Discounted cash flows	Discount rate	6.70	%	5.91	%
Impaired loans	Collateral Valuations	Discount to appraised value	8.50% to 9.00%		0.0% to 8.50%
Loans individually evaluated							Collateral valuations	Discount to appraised value	0.0% to 20.0%		0.0% to 20.0%
REO	Appraisals	Discount to appraised value	32.00	%	69.20	%	Appraisals	Discount to appraised value	52.03	%	58.50	%
Interest rate lock commitments							Pricing model	Pull-through rate	84.19	%	89.61	%

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

Junior subordinated debentures: Similar to the TPS securities discussed above, management believes that the credit risk-adjusted spread utilized in the fair value measurement of the junior subordinated debentures is indicative of the risk premium a willing market participant would require under current market conditions for an issuer with Banner's credit risk profile. Management attributes the change in fair value of the junior subordinated debentures, compared to their par value, primarily to perceived general market adjustments to the risk premiums for these types of liabilities subsequent to their issuance. Future contractions in the risk adjusted spread relative to the spread currently utilized to measure the Company's junior subordinated debentures at fair value as of ~~June 30, 2019,~~March 31, 2020, or the passage of time, will result in negative fair value adjustments. At ~~June 30, 2019,~~March 31, 2020, the discount rate utilized was based on a credit spread of ~~400~~550 basis points and three-month LIBOR of ~~232~~120 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.

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 six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ (in thousands):


	Three Months Ended						Six Months Ended						Three Months Ended
	June 30, 2019						June 30, 2019						March 31, 2020
	Level 3 Fair Value Inputs						Level 3 Fair Value Inputs						Level 3 Fair Value Inputs
	TPS Securities			Borrowings—Junior Subordinated Debentures			TPS Securities			Borrowings— Junior Subordinated Debentures			TPS Securities			Borrowings—Junior Subordinated Debentures
Beginning balance	$	25,838		$	113,917		$	25,896		$	114,091		$	25,636		$	119,304
Total gains or losses recognized
Assets losses	(97		)	—			(155		)	—			(4,596		)	—
Liabilities gains	—			(296		)	—			(470		)	—			(19,509		)
Ending balance at June 30, 2019	$	25,741		$	113,621		$	25,741		$	113,621
Ending balance at March 31, 2020													$	21,040		$	99,795

	Three Months Ended						Six Months Ended						Three Months Ended
	June 30, 2018						June 30, 2018						March 31, 2019
	Level 3 Fair Value Inputs						Level 3 Fair Value Inputs						Level 3 Fair Value Inputs
	TPS Securities			Borrowings—Junior Subordinated Debentures			TPS Securities			Borrowings— Junior Subordinated Debentures			TPS Securities			Borrowings—Junior Subordinated Debentures
Beginning balance	$	25,474		$	112,516		$	22,058		$	98,707		$	25,896		$	114,091
Total gains or losses recognized
Assets gains	66			—			3,482			—			(58		)	—
Liabilities losses	—			258			—			14,067			—			(174		)
Ending balance at June 30, 2018	$	25,540		$	112,774		$	25,540		$	112,774
Ending balance at March 31, 2019													$	25,838		$	113,917

Interest income and dividends from the TPS securities are ~~recorded~~recoded as a component of interest income. Interest expense related to the junior subordinated debentures ~~are~~is measured based on contractual interest rates and reported in interest expense. ~~The change in fair market value on TPS securities has been recorded as a component of non-interest income.~~ The change in fair value of the junior subordinated debentures, which represents changes in instrument specific credit risk, is recorded in other comprehensive ~~income (loss).~~income.

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 ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 (in thousands):


	June 30, 2019								March 31, 2020
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Impaired loans	$	—	$	—	$	1,225	$	1,225
Loans individually evaluated									$	—	$	—	$	19,954	$	19,954
REO	—		—		2,513		2,513		—		—		2,402		2,402

	December 31, 2018								December 31, 2019
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Impaired loans	$	—	$	—	$	2,915	$	2,915	$	—	$	—	$	14,853	$	14,853
REO	—		—		2,611		2,611		—		—		814		814

The following table presents the losses resulting from non-recurring fair value adjustments for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2019			2018			2019			2018			2020		2019
Impaired loans	$	(125	)	$	(329	)	$	(425	)	$	(329	)
Loans individually evaluated													$	—	$	(300	)
REO	—			—			—			(160		)	—		—
Total loss from non-recurring measurements	$	(125	)	$	(329	)	$	(425	)	$	(489	)	$	—	$	(300	)

~~Impaired loans~~Loans individually evaluated: ~~Impaired~~Expected credit losses for loans evaluated individually are measured based on the present value of expected future cash flows discounted at the ~~loan's~~loan’s original effective interest rate or ~~as a practical expedient, at~~when the ~~loan's observable market price or~~Bank determines that foreclosure is probable, the expected credit loss is measured based on the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. 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 considered~~fair 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. Subsequent~~limited to the amount previously charged-off by the subsequent changes in the ~~value of impaired~~expected credit losses for loans evaluated individually are included within the provision for ~~loan~~credit losses in the same manner in which ~~impairment~~the 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 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 ~~June 30, 2019,~~March 31, 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 Montana state jurisdictions.

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

The following table presents the balances of the Company’s tax credit investments and related unfunded commitments at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 (in thousands):


	June 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Tax credit investments	$	21,359	$	17,360	$	33,811	$	29,620
Unfunded commitments—tax credit investments	15,700		12,726		24,409		20,235

The following table presents other information related to the Company's tax credit investments for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
Tax credits and other tax benefits recognized	$	494	$	364	$	988	$	728	$	1,007	$	494
Tax credit amortization expense included in provision for income taxes	405		288		810		575		809		405

Note 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 six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ (in thousands, except shares and per share data):


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
Net income	$	39,700	$	32,424	$	73,046	$	61,214	$	16,882	$	33,346

Basic weighted average shares outstanding	34,831,047		32,250,514		34,940,106		32,323,635		35,463,541		35,050,376
Plus unvested restricted stock	51,312		81,095		88,775		98,652		176,922		121,680
Diluted weighted shares outstanding	34,882,359		32,331,609		35,028,881		32,422,287		35,640,463		35,172,056
Earnings per common share
Basic	$	1.14	$	1.01	$	2.09	$	1.89	$	0.48	$	0.95
Diluted	$	1.14	$	1.00	$	2.09	$	1.89	$	0.47	$	0.95

Note 12: STOCK-BASED COMPENSATION PLANS

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

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

2014 Omnibus Incentive Plan (the 2014 Plan).

2018 Omnibus Incentive Plan (the 2018 Plan).

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

~~2012 Restricted Stock and Incentive Bonus Plan~~

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

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

As of June 30, 2019, the Company had granted 269,863 shares of restricted stock from the 2012 Restricted Stock Plan (as amended and restated), of which 261,966 shares had vested and 7,897 shares remain unvested.

2014 Omnibus Incentive Plan

The 2014 Plan was approved by shareholders on April 22, 2014. The 2014 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, other stock-based awards and other cash awards, and provides for vesting requirements which may include time-based or performance-based conditions. The Company reserved 900,000 shares of its common stock for issuance under the 2014 Plan in connection with the exercise of awards. As of ~~June 30, 2019, 316,281~~March 31, 2020, 295,318 restricted stock shares and ~~384,117~~398,986 restricted stock units have been granted under the 2014 Plan of which ~~281,760~~265,381 restricted stock shares and ~~52,371~~134,848 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 ~~June 30, 2019, no~~March 31, 2020, 0 shares orand 365,063 units have been granted under the 2018 Plan.

The expense associated with all restricted stock grants (including restricted stock shares and restricted stock units) was ~~$2.2~~$1.9 million and ~~$3.5~~$1.2 million for the three ~~and six~~ month periods ended ~~June 30,~~March 31, 2020 and March 31, 2019, ~~and was $1.9 million and $3.3 million for the three and six month periods ended June 30, 2018,~~ respectively. Unrecognized compensation expense for these awards as of ~~June 30, 2019~~March 31, 2020 was ~~$15.9~~$20.5 million and will be amortized over the next 36 months.

Note 13: COMMITMENTS AND CONTINGENCIES

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

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

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


	Contract or Notional Amount				Contract or Notional Amount
	June 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Commitments to extend credit	$	2,934,838	$	2,837,981	$	2,975,390	$	3,051,681
Standby letters of credit and financial guarantees	15,529		17,784		15,619		14,298
Commitments to originate loans	61,037		32,145		75,180		39,676
Risk participation agreement	41,057		24,091		41,004		41,022

Derivatives also included in Note 14:
Commitments to originate loans held for sale	110,648		31,728		191,119		66,196
Commitments to sell loans secured by one- to four-family residential properties	46,726		18,328		81,429		70,895
Commitments to sell securities related to mortgage banking activities	225,703		144,250		229,000		239,320

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 $467,000 of the commitment, with $9.5 million of the commitment remaining to be funded at both March 31, 2020 and 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 ~~reserve~~allowance for credit losses - unfunded loan commitments ~~was $2.6 million~~ at ~~both June 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019 was $11.5 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 Company then attempts to deliver these loans before their rate locks expired. This arrangement generally required delivery of the loans prior to the expiration of the rate lock. Delays in funding the loans required a lock extension. The cost of a lock extension at times was borne by the customer and at times by the Company. These lock extension costs have not had a material impact to ~~our~~the 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 no0 counterparty default losses on forward contracts during the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 or ~~June 30, 2018.~~March 31, 2019. Market risk with respect to forward contracts arises principally from changes in the value of contractual positions due to changes in interest rates. The Company limits its exposure to market risk by monitoring differences between commitments to customers and forward contracts with market investors and securities broker/dealers. In the event the Company has forward delivery contract commitments in excess of available mortgage loans, the transaction is completed by either paying or receiving a fee to or from the investor or broker/dealer equal to the increase or decrease in the market value of the forward contract.

In the normal course of business, the Company and/or its subsidiaries have various legal proceedings and other contingent matters outstanding. These proceedings and the associated legal claims are often contested and the outcome of individual matters is not always predictable. These claims and counter-claims typically arise during the course of collection efforts on problem loans or with respect to action to enforce liens on properties in which the Banks hold a security interest. Based upon the information known to management at this time, the Company and the Banks are not a party to any legal proceedings that management believes would have a material adverse effect on the results of operations or consolidated financial position at ~~June 30, 2019.~~March 31, 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 Banks may have an obligation to repurchase the assets or indemnify the purchaser against any loss. The Banks believe that the potential for material loss under these arrangements is remote. Accordingly, the fair value of such obligations is not material.

NOTE 14: DERIVATIVES AND HEDGING

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

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

Derivatives Designated in Hedge Relationships

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

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

As of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the notional values or contractual amounts and fair values of the Company's derivatives designated in hedge relationships were as follows (in thousands):

Asset Derivatives Liability Derivatives
June 30, 2019 December 31, 2018 June 30, 2019 December 31, 2018

Notional/
Contract Amount

Fair
   Value ⁽¹⁾

Notional/
Contract Amount

Fair
   Value ⁽¹⁾

Notional/
Contract Amount

Fair
   Value ⁽²⁾

Notional/
Contract Amount

Fair
   Value ⁽²⁾
Interest rate swaps $ 3,773
$ 279
$ 3,973
$ 270
$ 3,773
$ 279
$ 3,973
$ 270



	Asset Derivatives								Liability Derivatives
	March 31, 2020				December 31, 2019				March 31, 2020				December 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	$	2,253	$	155	$	3,567	$	220	$	2,253	$	155	$	3,567	$	220


⁽¹⁾	Included in Loans receivable on the ~~Consolidated Statements~~consolidated statements of ~~Financial Condition.~~financial condition.


⁽²⁾	Included in Other liabilities on the ~~Consolidated Statements~~consolidated statements of ~~Financial Condition.~~financial condition.

Derivatives Not Designated in Hedge Relationships

Interest Rate Swaps: Banner Bank uses an interest rate swap program for commercial loan customers, that provides the client with a ~~variable rate~~variable-rate loan and enters into an interest rate swap in which the client ~~locks in a fixed rate and the Bank~~ receives a ~~variable rate~~variable-rate payment in exchange for a fixed-rate payment. The Bank offsets its risk exposure by entering into an offsetting interest rate swap with a dealer counterparty for the same notional amount and length of term as the client interest rate swap providing the dealer counterparty with a fixed-rate payment in exchange for a variable-rate payment. 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 ~~hedge~~hedges the risk of changing interest rates associated with these mortgage loan commitments by entering into forward sales contracts to sell one- to four-family and multifamily mortgage loans or mortgage-backed securities to broker/dealers asat specific prices and dates.

As of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the notional values or contractual amounts and fair values of the Company's derivatives not designated in hedge relationships were as follows (in thousands):


	Asset Derivatives								Liability Derivatives								Asset Derivatives								Liability Derivatives
	June 30, 2019				December 31, 2018				June 30, 2019				December 31, 2018				March 31, 2020				December 31, 2019				March 31, 2020				December 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⁾		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	$	287,416	$	13,325	$	272,374	$	2,868	$	287,416	$	10,788	$	272,374	$	2,868	$	404,492	$	42,532	$	371,957	$	14,982	$	404,492	$	23,125	$	371,957	$	10,746
Mortgage loan commitments	88,810		1,373		20,229		273		42,890		45		17,763		187		170,207		2,517		50,755		791		51,063		2		65,855		190
Forward sales contracts	46,726		172		18,328		198		225,703		1,035		144,250		1,467		81,429		808		70,895		317		229,000		4,446		239,320		484
	$	422,952	$	14,870	$	310,931	$	3,339	$	556,009	$	11,868	$	434,387	$	4,522	$	656,128	$	45,857	$	493,607	$	16,090	$	684,555	$	27,573	$	677,132	$	11,420


⁽¹⁾	Included in Other assets on the Consolidated Statements of Financial Condition, with the exception of certain interest swaps and mortgage loan commitments (with a fair value of ~~$406,000~~$959,000 at ~~June 30, 2019~~March 31, 2020 and ~~$282,000~~$347,000 at December 31, ~~2018)~~2019), which are included in Loans receivable.


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

Gains (losses) recognized in income on derivatives not designated in hedge relationships for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ were as follows (in thousands):


	Location on Consolidated Statements of Operations	Three Months Ended June 30,						Six Months Ended June 30,					Location on Consolidated Statements of Operations	Three Months Ended March 31,
	Location on Consolidated Statements of Operations	2019			2018			2019			2018		Location on Consolidated Statements of Operations	2020			2019
Mortgage loan commitments	Mortgage banking operations	$	1,093		$	96		$	1,100		$	164	Mortgage banking operations	$	1,726		$	7
Forward sales contracts	Mortgage banking operations	(392		)	(73		)	(242		)	268		Mortgage banking operations	(3,068		)	150
		$	701		$	23		$	858		$	432		$	(1,342	)	$	157

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 ~~June 30, 2019~~March 31, 2020 or December 31, ~~2018,~~2019, it could have been required to settle its obligations under the agreements at the termination value. As of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the termination value of derivatives in a net liability position related to these agreements was ~~$13.6~~$42.7 million and ~~$1.3~~$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 ~~$20.7~~$42.3 million and ~~$13.6~~$28.1 million as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

Derivative assets and liabilities are recorded at fair value on the balance 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 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 March 31, 2020 and December 31, 2019, the variation margin adjustment was a negative adjustment of $19.4 million and $4.3 million, respectively.

The following tables present additional information related to the Company's derivative contracts, by type of financial instrument, as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 (in thousands):


	June 30, 2019														March 31, 2020
								Gross Amounts of Financial Instruments Not Offset in the Consolidated Statements of Financial Condition														Gross Amounts of Financial Instruments Not Offset in the Consolidated Statements of Financial Condition
	Gross Amounts Recognized		Amounts offset in the Statement of Financial Condition			Net Amounts in the Statement of Financial Condition		Netting Adjustment Per Applicable Master Netting Agreements		Fair Value of Financial Collateral in the Statement of Financial Condition			Net Amount		Gross Amounts Recognized		Amounts offset in the Statement of Financial Condition			Net Amounts in the Statement of Financial Condition		Netting Adjustment Per Applicable Master Netting Agreements		Fair Value of Financial Collateral in the Statement of Financial Condition			Net Amount
Derivative assets
Interest rate swaps	$	13,621	$	(17	)	$	13,604	$	—	$	—		$	13,604	$	42,687	$	—		$	42,687	$	—	$	—		$	42,687
	$	13,621	$	(17	)	$	13,604	$	—	$	—		$	13,604	$	42,687	$	—		$	42,687	$	—	$	—		$	42,687

Derivative liabilities
Interest rate swaps	$	13,621	$	(2,554	)	$	11,067	$	—	$	(10,919	)	$	148	$	42,687	$	(19,407	)	$	23,280	$	—	$	(23,285	)	$	(5	)
	$	13,621	$	(2,554	)	$	11,067	$	—	$	(10,919	)	$	148	$	42,687	$	(19,407	)	$	23,280	$	—	$	(23,285	)	$	(5	)

	December 31, 2018														December 31, 2019
								Gross Amounts of Financial Instruments Not Offset in the Consolidated Statements of Financial Condition														Gross Amounts of Financial Instruments Not Offset in the Consolidated Statements of Financial Condition
	Gross Amounts Recognized		Amounts offset in the Statement of Financial Condition			Net Amounts in the Statement of Financial Condition		Netting Adjustment Per Applicable Master Netting Agreements		Fair Value of Financial Collateral in the Statement of Financial Condition			Net Amount		Gross Amounts Recognized		Amounts offset in the Statement of Financial Condition			Net Amounts in the Statement of Financial Condition		Netting Adjustment Per Applicable Master Netting Agreements		Fair Value of Financial Collateral in the Statement of Financial Condition			Net Amount
Derivative assets
Interest rate swaps	$	5,038	$	(1,900	)	$	3,138	$	—	$	—		$	3,138	$	15,242	$	(40	)	$	15,202	$	—	$	—		$	15,202
	$	5,038	$	(1,900	)	$	3,138	$	—	$	—		$	3,138	$	15,242	$	(40	)	$	15,202	$	—	$	—		$	15,202

Derivative liabilities
Interest rate swaps	$	5,038	$	(1,900	)	$	3,138	$	—	$	(1,320	)	$	1,818	$	15,242	$	(4,276	)	$	10,966	$	—	$	(15,209	)	$	(4,243	)
	$	5,038	$	(1,900	)	$	3,138	$	—	$	(1,320	)	$	1,818	$	15,242	$	(4,276	)	$	10,966	$	—	$	(15,209	)	$	(4,243	)

NOTE 15: REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregation of Revenue:

Deposit fees and other service charges for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ are summarized as follows (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
Deposit service charges	$	4,829		$	4,528		$	9,416		$	8,848		$	4,832		$	4,586
Debit and credit card interchange fees	9,272			7,872			17,203			15,191			4,884			7,931
Debit and credit card expense	(1,949		)	(1,933		)	(4,398		)	(3,903		)	(1,932		)	(2,449		)
Merchant services income	3,345			2,513			6,201			4,774			3,002			2,856
Merchant services expense	(2,661		)	(1,924		)	(4,981		)	(3,729		)	(2,436		)	(2,319		)
Other service charges	1,210			929			3,223			2,100			1,453			2,013
Total deposit fees and other service charges	$	14,046		$	11,985		$	26,664		$	23,281		$	9,803		$	12,618

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 dollar volume and number of transactions processed. The performance obligation is satisfied and the related fee is earned when each payment is accepted by the processing network.

