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Filed: 5 May 21, 3:55pm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q 
(Mark One)

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2021
OR
☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ to ______________
 Commission File Number 000-26584
BANNER CORPORATION
(Exact name of registrant as specified in its charter)
Washington91-1691604
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $.01 per shareBANRThe NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 Yes[x]No[  ]
Indicate by check mark whether the registrant has submitted electronically 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]No[  ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer[x]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).YesNo[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 April 30, 2021
Common Stock, $.01 par value per share34,797,764 shares
 
1


BANNER CORPORATION AND SUBSIDIARIES

Table of Contents
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements.  The Unaudited Condensed Consolidated Financial Statements of Banner Corporation and Subsidiaries filed as a part of the report are as follows:
Consolidated Statements of Financial Condition as of March 31, 2021 and December 31, 2020
Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and 2020
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2021 and 2020
Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2021 and the Year Ended December 31, 2020
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020
Selected Notes to the Consolidated Financial Statements
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations 
Executive Overview
Comparison of Financial Condition at March 31, 2021 and December 31, 2020
Comparison of Results of Operations for the Three Months Ended March 31, 2021 and 2020
Asset Quality
Liquidity and Capital Resources
Capital Requirements
Item 3 – Quantitative and Qualitative Disclosures About Market Risk 
Market Risk and Asset/Liability Management
Sensitivity Analysis
Item 4 – Controls and Procedures
PART II – OTHER INFORMATION 
Item 1 – Legal Proceedings
Item 1A – Risk Factors
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 – Defaults upon Senior Securities
Item 4 – Mine Safety Disclosures
Item 5 – Other Information
Item 6 – Exhibits
SIGNATURES
2


Special Note Regarding Forward-Looking Statements

Certain matters in this Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements relate to our financial condition, liquidity, results of operations, plans, objectives, future performance or business.  Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.”  Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance and projections of financial items.  These forward 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. The novel coronavirus (COVID-19) pandemic, is adversely affecting us, our clients, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Deterioration in general business and economic conditions, including increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. Other factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following: 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 credit losses and provisions for 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 clients’ needs and developments in the marketplace; the ability to access cost-effective funding; the ability to control operating costs and expenses; the use of estimates in determining fair value of certain assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect employees, and potential associated charges; disruptions, security breaches or other adverse events, failures or interruptions in, or attacks on, information technology systems or on the third-party vendors who perform critical processing functions; changes in financial markets; changes in economic conditions in general and in Washington, Idaho, Oregon and California in particular; secondary market conditions for loans and 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, results of safety and soundness and compliance examinations by the Board of Governors of the Federal Reserve System (the Federal Reserve), 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 (the CARES Act) and the Consolidated Appropriations Act, 2021 the (CAA); 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, including recent vaccination efforts, or other factors; and other risks detailed from time to time in our filings with the U.S. Securities and Exchange Commission (SEC), including this report on Form 10-Q.  Any forward-looking statements are based upon management’s beliefs and assumptions at the time they are made.  We do not undertake and specifically disclaim any obligation to update any forward-looking statements included in this report or the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise.  These risks could cause our actual results to differ materially from those expressed in any forward-looking statements by, or on behalf of, us. Further, many of these risks and uncertainties are currently amplified by and may continue to be amplified by or may, in the future, be amplified by, the COVID-19 pandemic.  In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.

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


3


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) (In thousands, except shares)
March 31, 2021 and December 31, 2020
ASSETSMarch 31,
2021
December 31,
2020
Cash and due from banks$296,184 $311,899 
Interest bearing deposits1,353,743 922,284 
Total cash and cash equivalents1,649,927 1,234,183 
Securities—trading25,039 24,980 
Securities—available-for-sale, amortized cost $2,996,902 and $2,256,189, respectively2,989,760 2,322,593 
Securities—held-to-maturity, net of allowance for credit losses of $98 and $94, respectively, fair value $459,595 and $448,681, respectively441,857 421,713 
     Total securities3,456,656 2,769,286 
Federal Home Loan Bank (FHLB) stock14,001 16,358 
Loans held for sale (includes $60.0 million and $133.6 million, at fair value, respectively)135,263 243,795 
Loans receivable9,947,697 9,870,982 
Allowance for credit losses - loans(156,054)(167,279)
Net loans receivable9,791,643 9,703,703 
Accrued interest receivable49,214 46,617 
Real estate owned (REO), held for sale, net340 816 
Property and equipment, net161,268 164,556 
Goodwill373,121 373,121 
Other intangibles, net19,715 21,426 
Bank-owned life insurance (BOLI)191,388 191,830 
Deferred tax assets, net83,178 65,742 
Operating lease right-of-use assets56,217 55,367 
Other assets137,861 144,823 
Total assets$16,119,792 $15,031,623 
LIABILITIES
Deposits:
Non-interest-bearing$5,994,693 $5,492,924 
Interest-bearing transaction and savings accounts6,647,196 6,159,052 
Interest-bearing certificates906,978 915,320 
Total deposits13,548,867 12,567,296 
Advances from FHLB100,000 150,000 
Other borrowings216,260 184,785 
Subordinated notes, net98,290 98,201 
Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)117,248 116,974 
Operating lease liabilities59,884 59,343 
Accrued expenses and other liabilities313,801 143,300 
Deferred compensation46,625 45,460 
Total liabilities14,500,975 13,365,359 
COMMITMENTS AND CONTINGENCIES (Note 12)00
SHAREHOLDERS’ EQUITY
Preferred stock - $0.01 par value per share, 500,000 shares authorized; 0 shares outstanding at March 31, 2021 and December 31, 2020
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized; 34,735,343 shares issued and outstanding at March 31, 2021; 35,159,200 shares issued and outstanding at December 31, 20201,326,269 1,349,879 
Common stock (non-voting) and paid in capital - $0.01 par value per share, 5,000,000 shares authorized; 0 shares issued and outstanding at March 31, 2021; 0 shares issued and outstanding at December 31, 2020
Retained earnings279,582 247,316 
Carrying value of shares held in trust for stock-based compensation plans(7,614)(7,636)
Liability for common stock issued to stock related compensation plans7,614 7,636 
Accumulated other comprehensive income12,966 69,069 
Total shareholders’ equity1,618,817 1,666,264 
Total liabilities and shareholders’ equity$16,119,792 $15,031,623 
See Selected Notes to the Consolidated Financial Statements
4