~~Note~~NOTE 16: LEASES

The Company leases ~~106~~105 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. The Company adopted the requirements of Topic 842 effective January 1, 2019, which required the Company to record a right-of-use lease asset and a lease liability for leases with an initial term of more than 12 months for leases that existed as of January 1, 2019. The periods prior to the date of adoption are accounted for under Lease Topic 840; therefore, the following disclosures include only the periods for which Topic 842 was effective.

Lease Position as of ~~June 30,~~March 31, 2020 and December 31, 2019

The table below presents the lease right-of-use assets and lease liabilities recorded on the balance sheet at ~~June 30,~~March 31, 2020 and December 31, 2019 (dollars in thousands):


	Classification on the Balance Sheet	June 30, 2019		Classification on the Balance Sheet	March 31, 2020		December 31, 2019
Assets
Operating right-of-use lease assets	Other assets	$	54,515	Other assets	$	59,620	$	61,766

Liabilities
Operating lease liabilities	Accrued expenses and other liabilities	$	57,638	Accrued expenses and other liabilities	$	63,757	$	65,818



~~Weighted-average remaining lease term~~
~~Operating leases~~	~~5.8 years~~

~~Weighted-average discount rate~~
~~Operating leases~~	~~4.24~~	%



Weighted-average remaining lease term
Operating leases	6.0 years		6.2 years

Weighted-average discount rate
Operating leases	3.6	%	3.7	%

Lease Costs

The table below presents certain information related to the lease costs for operating leases for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 (in thousands):


	Three Months Ended June 30,			Six Months Ended June 30,			Three Months Ended March 31,
	2019			2019			2020			2019
Operating lease cost ⁽¹⁾	$	3,858		$	7,832		$	4,164		$	3,975
Short-term lease cost ⁽¹⁾	99			222			21			121
Variable lease cost ⁽¹⁾	567			1,128			811			561
Less sublease income ⁽¹⁾	(231		)	(468		)	(254		)	(237		)
Total lease cost	$	4,293		$	8,714		$	4,742		$	4,420

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

Supplemental Cash Flow Information

Operating cash flows paid for operating lease amounts included in the measurement of lease liabilities were ~~$3.8~~$4.1 million and ~~$7.7~~$3.9 million for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and March 31, 2019, respectively. During the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and March 31, 2019, the Company recorded ~~$2.9~~$1.6 million and ~~$64.1~~$61.0 million, respectively, of right-of-use lease assets in exchange for operating lease liabilities.

Undiscounted Cash Flows

The table below reconciles the undiscounted cash flows for each of the ~~first~~next five years beginning with ~~2019~~2020 and the total of the remaining years to the operating lease liabilities recorded on the Consolidated Statements of Financial Position (in thousands):


	Operating Leases			Operating Leases
Remainder of 2019	$	7,514
2020	14,330
Remainder of 2020				$	12,180
2021	12,611			15,370
2022	9,083			11,764
2023	6,011			8,675
2024				6,756
Thereafter	15,659			16,489
Total minimum lease payments	65,208			71,234
Less: amount of lease payments representing interest	(7,570		)	(7,477		)
Lease obligations	$	57,638		$	63,757

As of ~~June 30,~~March 31, 2020 and December 31, 2019, the Company had ~~$2.8 million of~~0 undiscounted lease payments under an operating lease that had not yet commenced. ~~This lease will commence later in 2019 with a lease term of 20 years.~~

~~NOTE 17: SUBSEQUENT EVENT~~

On ~~July 24, 2019~~, the Company announced the execution of a definitive agreement to purchase AltaPacific, the holding company for AltaPacific Bank, a California state-chartered commercial bank. Subject to the terms and conditions of the merger agreement, the transaction provides for the AltaPacific shareholders to receive consideration of 0.2712 shares of Banner common stock in exchange for each share of AltaPacific common stock, subject to potential adjustment as provided in the merger agreement. Based on the closing price of $54.19 per share of Banner common stock on July 23, 2019, the merger consideration would have an aggregate value of approximately $87.4 million. Completion of the transaction is subject to customary conditions, including approval of the merger agreement by AltaPacific shareholders, regulatory approvals and other customary closing conditions and is expected to close late in the fourth quarter of 2019. Upon closing of the transaction AltaPacific will be merged into Banner and AltaPacific Bank will be merged into Banner Bank. At June 30, 2019, AltaPacific had assets of $436 million, loans of $339 million, and deposits of $307 million with five banking locations in Southern California and one banking location in Northern California.

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 ~~June 30, 2019, its~~March 31, 2020, it had 173 branch offices and 1718 loan production offices located in Washington, Oregon, California, ~~Utah~~Idaho and ~~Idaho.~~Utah. Islanders Bank is a Washington-chartered commercial bank and conducts its business from three locations in San Juan County, Washington. Banner Corporation is subject to regulation by the Board of Governors of the Federal Reserve System (the Federal Reserve Board). Banner Bank and Islanders Bank (the Banks) are subject to regulation by the Washington State Department of Financial Institutions, Division of Banks and the Federal Deposit Insurance Corporation (the FDIC). As of ~~June 30, 2019,~~March 31, 2020, we had total consolidated assets of ~~$11.85~~$12.78 billion, total loans of ~~$8.75~~$9.29 billion, total deposits of ~~$9.29~~$10.45 billion and total shareholders’ equity of ~~$1.52~~$1.60 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 secondary loan markets, engaging in mortgage banking operations largely through the origination and sale of one- to four-family and multifamily residential loans. Lending activities include commercial business and commercial real estate loans, agriculture business loans, construction and land development loans, one- to four-family and multifamily residential loans and consumer loans.

Banner Corporation's successful execution of its super community bank model and strategic initiatives have delivered solid core operating results and profitability. Highlights of this success have included solid asset quality, client acquisition and account growth, which have resulted in increased ~~non-interest-bearing~~core deposit balances and strong revenue generation ~~from core operations~~ while maintaining the Company's moderate risk profile.

Our financial results for the quarter ended March 31, 2020 reflects 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 Banner operates. In response to COVID-19, Banner is offering payment and financial relief programs for borrowers impacted by the economic decline. These programs include loan payment deferrals for up to 90 days, waived late fees, and, on a more limited basis, waived interest or allowed interest only loan payments and we have suspended foreclosure proceedings. As of April 30, 2020, Banner had modified 2,582 loans with a balance of $837.0 million under these programs. 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. 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 loans to clients in its service area through this program. As of April 30, 2020, Banner had received approval from the SBA on approximately 7,000 PPP loan applications with a balance of over $1.1 billion. Banner is also planning to assist our clients with accessing other borrowing options as they become available, including the Main Street Lending Program and other government sponsored lending programs, as appropriate.

Banner has taken various steps to ensure the safety of customers and staff by limiting branch activities to appointment only and use of our drive-up facilities, and by encouraging the use of our digital and electronic banking channels, all the while adjusting for evolving State and Federal

stay-at-home guidelines. To protect the well-being of staff and customers, Banner implemented measures to allow employees to work from home to the extent practicable. To facilitate this approach, Banner purchased additional computer equipment to 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 $239,000 of related costs during the quarter ended March 31, 2020.

For the quarter ended ~~June 30, 2019,~~March 31, 2020, our net income was ~~$39.7~~$16.9 million, or ~~$1.14~~$0.47 per diluted share, compared to net income of ~~$32.4~~$33.3 million, or ~~$1.00~~$0.95 per diluted share, for the quarter ended ~~June 30, 2018~~.March 31, 2019. The current quarter was positively impacted by ~~the completion of the integration of Skagit operations,~~ growth in residential ~~and multifamily~~ mortgage loan production, which was offset by an increase in the provision for credit losses, a decrease in deposit fees and ~~growth~~other service charges, the recognition of a net loss for fair value adjustments as a result of changes in ~~average interest-earning assets.~~the valuation of financial instruments carried at fair value, as well as an increase in non-interest expense. Compared to the same quarter a year ago, we had a ~~significant increase~~decrease in net interest income, due to an increase in the provision for credit losses for the current quarter primarily reflecting expected lifetime credit losses due to the ~~growth~~COVID-19 pandemic based upon the financial conditions and economic outlook that existed as of ~~the Company, both organically~~March 31, 2020. The probability for further decline in economic conditions, including higher unemployment rates and ~~through the acquisition of Skagit,~~lower gross domestic product, has increased since quarter end and should they materialize, an ~~improved yield on total interest-earning assets.~~additional provision for expected credit losses will be necessary that may materially adversely affect our earnings.

Our operating results depend primarily on our net interest income, which is the difference between interest income on interest-earning assets, consisting primarily of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of customer deposits, FHLB advances, other borrowings and junior subordinated debentures. Net interest income is primarily a function of our interest rate spread, which is the difference between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, as well as a function of the average balances of interest-earning assets, interest-bearing liabilities and non-interest-bearing funding sources including non-interest-bearing deposits. Our net interest income increased ~~$11.6~~$3.2 million, or ~~11%~~3%, to ~~$116.7~~$119.3 million for the quarter ended ~~June 30, 2019,~~March 31, 2020, compared to ~~$105.1~~$116.1 million for the same quarter one year earlier. This increase in net interest income ~~primarily reflects the~~is a result of growth in total loans ~~receivable.~~receivable and core deposits.

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

Our total revenues (net interest income before the provision for loan losses plus total non-interest income) for the ~~second~~first quarter of ~~2019~~2020 increased ~~$13.1~~$4.2 million, or ~~10%~~3%, to ~~$139.4~~$138.4 million, compared to ~~$126.3~~$134.2 million for the same period a year earlier, largely as a result of increased net 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 ~~$22.7~~$19.2 million for the quarter ended ~~June 30, 2019,~~March 31, 2020, compared to ~~$21.2~~$18.1 million for the quarter ended ~~June 30, 2018.~~March 31, 2019.

Our non-interest expense increased in the ~~second~~first quarter of ~~2019~~2020 compared to a year earlier largely as a result of the higher salary and employee benefits due to additional staffing related to the operations acquired from the acquisition of ~~Skagit~~AltaPacific on November 1, ~~2018~~2019 and normal salary and wage ~~adjustments.~~adjustments, as well as the $1.7 million provision for credit losses - unfunded loan commitments recorded in the first quarter of 2020. Non-interest expense was ~~$86.7~~$95.2 million for the quarter ended ~~June 30, 2019,~~March 31, 2020, compared to ~~$82.6~~$90.0 million for the same quarter a year earlier.

~~Although our~~We recorded a $21.7 million provision for credit ~~quality metrics continue~~losses - loans in the quarter ended March 31, 2020, compared to ~~reflect our moderate risk profile, we recorded~~ a $2.0 million provision for loan losses infor the quarter ended ~~June 30,~~March 31, 2019 due to the ~~same amount as was recorded in~~COVID-19 pandemic. The provision for the ~~first quarter a year ago. The~~ current quarter ~~provision for loan~~primarily reflects expected lifetime credit losses ~~was primarily a result~~due to the COVID-19 pandemic based upon the financial conditions and economic outlook that existed as of ~~the origination of new loans, the renewal of acquired loans out of the discounted acquired loan portfolio and net charge-offs.~~March 31, 2020. The allowance for ~~loan~~credit losses - loans at ~~June 30, 2019~~March 31, 2020 was ~~$98.3~~$130.5 million, representing ~~534%~~299% of non-performing ~~loans. Non-performing~~ loans ~~were $18.4~~compared 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 $11.5 million at ~~June 30, 2019,~~March 31, 2020 compared to ~~$15.7~~$2.7 million at December 31, ~~2018~~2019. Non-performing loans were $43.7 million at March 31, 2020, compared to $39.6 million at December 31, 2019 and ~~$15.3~~$19.3 million a year earlier. (See Note 5, Loans Receivable and the Allowance for ~~Loan~~Credit Losses, as well as “Asset Quality” below in this Form 10-Q.)

Banner and Banner Bank exceeded $10 billion in assets as of December 31, 2018 and, therefore, Banner Bank and Islanders Bank became subject to the Durbin Amendment interchange fee limitation effective July 1, 2019. Based on current debit card transaction volumes, Banner anticipates that the Durbin Amendment will have a $15 million annualized negative impact on pre-tax revenues commencing in July 2019.

*Non-GAAP financial measures: Net income, revenues and other earnings and expense information excluding fair value adjustments, ~~OTTI losses or recoveries,~~ gains or losses on the sale of securities, acquisition-related expenses, COVID-19 expenses, amortization of CDI, REO gain (loss) and state/municipal business and use taxes are non-GAAP financial measures. Management has presented these and other non-GAAP financial measures in this discussion and analysis because it believes that they provide useful and comparative information to assess trends in our core operations and in understanding our capital position. However, these non-GAAP financial measures are supplemental and are not a substitute for any analysis based on GAAP. Where applicable, we have also presented comparable earnings information using GAAP financial measures. For a reconciliation of these non-GAAP financial measures, see the tables below. Because not all companies use the same calculations, our presentation may not be comparable to other similarly titled measures as calculated by other companies. See “Comparison of Results of Operations for the Three ~~and Six~~ Months Ended ~~June 30, 2019~~March 31, 2020 and ~~2018~~”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 June 30,					For the Six Months Ended June 30,					For the Three Months Ended March 31,
	2019		2018			2019		2018			2020			2019
REVENUE FROM CORE OPERATIONS:
ADJUSTED REVENUE
Net interest income	$	116,695	$	105,063		$	232,799	$	204,436		$	119,258		$	116,104
Total non-interest income	22,676		21,217			40,801		42,579			19,165			18,125
Total GAAP revenue	139,371		126,280			273,600		247,015			138,423			134,229
Exclude net (gain) loss on sale of securities	28		(44		)	27		(48		)
Exclude net gain on sale of securities											(78		)	(1		)
Exclude change in valuation of financial instruments carried at fair value	114		(224		)	103		(3,532		)	4,596			(11		)
Revenue from core operations (non-GAAP)	$	139,513	$	126,012		$	273,730	$	243,435
Adjusted Revenue (non-GAAP)											$	142,941		$	134,217

For the Three Months Ended
June 30, For the Six Months Ended
June 30,
2019 2018 2019 2018
EARNINGS FROM CORE OPERATIONS:
Net income (GAAP) $ 39,700
$ 32,424
$ 73,046
$ 61,214
Exclude net loss (gain) on sale of securities 28
(44 ) 27
(48 )
Exclude change in valuation of financial instruments carried at fair value 114
(224 ) 103
(3,532 )
Exclude acquisition-related expenses 301
—
2,449
—
Exclude related tax (benefit) expense (106 ) 64
(619 ) 859
Total earnings from core operations (non-GAAP) $ 40,037
$ 32,220
$ 75,006
$ 58,493
Diluted earnings per share (GAAP) $ 1.14
$ 1.00
$ 2.09
$ 1.89
Diluted core earnings per share (non-GAAP) $ 1.15
$ 1.00
$ 2.14
$ 1.80



	For the Three Months Ended March 31,
	2020			2019
ADJUSTED EARNINGS
Net income (GAAP)	$	16,882		$	33,346
Exclude net gain on sale of securities	(78		)	(1		)
Exclude change in valuation of financial instruments carried at fair value	4,596			(11		)
Exclude acquisition-related expenses	1,142			2,148
Exclude COVID-19 expenses	239			—
Exclude related tax benefit	(1,405		)	(513		)
Total adjusted earnings (non-GAAP)	$	21,376		$	34,969
Diluted earnings per share (GAAP)	$	0.47		$	0.95
Diluted adjusted earnings per share (non-GAAP)	$	0.60		$	0.99


	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
ADJUSTED EFFICIENCY RATIO
Non-interest expense (GAAP)	$	86,716		$	82,637		$	176,730		$	164,343		$	95,185		$	90,014
Exclude acquisition-related expenses	(301		)	—			(2,449		)	—			(1,142		)	(2,148		)
Exclude COVID-19 expenses													(239		)	—
Exclude CDI amortization	(2,053		)	(1,382		)	(4,105		)	(2,764		)	(2,001		)	(2,052		)
Exclude state/municipal tax expense	(1,007		)	(816		)	(1,952		)	(1,529		)	(984		)	(945		)
Exclude REO (loss) gain	(260		)	319			(137		)	(121		)
Exclude REO loss													(100		)	123
Adjusted non-interest expense (non-GAAP)	$	83,095		$	80,758		$	168,087		$	159,929		$	90,719		$	84,992

Net interest income (GAAP)	$	116,695		$	105,063		$	232,799		$	204,436		$	119,258		$	116,104
Non-interest income (GAAP)	22,676			21,217			40,801			42,579			19,165			18,125
Total revenue	139,371			126,280			273,600			247,015			138,423			134,229
Exclude net loss (gain) on sale of securities	28			(44		)	27			(48		)
Exclude net gain on sale of securities													(78		)	(1		)
Exclude net change in valuation of financial instruments carried at fair value	114			(224		)	103			(3,532		)	4,596			(11		)
Revenue from core operations (non-GAAP)	$	139,513		$	126,012		$	273,730		$	243,435
Adjusted revenue (non-GAAP)													$	142,941		$	134,217