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands, except shares and per share amounts)
For the Three Months Ended March 31, 2021 and 2020
Three Months Ended
March 31,
20212020
INTEREST INCOME:
Loans receivable$108,924 $118,926 
Mortgage-backed securities9,371 9,137 
Securities and cash equivalents6,226 3,602 
Total interest income124,521 131,665 
INTEREST EXPENSE:
Deposits3,609 8,750 
FHLB advances934 2,064 
Other borrowings109 116 
Subordinated debt2,208 1,477 
Total interest expense6,860 12,407 
Net interest income117,661 119,258 
(RECAPTURE)/PROVISION FOR CREDIT LOSSES(9,251)23,470 
Net interest income after (recapture)/provision for credit losses126,912 95,788 
NON-INTEREST INCOME:
Deposit fees and other service charges8,939 9,803 
Mortgage banking operations11,440 10,191 
Bank-owned life insurance (BOLI)1,307 1,050 
Miscellaneous2,042 2,639 
23,728 23,683 
Net gain on sale of securities485 78 
Net change in valuation of financial instruments carried at fair value59 (4,596)
Total non-interest income24,272 19,165 
NON-INTEREST EXPENSE:
Salary and employee benefits64,819 59,908 
Less capitalized loan origination costs(9,696)(5,806)
Occupancy and equipment12,989 13,107 
Information/computer data services6,203 5,810 
Payment and card processing expenses4,326 4,240 
Professional and legal expenses3,328 1,919 
Advertising and marketing1,263 1,827 
Deposit insurance expense1,533 1,635 
State/municipal business and use taxes1,065 984 
REO operations, net(242)100 
Amortization of core deposit intangibles1,711 2,001 
Miscellaneous5,509 6,357 
 92,808 92,082 
COVID-19 expenses148 239 
Merger and acquisition related expenses571 1,142 
Total non-interest expense93,527 93,463 
Income before provision for income taxes57,657 21,490 
PROVISION FOR INCOME TAXES10,802 4,608 
NET INCOME$46,855 $16,882 
Earnings per common share:
Basic$1.34 $0.48 
Diluted$1.33 $0.47 
Cumulative dividends declared per common share$0.41 $0.41 
Weighted average number of common shares outstanding:
Basic34,973,383 35,463,541 
Diluted35,303,483 35,640,463 
See Selected Notes to the Consolidated Financial Statements
5


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
For the Three Months Ended March 31, 2021 and 2020
Three Months Ended
March 31,
20212020
NET INCOME$46,855 $16,882 
OTHER COMPREHENSIVE INCOME, NET OF INCOME TAXES:
Unrealized holding (loss) gain on available-for-sale securities arising during the period(73,107)42,178 
Income tax benefit (expense) related to available-for-sale securities unrealized holding (loss) gain17,546 (10,123)
Reclassification for net gain on available-for-sale securities realized in earnings(439)(78)
Income tax expense related to available-for-sale securities realized in earnings105 19 
Changes in fair value of junior subordinated debentures related to instrument specific credit risk(274)19,509 
Income tax benefit (expense) related to junior subordinated debentures66 (4,682)
Other comprehensive (loss) income(56,103)46,823 
COMPREHENSIVE (LOSS) INCOME$(9,248)$63,705 

See Selected Notes to the Consolidated Financial Statements
6


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited) (In thousands, except shares)
For the Three Months Ended March 31, 2021 and the Year Ended December 31, 2020
Common Stock
and Paid in Capital
Retained EarningsAccumulated
Other Comprehensive Income
Shareholders’
Equity
SharesAmount
Balance, January 1, 202035,751,576 $1,373,940 $186,838 $33,256 $1,594,034 
New credit standard (Accounting Standards Codification (ASC) 326) - impact in year of adoption(11,215)(11,215)
Net income16,882 16,882 
Other comprehensive income, net of income tax46,823 46,823 
Accrual of dividends on common stock ($0.41/share)(14,583)(14,583)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered(24,337)1,534 1,534 
Repurchase of common stock(624,780)(31,775)(31,775)
Balance, March 31, 202035,102,459 $1,343,699 $177,922 $80,079 $1,601,700 

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

Continued on next page



7






Common Stock
and Paid in Capital
Retained EarningsAccumulated
Other Comprehensive Income
Shareholders’
Equity
SharesAmounts
Balance, July 1, 202035,157,899 $1,345,096 $201,448 $78,559 $1,625,103 
Net income36,548 36,548 
Other comprehensive loss, net of income tax(2,601)(2,601)
Accrual of dividends on common stock ($0.41/share)(15,037)(15,037)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered669 2,516 2,516 
Balance, September 30, 202035,158,568 $1,347,612 $222,959 $75,958 $1,646,529 
Common Stock
and Paid in Capital
Retained EarningsAccumulated
Other Comprehensive Income
Shareholders’
Equity
SharesAmounts
Balance, October 1, 202035,158,568 $1,347,612 $222,959 $75,958 $1,646,529 
Net income38,957 38,957 
Other comprehensive loss, net of income tax(6,889)(6,889)
Accrual of dividends on common stock ($0.41/share)(14,600)(14,600)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered632 2,267 2,267 
Balance, December 31, 202035,159,200 $1,349,879 $247,316 $69,069 $1,666,264 

Continued on next page
8


Common Stock
and Paid in Capital
Retained EarningsAccumulated
Other Comprehensive Income
Shareholders’
Equity
SharesAmount
Balance, January 1, 202135,159,200 $1,349,879 $247,316 $69,069 $1,666,264 
Net income46,855 46,855 
Other comprehensive loss, net of income tax(56,103)(56,103)
Accrual of dividends on common stock ($0.41/share)(14,589)(14,589)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered76,143 1,714 1,714 
Repurchase of common stock(500,000)(25,324)(25,324)
Balance, March 31, 202134,735,343 $1,326,269 $279,582 $12,966 $1,618,817 



See Selected Notes to the Consolidated Financial Statements
9


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
For the Three Months Ended March 31, 2021 and 2020
Three Months Ended March 31,
20212020
OPERATING ACTIVITIES:
Net income$46,855 $16,882 
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation4,411 4,614 
Deferred income/expense and capitalized servicing rights, net of amortization(7,203)(1,129)
Amortization of core deposit intangibles1,711 2,001 
Gain on sale of securities, net(485)(78)
Net change in valuation of financial instruments carried at fair value(59)4,596 
(Increase) decrease in deferred taxes(17,436)16,507 
Increase in current taxes payable9,506 2,067 
Stock-based compensation2,152 1,872 
Net change in cash surrender value of BOLI(1,002)(1,041)
Gain on sale of loans, excluding capitalized servicing rights(9,487)(8,363)
(Gain) loss on disposal of real estate held for sale and property and equipment, net(298)444 
(Recapture) provision for credit losses(9,251)23,470 
Origination of loans held for sale(301,393)(296,712)
Proceeds from sales of loans held for sale419,412 333,094 
Net change in:
Other assets20,319 (51,061)
Other liabilities164,729 5,400 
Net cash provided from operating activities322,481 52,563 
INVESTING ACTIVITIES:
Purchases of securities—available-for-sale(1,225,723)(143,973)
Principal repayments and maturities of securities—available-for-sale434,651 82,760 
Proceeds from sales of securities—available-for-sale48,784 44,509 
Purchases of securitiesheld-to-maturity
(31,170)(206,155)
Principal repayments and maturities of securities—held-to-maturity9,982 3,786 
Purchases of equity securities(4,750)
Proceeds from sales of equity securities4,796 
Loan originations, net of principal repayments(77,834)16,646 
Proceeds from sales of other loans8,367 5,751 
Purchases of property and equipment(2,334)(3,086)
Proceeds from sale of real estate held for sale and sale of other property1,999 877 
Proceeds from FHLB stock repurchase program2,358 47,840 
Purchase of FHLB stock(39,745)
Other1,418 (72)
Net cash used in investing activities(829,456)(190,862)
FINANCING ACTIVITIES:
Increase in deposits, net981,571 400,895 
Repayment of long term FHLB advances(50,000)
Repayment of overnight and short term FHLB advances, net(203,000)
Increase in other borrowings, net31,474 10,289 
Cash dividends paid(14,565)(50,505)
Taxes paid related to net share settlement of equity awards(437)(339)
Cash paid for the repurchase of common stock(25,324)(31,775)
Net cash provided from financing activities922,719 125,565 
NET CHANGE IN CASH AND CASH EQUIVALENTS415,744 (12,734)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD1,234,183 307,735 
CASH AND CASH EQUIVALENTS, END OF PERIOD$1,649,927 $295,001 
Continued on next page

10


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Three Months Ended March 31, 2021 and 2020
Three Months Ended March 31,
20212020
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid in cash$5,829 $13,014 
Tax refunds received (paid)100 (29)
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Loans, net of discounts, specific loss allowances and unearned income,
transferred to real estate owned and other repossessed assets
1,588 
   Dividends accrued but not paid until after period end1,381 15,277 

See Selected Notes to the Consolidated Financial Statements
11


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 subsidiary, Banner Bank (the Bank).