Efficiency ratio (GAAP)	62.22		%	65.44		%	64.59		%	66.53		%	68.76		%	67.06		%
Adjusted efficiency ratio (non-GAAP)	59.56		%	64.09		%	61.41		%	65.70		%	63.47		%	63.32		%

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


TANGIBLE COMMON SHAREHOLDERS' EQUITY TO TANGIBLE ASSETS
TANGIBLE COMMON SHAREHOLDERS' EQUITY TO TANGIBLE ASSETS	June 30, 2019			December 31, 2018			June 30, 2018			March 31, 2020			December 31, 2019			March 31, 2019
Shareholders’ equity (GAAP)	$	1,521,055		$	1,478,595		$	1,253,010		$	1,601,700		$	1,594,034		$	1,511,191
Exclude goodwill and other intangible assets, net	367,749			372,078			262,517			400,278			402,279			369,801
Tangible common shareholders’ equity (non-GAAP)	$	1,153,306		$	1,106,517		$	990,493		$	1,201,422		$	1,191,755		$	1,141,390
Total assets (GAAP)	$	11,847,374		$	11,871,317		$	10,379,194		$	12,780,950		$	12,604,031		$	11,740,285
Exclude goodwill and other intangible assets, net	367,749			372,078			262,517			400,278			402,279			369,801
Total tangible assets (non-GAAP)	$	11,479,625		$	11,499,239		$	10,116,677		$	12,380,672		$	12,201,752		$	11,370,484
Common shareholders’ equity to total assets (GAAP)	12.84		%	12.46		%	12.07		%	12.53		%	12.65		%	12.87		%
Tangible common shareholders’ equity to tangible assets (non-GAAP)	10.05		%	9.62		%	9.79		%	9.70		%	9.77		%	10.04		%

TANGIBLE COMMON SHAREHOLDERS' EQUITY PER SHARE
Tangible common shareholders' equity (non-GAAP)	$	1,153,306		$	1,106,517		$	990,493		$	1,201,422		$	1,191,755		$	1,141,390
Common shares outstanding at end of period	34,573,643			35,182,772			32,405,696			35,102,459			35,751,576			35,152,746
Common shareholders' equity (book value) per share (GAAP)	$	43.99		$	42.03		$	38.67		$	45.63		$	44.59		$	42.99
Tangible common shareholders' equity (tangible book value) per share (non-GAAP)	$	33.36		$	31.45		$	30.57		$	34.23		$	33.33		$	32.47

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

Summary of Critical Accounting Policies and Estimates

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

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our financial statements. These policies relate to (i) the methodology for the recognition of interest income, (ii) determination of the provision and allowance for ~~loan~~credit 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, ~~2018~~2019 except for the change related to the adoption of Financial Instruments - Credit Losses (Topic 326) as described below and in ~~Note~~Notes 1 and 2 to the Consolidated Financial Statements. For additional information concerning critical accounting policies, see the Selected Notes to the Consolidated Financial Statements and the following:

Interest Income: (Notes 4 and 5) Interest on loans and securities is accrued as earned unless management doubts the collectability of the asset or the unpaid interest. Interest accruals on loans are generally discontinued when loans become 90 days past due for payment of interest and the loans are then placed on nonaccrual status. All previously accrued but uncollected interest is deducted from interest income upon transfer to nonaccrual status. For any future payments collected, interest income is recognized only upon management’s assessment that there is a strong likelihood that the full amount of a loan will be repaid or recovered. Management's assessment of the likelihood of full repayment involves judgment including determining the fair value of the underlying collateral which can be impacted by the economic environment. A loan may be put on nonaccrual status sooner than this policy would dictate if, in management’s judgment, the amounts owed, principal or interest, may be uncollectable. While less common, similar interest reversal and nonaccrual treatment is applied to investment securities if their ultimate collectability becomes questionable. Loans modified due to the COVID-19 pandemic are considered current if they are less than 30 days past due on the contractual payments at the time the loan modification program was put in place and therefore continue to accrue interest unless the interest is being waived.

Provision and Allowance for ~~Loan Losses:~~Credit Losses - Loans: (Note 5) The methodology for determining the allowance for ~~loan~~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 ~~loan~~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 ~~loan~~credit losses reflects the amount required to maintain the allowance ~~loan~~ for credit losses at an appropriate level based upon management’s evaluation of the adequacy of ~~general~~collective and ~~specific~~individual loss reserves. Among the material estimates required to establish the allowance for loan losses are: overall economic conditions; value of collateral; strength of guarantors; loss exposure at default; the amount and timing of future cash flows on impaired loans; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. We haveThe Company has established systematic methodologies for the determination of the adequacy of ~~our~~the Company’s allowance for ~~loan~~credit losses. The methodologies are set forth in a formal policy and take into consideration the need for ~~an overall general~~a 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 our~~loans that do not share risk characteristics. The Company increases its allowance for ~~loan~~credit losses by charging provisions for ~~probable loan~~credit losses ~~against our income.~~

~~The allowance for loan losses is maintained at a level sufficient to provide for probable losses based~~ on ~~evaluating known and inherent risks in the loan portfolio and upon our continuing analysis~~its 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 ~~loan~~credit 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 ~~loan~~credit losses ~~may be necessary due~~using relevant information, from internal and external sources, relating to ~~economic, operating, regulatory~~past events, current conditions, and ~~other conditions beyond our control.~~reasonable and supportable forecasts. The ~~adequacy~~allowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of ~~general and specific reserves is~~the loan based on ~~our continuing evaluation~~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 ~~pertinent~~loan portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic conditions.

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 individual~~Company’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 terms~~quality 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 are not included in the collective evaluation. Factors involved in determining ~~impairment~~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 less selling costs and the current status of the economy. Impaired~~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 ~~as a practical expedient, at~~when the ~~loan’s observable market price or~~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, ~~is collateral dependent. We continue to assess~~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 ~~these impaired loans and update our appraisals on these loans on an annual basis. To~~ the ~~extent~~loan. If the ~~property values continue~~fair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to ~~decline, there could~~the amortized cost basis will be ~~additional losses on these impaired loans, which may be material.~~limited to the amount previously charged-off. Subsequent changes in the ~~value of impaired~~expected credit losses for loans evaluated individually are included within the provision for ~~loan~~credit losses in the same manner in which ~~impairment~~the 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 homogeneous~~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 ~~collectively evaluated~~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 ~~impairment. Loans that are collectively evaluated~~a transaction of similar risk. The allowance for ~~impairment include residential real estate and consumer~~credit 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 assessing~~investment, except when the ~~appropriateness~~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 ~~loan~~credit losses ~~consists~~is 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 allowance and an unallocated allowance. Losses~~outlined, among other criteria, that short-term modifications made on ~~specific loans~~a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are ~~provided for when~~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 ~~losses~~CARES Act if they 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~~less than 30 days past due on ~~analysis of potential exposures existing in our loan portfolio including evaluation of historical trends, current market conditions and other relevant factors identified by us~~their contractual payments at the time ~~the financial statements are prepared. The formula allowance~~a 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.

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.

implemented.

Fair Value Accounting and Measurement: (Note 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 required, our estimate of their fair value.

Loans Acquired ~~Loans:~~in Business Combinations: (Notes 3 and 5) ~~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 losses is not recorded~~ at the acquisition date. Establishing the fair value of acquired loans involves a significant amount of judgment, including determining the credit ~~discount. The credit~~ discount is based upon historical data adjusted for current economic conditions and other factors. If any of these assumptions are inaccurate actual credit losses could vary significantly from the credit discount used to calculate the fair value of the acquired loans. Acquired loans are evaluated upon acquisition and classified as either purchased ~~credit-impaired~~credit deteriorated or purchased ~~non-credit-impaired.~~non-credit-deteriorated. Purchased ~~credit-impaired (PCI)~~credit deteriorated (PCD) loans ~~reflect~~have experienced more than insignificant credit deterioration since ~~origination such that it~~origination. For PCD loans, an allowance for credit losses is ~~probable~~determined at the acquisition ~~that~~date using the ~~Company will be unable~~same 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 ~~accounting~~loan’s fair value grossed up for ~~PCI loans~~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 ~~periodically updated for changes in cash flow expectations, and reflected in~~a 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 attributable~~loan. Subsequent changes to the allowance for credit ~~deterioration~~losses are ~~recognized by recording~~recorded through a provision for ~~loan~~credit losses.

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

Goodwill: (Note 7) Goodwill represents the excess of the purchase consideration paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination and is not amortized but is reviewed annually, or more frequently as current circumstances and conditions warrant, for impairment. An assessment of qualitative factors is completed to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The qualitative assessment involves judgment by management on determining whether there have been any triggering events that have occurred which would indicate potential impairment. If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed. The quantitative goodwill impairment test is used to identify the existence of impairment and the amount of impairment loss and compares the reporting unit's estimated fair values, including goodwill, to its carrying amount. If the fair value exceeds the carry amount then goodwill is not considered impaired. If the carrying amount exceeds its fair value, an impairment loss would be recognized equal to the amount of excess, limited to the amount of total goodwill allocated to the reporting unit. The impairment loss would be recognized as a charge to earnings.

Other Intangible Assets: (Note 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 years. The determination of the estimated useful life of the core deposit intangible involves judgment by management. The actual life of the core deposit intangible could vary significantly from the estimated life. These assets are reviewed at least annually for events or circumstances that could impact their recoverability. These events could include loss of the underlying core deposits, increased competition or adverse changes in the economy. To the extent other identifiable intangible assets are deemed unrecoverable, impairment losses are recorded in other non-interest expense to reduce the carrying amount of the assets.

Mortgage Servicing Rights: (Note 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 6) Property acquired by foreclosure or deed in lieu of foreclosure is recorded at the estimated fair value of the property, less expected selling costs. Development and improvement costs relating to the property may be capitalized, while other holding costs are expensed. The carrying value of the property is periodically evaluated by management. Property values are influenced by current economic and market conditions, changes in economic conditions could result in a decline in property value. To the extent that property values decline, allowances are established to reduce the carrying value to net realizable value. Gains or losses at the time the property is sold are charged or credited to operations in the period in which they are realized. The amounts the Banks will ultimately recover from real estate held for sale may differ substantially from the carrying value of the assets because of market factors beyond the Banks’ control or because of changes in the Banks’ strategies for recovering the investment.

Income Taxes and Deferred Taxes: (Note 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 Montana. Income taxes are accounted for using the asset and liability method. Under this method a deferred tax asset or liability is determined based on the enacted tax rates which are expected to be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’s income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. We assess the appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial

precedent and other pertinent information and maintain tax accruals consistent with our evaluation. Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations by the tax authorities and newly enacted statutory, judicial and regulatory guidance that could impact the relative merits of tax positions. These changes, when they occur, impact accrued taxes and can materially affect our operating results. A valuation allowance is required to be recognized if it is ~~“more~~more 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.

Comparison of Financial Condition at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019

General: Total assets ~~decreased $23.9~~increased $176.9 million, to ~~$11.85~~$12.78 billion at ~~June 30, 2019,~~March 31, 2020, from ~~$11.87~~$12.60 billion at December 31, ~~2018.~~2019. The ~~decrease~~increase was largely the result of ~~decreases~~increases in ~~the securities portfolio. The proceeds from these decreases were used~~both held to ~~fund loan growth~~maturity and ~~reduce our brokered certificates of deposit.~~ available for sale securities.

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. ~~Portfolio~~Total loans ~~increased $62.0~~receivable decreased $19.6 million during the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, primarily reflecting ~~increased multifamily~~decreased one-to-four family, construction, land and ~~commercial business~~land development, agricultural and consumer loan balances ~~offset by~~due to seasonal and other market factors, ~~resulting in decreased agricultural, one-to-four family,~~partially offset by increased commercial real estate, multifamily real estate, and ~~one-to-four-family construction~~commercial business loan balances. At ~~June 30, 2019,~~March 31, 2020, our ~~loan portfolio~~loans receivable totaled ~~$8.75~~$9.29 billion compared to ~~$8.68~~$9.31 billion at December 31, ~~2018~~2019 and ~~$7.68~~$8.69 billion at ~~June 30, 2018.~~March 31, 2019. The growth over the year ago period includes the impact of the acquisition of ~~Skagit~~AltaPacific during the fourth quarter of ~~2018~~2019 which included ~~$631.7~~$332.4 million of portfolio loans.

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


							Percentage Change										Percentage Change
	Jun 30, 2019		Dec 31, 2018		Jun 30, 2018		Prior Yr End		Prior Year		Mar 31, 2020		Dec 31, 2019		Mar 31, 2019		Prior Year End		Prior Year
Commercial real estate:
Owner occupied	$	1,433,995	$	1,430,097	$	1,256,730	0.3	%	14.1	%
Owner-occupied											$	1,024,089	$	980,021	$	869,634	4.5	%	17.8	%
Investment properties	2,116,306		2,131,059		1,920,790		(0.7	)	10.2		2,007,537		2,024,988		1,838,328		(0.9	)	9.2
Small balance CRE											591,783		613,484		619,646		(3.5	)	(4.5	)
Multifamily real estate	402,241		368,836		330,384		9.1		21.7		400,206		388,388		300,684		3.0		33.1
Construction, land and land development:
Commercial construction	172,931		172,410		166,089		0.3		4.1		205,476		210,668		181,888		(2.5	)	13.0
Multifamily construction	189,160		184,630		147,576		2.5		28.2		250,410		233,610		183,203		7.2		36.7
One- to four-family construction	503,061		534,678		480,591		(5.9	)	4.7		534,956		544,308		514,410		(1.7	)	4.0
Land and land development:
Residential	187,180		188,508		163,335		(0.7	)	14.6
Commercial	27,470		27,278		22,849		0.7		20.2
Land and land development											232,506		245,530		271,038		(5.3	)	(14.2	)
Commercial business:
Commercial business	1,598,788		1,483,614		1,312,424		7.8		21.8		1,357,817		1,364,650		1,199,930		(0.5	)	13.2
Agricultural business including secured by farmland	380,805		404,873		336,709		(5.9	)	13.1
One- to four-family real estate	944,617		973,616		840,470		(3.0	)	12.4
Small business scored											807,539		772,657		738,665		4.5		9.3
Agricultural business, including secured by farmland											330,257		337,271		339,472		(2.1	)	(2.7	)
One- to four-family residential											881,387		925,531		942,477		(4.8	)	(6.5	)
Consumer:
Consumer secured by one- to four-family real estate	575,658		568,979		536,007		1.2		7.4
Consumer-other	214,338		216,017		170,778		(0.8	)	25.5
Consumer—home equity revolving lines of credit											521,618		519,336		532,600		0.4		(2.1	)
Consumer—other											140,163		144,915		160,682		(3.3	)	(12.8	)
Total loans receivable	$	8,746,550	$	8,684,595	$	7,684,732	0.7	%	13.8	%	$	9,285,744	$	9,305,357	$	8,692,657	(0.2	)%	6.8	%

Our commercial real estate loans for ~~both~~ owner-occupied, ~~and~~ investment properties, and small balance CRE totaled ~~$3.55~~$3.62 billion, or ~~41%~~39% of our loan portfolio at ~~June 30, 2019.~~March 31, 2020. In addition, multifamily residential real estate loans totaled ~~$402.2~~$400.2 million and comprised 5%4% of our loan portfolio. Commercial real estate loans ~~decreased~~increased by ~~$10.9~~$4.9 million during the first ~~six~~three months of ~~2019~~2020 while multifamily real estate loans increased by ~~$33.4~~$11.8 million. Although multifamily real estate loans remain a modest portion of our held-for-investment loan portfolio, originations and sales of multifamily real estate loans held for sale 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 ~~$1.08~~$1.22 billion, or ~~12%~~13% of our loan portfolio at ~~June 30, 2019.~~March 31, 2020. Residential construction ~~loan~~ balances decreased ~~as the velocity of one-~~$9.4 million, or 2%, to ~~four-family home sales~~$535.0 million at March 31, 2020 compared to $544.3 million at December 31, 2019 and increased ~~during the quarter. We continue~~$20.5 million, or 4%, compared to ~~see demand for residential construction loans in many markets where we operate.~~$514.4 million at March 31, 2019. We also originate residential construction loans for owner occupants, although construction balances for these loans are modest as the loans convert to one- to four-family real estate loans upon completion of the homes and are often sold in the secondary market. Residential construction ~~land and land development balances decreased $32.9 million, or 5%, to $690.2 million at June 30, 2019 compared to $723.2 million at December 31, 2018 and increased~~

~~$46.3 million, or 7%, compared to $643.9 million at June 30, 2018. Residential construction, residential land and land development~~ loans represented approximately 8%6% of our total loan portfolio at ~~June 30, 2019.~~March 31, 2020.

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 ~~$185.4~~$183.7 million at ~~June 30, 2019.~~March 31, 2020. Our commercial and agricultural business loans increased ~~$91.1~~$21.0 million to ~~$1.98~~$2.50 billion at ~~June 30, 2019,~~March 31, 2020, compared to ~~$1.89~~$2.47 billion at December 31, ~~2018,~~2019, and increased ~~$330.5~~$217.5 million, or ~~20%~~10%, compared to ~~$1.65~~$2.28 billion at ~~June 30, 2018.~~March 31, 2019. The increase in the current quarter primarily reflects growth in commercial

business loans as commercial line of credit usage increased as a result of COVID-19 offset partially by seasonal decreases in agricultural loan balances. Commercial and agricultural business loans represented approximately ~~23%~~27% of our portfolio at ~~June 30, 2019.~~March 31, 2020.

Our one- to four-family real estate loan originations have been relatively strong, as interest rates have declined during the ~~first half of 2019.~~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-family real estate loans that we originate are sold in secondary markets with net gains on sales and loan servicing fees reflected in our revenues from mortgage banking. At ~~June 30, 2019,~~March 31, 2020, our outstanding balance of one- to four-family real estate loans retained in our portfolio decreased ~~$29.0~~$44.1 million, to ~~$944.6~~$881.4 million, compared to ~~$973.6~~$925.5 million at December 31, ~~2018,~~2019, and ~~increased $104.1~~decreased $61.1 million, or ~~12%~~6%, compared to ~~$840.5~~$942.5 million at ~~June 30, 2018.~~March 31, 2019. One- to four-family real estate loans represented ~~11%~~10% of our loan portfolio at ~~June 30, 2019.~~March 31, 2020.