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 March 31, 2021 for potential recognition or disclosure. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and note disclosures 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 2020 Consolidated Financial Statements and/or schedules to conform to the 2021 presentation. Prior to the first quarter of 2021, the (recapture) provision for credit losses - unfunded loan commitment was recorded as non-interest expense, beginning in the first quarter of 2021 the (recapture) provision for credit losses - unfunded loan commitment is recorded as a component of the provision for credit losses. 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 credit losses, (iii) the valuation of financial assets and liabilities recorded at fair value (iv) the valuation of intangibles, such as goodwill, core deposit intangibles (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, 2020 filed with the SEC (2020 Form 10-K).  There have been no significant changes in our application of these accounting policies during the first three months of 2021.

The information included in this Form 10-Q should be read in conjunction with our 2020 Form 10-K.  Interim results are not necessarily indicative of results for a full year or any other interim period.
12


Note 2:  ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED

Reference Rate Reform (Topic 848)

In March 2020, the Financial Accounting Standards Board (FASB) issued guidance within Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, in response to the scheduled discontinuation of LIBOR on December 31, 2021. The amendments in this ASU provide optional guidance designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements (e.g., loans, debt securities, derivatives, borrowings) necessitated by reference rate reform. Since the issuance of this guidance, the publication cessation of U.S. dollar LIBOR has been extended to June 30, 2023.

The following optional expedients for applying the requirements of certain Topics or Industry Subtopics in the Codification are permitted for contracts that are modified because of reference rate reform and that meet certain scope guidance: 1) modifications of contracts within the scope of Topics 310, Receivables, and 470, Debt, should be accounted for by prospectively adjusting the effective interest rate; 2) modifications of contracts within the scope of Topic 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required under this Topic for modifications not accounted for as separate contracts; 3) modifications of contracts do not require an entity to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract under Subtopic 815-15, Derivatives and Hedging- Embedded Derivatives; and 4) for other Topics or Industry Subtopics in the Codification, the amendments in this ASU also include a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. Upon adoption, an entity may make a one-time election to sell, transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that are classified as held to maturity before January 1, 2020.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.

The amendments in these ASUs are effective upon the issuance date of March 12, 2020 and once adopted will apply to contract modifications made and new hedging relationships entered into through December 31, 2022. The Company will be able to use the expedients in this guidance to manage through the transition away from LIBOR, specifically as they relate to loans and leases. The adoption of this accounting guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.





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Note 3:  SECURITIES

The amortized cost, gross unrealized gains and losses and estimated fair value of securities at March 31, 2021 and December 31, 2020 are summarized as follows (in thousands):
 March 31, 2021
 Amortized CostFair
Value
Trading:
Corporate bonds$27,203 $25,039 
$27,203 $25,039 
 March 31, 2021
 Amortized CostGross Unrealized GainsGross Unrealized LossesAllowance for Credit LossesFair
Value
Available-for-Sale:
U.S. Government and agency obligations$62,922 $740 $(816)$$62,846 
Municipal bonds287,685 14,378 (1,328)300,735 
Corporate bonds243,428 2,290 (290)245,428 
Mortgage-backed or related securities2,399,117 28,710 (50,824)2,377,003 
Asset-backed securities3,750 (2)3,748 
 $2,996,902 $46,118 $(53,260)$$2,989,760 
 March 31, 2021
 Amortized CostGross Unrealized GainsGross Unrealized LossesFair
Value
Allowance for Credit Losses
Held-to-Maturity:
U.S. Government and agency obligations$339 $$$345 $
Municipal bonds381,136 17,740 (1,481)397,395 (61)
Corporate bonds3,190 (7)3,183 (37)
Mortgage-backed or related securities57,290 1,668 (286)58,672 
$441,955 $19,414 $(1,774)$459,595 $(98)

December 31, 2020
Amortized CostFair
Value
Trading:
Corporate bonds$27,203 $24,980 
$27,203 $24,980 

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December 31, 2020
Amortized CostGross Unrealized GainsGross Unrealized LossesAllowance for Credit LossesFair Value
Available-for-Sale:
U.S. Government and agency obligations$141,668 $1,002 $(935)$$141,735 
Municipal bonds283,997 19,523 (2)303,518 
Corporate bonds219,086 2,762 (79)221,769 
Mortgage-backed or related securities1,602,033 45,179 (1,060)1,646,152 
Asset-backed securities9,405 77 (63)9,419 
$2,256,189 $68,543 $(2,139)$$2,322,593 