Our consumer loan activity is primarily directed at meeting demand from our existing deposit customers. At ~~June 30, 2019,~~March 31, 2020, consumer loans, including ~~consumer loans secured by one- to four-family residences, increased $5.0~~home equity revolving lines of credit, decreased $2.5 million to ~~$790.0~~$661.8 million, compared to ~~$785.0~~$664.3 million at December 31, ~~2018,~~2019, and ~~increased $83.2~~decreased $31.5 million compared to ~~$706.8~~$693.3 million at ~~June 30, 2018.~~March 31, 2019.

The following table shows loan origination (excluding loans held for sale) activity for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and March 31, 2019 ~~and June 30, 2018~~ (in thousands):


	Three Months Ended				Six months ended				Three Months Ended
	Jun 30, 2019		Jun 30, 2018		Jun 30, 2019		Jun 30, 2018		Mar 31, 2020		Mar 31, 2019
Commercial real estate	$	81,361	$	155,781	$	175,557	$	221,506	$	76,359	$	92,183
Multifamily real estate	21,651		6,090		29,267		6,825		10,171		3,733
Construction and land	368,224		361,427		601,718		692,350		369,613		231,744
Commercial business	241,134		195,909		367,046		328,896		199,873		137,142
Agricultural business	20,702		41,480		52,761		68,054		31,261		30,483
One-to four- family residential	26,210		26,416		57,999		44,351		31,041		31,186
Consumer	119,970		114,289		183,743		184,822		67,357		62,370
Total loan originations (excluding loans held for sale)	$	879,252	$	901,392	$	1,468,091	$	1,546,804	$	785,675	$	588,841

The origination table above includes loan participations and loan purchases. There were ~~$777,000 of~~no loan purchases during the ~~six~~three months ended ~~June 30,~~March 31, 2020 or March 31, 2019. ~~We purchased $2.3 million of loans during the six months ended June 30, 2018, all of which were one-to four-family loans.~~

Loans held for sale decreased ~~slightly~~ to ~~$170.7~~$182.4 million at ~~June 30, 2019,~~March 31, 2020, compared to ~~$171.0~~$210.4 million at December 31, ~~2018,~~2019, as ~~the~~ sales of ~~multifamily~~ held-for-sale loans exceeded the origination of ~~multifamily~~ held-for-sale loans during the ~~six~~three months ended ~~June 30,~~March 31, 2020. Loans held for sale were $45.9 million at March 31, 2019. Origination of loans held for sale ~~decreased~~increased to ~~$397.2~~$296.7 million for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 compared to ~~$415.8~~$134.7 million for the same period last year. The volume of one- to four-family residential mortgage loans sold was $204.0 million during the three months ended March 31, 2020, compared to $107.2 million in the same period a year ago. During the three months ended March 31, 2020, we sold $119.7 million in multifamily loans compared to $149.9 million for the same period last year. Loans held for sale ~~were $78.8 million~~ at ~~June 30, 2018. Loans held for sale at June 30, 2019~~March 31, 2020 included ~~$108.2~~$105.4 million of multifamily loans and ~~$62.5~~$77.1 million of one- to four-family loans compared to ~~$51.3~~$3.3 million of multifamily loans and ~~$27.6~~$42.5 million of one- to four-family loans at ~~June 30, 2018.~~

March 31, 2019.

The following table presents loans by geographic concentration at ~~June 30, 2019,~~March 31, 2020, December 31, ~~2018~~2019 and ~~June 30, 2018~~March 31, 2019 (dollars in thousands):


	Jun 30, 2019				Dec 31, 2018		Jun 30, 2018		Percentage Change				Mar 31, 2020				Dec 31, 2019		Mar 31, 2019		Percentage Change
	Amount		Percentage		Amount		Amount		Prior Yr End		Prior Yr Qtr		Amount		Percentage		Amount		Amount		Prior Year End		Prior Year Qtr
Washington	$	4,293,854	49.1	%	$	4,324,588	$	3,550,945	(0.7	)%	20.9	%	$	4,350,273	46.7	%	$	4,364,764	$	4,329,759	(0.3	)%	0.5	%
California													2,140,895		23.1		2,129,789		1,581,654		0.5		35.4
Oregon	1,628,102		18.6		1,636,152		1,601,939		(0.5	)	1.6		1,664,652		17.9		1,650,704		1,639,427		0.8		1.5
California	1,659,326		19.0		1,596,604		1,477,293		3.9		12.3
Idaho	548,189		6.3		521,026		500,201		5.2		9.6		524,663		5.7		530,016		524,705		(1.0	)	—
Utah	62,944		0.7		57,318		76,414		9.8		(17.6	)	52,747		0.6		60,958		59,940		(13.5	)	(12.0	)
Other	554,135		6.3		548,907		477,940		1.0		15.9		552,514		6.0		569,126		557,172		(2.9	)	(0.8	)
Total loans receivable	$	8,746,550	100.0	%	$	8,684,595	$	7,684,732	0.7	%	13.8	%	$	9,285,744	100.0	%	$	9,305,357	$	8,692,657	(0.2	)%	6.8	%

Investment Securities: Our total investment in securities ~~decreased $106.4~~increased $253.8 million to ~~$1.79~~$2.07 billion at ~~June 30, 2019~~March 31, 2020 from December 31, ~~2018.~~2019. Securities purchases made towards the end of the quarter as balance sheet liquidity increased and market spreads widened exceeded sales,

paydowns and maturities during the ~~six-month period exceeded purchases.~~three-month period. 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 ~~2.6~~2.9 years at ~~June 30, 2019.~~March 31, 2020. Net fair value adjustments to the portfolio of securities held for trading, which were included in net income, were a decrease of ~~$103,000~~$4.6 million in the ~~six~~three months ended ~~June 30, 2019.~~March 31, 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 ~~$37.4~~$42.2 million for the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, which was included net of the associated tax expense of ~~$9.0~~$10.1 million as a component of other comprehensive income, and largely occurred as a result of ~~increased~~decreased market interest rates. (See Note 4 of the Selected Notes to the Consolidated Financial Statements in this Form 10-Q.)

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

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


							Percentage Change										Percentage Change
	Jun 30, 2019		Dec 31, 2018		Jun 30, 2018		Prior Yr End		Prior Year Qtr		Mar 31, 2020		Dec 31, 2019		Mar 31, 2019		Prior Year End		Prior Year Quarter
Non-interest-bearing	$	3,671,995	$	3,657,817	$	3,346,777	0.4	%	9.7	%	$	4,107,262	$	3,945,000	$	3,676,984	4.1	%	11.7	%
Interest-bearing checking	1,187,035		1,191,016		1,012,519		(0.3	)	17.2		1,331,860		1,280,003		1,174,169		4.1		13.4
Regular savings accounts	1,848,048		1,842,581		1,635,080		0.3		13.0		1,997,265		1,934,041		1,865,852		3.3		7.0
Money market accounts	1,511,119		1,465,369		1,384,684		3.1		9.1		1,846,844		1,769,194		1,495,948		4.4		23.5
Interest-bearing transaction & savings accounts	4,546,202		4,498,966		4,032,283		1.0		12.7		5,175,969		4,983,238		4,535,969		3.9		14.1
Total core deposits	8,218,197		8,156,783		7,379,060		0.8		11.4		9,283,231		8,928,238		8,212,953		4.0		13.0
Interest-bearing certificates	1,070,770		1,320,265		1,148,607		(18.9	)	(6.8	)	1,166,306		1,120,403		1,163,276		4.1		0.3
Total deposits	$	9,288,967	$	9,477,048	$	8,527,667	(2.0	)%	8.9	%	$	10,449,537	$	10,048,641	$	9,376,229	4.0	%	11.4	%

Total deposits were ~~$9.29~~$10.45 billion at ~~June 30, 2019,~~March 31, 2020, compared to ~~$9.48~~$10.05 billion at December 31, ~~2018~~2019 and ~~$8.53~~$9.38 billion a year ago. The ~~$188.1~~$400.9 million ~~decrease~~increase in total deposits compared to December 31, ~~2018~~2019 primarily reflects a ~~$239.0~~$355.0 million ~~decrease in brokered deposits from December 31, 2018, partially offset by an~~ increase in core deposits and a $48.1 million increase in brokered deposits. The year-over-year increase in deposits 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 ~~slightly~~4.1% to ~~$3.67~~$4.11 billion at ~~June 30, 2019,~~March 31, 2020, compared to ~~$3.66~~$3.95 billion at December 31, ~~2018,~~2019, and increased ~~10%~~12% compared to ~~$3.35~~$3.68 billion a year ago. Interest-bearing transaction and savings accounts increased 1%4% to ~~$4.55~~$5.18 billion at ~~June 30, 2019,~~March 31, 2020, compared to ~~$4.50~~$4.98 billion at December 31, ~~2018,~~2019, and increased ~~13%~~14% compared to ~~$4.03~~$4.54 billion a year ago. Certificates of deposit ~~decreased 19%~~increased 4% to ~~$1.07~~$1.17 billion at ~~June 30, 2019,~~March 31, 2020, compared to ~~$1.32~~$1.12 billion at December 31, ~~2018~~2019 and ~~decreased 7%~~increased slightly compared to ~~$1.15~~$1.16 billion a year ago. Brokered deposits totaled ~~$138.4~~$251.0 million at ~~June 30, 2019,~~March 31, 2020, compared to ~~$377.3~~$202.9 million at December 31, ~~2018~~2019 and ~~$280.1~~$239.4 million a year ago. ~~Brokered deposits decreased during the six months ended~~

~~June 30, 2019 in connection with investment securities maturities and sales.~~ Core deposits represented ~~88%~~89% of total deposits at ~~June 30, 2019, compared to 86% of total deposits at~~both March 31, 2020 and December 31, ~~2018.~~2019.

The following table presents deposits by geographic concentration at ~~June 30, 2019,~~March 31, 2020, December 31, ~~2018~~2019 and ~~June 30, 2018~~March 31, 2019 (dollars in thousands):


	Jun 30, 2019				Dec 31, 2018		Jun 30, 2018		Percentage Change				Mar 31, 2020				Dec 31, 2019		Mar 31, 2019		Percentage Change
	Amount		Percentage		Amount		Amount		Prior Yr End		Prior Yr Qtr		Amount		Percentage		Amount		Amount		Prior Year End		Prior Year Quarter
Washington(1)	$	5,503,280	59.2	%	$	5,674,328	$	4,735,357	(3.0	)%	16.2	%	$	6,037,864	57.8	%	$	5,861,809	$	5,604,567	3.0	%	7.7	%
Oregon	1,919,051		20.7		1,891,145		1,886,435		1.5		1.7		2,093,738		20.0		2,006,163		1,906,132		4.4		9.8
California	1,399,137		15.1		1,434,033		1,444,413		(2.4	)	(3.1	)	1,828,064		17.5		1,698,289		1,402,213		7.6		30.4
Idaho	467,499		5.0		477,542		461,462		(2.1	)	1.3		489,871		4.7		482,380		463,317		1.6		5.7
Total deposits	$	9,288,967	100.0	%	$	9,477,048	$	8,527,667	(2.0	)%	8.9	%	$	10,449,537	100.0	%	$	10,048,641	$	9,376,229	4.0	%	11.4	%


⁽¹⁾	Includes brokered deposits.

Borrowings: FHLB advances ~~increased~~decreased to ~~$606.0~~$247.0 million at ~~June 30, 2019~~March 31, 2020 from ~~$540.2~~$450.0 million at December 31, ~~2018~~2019 as ~~FHLB advances~~core deposits were used ~~as an alternative funding source instead of brokered deposits.~~to reduce borrowings and fund growth in the securities portfolio. Other borrowings, consisting of retail repurchase agreements primarily related to customer cash management accounts, ~~decreased $625,000,~~increased $10.3 million, or 1%9%, to ~~$118.4~~$128.8 million at ~~June 30, 2019,~~March 31, 2020, compared to ~~$119.0~~$118.5 million at December 31, ~~2018.~~2019. No additional junior subordinated debentures were issued or matured during the ~~six~~three months ended ~~June 30, 2019;~~March 31, 2020; however, the estimated fair value of these instruments decreased by ~~$470,000,~~$19.5 million, reflecting ~~a decrease in LIBOR.~~wider market spreads. Junior subordinated debentures totaled ~~$113.6~~$99.8 million at ~~June 30, 2019~~March 31, 2020 compared to ~~$114.1~~$119.3 million at December 31, ~~2018.~~2019.

Shareholders' Equity: Total shareholders' equity increased ~~$42.5~~$7.7 million to ~~$1.52~~$1.60 billion at ~~June 30, 2019~~March 31, 2020 compared to ~~$1.48~~$1.59 billion at December 31, ~~2018.~~2019. The increase in shareholders' equity primarily reflects ~~$73.0~~$16.9 million of year-to-date net income and a ~~$28.8~~$46.8 million increase in accumulated other comprehensive income primarily representing the decrease in the fair value of junior subordinated debentures and the increase in unrealized gains on securities available-for-sale, net of tax. These increases were partially offset by the accrual of ~~$28.8~~$14.6 million of cash dividends to common shareholders and the repurchase of ~~$32.1 million~~624,780 shares of common ~~stock.~~stock at a total cost of $31.8 million. The share repurchases during the current quarter 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 an $11.2 million reduction to shareholders' equity as of the adoption date. During the ~~six~~three months ended ~~June 30, 2019, 26,934~~March 31, 2020, 20,282 shares of restricted stock were forfeited and ~~33,229~~21,592 shares were surrendered by employees to satisfy tax withholding obligations upon the vesting of restricted stock grants. (See Part II, Item 2, "Unregistered Sales of Equity Securities and Use of Proceeds" in this Form 10-Q.) Tangible common shareholders' equity, which excludes goodwill and other intangible assets, increased ~~$46.8~~$9.7 million to ~~$1.15~~$1.20 billion, or ~~10.05%~~9.70% of tangible assets at ~~June 30, 2019,~~March 31, 2020, compared to ~~$1.11~~$1.19 billion, or ~~9.62%~~9.77% of tangible assets at December 31, ~~2018.~~2019.

Comparison of Results of Operations for the Three ~~and Six~~ Months Ended ~~June 30, 2019~~March 31, 2020 and ~~2018~~2019

For the quarter ended ~~June 30, 2019~~March 31, 2020, our net income was ~~$39.7~~$16.9 million, or ~~$1.14~~$0.47 per diluted share, compared to $~~32.4~~33.3 million, or $~~1.00~~0.95 per diluted share, for the quarter ended ~~June 30, 2018~~March 31, 2019. For the six months ended June 30, 2019 our net income was $73.0 million, or $2.09 per diluted share, compared to net income of $61.2 million, or $1.89 per diluted share for the same period a year earlier. Our net income for the quarter ended March 31, 2020 included a $21.7 million provision for credit losses and ~~six months ended June 30, 2019 was positively impacted~~a $5.9 million increase in non-interest expense, including a $1.7 million provision for credit losses - unfunded loan commitments and $1.1 million of acquisition-related expenses, partially offset by growth in interest-earning assets, due to the acquisition of ~~Skagit~~AltaPacific as well as organic ~~growth, partially offset by increased non-interest expense including $301,000 and $2.4 million of acquisition-related expenses, respectively.~~growth.

Growth in average interest-earning assets ~~coupled with a slightly higher yield on interest-earning assets, partially offset by increased~~and decreased funding ~~liabilities,~~costs produced increased net interest income. This resulted in increases in revenues in the ~~quarter and six~~three months ended ~~June 30, 2019~~March 31, 2020 compared to the same ~~periods~~period a year earlier. The results for the ~~current~~ quarter ended March 31, 2020 included the operations acquired in the ~~Skagit~~AltaPacific acquisition which closed in the fourth quarter of ~~2018. Credit costs remained low, while non-interest~~2019. Banner recorded a $21.7 million provision for credit losses, compared to $2.0 million in the 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 March 31, 2020. Non-interest expenses increased in ~~both periods~~the three months ended March 31, 2020 compared to the same period a year ago, reflecting acquisition-related expenses as well as additional expenses associated with the ongoing operations acquired in the ~~Skagit~~AltaPacific acquisition. Net income for the current year ~~was strong, representing further progress on our strategic priorities and initiatives, and produced an annualized return on average assets~~reflects the impact of ~~1.36% for~~ the ~~current quarter compared to 1.25% for~~COVID-19 pandemic resulting in a substantial reduction in business activity or the ~~six months ended June 30, 2019.~~closing of businesses in all the western states Banner operates.

Our adjusted earnings, ~~from core operations,~~ which excludes net gains or losses on sales of securities, changes in the valuation of financial instruments carried at fair value, acquisition-related expenses, COVID-19 expenses and related tax expenses or benefits, were ~~$40.0~~$21.4 million, or ~~$1.15~~$0.60 per diluted share, for the quarter ended ~~June 30, 2019,~~March 31, 2020, compared to ~~$32.2~~$35.0 million, or ~~$1.00~~$0.99 per diluted share, for the quarter ended June 30, 2018. For the six months ended June 30, 2019, our earnings from core operations were $75.0 million, or $2.14 per diluted share, compared with $58.5 million, or $1.80 per diluted share, for the same period a year earlier.March 31, 2019.