December 31, 2020
Amortized CostGross Unrealized GainsGross Unrealized LossesFair ValueAllowance for Credit Losses
Held-to-Maturity:
U.S. Government and agency obligations$340 $$$347 $
Municipal bonds370,998 24,130 (94)395,034 (59)
Corporate bonds3,222 (12)3,210 (35)
Mortgage-backed or related securities47,247 2,843 50,090 
$421,807 $26,980 $(106)$448,681 $(94)

Accrued interest receivable on held-to-maturity debt securities was $2.7 million and $3.0 million as of March 31, 2021 and December 31, 2020, respectively, and was $8.2 million and $6.9 million on available-for-sale debt securities as of March 31, 2021 and December 31, 2020, 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 March 31, 2021 and December 31, 2020, the gross unrealized losses and the fair value for securities available-for-sale aggregated by the length of time that individual securities have been in a continuous unrealized loss position were as follows (in thousands):
March 31, 2021
Less Than 12 Months12 Months or MoreTotal
Fair
Value
Unrealized LossesFair
Value
Unrealized LossesFair
Value
Unrealized Losses
Available-for-Sale:
U.S. Government and agency obligations$3,090 $(10)$43,952 $(806)$47,042 $(816)
Municipal bonds50,710 (1,232)8,403 (96)59,113 (1,328)
Corporate bonds24,406 (286)996 (4)25,402 (290)
Mortgage-backed or related securities863,848 (34,608)501,048 (16,216)1,364,896 (50,824)
Asset-backed securities3,748 (2)3,748 (2)
$945,802 $(36,138)$554,399 $(17,122)$1,500,201 $(53,260)

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December 31, 2020
Less Than 12 Months12 Months or MoreTotal
Fair
Value
Unrealized LossesFair
Value
Unrealized LossesFair
Value
Unrealized Losses
Available-for-Sale:
U.S. Government and agency obligations$3,126 $(8)$50,603 $(927)$53,729 $(935)
Municipal bonds495 (2)495 (2)
Corporate bonds3,586 (79)3,586 (79)
Mortgage-backed or related securities181,871 (1,046)2,337 (14)184,208 (1,060)
Asset-backed securities5,676 (63)5,676 (63)
$189,078 $(1,135)$58,616 $(1,004)$247,694 $(2,139)

At March 31, 2021, there were 81 securities—available-for-sale with unrealized losses, compared to 54 at December 31, 2020.  Management does not believe that any individual unrealized loss as of March 31, 2021 or December 31, 2020 resulted from credit loss.  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 0 sales of securities—trading during the three months ended March 31, 2021 or 2020. There were 0 securities—trading in a nonaccrual status at March 31, 2021 or December 31, 2020.  Net unrealized holding gains of $59,000 were recognized during the three months ended March 31, 2021 compared to $4.6 million of net unrealized holding losses recognized during the three months ended March 31, 2020.

The following table presents gross gains and losses on sales of securities available-for-sale (in thousands):

 Three Months Ended
March 31,
 20212020
Available-for-Sale:
Gross Gains$595 $78 
Gross Losses(110)
Balance, end of the period$485 $78 

There were 0 securities—available-for-sale in a nonaccrual status at March 31, 2021 or December 31, 2020.

There were 0 sales of securities—held-to-maturity during the three months ended March 31, 2021 or 2020. There were 0 securities—held-to-maturity in a nonaccrual status or 30 days or more past due at March 31, 2021 or December 31, 2020.

There was one sale of equity securities totaling $4.8 million during the three months ended March 31, 2021 with a resulting net gain of $46,000 and no sales of equity securities during the three months ended March 31, 2020.

The amortized cost and estimated fair value of securities at March 31, 2021, 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.
 March 31, 2021
TradingAvailable-for-SaleHeld-to-Maturity
 Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Maturing in one year or less$$$158,605 $158,816 $5,609 $5,671 
Maturing after one year through five years178,983 187,427 54,888 57,069 
Maturing after five years through ten years680,138 675,201 33,435 35,387 
Maturing after ten years through twenty years27,203 25,039 276,682 285,450 152,353 155,651 
Maturing after twenty years1,702,494 1,682,866 195,670 205,817 
 $27,203 $25,039 $2,996,902 $2,989,760 $441,955 $459,595 

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The following table presents, as of March 31, 2021, investment securities which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law (in thousands):
March 31, 2021
Carrying ValueAmortized CostFair
Value
Purpose or beneficiary:
State and local governments public deposits$206,699 $205,752 $218,842 
Interest rate swap counterparties28,385 27,749 28,550 
Repurchase agreements245,018 250,440 245,018 
Other2,588 2,588 2,648 
Total pledged securities$482,690 $486,529 $495,058 

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, 2021 and December 31, 2020 (in thousands):
March 31, 2021
U.S. Government and agency obligationsMunicipal bondsCorporate bondsMortgage-backed or related securitiesTotal
AAA/AA/A$$349,687 $500 $$350,187 
Not Rated339 31,449 2,690 57,290 91,768 
$339 $381,136 $3,190 $57,290 $441,955 

December 31, 2020
U.S. Government and agency obligationsMunicipal bondsCorporate bondsMortgage-backed or related securitiesTotal
AAA/AA/A$$349,123 $500 $$349,623 
Not Rated340 21,875 2,722 47,247 72,184 
$340 $370,998 $3,222 $47,247 $421,807 

The following table presents the activity in the allowance for credit losses for held-to-maturity debt securities by major type for the three months ended March 31, 2021 and March 31, 2020 (in thousands):
For the Three Months Ended March 31, 2021
U.S. Government and agency obligationsMunicipal bondsCorporate bondsMortgage-backed or related securitiesTotal
Allowance for credit losses - securities
Beginning Balance$$59 $35 $$94 
Provision for credit losses
Ending Balance$$61 $37 $$98 

For the Three Months Ended March 31, 2020
U.S. Government and agency obligationsMunicipal bondsCorporate bondsMortgage-backed or related securitiesTotal
Allowance for credit losses - securities
Beginning Balance$$$$$
Impact of adopting ASC 32628 35 63 
Provision for credit losses33 35 
Ending Balance$$61 $37 $$98 
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Note 4: LOANS RECEIVABLE AND THE ALLOWANCE FOR CREDIT LOSSES - LOANS

The following table presents the loans receivable at March 31, 2021 and December 31, 2020 by class (dollars in thousands).
 March 31, 2021December 31, 2020
 AmountPercent of TotalAmountPercent of Total
Commercial real estate:    
Owner-occupied$1,045,656 10.5 %$1,076,467 10.9 %
Investment properties1,931,805 19.4 1,955,684 19.8 
Small balance CRE639,330 6.4 573,849 5.8 
Multifamily real estate433,775 4.3 428,223 4.4 
Construction, land and land development:
Commercial construction199,037 2.0 228,937 2.3 
Multifamily construction305,694 3.1 305,527 3.1 
One- to four-family construction542,840 5.5 507,810 5.1 
Land and land development266,730 2.7 248,915 2.5 
Commercial business:
Commercial business (1)
2,376,594 23.9 2,178,461 22.1 
Small business scored717,502 7.2 743,451 7.5 
Agricultural business, including secured by farmland (2)
262,410 2.6 299,949 3.0 
One- to four-family residential655,627 6.6 717,939 7.3 
Consumer:
Consumer—home equity revolving lines of credit466,132 4.7 491,812 5.0 
Consumer—other104,565 1.1 113,958 1.2 
Total loans9,947,697 100.0 %9,870,982 100.0 %
Less allowance for credit losses - loans(156,054) (167,279) 
Net loans$9,791,643  $9,703,703  

(1)    Includes $1.28 billion and $1.04 billion of U.S. Small Business Administration (SBA) Paycheck Protection Program (PPP) loans as of March 31, 2021 and December 31, 2020, respectively.
(2)    Includes $36.3 million of PPP loans as of March 31, 2021 and none as of December 31, 2020.


Loan amounts are net of unearned loan fees in excess of unamortized costs of $35.5 million as of March 31, 2021 and $25.6 million as of December 31, 2020. Net loans include net discounts on acquired loans of $13.9 million and $16.1 million as of March 31, 2021 and December 31, 2020, respectively. Net loans does not include accrued interest receivable. Accrued interest receivable on loans was $38.2 million as of March 31, 2021 and $36.6 million as of December 31, 2020 and was reported in accrued interest receivable on the Consolidated Statements of Financial Condition.

Purchased credit-deteriorated and purchased non-credit-deteriorated loans. Loans acquired in business combinations are recorded at their fair value at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased credit-deteriorated (PCD) or purchased non-credit-deteriorated. There were no PCD loans acquired for the three months ended March 31, 2021.
Troubled Debt Restructurings. Loans are reported as TDRs when the bank grants one or more concessions to a borrower experiencing financial difficulties that it would not otherwise consider.  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.

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As of March 31, 2021 and December 31, 2020, the Company had TDRs of $7.6 million and $7.9 million, respectively, and 0 commitments to advance additional funds related to TDRs.

There were no new TDRs that occurred during the three months ended March 31, 2021. The following table presents new TDRs that occurred during the three months ended March 31, 2020 (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 business4,796 4,796 
Total$4,796 $4,796 

There were 0 TDRs which incurred a payment default within twelve months of the restructure date during the three-month periods ended March 31, 2021 and 2020. 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 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 for the periods presented.

Risk Ratings 1-5: Pass
Credits with risk ratings of 1 to 5 meet the definition of a pass risk rating. The strength of credits vary within the pass risk ratings, ranging from a risk rated 1 being an exceptional credit to a risk rated 5 being an acceptable credit that requires a more than normal level of supervision.

Risk Rating 6: 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 make the amount and timing of any loss indeterminable.  In these situations taking the loss is inappropriate until the outcome of the pending event is clear.