Net Interest Income. Net interest income increased by ~~$11.6~~$3.2 million, or ~~11%~~3%, to ~~$116.7~~$119.3 million for the quarter ended ~~June 30, 2019,~~March 31, 2020, compared to ~~$105.1~~$116.1 million for the same quarter one year earlier, as an increase of ~~$1.09 billion~~$670.1 million in the average balance of interest-earning assets produced ~~strong~~ growth for this key source of revenue. The growth in the average balance of interest-earning assets reflects organic growth as well as the ~~Skagit~~AltaPacific acquisition. Net interest margin was enhanced by the amortization of acquisition accounting discounts on purchased loans which is accreted into loan interest income. The net interest margin of ~~4.38%~~4.19% for the quarter ended ~~June 30, 2019~~March 31, 2020 was enhanced by ~~seven~~ten basis points as a result of acquisition accounting adjustments. This compares to a net interest margin of ~~4.39%~~4.37% for the quarter ended ~~June 30, 2018,~~March 31, 2019, which included ~~six~~seven basis points from acquisition accounting adjustments. The ~~slight~~ decrease in net interest margin compared to a year earlier primarily

reflects ~~higher~~lower yields on average ~~interest-bearing liabilities balances and costs,~~interest-earning assets, partially offset by ~~increases~~decreases in ~~average loan and security balances and yields.~~

~~Net interest income before provision for loan losses for~~ the ~~six months ended June 30, 2019 increased by $28.4 million, or 14%, to $232.8 million compared to $204.4 million for the same period one year earlier, as a result~~cost of ~~a $1.30 billion increase in~~funding liabilities. The lower yields on average interest-earning assets ~~and,~~compared to a ~~lessor extent,~~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 LIBOR rates. Beginning in August 2019, the Federal Reserve reduced the targeted Fed Funds Rate by 25 basis points three times in 2019 and 150 basis points during the current quarter to a ~~slightly enhanced net~~range of 0.00% to 0.25% at March 31, 2020. The 150 basis-point decrease in the Fed Funds target rate did not occur until late in the quarter in March 2020, and the full effect of the lower interest ~~margin.~~rate environment had not yet been realized at quarter end. The ~~net interest margin increased to 4.38% for~~decreases in the ~~six months ended June 30, 2019~~costs of funding liabilities compared to ~~4.37% for~~a year earlier was also largely due to the ~~same period~~impact of decreases to the targeted Fed Funds Rate, however, the effect of recent changes in the ~~prior year. The net interest margin included seven basis points~~targeted Fed Funds rate on the cost of ~~accretion acquisition accounting adjustments~~funding liabilities typically lags the effect on the yield earned on interest-earning assets because rates on many deposit accounts are decision-based, not tied to a specific market-based index, and are based on competition for ~~both the six months ended June 30, 2019 and June 30, 2018.~~deposits while most interest-earning assets adjust earlier because they are tied to a specific market-based index.

Interest Income. Interest income for the quarter ended ~~June 30, 2019~~March 31, 2020 was ~~$130.8~~$131.7 million, compared to ~~$112.4~~$130.0 million for the same quarter in the prior year, an increase of ~~$18.4~~$1.7 million, or ~~16%~~1%. The increase in interest income occurred as a result of increases in ~~both~~ the average balances ~~and yields~~of loans, partially offset by the decrease in the yield on ~~both loans and~~interest-earning assets, as well as a slight decrease in the average balance of investment

securities. The average balance of interest-earning assets was ~~$10.69~~$11.44 billion for the quarter ended ~~June 30, 2019,~~March 31, 2020, compared to ~~$9.59~~$10.77 billion for the same period a year earlier. The average yield on interest-earning assets was ~~4.91%~~4.63% for quarter ended ~~June 30, 2019,~~March 31, 2020, compared to ~~4.70%~~4.89% for the same quarter one year earlier. The ~~increase~~decrease in yield between periods reflects ~~an 18~~a 28 basis point ~~increase~~decrease in the average yield on loans ~~as well as~~and a 1537 basis point ~~increase~~decrease in the average yield on investment securities. Average loans receivable for the quarter ended ~~June 30, 2019~~March 31, 2020 increased ~~$1.01 billion,~~$691.0 million, or ~~13%~~8%, to ~~$8.80~~$9.51 billion, compared to ~~$7.78~~$8.82 billion for the same quarter in the prior year. Interest income on loans increased by ~~$17.2~~$3.5 million, or ~~17%~~3%, to ~~$117.0~~$118.9 million for the current quarter from ~~$99.9~~$115.5 million for the quarter ended ~~June 30, 2018,~~March 31, 2019, reflecting the impact of the previously mentioned increases in average ~~loan balances and yields.~~loans receivable. The ~~increase~~decrease in average loan yields reflects the impact of ~~higher~~lower index interest rates over the last year. The acquisition accounting loan discount accretion and the related balance sheet impact added ~~nine~~12 basis points to the current quarter loan yield, compared to ~~eight~~nine basis points for the same quarter one year earlier.

The combined average balance of mortgage-backed securities, other investment securities, daily interest-bearing deposits and FHLB stock (total investment securities or combined portfolio) ~~increased~~decreased to ~~$1.89~~$1.93 billion for the quarter ended ~~June 30, 2019~~March 31, 2020 (excluding the effect of fair value adjustments), compared to ~~$1.81~~$1.95 billion for the quarter ended ~~June 30, 2018;~~March 31, 2019; and the interest and dividend income from those investments ~~increased~~decreased by ~~$1.3~~$1.8 million compared to the same quarter in the prior year. The average yield on the combined portfolio ~~increased~~decreased to ~~2.94%~~2.65% for the quarter ended ~~June 30, 2019,~~March 31, 2020, from ~~2.79%~~3.02% for the same quarter one year ~~earlier, due to higher yields on the securities purchased during 2019 compared to the existing portfolio.~~

Interest income for the six months ended June 30, 2019 was $260.8 million, compared to $217.2 million for the same period in the prior year, an increase of $43.6 million, or 20%. As with quarterly results, the year-to-date results reflect a $1.30 billion, or 14%, increase in the average balance of interest-earning assets as well as a 25 basis point increase in the average yield on interest-earning assets.earlier.

Interest Expense. Interest expense for the quarter ended ~~June 30, 2019~~March 31, 2020 was ~~$14.1~~$12.4 million, compared to ~~$7.4~~$13.9 million for the same quarter in the prior year. The interest expense ~~increase~~decrease between periods reflects a ~~$1.01 billion,~~ten basis point decrease in the average cost of all funding liabilities, partially offset by a $667.7 million, or ~~11%~~7%, increase in the average balance of funding ~~liabilities and a 23 basis point increase in the average cost of all funding~~ liabilities.

Interest expense for the six months ended June 30, 2019 was $28.0 million, compared to $12.8 million for the same period in the prior year. As with the quarterly results, the six month results reflect a 1.22 billion or 14% increase in the average balance of funding liabilities and a 27 basis point increase in the average cost of all funding liabilities.

Deposit interest expense increased ~~$4.8 million,~~$107,000, or ~~112%~~1%, to ~~$9.0~~$8.8 million for the quarter ended ~~June 30, 2019,~~March 31, 2020, compared to ~~$4.3~~$8.6 million for the same quarter in the prior year, primarily as a result of ~~increases~~an increase in ~~both~~ the average ~~balance and~~balances, partially offset by a slight decrease in the cost of ~~interest-bearing~~ deposits. Average deposit balances increased to ~~$9.29~~$10.14 billion for the quarter ended ~~June 30, 2019,~~March 31, 2020, from ~~$8.51~~$9.36 billion for the quarter ended ~~June 30, 2018,~~March 31, 2019, while the average rate paid on total deposits ~~increased~~decreased to ~~0.39%~~0.35% in the ~~second~~first quarter of ~~2019~~2020 from ~~0.20%~~0.37% for the quarter ended ~~June 30, 2018,~~March 31, 2019, primarily reflecting decreases in the costs of interest-bearing checking, money market and savings accounts, partially offset by increases in the cost of certificates of deposits ~~as well as increases in the costs of money market~~ and ~~savings accounts partially offset by the increase~~ in non-interest-bearing deposit balances. The cost of interest-bearing deposits ~~increased~~decreased by 31four basis points to ~~0.64%~~0.57% for the quarter ended ~~June 30, 2019~~March 31, 2020 compared to ~~0.33%~~0.61% in the same quarter a year earlier.

Deposit interest expense increased $10.0 million or 132%, to $17.7 million for the six months ended June 30, 2019, compared to $7.6 million for the same period in the prior year. Average deposit balances increased to $9.32 billion for the six months ended June 30, 2019, from $8.42 billion for the six months ended June 30, 2018, while the average rate paid on deposits increased to 0.38% in the six months ended June 30, 2019 from 0.18% in the six months ended June 30, 2018. The ~~cost of interest-bearing deposits increased by 33 basis points to 0.63% for the six months ended June 30, 2019 compared to 0.30% in the same period a year earlier.~~

~~The increase~~decrease in the cost of interest-bearing deposits between the periods ~~is largely due to the increase in short-term rates following the changes~~was driven by market and competitive factors as a result of decreases in the target Fed Funds ~~target rate~~Rate over the last year.

Average total borrowings were ~~$777.4~~$678.1 million for the quarter ended ~~June 30, 2019,~~March 31, 2020, compared to ~~$541.7~~$792.5 million for the same quarter one year earlier and the average rate paid on total borrowings for the quarter ended ~~June 30, 2019 increased~~March 31, 2020 decreased to ~~2.64%~~2.17% from ~~2.29%~~2.69% for the same quarter one year earlier. The ~~increase~~decrease in the average total borrowings balance for the quarter ended ~~June 30, 2019~~March 31, 2020 from the same period a year earlier was primarily due to a ~~$218.2~~$128.8 million ~~increase~~decrease in average FHLB advances, coupled with a 6059 basis point ~~increase~~decrease in the cost of FHLB advances. Interest expense on total borrowings ~~increased~~decreased to ~~$5.1~~$3.7 million for the quarter ended ~~June 30, 2019~~March 31, 2020 from ~~$3.1~~$5.2 million for the quarter ended ~~June 30, 2018.~~March 31, 2019.

Interest expense on total borrowings increased to $10.4 million for the six months ended June 30, 2019 from $5.2 million for the six months ended June 30, 2018. Average borrowings were $784.9 million for the six months ended June 30, 2019, compared to $469.7 million for the same period a year earlier, while the average rate paid on borrowings for the six months ended June 30, 2019 increased to 2.66% from 2.23% for the same period in 2018. The increase in the average balance was due to a $298.0 million increase in average FHLB advances, coupled with a $17.2 million increase in average other borrowings, reflecting our funding a larger portion of the balance sheet with 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):


	Three Months Ended June 30, 2019						Three Months Ended June 30, 2018						Three Months Ended March 31, 2020						Three Months Ended March 31, 2019
	Average Balance		Interest and Dividends		Yield/ Cost ⁽³⁾		Average Balance		Interest and Dividends		Yield/ Cost ⁽³⁾		Average Balance		Interest and Dividends		Yield/ Cost ⁽³⁾		Average Balance		Interest and Dividends		Yield/ Cost ⁽³⁾
Interest-earning assets:
Held for sale loans	$	47,663	$	567	4.77	%	$	112,664	$	1,295	4.61	%	$	152,627	$	1,520	4.01	%	$	98,005	$	1,121	4.64	%
Mortgage loans	6,800,802		89,682		5.29		6,050,560		76,908		5.10		7,310,115		92,454		5.09		6,833,933		88,602		5.26
Commercial/agricultural loans	1,769,603		23,924		5.42		1,479,148		19,381		5.26		1,884,006		22,357		4.77		1,703,503		22,812		5.43
Consumer and other loans	179,693		2,834		6.33		141,401		2,269		6.44		163,098		2,595		6.40		183,451		2,920		6.46
Total loans ⁽¹⁾	8,797,761		117,007		5.33		7,783,773		99,853		5.15		9,509,846		118,926		5.03		8,818,892		115,455		5.31
Mortgage-backed securities	1,354,048		9,794		2.90		1,261,809		8,899		2.83		1,354,585		9,137		2.71		1,392,118		10,507		3.06
Other securities	448,721		3,310		2.96		473,953		3,331		2.82		458,116		2,887		2.53		484,134		3,479		2.91
Interest-bearing deposits with banks	53,955		340		2.53		51,886		211		1.63		92,659		393		1.71		44,757		289		2.62
FHLB stock	30,902		387		5.02		22,231		129		2.33		26,522		322		4.88		31,761		266		3.40
Total investment securities	1,887,626		13,831		2.94		1,809,879		12,570		2.79		1,931,882		12,739		2.65		1,952,770		14,541		3.02
Total interest-earning assets	10,685,387		130,838		4.91		9,593,652		112,423		4.70		11,441,728		131,665		4.63		10,771,662		129,996		4.89
Non-interest-earning assets	1,048,811						804,229						1,193,256						1,031,591
Total assets	$	11,734,198					$	10,397,881					$	12,634,984					$	11,803,253
Deposits:
Interest-bearing checking accounts	$	1,177,534	564		0.19		$	1,051,409	281		0.11		$	1,266,647	469		0.15		$	1,153,949	475		0.17
Savings accounts	1,851,913		2,119		0.46		1,648,739		811		0.20		2,039,857		1,755		0.35		1,854,123		1,920		0.42
Money market accounts	1,497,717		2,656		0.71		1,419,578		792		0.22		1,743,118		2,439		0.56		1,490,326		2,251		0.61
Certificates of deposit	1,105,844		3,684		1.34		1,067,742		2,380		0.89		1,124,994		4,087		1.46		1,253,613		3,997		1.29
Total interest-bearing deposits	5,633,008		9,023		0.64		5,187,468		4,264		0.33		6,174,616		8,750		0.57		5,752,011		8,643		0.61
Non-interest-bearing deposits	3,652,096		—		—		3,324,104		—		—		3,965,380		—		—		3,605,922		—		—
Total deposits	9,285,104		9,023		0.39		8,511,572		4,264		0.20		10,139,996		8,750		0.35		9,357,933		8,643		0.37
Other interest-bearing liabilities:
FHLB advances	514,703		3,370		2.63		296,495		1,499		2.03		405,429		2,064		2.05		534,238		3,476		2.64
Other borrowings	122,455		67		0.22		105,013		49		0.19		124,771		116		0.37		118,008		60		0.21
Junior subordinated debentures	140,212		1,683		4.81		140,212		1,548		4.43		147,944		1,477		4.02		140,212		1,713		4.95
Total borrowings	777,370		5,120		2.64		541,720		3,096		2.29		678,144		3,657		2.17		792,458		5,249		2.69
Total funding liabilities	10,062,474		14,143		0.56		9,053,292		7,360		0.33		10,818,140		12,407		0.46		10,150,391		13,892		0.56
Other non-interest-bearing liabilities ⁽²⁾	151,436						75,784						212,162						151,937
Total liabilities	10,213,910						9,129,076						11,030,302						10,302,328
Shareholders’ equity	1,520,288						1,268,805						1,604,682						1,500,925
Total liabilities and shareholders’ equity	$	11,734,198					$	10,397,881					$	12,634,984					$	11,803,253
Net interest income/rate spread			$	116,695	4.35	%			$	105,063	4.37	%			$	119,258	4.17	%			$	116,104	4.33	%
Net interest margin					4.38	%					4.39	%					4.19	%					4.37	%
Additional Key Financial Ratios:
Return on average assets					1.36	%					1.25	%					0.54	%					1.15	%
Return on average equity					10.47						10.25						4.23						9.01
Average equity / average assets					12.96						12.20						12.70						12.72
Average interest-earning assets / average interest-bearing liabilities					166.69						167.45						166.97						164.59
Average interest-earning assets / average funding liabilities					106.19						105.97						105.76						106.12
Non-interest income / average assets					0.78						0.82						0.61						0.62
Non-interest expense / average assets					2.96						3.19						3.03						3.09
Efficiency ratio ⁽⁴⁾					62.22						65.44						68.76						67.06
Adjusted efficiency ratio ⁽⁵⁾					59.56						64.09						63.47						63.32


⁽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 ~~revenue from core operations.~~adjusted revenue. These represent non-GAAP financial measures. See the non-GAAP reconciliation tables above under "Executive Overview—Non-GAAP Financial Measures."

Six months ended June 30, 2019 Six months ended June 30, 2018

Average
Balance
Interest and Dividends
Yield/
Cost ⁽³⁾

Average
Balance
Interest and Dividends
Yield/
Cost ⁽³⁾
Interest-earning assets:
Held for sale loans $ 72,694
$ 1,688
4.68 % $ 85,815
$ 1,976
4.64 %
Mortgage loans 6,817,276
178,284
5.27
$ 6,028,667
150,573
5.04
Commercial/agricultural loans 1,736,735
46,736
5.43
1,467,789
36,803
5.06
Consumer and other loans 181,562
5,754
6.39
141,016
4,523
6.47
Total loans ⁽¹⁾
8,808,267
232,462
5.32
7,723,287
193,875
5.06
Mortgage-backed securities 1,372,978
20,301
2.98
1,160,407
16,230
2.82
Other securities 466,330
6,789
2.94
468,480
6,420
2.76
Interest-bearing deposits with banks 49,382
629
2.57
58,164
442
1.53
FHLB stock 31,329
653
4.20
19,406
276
2.87
Total investment securities 1,920,019
28,372
2.98
1,706,457
23,368
2.76
Total interest-earning assets 10,728,286
260,834
4.90
9,429,744
217,243
4.65
Non-interest-earning assets 1,040,248
804,862

Total assets $ 11,768,534
$ 10,234,606

Deposits:
Interest-bearing checking accounts $ 1,165,807
1,039
0.18
$ 1,027,800
527
0.10
Savings accounts 1,853,012
4,039
0.44
1,625,335
1,438
0.18
Money market accounts 1,494,042
4,907
0.66
1,431,068
1,458
0.21
Certificates of deposit 1,179,320
7,681
1.31
1,033,431
4,199
0.82
Total interest-bearing deposits 5,692,181
17,666
0.63
5,117,634
7,622
0.30
Non-interest-bearing deposits 3,629,136
—
—
3,303,509
—
—
Total deposits 9,321,317
17,666
0.38
8,421,143
7,622
0.18
Other interest-bearing liabilities:
FHLB advances 524,417
6,846
2.63
226,407
2,177
1.94
Other borrowings 120,243
127
0.21
103,073
119
0.23
Junior subordinated debentures 140,212
3,396
4.88
140,212
2,889
4.16
Total borrowings 784,872
10,369
2.66
469,692
5,185
2.23
Total funding liabilities 10,106,189
28,035
0.56
8,890,835
12,807
0.29
Other non-interest-bearing liabilities ⁽²⁾
151,685
70,908

Total liabilities 10,257,874
8,961,743

Shareholders’ equity 1,510,660
1,272,863

Total liabilities and shareholders’ equity $ 11,768,534
$ 10,234,606

Net interest income/rate spread $ 232,799
4.34 % $ 204,436
4.36 %
Net interest margin 4.38 % 4.37 %
Additional Key Financial Ratios:
Return on average assets 1.25 % 1.21 %
Return on average equity 9.75
9.70
Average equity / average assets 12.84
12.44
Average interest-earning assets / average interest-bearing liabilities 165.64
168.77
Average interest-earning assets / average funding liabilities 106.16
106.06
Non-interest income / average assets 0.70
0.84
Non-interest expense / average assets 3.03
3.24
Efficiency ratio ⁽⁴⁾
64.59
66.53
Adjusted efficiency ratio ⁽⁵⁾
61.41
65.70



⁽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 revenue from core operations. These represent non-GAAP financial measures. See the non-GAAP reconciliation tables above under "Executive Overview—Non-GAAP Financial Measures."