Risk Rating 9: 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.

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The following tables present the Company’s portfolio of risk-rated loans by class and by grade as of March 31, 2021 and December 31, 2020 (in thousands). Revolving loans that are converted to term loans are treated as new originations in the table below and are presented by year of origination. Term loans that are renewed or extended for periods longer than 90 days are presented as a new origination in the year of the most recent renewal or extension.
March 31, 2021
Term Loans by Year of OriginationRevolving LoansTotal Loans
By class:20212020201920182017Prior
Commercial real estate - owner occupied
Risk Rating
Pass$39,192 $236,836 $158,294 $147,397 $98,352 $266,316 $5,455 $951,842 
Special Mention16,835 2,217 87 19,139 
Substandard45 7,096 24,526 2,329 2,311 38,368 74,675 
Doubtful
Loss
Total Commercial real estate - owner occupied$39,237 $243,932 $199,655 $149,726 $102,880 $304,771 $5,455 $1,045,656 
Commercial real estate - investment properties
Risk Rating
Pass$41,181 $238,095 $260,934 $284,975 $226,762 $711,557 $20,001 $1,783,505 
Special Mention11,079 11,079 
Substandard422 28,529 11,383 20,864 36,212 39,811 137,221 
Doubtful
Loss
Total Commercial real estate - investment properties$41,603 $266,624 $272,317 $305,839 $262,974 $762,447 $20,001 $1,931,805 
Multifamily real estate
Risk Rating
Pass$16,005 $76,245 $71,073 $37,683 $93,037 $133,912 $2,080 $430,035 
Special Mention
Substandard2,312 1,428 3,740 
Doubtful
Loss
Total Multifamily real estate$16,005 $78,557 $72,501 $37,683 $93,037 $133,912 $2,080 $433,775 
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March 31, 2021
Term Loans by Year of OriginationRevolving LoansTotal Loans
By class:20212020201920182017Prior
Commercial construction
Risk Rating
Pass$4,182 $94,483 $42,572 $38,566 $332 $527 $$180,662 
Special Mention5,967 5,967 
Substandard3,507 3,938 4,865 98 12,408 
Doubtful
Loss
Total Commercial construction$7,689 $94,483 $52,477 $43,431 $332 $625 $$199,037 
Multifamily construction
Risk Rating
Pass$26,801 $84,144 $128,336 $51,514 $14,899 $$$305,694 
Special Mention
Substandard
Doubtful
Loss
Total Multifamily construction$26,801 $84,144 $128,336 $51,514 $14,899 $$$305,694 
One- to four- family construction
Risk Rating
Pass$204,174 $324,068 $10,374 $$$$3,537 $542,153 
Special Mention
Substandard356 331 687 
Doubtful
Loss
Total One- to four- family construction$204,530 $324,068 $10,705 $$$$3,537 $542,840 
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March 31, 2021
Term Loans by Year of OriginationRevolving LoansTotal Loans
By class:20212020201920182017Prior
Land and land development
Risk Rating
Pass$50,665 $141,075 $26,180 $12,004 $6,567 $10,249 $16,751 $263,491 
Special Mention
Substandard2,869 14 28 141 187 3,239 
Doubtful
Loss
Total Land and land development$53,534 $141,089 $26,208 $12,145 $6,754 $10,249 $16,751 $266,730 
Commercial business
Risk Rating
Pass$440,419 $1,103,935 $211,237 $191,647 $62,188 $100,296 $211,777 $2,321,499 
Special Mention75 96 3,184 752 104 10,487 14,698 
Substandard2,235 3,620 4,912 18,140 4,860 1,583 5,047 40,397 
Doubtful
Loss
Total Commercial business$442,729 $1,107,651 $219,333 $209,787 $67,800 $101,983 $227,311 $2,376,594 
Agricultural business including secured by farmland
Risk Rating
Pass$12,322 $31,316 $55,503 $29,215 $20,206 $44,027 $61,005 $253,594 
Special Mention810 810 
Substandard445 2,548 803 144 2,175 1,891 8,006 
Doubtful
Loss
Total Agricultural business including secured by farmland$12,322 $31,761 $58,051 $30,018 $21,160 $46,202 $62,896 $262,410 

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December 31, 2020
Term Loans by Year of OriginationRevolving LoansTotal Loans
By class:20202019201820172016Prior
Commercial real estate - owner occupied
Risk Rating
Pass$243,100 $156,838 $156,817 $122,484 $92,312 $212,792 $3,379 $987,722 
Special Mention4,560 2,251 1,869 149 8,829 
Substandard7,923 26,914 3,040 2,516 11,731 27,792 79,916 
Doubtful
Loss
Total Commercial real estate - owner occupied$251,023 $188,312 $159,857 $127,251 $104,043 $242,453 $3,528 $1,076,467 
Commercial real estate - investment properties
Risk Rating
Pass$237,553 $262,543 $299,452 $218,018 $278,348 $502,914 $20,062 $1,818,890 
Special Mention2,712 2,730 1,856 7,298 
Substandard19,812 11,418 20,352 36,310 23,027 18,577 129,496 
Doubtful
Loss
Total Commercial real estate - investment properties$257,365 $276,673 $319,804 $254,328 $304,105 $523,347 $20,062 $1,955,684 
Multifamily real estate
Risk Rating
Pass$78,632 $69,825 $39,343 $93,442 $44,395 $96,863 $1,983 $424,483 
Special Mention
Substandard2,312 1,428 3,740 
Doubtful
Loss
Total Multifamily real estate$80,944 $71,253 $39,343 $93,442 $44,395 $96,863 $1,983 $428,223 