Provision and Allowance for ~~Loan~~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 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
CHANGE IN THE	Mar 31, 2020			Dec 31, 2019			Mar 31, 2019
ALLOWANCE FOR CREDIT LOSSES - LOANS
Balance, beginning of period	$	100,559		$	97,801		$	96,485
Beginning balance adjustment for adoption of Topic 326	7,812			—			—
Provision for credit losses - loans	21,713			4,000			2,000
Recoveries of loans previously charged off:
Commercial real estate	167			199			21
Construction and land	—			—			22
One- to four-family real estate	148			159			43
Commercial business	205			225			23
Agricultural business, including secured by farmland	1,750			10			—
Consumer	96			61			110
	2,366			654			219
Loans charged off:
Commercial real estate	(100		)	—			(431		)
Multifamily real estate	(66		)	—			—
Construction and land	—			(45		)	—
One- to four-family real estate	(64		)	—			—
Commercial business	(1,384		)	(1,180		)	(590		)
Agricultural business, including secured by farmland	—			(4		)	(4		)
Consumer	(348		)	(667		)	(371		)
	(1,962		)	(1,896		)	(1,396		)
Net charge-offs	404			(1,242		)	(1,177		)
Balance, end of period	$	130,488		$	100,559		$	97,308
Net charge-offs / Average loans receivable	0.004		%	(0.013		)%	(0.013		)%

The provision for ~~loan~~credit losses - loans reflects the amount required to maintain the allowance for ~~loan~~credit losses - loans at an appropriate level based upon management’s evaluation of the adequacy of ~~general~~collective and ~~specific~~individual loss ~~reserves, trends in delinquencies and net charge-offs and current economic conditions.~~reserves. During the three months ended ~~June 30, 2019,~~March 31, 2020, we recorded a provision for ~~loans~~credit losses of $21.7 million, compared to provision for loan losses of $2.0 million ~~compared~~during the quarter a year ago. The current quarter provision for loan credit losses was primarily due to ~~$2.0 million~~the impacts of COVID-19 due to higher forecasted unemployment rates and lower gross domestic product, as well as other economic metrics in our reasonable and supportable forecast. The reasonable and supportable forecast used was based upon economic forecast data available as of March 31, 2020. The probability for ~~both the first~~further decline in economic conditions, including higher unemployment rates and lower gross domestic product, has increased since quarter ~~of 2019~~end and should they materialize, an additional provision for expected credit losses will be necessary in the second quarter of ~~2018. We continue~~2020. Future assessments of the expected credit losses will not only be impacted by changes to ~~maintain~~the reasonable and supportable forecast, but will also include an ~~appropriate allowance for loan losses at June 30, 2019, reflecting growth~~updated assessment of qualitative factors, as well as, consideration of any required changes in the ~~related portfolio~~reasonable and ~~current economic conditions.~~

In accordance with acquisition accounting, loans acquired from acquisitions were recorded at their estimated fair value, which resulted in a net discount to the loans contractual amounts, of which a portion reflects a discount for possible credit losses. Credit discounts are included in the determination of fair value and as a result no allowance for loan and lease losses is recorded for acquired loans at the acquisition date, although the discount recorded on the acquired loans is not reflected in the allowance for loan losses, or related allowance coverage ratios. The discount on acquired loans was $22.6 million at June 30, 2019 compared to $25.7 million at December 31, 2018 and $18.1 million at June 30, 2018.supportable forecast reversion period.

Net loan ~~charge-offs~~recoveries were ~~$1.1 million~~$404,000 for the quarter ended ~~June 30, 2019~~March 31, 2020 compared to net loan charge-offs of ~~$332,000~~$1.2 million for the same quarter in the prior year. ~~For the first six months of 2019 we recorded net charge-offs of $2.2 million compared to net recoveries of $847,000 for the same period in 2018.~~ The allowance for ~~loan~~credit losses - loans was ~~$98.3~~$130.5 million at ~~June 30, 2019~~March 31, 2020 compared to ~~$96.5~~$100.6 million at December 31, ~~2018~~2019 and ~~$93.9~~$97.3 million at June 30, 2018. Included in our allowance at June 30, 2019 was an unallocated portion of $7.2 million, which is based upon our evaluation of various factors that are not directly measured in the determination of the formula and specific allowances.March 31, 2019. The allowance for ~~loan~~credit losses - loans as a percentage of total loans (loans receivable excluding allowance for loan losses) was 1.41% at March 31, 2020 as compared to 1.12% at ~~June 30, 2019, compared to 1.11% at December~~March 31, ~~2018 and 1.22% at June 30, 2018.~~

~~We believe that~~2019. The increase 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 quarter primarily as the result of forecasted credit deterioration due to the COVID-19 pandemic.

The provision for credit losses - unfunded loan commitments reflects the amount required to maintain the allowance for credit losses ~~as of June 30, 2019 was adequate to absorb the known and inherent risks of loss in the~~- unfunded loan ~~portfolio~~commitments at ~~that date. We believe the estimates and assumptions used in our determination~~an 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
CHANGE IN THE	Mar 31, 2020		Dec 31, 2019		Mar 31, 2019
ALLOWANCE FOR CREDIT LOSSES - UNFUNDED LOAN COMMITMENTS
Balance, beginning of period	$	2,716	$	2,599	$	2,599
Beginning balance adjustment for adoption of Topic 326	7,022		—		—
Provision for credit losses - unfunded loan commitments	1,722		—		—
Additions through acquisitions	—		117		—
Balance, end of period	$	11,460	$	2,716	$	2,599

The allowance for credit losses - unfunded loan commitments was $11.5 million at March 31, 2020 compared to $2.7 million at December 31, 2019 and $2.6 million at March 31, 2019. The increase the allowance ~~are~~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 current quarter. During the three months ended March 31, 2020, we recorded a provision for credit losses - unfunded loan commitments of $1.7 million, compared to a provision for loan losses of none during the quarter a year ago. The current quarter provision for loan credit losses - unfunded loan commitments was primarily due to the impacts of COVID-19 due to higher forecasted unemployment rates, as well as other economic metrics in our reasonable ~~although there can be no assurance that these estimates~~ and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations.supportable forecast.

Non-interest Income. The following table presents the key components of non-interest income for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ (dollars in thousands):


	Three months ended June 30,										Six months ended June 30,										Three months ended March 31,
	2019			2018		Change Amount			Change Percent		2019			2018		Change Amount			Change Percent		2020			2019		Change Amount			Change Percent
Deposit fees and other service charges	$	14,046		$	11,985	$	2,061		17.2	%	$	26,664		$	23,281	$	3,383		14.5	%	$	9,803		$	12,618	$	(2,815	)	(22.3	)%
Mortgage banking operations	5,936			4,643		1,293			27.8		9,351			9,507		(156		)	(1.6	)	10,191			3,415		6,776			198.4
Bank owned life insurance	1,123			933		190			20.4		2,399			1,785		614			34.4		1,050			1,276		(226		)	(17.7	)
Miscellaneous	1,713			3,388		(1,675		)	(49.4	)	2,517			4,426		(1,909		)	(43.1	)	2,639			804		1,835			228.2
	22,818			20,949		1,869			8.9		40,931			38,999		1,932			5.0		23,683			18,113		5,570			30.8
Net (loss) gain on sale of securities	(28		)	44		(72		)	(163.6	)	(27		)	48		(75		)	(156.3	)
Net gain on sale of securities																					78			1		77			nm
Net change in valuation of financial instruments carried at fair value	(114		)	224		(338		)	(150.9	)	(103		)	3,532		(3,635		)	(102.9	)	(4,596		)	11		(4,607		)	nm
Total non-interest income	$	22,676		$	21,217	$	1,459		6.9		$	40,801		$	42,579	$	(1,778	)	(4.2	)	$	19,165		$	18,125	$	1,040		5.7

Non-interest income was ~~$22.7~~$19.2 million for the quarter ended ~~June 30, 2019,~~March 31, 2020, compared to ~~$21.2~~$18.1 million for the same quarter ~~in the prior year, and $40.8 million for the six months ended June 30, 2019, compared to $42.6 million for the same period~~ in the prior year. Our non-interest income for the quarter ended ~~June 30, 2019~~March 31, 2020 included a ~~$114,000~~$4.6 million net loss for fair value adjustments and a net ~~loss~~gain of ~~$28,000~~$78,000 on ~~sale~~sales of securities. For the quarter ended ~~June 30, 2018,~~March 31, 2019, fair value adjustments resulted in a net gain of ~~$224,000~~$11,000 and we had a net gain of ~~$44,000~~$1,000 on sale of securities. The net loss for fair value adjustments recognized for the quarter ended ~~June 30, 2019~~March 31, 2020 was due to a decrease in the value of certain securities in our held-for-trading ~~portfolio. Our non-interest income for the six months ended June 30, 2019 included a $103,000 net loss for fair value adjustments and a $27,000 loss~~portfolio as market spreads widened on ~~sale of securities. During the six months ended June 30, 2018, fair value adjustments resulted in a net gain of $3.5 million and we had a $48,000 net gain on sale~~certain types of securities. For a more detailed discussion of our fair value adjustments, please refer to Note 9 in the Selected Notes to the Consolidated Financial Statements in this Form 10-Q.

Deposit fees and other service charges ~~increased~~decreased by ~~$2.1~~$2.8 million, or ~~17%~~22%, for the quarter ended ~~June 30, 2019 and $3.4 million, or 15%, for the six months ended June 30, 2019,~~March 31, 2020, compared to the same ~~periods~~period a year ago the, reflecting ~~growth in~~ the ~~number~~impact of ~~deposit accounts resulting in increased transaction activity, including deposit accounts from~~Banner becoming subject to the ~~Skagit acquisition.~~Durbin Amendment on July 1, 2019, which reduced the amount of interchange fees which can be charged for certain debit card transactions. Mortgage banking revenues, including gains on one- to four-family and multifamily loan sales and loan servicing fees, increased ~~$1.3~~$6.8 million for the quarter ended ~~June 30, 2019 and decreased $156,000 for the six months ended June 30, 2019,~~March 31, 2020, compared to the same ~~periods~~period a year ago. Gains on multifamily loans in the current quarter resulted in income of ~~$744,000~~$189,000 for the quarter ended ~~June 30, 2019,~~March 31, 2020, compared to ~~$307,000 the same period a year ago, and $535,000 for the six months~~

~~ended June 30, 2019, compared to $916,000~~net loss of $209,000 for the same period a year ago. Gains on one- to four-family loans in the current quarter resulted in income of ~~$4.6~~$9.6 million for the quarter ended ~~June 30, 2019,~~March 31, 2020, compared to ~~$3.7~~$2.9 million in ~~the same period a year ago, and $7.6 million for the six months ended June 30, 2019, compared to $7.3 million for~~ the same period a year ago. The higher mortgage banking revenue reflected an increase in residential ~~and multifamily~~ mortgage held-for-sale loan ~~production.~~production as well as an increase in the gain on sale spread on one- to four-family held for sale loans during the quarter compared to the same period a year ago. Home purchase activity accounted for ~~77%~~54% of one- to four-family mortgage banking loan originations during ~~second~~the quarter ~~2019~~ended March 31, 2020 compared to ~~81%~~80% during ~~second~~the quarter ~~2018 . Miscellaneous~~ended March 31, 2019. The decrease in the percentage of home purchase activity during the current quarter reflects an increase home refinance activity as market interest rates decreased. The increase in miscellaneous income for the ~~three~~quarter ended March 31, 2020 compared to the same period a year ago was a

result of higher gains on the sales of Small Business Administration loans, an increase in interest rate swap income and ~~six months ended June 30, 2018 included $2.1 million~~a decline in losses related to the disposition of ~~gains from the sale of our Poulsbo branch deposits and two former business locations.~~assets.

Non-interest Expense. The following table represents key elements of non-interest expense for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ (dollars in thousands):


	For the Three Months Ended June 30,											For the Six Months Ended June 30,											For the Three Months Ended March 31,
	2019			2018			Change Amount			Change Percent		2019			2018			Change Amount			Change Percent		2020			2019			Change Amount			Change Percent
Salaries and employee benefits	$	55,629		$	51,494		$	4,135		8.0	%	$	110,269		$	101,561		$	8,708		8.6	%	$	59,908		$	54,640		$	5,268		9.6	%
Less capitalized loan origination costs	(7,399		)	(4,733		)	(2,666		)	56.3		(12,248		)	(8,744		)	(3,504		)	40.1		(5,806		)	(4,849		)	(957		)	19.7
Occupancy and equipment	12,681			11,574			1,107			9.6		26,447			23,340			3,107			13.3		13,107			13,766			(659		)	(4.8	)
Information/computer data services	5,273			4,564			709			15.5		10,599			8,945			1,654			18.5		5,810			5,326			484			9.1
Payment and card processing expenses	4,041			3,731			310			8.3		8,025			7,431			594			8.0		4,240			3,984			256			6.4
Professional and legal expenses	2,336			3,838			(1,502		)	(39.1	)	4,770			8,266			(3,496		)	(42.3	)	1,919			2,434			(515		)	(21.2	)
Advertising and marketing	2,065			2,141			(76		)	(3.5	)	3,594			3,971			(377		)	(9.5	)	1,827			1,529			298			19.5
Deposit insurance	1,418			1,021			397			38.9		2,836			2,362			474			20.1
Deposit insurance expense																							1,635			1,418			217			15.3
State/municipal business and use taxes	1,007			816			191			23.4		1,952			1,529			423			27.7		984			945			39			4.1
REO operations	260			(319		)	579			(181.5	)	137			121			16			13.2		100			(123		)	223			(181.3	)
Amortization of core deposit intangibles	2,053			1,382			671			48.6		4,105			2,764			1,341			48.5		2,001			2,052			(51		)	(2.5	)
Provision for credit losses - unfunded loan commitments																							1,722			—			1,722			nm
Miscellaneous	7,051			7,128			(77		)	(1.1	)	13,795			12,797			998			7.8		6,357			6,744			(387		)	(5.7	)
	86,415			82,637			3,778			4.6		174,281			164,343			9,938			6.0		93,804			87,866			5,938			6.8
COVID-19 expenses																							239			—			239			nm
Acquisition-related expenses	301			—			301					2,449			—			2,449					1,142			2,148			(1,006		)	(46.8	)
Total non-interest expense	$	86,716		$	82,637		$	4,079		4.9	%	$	176,730		$	164,343		$	12,387		7.5	%	$	95,185		$	90,014		$	5,171		5.7	%

Non-interest expenses increased by ~~$4.1~~$5.2 million, to ~~$86.7~~$95.2 million for the quarter ended ~~June 30, 2019,~~March 31, 2020, compared to ~~$82.6~~$90.0 million for the quarter ended ~~June 30, 2018. For the six months ended June 30, 2019, non-interest expense increased by $12.4 million, to $176.7 million compared to $164.3 million for the same period last year.~~March 31, 2019. The ~~increases in both periods were~~increase was primarily due to the increase in the provision for credit losses - unfunded commitments and increases in salaries and employee benefits ~~acquisition-related expenses,~~ and expenses related to the operations acquired in the ~~Skagit acquisition.~~AltaPacific acquisition and normal salary and wage adjustments, partially offset by increases in capitalized loan origination costs. In addition, the quarter ended March 31, 2020 included $239,000 of COVID-19 expenses. We expect to see an increase in these expenses in the following quarters depending on the duration of the current pandemic.

Salary and employee benefits expenses increased ~~$4.1~~$5.3 million to ~~$55.6~~$59.9 million for the quarter ended ~~June 30, 2019,~~March 31, 2020, compared to ~~$51.5~~$54.6 million for the quarter ended ~~June 30, 2018,~~March 31, 2019, primarily reflecting additional staffing related to the ~~build out of the Company's risk infrastructure and~~ operations acquired from the acquisition of ~~Skagit~~AltaPacific on November 1, ~~2018,~~2019 as well as normal salary and wage adjustments. ~~For similar reasons salary and employee benefits expenses increased to~~ ~~$110.3 million~~ ~~for the six months ended June 30, 2019, compared to~~ ~~$101.6 million~~ ~~for the six months ended June 30, 2018.~~ Capitalized loan origination costs increased ~~$2.7~~$1.0 million for the quarter ended ~~June 30, 2019, and $3.5 million for the six months ended June 30, 2019,~~March 31, 2020, compared to the same ~~periods~~period in the prior year, reflecting the increase in ~~held-for-sale~~ loan ~~originations and loan renewals as well as higher deferred costs on a per loan basis related to the annual update of our deferred loan cost models.~~originations. Occupancy and equipment expense ~~increased $1.1 million,~~decreased $659,000, to ~~$12.7~~$13.1 million for the quarter ended ~~June 30, 2019, and increased $3.1 million, to $26.4 million for the six months ended June 30, 2019,~~March 31, 2020, compared to the same ~~periods~~period in the prior year, reflecting ~~the operations acquired from the Skagit acquisition.~~decreases in occupancy expenses. Information data services expenses increased ~~$709,000~~$484,000 for the quarter ended ~~June 30, 2019, and $1.7 million for the six months ended June 30, 2019,~~March 31, 2020, compared to the same ~~periods~~period in the prior year, reflecting incremental costs as the Company continued to grow. Professional and legal expenses decreased ~~$1.5 million~~$515,000 for the quarter ended ~~June 30, 2019, and $3.5 million for the six months ended June 30, 2019,~~March 31, 2020, compared to the same periods in the prior year, reflecting ~~lower consulting costs~~a reduction in audit expenses due to the timing of accounting and audit work as ~~a result~~well as decreased legal matters in the first quarter of ~~completing the build out of our risk management infrastructure.~~

2020.

Income Taxes. For the quarter ended ~~June 30, 2019~~March 31, 2020, we recognized ~~$11.0~~$4.6 million in income tax expense for an effective tax rate of ~~21.6%~~21.4%, 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. Our ~~normal, expected~~ statutory income tax rate is ~~23.7%~~23.5%, representing a blend of the statutory federal income tax rate of 21.0% and apportioned effects of the state income tax rates. For the quarter ended ~~June 30, 2018,~~March 31, 2019, we recognized ~~$9.2~~$8.9 million in income tax expense for an effective tax rate of ~~22.1%~~21.0%. For the six months ended June 30, 2019, we recognized $19.8 million in tax expense for an effective rate of 21.3%, compared to $17.5 million in income tax expense for an effective rate of 22.2% for the six months ended June 30, 2018. For more discussion on our income taxes, please refer to Note 10 in the Selected Notes to the Consolidated Financial Statements in this report on Form 10-Q.

Asset Quality

~~Achieving and maintaining~~Maintaining a moderate risk profile by employing appropriate underwriting standards, avoiding excessive asset concentrations and aggressively managing troubled assets has been and will continue to be a primary focus for us. ~~As a result, current asset quality metrics are at historically favorable levels and are unlikely to meaningfully improve.~~ Our ~~reserve levels are adequate and reflect~~allowance 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 owned~~REO as a result of foreclosures.

Non-Performing Assets: Non-performing assets increased to ~~$21.0~~$46.1 million, or ~~0.18%~~0.36% of total assets, at ~~June 30, 2019,~~March 31, 2020, from ~~$18.9~~$40.5 million, or ~~0.16%~~0.32% of total assets, at December 31, ~~2018,~~2019, and increased compared to ~~$16.5~~$22.0 million, or ~~0.16%~~0.19% of total assets, at ~~June 30, 2018.~~March 31, 2019. The increase in non-performing loans during year-over-year was largely due to one commercial banking relationship totaling $14.7 million moving to nonaccrual. Our allowance for credit losses - loans was $130.5 million, or 299% of non-performing loans at March 31, 2020 and our allowance for loan losses was ~~$98.3~~$100.6 million, or ~~534% of non-performing loans at June 30, 2019, compared to $96.5 million, or 616%~~254% of non-performing loans at December 31, ~~2018~~2019 and ~~$93.9~~$97.3 million, or ~~613%~~504% of non-performing loans at ~~June 30, 2018. Our~~March 31, 2019. In addition to the allowance for credit losses - loans, the Company maintains an allowance for credit losses - unfunded loan commitments which was $11.5 million at March 31, 2020 compared to $2.7 million at December 31, 2019 and $2.6 million at March 31, 2019. We believe our level of non-performing loans and assets continues to be ~~manageable.~~manageable at March 31, 2020. The primary components of the ~~$21.0~~$46.1 million in non-performing assets were ~~$17.1~~$40.3 million in nonaccrual loans, ~~$1.4~~$3.4 million in loans more than 90 days delinquent and still accruing interest, and ~~$2.6~~$2.4 million in REO and other repossessed ~~assets, the majority of which were acquired in the Skagit acquisition.~~assets.

Loans are reported as restructured when we grant concessions to a borrower experiencing financial difficulties that we would not otherwise consider. As a result of these concessions, restructured loans or TDRs are impaired as the Banks will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement. If any restructured loan becomes delinquent or other matters call into question the borrower's ability to repay full interest and principal in accordance with the restructured terms, the restructured loan(s) would be reclassified as nonaccrual. At ~~June 30, 2019,~~March 31, 2020, we had ~~$6.6~~$6.4 million of restructured loans ~~currently~~ performing under their restructured repayment terms.

~~Loans~~Prior to the implementation of Financial Instruments—Credit Losses (Topic 326) on January 1, 2020, loans acquired in merger transactions with deteriorated credit quality ~~are~~were accounted for as purchased credit-impaired pools. Typically, this would include loans that were considered non-performing or restructured as of the acquisition date. Accordingly, subsequent to acquisition, loans included in the purchased credit-impaired pools ~~are~~were not reported as non-performing loans based upon their individual performance status, so the loan categories of nonaccrual, impaired and 90 days past due and accruing dodid not include any purchased credit-impaired loans. Purchased credit-impaired loans were ~~$12.9 million at June 30, 2019, compared to $14.4~~$15.9 million at December 31, ~~2018~~2019 and ~~$18.1~~$13.3 million at ~~June 30, 2018.~~March 31, 2019.

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


	June 30, 2019			December 31, 2018			June 30, 2018			March 31, 2020			December 31, 2019			March 31, 2019
Nonaccrual Loans: ⁽¹⁾
Secured by real estate:
Commercial										$	8,512		$	5,952		$	5,734
Multifamily										—			85			—
Construction and land										1,393			1,905			3,036
One- to four-family										3,045			3,410			1,538
Commercial business										25,027			23,015			3,614
Agricultural business, including secured by farmland										495			661			2,507
Consumer										1,812			2,473			2,181
										40,284			37,501			18,610
Loans more than 90 days delinquent, still on accrual:
Secured by real estate:
Commercial	$	4,603		$	4,088		$	4,341		24			89			—
Construction and land	2,214			3,188			1,176			1,407			332			—
One- to four-family	2,665			1,544			2,281			1,089			877			640
Commercial business	2,983			2,936			2,673			77			401			1
Agricultural business, including secured by farmland	1,359			1,751			1,712			461			—			—
Consumer	3,230			1,241			1,176			320			398			42
	17,054			14,748			13,359			3,378			2,097			683
Loans more than 90 days delinquent, still on accrual:
Secured by real estate:
Construction and land	262			—			784
One- to four-family	995			658			905
Commercial business	1			1			1
Consumer	97			247			253
	1,355			906			1,943
Total non-performing loans	18,409			15,654			15,302			43,662			39,598			19,293
REO, net ⁽²⁾	2,513			2,611			473			2,402			814			2,611
Other repossessed assets held for sale	112			592			733			47			122			50
Total non-performing assets	$	21,034		$	18,857		$	16,508		$	46,111		$	40,534		$	21,954

Total non-performing loans to loans before allowance for loan losses	0.21		%	0.18		%	0.20		%
Total non-performing loans to loans before allowance for credit losses / allowance for loan losses										0.47		%	0.43		%	0.22		%
Total non-performing loans to total assets	0.16		%	0.13		%	0.15		%	0.34		%	0.31		%	0.16		%
Total non-performing assets to total assets	0.18		%	0.16		%	0.16		%	0.36		%	0.32		%	0.19		%

Restructured loans performing under their restructured terms ⁽³⁾	$	6,594		$	13,422		$	13,793		$	6,423		$	6,466		$	13,036

Loans 30-89 days past due and on accrual ⁽⁴⁾	$	17,923		$	25,108		$	8,040		$	39,974		$	20,178		$	28,972

⁽¹⁾

Includes ~~$1.6~~$6.6 million of nonaccrual ~~restructured~~TDR loans at ~~June 30, 2019.~~March 31, 2020. For the three months ended March 31, 2020, interest income was reduced by $472,000 as a result of nonaccrual loan activity, which includes the reversal of $222,000 of accrued interest as of the date the loan was placed on nonaccrual. There was no interest income recognized on nonaccrual loans for the three months ended March 31, 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 ~~June 30, 2019.~~the dates indicated.

⁽⁴⁾~~Includes purchased~~Purchased credit-impaired ~~loans.~~loans are included at December 31, 2019 and March 31, 2019.

In addition to the non-performing loans ~~and purchased credit-impaired loans~~ as of ~~June 30, 2019,~~March 31, 2020, we had other classified loans with an aggregate outstanding balance of ~~$53.5~~$63.5 million that are not on nonaccrual status, with respect to which known information concerning possible credit problems with the borrowers or the cash flows of the properties securing the respective loans has caused management to be concerned about the ability of the borrowers to comply with present loan repayment terms. This may result in the future inclusion of such loans in the nonaccrual loan category.

REO: REO was ~~$2.5~~$2.4 million at ~~June 30, 2019~~March 31, 2020 and compared with ~~$2.6 million~~$814,000 at December 31, ~~2018.~~2019. The following table shows REO activity for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and March 31, 2019 ~~and June 30, 2018~~ (in thousands):


	Three Months Ended						Six months ended						Three Months Ended
	Jun 30, 2019			Jun 30, 2018			Jun 30, 2019			Jun 30, 2018			Mar 31, 2020		Mar 31, 2019
Balance, beginning of period	$	2,611		$	328		$	2,611		$	360		$	814	$	2,611
Additions from loan foreclosures	61			393			61			521			1,588		—
Proceeds from dispositions of REO	(150		)	(314		)	(150		)	(314		)
Gain on sale of REO	(9		)	66			(9		)	66
Valuation adjustments in the period	—			—			—			(160		)
Balance, end of period	$	2,513		$	473		$	2,513		$	473		$	2,402	$	2,611

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

Liquidity and Capital Resources

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

Our primary investing activity is the origination and purchase of loans and, in certain periods, the purchase of securities. During the ~~six~~three months ended ~~June 30,~~March 31, 2020 and March 31, 2019, ~~and June 30, 2018,~~ our loan originations, including originations of loans held for sale, exceeded our loan repayments by ~~$461.9~~$280.1 million and ~~$498.3~~$143.7 million, respectively. There were ~~$777,000 of~~no loan purchases during the ~~six~~three months ended ~~June 30, 2019 compared to loan purchases of $2.3 million during the six months ended June 30, 2018.~~March 31, 2020 or March 31, 2019. This activity was funded primarily by ~~principal repayment and maturities of securities,~~ increased core deposits and the sale of loans in ~~2019.~~2020. During the ~~six~~three months ended ~~June 30,~~March 31, 2020 and March 31, 2019, ~~and June 30, 2018,~~ we received proceeds of ~~$411.4~~$338.8 million and ~~$388.9~~$265.2 million, respectively, from the sale of loans. Securities purchased during the ~~six~~three months ended ~~June 30,~~March 31, 2020 and March 31, 2019 ~~and June 30, 2018~~ totaled ~~$52.5~~$350.1 million and ~~$599.7~~$5.1 million, respectively, and securities repayments, maturities and sales in those periods were ~~$191.3~~$131.1 million and ~~$82.6~~$67.2 million, respectively.

Our primary financing activity is gathering deposits. Total deposits ~~decreased~~increased by ~~$188.1~~$400.9 million during the first ~~six~~three months of ~~2019,~~2020, as ~~a $249.5~~core deposits increased by $355.0 million ~~decrease in certificate~~and certificates of deposits, primarily brokered deposits, ~~was partially offset~~increased by ~~a $61.4 million increase in core deposits.~~$45.9 million. 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 ~~June 30, 2019,~~March 31, 2020, certificates of deposit amounted to ~~$1.07~~$1.17 billion, or ~~12%~~11% of our total deposits, including ~~$766.9~~$887.6 million which were scheduled to mature within one year. While no assurance can be given as to future periods, historically, we have been able to retain a significant amount of our ~~deposits~~certificates of deposit as they mature.

FHLB advances ~~increased $65.8~~decreased $203.0 million to ~~$606.0~~$247.0 million during the first ~~six~~three months of ~~2019.~~2020. Other borrowings ~~decreased $625,000~~increased $10.3 million to ~~$118.4~~$128.8 million at ~~June 30, 2019~~March 31, 2020 from ~~$119.0~~$118.5 million at December 31, ~~2018.~~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 ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ we used our sources of funds primarily to fund loan commitments and purchase securities. At ~~June 30, 2019,~~March 31, 2020, we had outstanding loan commitments totaling ~~$3.16~~$3.30 billion, primarily relating to undisbursed loans in process and unused credit 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 ~~June 30, 2019~~March 31, 2020 provided for advances that in the aggregate would equal the lesser of 45% of Banner Bank’s assets or adjusted qualifying collateral (subject to a sufficient level of ownership of FHLB stock), up to a total possible credit line of ~~$5.15~~$5.54 billion, and ~~35%~~45% of Islanders Bank’s assets or adjusted qualifying collateral, up to a total possible credit line of ~~$97.0~~$134.0 million. Advances under these credit facilities totaled ~~$606.0~~$247.0 million at ~~June 30, 2019.~~March 31, 2020. In addition, Banner Bank has been approved for participation in the Borrower-In-Custody (BIC) program by the Federal Reserve Bank of San Francisco (FRBSF). Under this program Banner Bank had available lines of credit of approximately ~~$1.19~~$1.15 billion as of ~~June 30, 2019,~~March 31, 2020, subject to certain collateral requirements, namely the collateral type and risk rating of eligible pledged loans. We had no funds borrowed from the FRBSF at ~~June 30, 2019~~March 31, 2020 or December 31, ~~2018.~~2019. Banner Bank's liquidity is expected to be supplemented in the second quarter of 2020 by its participation in the Federal Reserve’s Paycheck Protection Program Liquidity Facility pursuant to which Banner Bank will pledge PPP loans as collateral to obtain FRBSF non-recourse loans. Management believes it has adequate resources and funding potential to meet our foreseeable liquidity requirements.

Banner Corporation is a separate legal entity from the Banks and, on a stand-alone level, must provide for its own liquidity and pay its own operating expenses and cash dividends. ~~Banner's~~Banner 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 ~~June 30, 2019,~~March 31, 2020, the Company on an unconsolidated basis had liquid assets of ~~$43.1~~$36.2 million.

As noted below, Banner Corporation and its subsidiary banks continued to maintain capital levels significantly in excess of the requirements to be categorized as “Well-Capitalized” under applicable regulatory standards. During the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, total shareholders' equity increased ~~$42.5~~$7.7 million, to ~~$1.52~~$1.60 billion. At ~~June 30, 2019,~~March 31, 2020, tangible common shareholders’ equity, which excludes goodwill and other intangible assets, was ~~$1.15~~$1.20 billion, or ~~10.05%~~9.70% 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 are 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.~~bonuses. At ~~June 30, 2019,~~March 31, 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 ~~2018~~2019 Form 10-K for additional information regarding regulatory capital requirements for Banner Corporation and the Banks.)

The actual regulatory capital ratios calculated for Banner Corporation, Banner Bank and Islanders Bank as of ~~June 30, 2019~~March 31, 2020, along with the minimum capital amounts and ratios, were as follows (dollars in thousands):


	Actual				Minimum to be Categorized as "Adequately Capitalized"				Minimum to be Categorized as “Well-Capitalized”				Actual				Minimum to be Categorized as "Adequately Capitalized"				Minimum to be Categorized as “Well-Capitalized”
	Amount		Ratio		Amount		Ratio		Amount		Amount		Amount		Ratio		Amount		Ratio		Amount		Amount
Banner Corporation—consolidated
Total capital to risk-weighted assets	$	1,327,875	13.37	%	$	794,575	8.00	%	$	993,218	10.00	%	$	1,397,202	12.98	%	$	860,978	8.00	%	$	1,076,223	10.00	%
Tier 1 capital to risk-weighted assets	1,227,022		12.35		595,931		6.00		595,931		6.00		1,275,806		11.85		645,734		6.00		645,734		6.00
Tier 1 leverage capital to average assets	1,227,022		10.83		453,256		4.00		n/a		n/a		1,275,806		10.45		488,124		4.00		n/a		n/a
Common equity tier 1 capital	1,091,022		10.98		446,948		4.50		n/a		n/a		1,132,306		10.52		484,300		4.50		n/a		n/a
Banner Bank
Total capital to risk-weighted assets	1,236,298		12.69		779,191		8.00		973,989		10.00		1,331,615		12.59		846,284		8.00		1,057,856		10.00
Tier 1 capital to risk-weighted assets	1,137,866		11.68		584,393		6.00		779,191		8.00		1,212,733		11.46		634,713		6.00		846,284		8.00
Tier 1 leverage capital to average assets	1,137,866		10.30		442,043		4.00		552,553		5.00		1,212,733		10.18		476,371		4.00		595,464		5.00
Common equity tier 1 capital	1,137,866		11.68		438,295		4.50		633,093		6.50		1,212,733		11.46		476,035		4.50		687,606		6.50
Islanders Bank
Total capital to risk-weighted assets	35,804		18.80		15,239		8.00		19,049		10.00		31,693		16.99		14,923		8.00		18,654		10.00
Tier 1 capital to risk-weighted assets	33,422		17.54		11,430		6.00		15,239		8.00		29,398		15.76		11,193		6.00		14,923		8.00
Tier 1 leverage capital to average assets	33,422		12.00		11,143		4.00		13,929		5.00		29,398		10.05		11,706		4.00		14,632		5.00
Common equity tier 1 capital	33,422		17.54		8,572		4.50		12,382		6.50		29,398		15.76		8,394		4.50		12,125		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 portion of our performing floating-rate loans, which help us maintain higher loan yields in periods when market interest rates decline significantly. The Company actively manages its exposure to interest rate risk through on-going adjustments to the mix of interest-earning assets and funding sources that affect the repricing speeds of loans, investments, interest-bearing deposits and borrowings.

The principal objectives of asset/liability management are: to evaluate the interest rate risk exposure; to determine the level of risk appropriate given our operating environment, business plan strategies, performance objectives, capital and liquidity constraints, and asset and liability allocation alternatives; and to manage our interest rate risk consistent with regulatory guidelines and policies approved by the Board of Directors. Through such management, we seek to reduce the vulnerability of our earnings and capital position to changes in the level of interest rates. Our actions in this regard are taken under the guidance of the Asset/Liability Management Committee, which is comprised of members of our senior management. The Committee closely monitors our interest sensitivity exposure, asset and liability allocation decisions, liquidity and capital positions, and local and national economic conditions and attempts to structure the loan and investment portfolios and funding sources to maximize earnings within acceptable risk tolerances.

Sensitivity Analysis

Our primary monitoring tool for assessing interest rate risk is asset/liability simulation modeling, which is designed to capture the dynamics of balance sheet, interest rate and spread movements and to quantify variations in net interest income resulting from those movements under different rate environments. The sensitivity of net interest income to changes in the modeled interest rate environments provides a measurement of interest rate risk. We also utilize economic value analysis, which addresses changes in estimated net economic value of equity arising from changes in the level of interest rates. The net economic value of equity is estimated by separately valuing our assets and liabilities under varying interest rate environments. The extent to which assets gain or lose value in relation to the gains or losses of liability values under the various interest rate assumptions determines the sensitivity of net economic value to changes in interest rates and provides an additional measure of interest rate risk.

The interest rate sensitivity analysis performed by us incorporates beginning-of-the-period rate, balance and maturity data, using various levels of aggregation of that data, as well as certain assumptions concerning the maturity, repricing, amortization and prepayment characteristics of loans and other interest-earning assets and the repricing and withdrawal of deposits and other interest-bearing liabilities into an asset/liability computer simulation model. We update and prepare simulation modeling at least quarterly for review by senior management and oversight by the directors. We believe the data and assumptions are realistic representations of our portfolio and possible outcomes under the various interest rate scenarios. Nonetheless, the interest rate sensitivity of our net interest income and net economic value of equity could vary substantially if different assumptions were used or if actual experience differs from the assumptions used.

The following table sets forth, as of ~~June 30, 2019~~March 31, 2020, the estimated changes in our net interest income over one-year and two-year time horizons and the estimated changes in economic value of equity based on the indicated interest rate environments (dollars in thousands):


	Estimated Increase (Decrease) in															Estimated Increase (Decrease) in
Change (in Basis Points) in Interest Rates ⁽¹⁾	Net Interest Income Next 12 Months					Net Interest Income Next 24 Months					Economic Value of Equity					Net Interest Income Next 12 Months					Net Interest Income Next 24 Months					Economic Value of Equity
+400	$	16,817		3.6	%	$	64,335		7.0	%	$	(88,043	)	(3.3	)%	$	31,287		7.2	%	$	99,072		11.7	%	$	(82,595	)	(3.6	)%
+300	20,605			4.5		67,577			7.3		(3,136		)	(0.1	)	32,230			7.4		97,861			11.6		24,300			1.1
+200	19,361			4.2		59,324			6.4		56,720			2.1		27,055			6.2		81,968			9.7		99,800			4.4
+100	13,371			2.9		38,659			4.2		69,655			2.6		17,083			3.9		51,497			6.1		109,397			4.8
0	—			—		—			—		—			—		—			—		—			—		—			—
-50	(9,776		)	(2.1	)	(27,831		)	(3.0	)	(75,767		)	(2.9	)
-100	(22,184		)	(4.8	)	(62,972		)	(6.8	)	(180,703		)	(6.8	)
-25																(4,816		)	(1.1	)	(14,935		)	(1.8	)	(45,973		)	(2.0	)


⁽¹⁾	Assumes an instantaneous and sustained uniform change in market interest rates at all maturities; however, no rates are allowed to go below zero. The targeted ~~federal funds rate~~Federal Funds Rate was between ~~2.25%~~0.00% and ~~2.50%~~0.25% at ~~June 30, 2019~~. March 31, 2020.

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 ~~June 30, 2019~~March 31, 2020 (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 ~~June 30, 2019,~~March 31, 2020, total interest-earning assets maturing or repricing within one year exceeded total interest-bearing liabilities maturing or repricing in the same time period by ~~$2.89~~$3.51 billion, representing a one-year cumulative gap to total assets ratio of ~~24.41%~~27.44%. 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 ~~June 30, 2019~~March 31, 2020 are within our internal policy guidelines and management considers that our current level of interest rate risk is reasonable.


	Within 6 Months			After 6 Months Within 1 Year			After 1 Year Within 3 Years			After 3 Years Within 5 Years			After 5 Years Within 10 Years			Over 10 Years			Total			Within 6 Months			After 6 Months Within 1 Year			After 1 Year Within 3 Years			After 3 Years Within 5 Years			After 5 Years Within 10 Years			Over 10 Years			Total
Interest-earning assets: ⁽¹⁾
Construction loans	$	723,160		$	69,439		$	94,771		$	17,460		$	4,402		$	900		$	910,132		$	794,925		$	70,792		$	121,213		$	26,560		$	12,779		$	1,874		$	1,028,143
Fixed-rate mortgage loans	352,155			205,939			608,899			417,376			403,842			10,454			1,998,665			319,587			242,806			771,977			464,599			385,444			21,253			2,205,666
Adjustable-rate mortgage loans	1,061,723			399,604			1,230,410			653,752			165,328			20			3,510,837			1,216,470			437,462			1,255,110			607,564			148,629			11			3,665,246
Fixed-rate mortgage-backed securities	90,640			86,898			294,060			223,467			439,073			83,156			1,217,294			229,236			185,315			318,638			161,895			244,468			35,595			1,175,147
Adjustable-rate mortgage-backed securities	137,936			7,300			25,871			32,057			10,267			—			213,431			144,215			10,827			38,345			5,857			4,924			—			204,168
Fixed-rate commercial/agricultural loans	138,532			112,822			243,861			83,576			70,154			25,094			674,039			156,958			119,045			239,322			99,540			82,975			23,151			720,991
Adjustable-rate commercial/agricultural loans	952,524			24,976			71,712			42,304			22,369			—			1,113,885			1,006,593			25,960			74,566			40,465			15,333			—			1,162,917
Consumer and other loans	465,635			81,924			91,104			20,746			14,848			39,686			713,943			490,585			52,858			67,147			15,003			15,564			36,213			677,370
Investment securities and interest-earning deposits	120,740			7,055			52,374			64,774			82,022			68,748			395,713			129,105			18,430			65,555			57,548			295,592			122,399			688,629
Total rate sensitive assets	4,043,045			995,957			2,713,062			1,555,512			1,212,305			228,058			10,747,939			4,487,674			1,163,495			2,951,873			1,479,031			1,205,708			240,496			11,528,277
Interest-bearing liabilities: ⁽²⁾
Regular savings	191,813			130,742			421,895			298,742			427,129			377,726			1,848,047			207,310			139,722			451,846			321,149			462,022			415,215			1,997,264
Interest checking accounts	94,115			48,831			174,047			144,622			264,009			461,411			1,187,035			118,894			54,445			193,325			160,278			292,631			512,288			1,331,861
Money market deposit accounts	148,895			101,351			335,086			245,634			364,542			315,611			1,511,119			188,902			122,938			406,784			298,575			443,942			385,703			1,846,844
Certificates of deposit	503,946			263,034			278,070			23,477			2,391			237			1,071,155			633,477			254,350			251,773			24,434			2,478			—			1,166,512
FHLB advances	306,000			100,000			200,000			—			—			—			606,000			97,000			50,000			100,000			—			—			—			247,000
Junior subordinated debentures	140,212			—			—			—			—			—			140,212			147,944			—			—			—			—			—			147,944
Retail repurchase agreements	118,370			—			—			—			—			—			118,370			128,764			—			—			—			—			—			128,764
Total rate sensitive liabilities	1,503,351			643,958			1,409,098			712,475			1,058,071			1,154,985			6,481,938			1,522,291			621,455			1,403,728			804,436			1,201,073			1,313,206			6,866,189
Excess (deficiency) of interest-sensitive assets over interest-sensitive liabilities	$	2,539,694		$	351,999		$	1,303,964		$	843,037		$	154,234		$	(926,927	)	$	4,266,001		$	2,965,383		$	542,040		$	1,548,145		$	674,595		$	4,635		$	(1,072,710	)	$	4,662,088
Cumulative excess of interest-sensitive assets	$	2,539,694		$	2,891,693		$	4,195,657		$	5,038,694		$	5,192,928		$	4,266,001		$	4,266,001		$	2,965,383		$	3,507,423		$	5,055,568		$	5,730,163		$	5,734,798		$	4,662,088		$	4,662,088
Cumulative ratio of interest-earning assets to interest-bearing liabilities	268.94		%	234.67		%	217.97		%	218.03		%	197.48		%	165.81		%	165.81		%	294.80		%	263.61		%	242.51		%	231.67		%	203.27		%	167.90		%	167.90		%
Interest sensitivity gap to total assets	21.44		%	2.97		%	11.01		%	7.12		%	1.30		%	(7.82		)%	36.01		%	23.20		%	4.24		%	12.11		%	5.28		%	0.04		%	(8.39		)%	36.48		%
Ratio of cumulative gap to total assets	21.44		%	24.41		%	35.41		%	42.53		%	43.83		%	36.01		%	36.01		%	23.20		%	27.44		%	39.56		%	44.83		%	44.87		%	36.48		%	36.48		%

(Footnotes on following page)

Footnotes for Table of Interest Sensitivity Gap

⁽¹⁾

Adjustable-rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due to mature, and fixed-rate assets are included in the period in which they are scheduled to be repaid based upon scheduled amortization, in each case adjusted to take into account estimated prepayments. Mortgage loans and other loans are not reduced for allowances for loan losses and non-performing loans. Mortgage loans, mortgage-backed securities, other loans and investment securities are not adjusted for deferred fees, unamortized acquisition premiums and discounts.

⁽²⁾

Adjustable-rate liabilities are included in the period in which interest rates are next scheduled to adjust rather than in the period they are due to mature. Although regular savings, demand, interest checking, and money market deposit accounts are subject to immediate withdrawal, based on historical experience management considers a substantial amount of such accounts to be core deposits having significantly longer maturities. For the purpose of the gap analysis, these accounts have been assigned decay rates to reflect their longer effective maturities. If all of these accounts had been assumed to be short-term, the one-year cumulative gap of interest-sensitive assets would have been ~~($939,000)~~$(836,000), or ~~(7.92)~~(6.54)% of total assets at ~~June 30, 2019.~~March 31, 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 Six~~ Months Ended ~~June 30, 2019~~March 31, 2020 and ~~2018”~~2019” 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 ~~June 30, 2019~~March 31, 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 ~~June 30, 2019~~March 31, 2020, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial ~~reporting.~~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.

PART II – OTHER INFORMATION

ITEM 1 – Legal Proceedings

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

ITEM 1A – Risk Factors

~~There have been no material changes~~The 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 currently under 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 addition, we continue to provide access to banking and financial services through online banking, ATMs and by 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. 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, deposit availability, market interest rates and negatively impacted many of our business and consumer borrower’s 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 recent reductions in the targeted federal funds rate, until the pandemic subsides, we expect our net interest income and net interest margin will 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.

If we were to close and fund all PPP loans approved by the SBA as of April 30, 2020, we would hold and service a portfolio of approximately 7,000 PPP loans with a balance in excess of $1.1 billion. The PPP loans are subject to the provisions of the CARES Act 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. As of now, the procedures and standards for determining loan forgiveness are not clear. We could face risk in our administrative capabilities to service our PPP loans, and risk 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 recent 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.

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, 2018.~~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 ~~June 30, 2019:~~March 31, 2020:

Period Total Number of Common Shares Purchased Average Price Paid per Common Share Total Number of Shares Purchased as Part of Publicly Announced authorization Maximum Number of Remaining Shares that May be Purchased as Part of Publicly Announced Authorization
April 1, 2019 - April 30, 2019 28,797
$ 55.47
—
1,757,637
May 1, 2019 - May 31, 2019 600,048
53.46
600,000
1,157,637
June 1, 2019 - June 30, 2019 —
—
—
1,157,637
Total for quarter 628,845
53.55
600,000
1,157,637



Period	Total Number of Common Shares Purchased	Average Price Paid per Common Share		Total Number of Shares Purchased as Part of Publicly Announced authorization	Maximum Number of Remaining Shares that May be Purchased as Part of Publicly Announced Authorization
January 1, 2020 - January 31, 2020	663	$	52.01	—	1,118,151
February 1, 2020 - February 28, 2020	420,249	53.21		414,780	703,371
March 1, 2020 - March 31, 2020	225,460	45.33		210,000	493,371
Total for quarter	646,372	50.46		624,780	493,371

Employees surrendered ~~28,845~~21,592 shares to satisfy tax withholding obligations upon the vesting of restricted stock grants during the three months ended ~~June 30, 2019.~~March 31, 2020.

On March 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 1,757,637 of the Company's outstanding shares. Under the authorization, shares may be repurchased by the Company in open market purchases. The extent to which the Company repurchases its shares and the timing of such repurchases will depend upon market conditions and other corporate considerations. During the quarter ended ~~June 30, 2019,~~March 31, 2020, the Company repurchased ~~600,000~~624,780 shares under the repurchase authorization, leaving ~~1,157,637~~493,371 available for future repurchase.

ITEM 3 – Defaults upon Senior Securities

Not Applicable.

ITEM 4 – Mine Safety Disclosures

Not Applicable.

ITEM 5 – Other Information

Not Applicable.

ITEM 6 – Exhibits



Exhibit	Index of Exhibits

~~2{a}~~	Agreement and Plan of Merger, dated as of July 25, 2018, by and between Banner Corporation and Skagit Bancorp, Inc. (incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed with the SEC on July 27, 2018 (File No. 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{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)].

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

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



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



Exhibit	Index of Exhibits

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

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

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

~~101~~101.INS	Inline XBRL Instance Document - The ~~following materials~~instance document does not appear in the interactive data file because its XBRL tags are embedded within the XBRL document

101.SCH	Inline XBRL Taxonomy Extension Schema Document

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document

104	The cover page from ~~Banner Corporation’s~~the Company's Quarterly Report on Form 10-Q for the quarter ended ~~June 30, 2019,~~March 31, 2020, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Statements of Financial Condition; (b) Consolidated Statements of Operations; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Shareholders' Equity; (e) Consolidated Statements of Cash Flows; and (f) Selected Notes to Consolidated Financial Statements.Inline XBRL (included in Exhibit 101)

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

~~August 2, 2019~~May 7, 2020	/s/ Mark J. Grescovich
	Mark J. Grescovich
	President and Chief Executive Officer (Principal Executive Officer)

~~August 2, 2019~~May 7, 2020	/s/ Peter J. Conner
	Peter J. Conner
	Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer)

7787



	Common Stock and Paid in Capital					Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Shareholders’ Equity
	Shares		Amount			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Shareholders’ Equity
Balance, January 1, 2018	32,726,485		$	1,187,127		$	90,535		$	(5,036	)	$	1,272,626

Cumulative effect of reclassification of the instrument-specific credit risk portion of junior subordinated debentures fair value adjustments and reclassification of equity securities from available-for-sale						(28,203		)	28,203			—
Net income						28,790						28,790
Other comprehensive loss, net of income tax									(21,777		)	(21,777		)
Repurchase of common stock	(269,711	)	(15,359		)							(15,359		)
Accrual of dividends on common stock ($0.35/share)						(11,349		)				(11,349		)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered	(33,101	)	1,192									1,192

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



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

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

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



	June 30, 2019						December 31, 2018
	Accrual Status		Nonaccrual Status		Total TDRs		Accrual Status		Nonaccrual Status		Total TDRs
Commercial real estate:
Owner-occupied	$	—	$	273	$	273	$	200	$	78	$	278
Investment properties	699		1,077		1,776		5,606		—		5,606
Commercial business	550		—		550		391		—		391
Agricultural business, including secured by farmland	2,320		—		2,320		2,561		—		2,561
One- to four-family residential	2,836		202		3,038		4,469		239		4,708
Consumer:
Consumer secured by one- to four-family	130		—		130		133		—		133
Consumer—other	59		—		59		62		—		62
	$	6,594	$	1,552	$	8,146	$	13,422	$	317	$	13,739



Loan balances:
Individually evaluated for impairment	$	4,352	$	—	$	2,166	$	550	$	3,058	$	3,582	$	964	$	—	$	14,672
Collectively evaluated for impairment	3,534,235		402,235		1,077,636		1,597,712		377,333		940,948		788,834		—		8,718,933
Purchased credit-impaired loans	11,714		6		—		526		414		87		198		—		12,945
Total loans	$	3,550,301	$	402,241	$	1,079,802	$	1,598,788	$	380,805	$	944,617	$	789,996	$	—	$	8,746,550




	Six months ended June 30, 2019						Six months ended June 30, 2018
	Average Balance		Interest and Dividends		Yield/ Cost ⁽³⁾		Average Balance		Interest and Dividends		Yield/ Cost ⁽³⁾
Interest-earning assets:
Held for sale loans	$	72,694	$	1,688	4.68	%	$	85,815	$	1,976	4.64	%
Mortgage loans	6,817,276		178,284		5.27		$	6,028,667	150,573		5.04
Commercial/agricultural loans	1,736,735		46,736		5.43		1,467,789		36,803		5.06
Consumer and other loans	181,562		5,754		6.39		141,016		4,523		6.47
Total loans ⁽¹⁾	8,808,267		232,462		5.32		7,723,287		193,875		5.06
Mortgage-backed securities	1,372,978		20,301		2.98		1,160,407		16,230		2.82
Other securities	466,330		6,789		2.94		468,480		6,420		2.76
Interest-bearing deposits with banks	49,382		629		2.57		58,164		442		1.53
FHLB stock	31,329		653		4.20		19,406		276		2.87
Total investment securities	1,920,019		28,372		2.98		1,706,457		23,368		2.76
Total interest-earning assets	10,728,286		260,834		4.90		9,429,744		217,243		4.65
Non-interest-earning assets	1,040,248						804,862
Total assets	$	11,768,534					$	10,234,606
Deposits:
Interest-bearing checking accounts	$	1,165,807	1,039		0.18		$	1,027,800	527		0.10
Savings accounts	1,853,012		4,039		0.44		1,625,335		1,438		0.18
Money market accounts	1,494,042		4,907		0.66		1,431,068		1,458		0.21
Certificates of deposit	1,179,320		7,681		1.31		1,033,431		4,199		0.82
Total interest-bearing deposits	5,692,181		17,666		0.63		5,117,634		7,622		0.30
Non-interest-bearing deposits	3,629,136		—		—		3,303,509		—		—
Total deposits	9,321,317		17,666		0.38		8,421,143		7,622		0.18
Other interest-bearing liabilities:
FHLB advances	524,417		6,846		2.63		226,407		2,177		1.94
Other borrowings	120,243		127		0.21		103,073		119		0.23
Junior subordinated debentures	140,212		3,396		4.88		140,212		2,889		4.16
Total borrowings	784,872		10,369		2.66		469,692		5,185		2.23
Total funding liabilities	10,106,189		28,035		0.56		8,890,835		12,807		0.29
Other non-interest-bearing liabilities ⁽²⁾	151,685						70,908
Total liabilities	10,257,874						8,961,743
Shareholders’ equity	1,510,660						1,272,863
Total liabilities and shareholders’ equity	$	11,768,534					$	10,234,606
Net interest income/rate spread			$	232,799	4.34	%			$	204,436	4.36	%
Net interest margin					4.38	%					4.37	%
Additional Key Financial Ratios:
Return on average assets					1.25	%					1.21	%
Return on average equity					9.75						9.70
Average equity / average assets					12.84						12.44
Average interest-earning assets / average interest-bearing liabilities					165.64						168.77
Average interest-earning assets / average funding liabilities					106.16						106.06
Non-interest income / average assets					0.70						0.84
Non-interest expense / average assets					3.03						3.24
Efficiency ratio ⁽⁴⁾					64.59						66.53
Adjusted efficiency ratio ⁽⁵⁾					61.41						65.70