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December 31, 2020
Term Loans by Year of OriginationRevolving LoansTotal Loans
By class:20202019201820172016Prior
Commercial construction
Risk Rating
Pass$83,506 $67,152 $41,299 $6,038 $2,158 $1,129 $$201,282 
Special Mention5,963 5,963 
Substandard12,913 3,808 4,873 98 21,692 
Doubtful
Loss
Total Commercial construction$96,419 $76,923 $46,172 $6,038 $2,256 $1,129 $$228,937 
Multifamily construction
Risk Rating
Pass$79,710 $151,141 $59,744 $14,932 $$$$305,527 
Special Mention
Substandard
Doubtful
Loss
Total Multifamily construction$79,710 $151,141 $59,744 $14,932 $$$$305,527 
One- to four- family construction
Risk Rating
Pass$461,294 $35,910 $$$$$7,581 $504,785 
Special Mention1,563 630 2,193 
Substandard501 331 832 
Doubtful
Loss
Total One- to four- family construction$463,358 $36,241 $$$$$8,211 $507,810 







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December 31, 2020
Term Loans by Year of OriginationRevolving LoansTotal Loans
By class:20202019201820172016Prior
Land and land development
Risk Rating
Pass$156,450 $37,397 $16,560 $6,801 $6,264 $4,840 $17,020 $245,332 
Special Mention
Substandard14 30 3,047 190 302 3,583 
Doubtful
Loss
Total Land and land development$156,464 $37,427 $19,607 $6,991 $6,264 $5,142 $17,020 $248,915 
Commercial business
Risk Rating
Pass$1,243,276 $230,845 $203,051 $65,524 $38,757 $66,206 $264,741 $2,112,400 
Special Mention103 412 829 115 9,507 10,966 
Substandard6,624 14,413 18,569 5,224 1,320 453 8,492 55,095 
Doubtful
Loss
Total Commercial business$1,250,003 $245,670 $221,620 $71,577 $40,077 $66,774 $282,740 $2,178,461 
Agricultural business including secured by farmland
Risk Rating
Pass$32,032 $62,058 $31,381 $22,635 $22,394 $24,950 $91,660 $287,110 
Special Mention810 537 1,347 
Substandard1,542 2,652 1,076 163 675 3,049 2,335 11,492 
Doubtful
Loss
Total Agricultural business including secured by farmland$33,574 $64,710 $32,457 $23,608 $23,069 $28,536 $93,995 $299,949 






25


The following tables present the Company’s portfolio of non-risk-rated loans by class and delinquency status as of March 31, 2021 and December 31, 2020 (in thousands). Revolving loans that are converted to term loans are treated as new originations in the table below and are presented by year of origination. Term loans that are renewed or extended for periods longer than 90 days are presented as a new origination in the year of the most recent renewal or extension.
March 31, 2021
Term Loans by Year of OriginationRevolving LoansTotal Loans
By class:20212020201920182017Prior
Small balance CRE
Past Due Category
Current$16,636 $86,223 $83,030 $89,631 $83,972 $275,125 $1,059 $635,676 
30-59 Days Past Due895 895 
60-89 Days Past Due1,978 1,978 
90 Days + Past Due558 223 781 
Total small balance CRE$16,636 $86,223 $83,030 $89,631 $84,530 $278,221 $1,059 $639,330 
Small business scored
Past Due Category
Current$36,376 $148,553 $134,717 $114,934 $78,944 $99,736 $100,192 $713,452 
30-59 Days Past Due50 17 139 694 82 357 121 1,460 
60-89 Days Past Due755 54 89 47 948 
90 Days + Past Due130 18 280 617 597 1,642 
Total small business scored$36,426 $149,455 $134,928 $115,997 $79,690 $100,690 $100,316 $717,502 
One- to four- family residential
Past Due Category
Current$16,134 $113,853 $80,610 $79,090 $82,592 $276,047 $2,740 $651,066 
30-59 Days Past Due277 247 369 94 987 
60-89 Days Past Due19 21 
90 Days + Past Due41 972 174 2,366 3,553 
Total One- to four- family residential$16,175 $114,130 $81,582 $79,530 $82,961 $278,509 $2,740 $655,627 

26


March 31, 2021
Term Loans by Year of OriginationRevolving LoansTotal Loans
By class:20212020201920182017Prior
Consumer—home equity revolving lines of credit
Past Due Category
Current$8,652 $1,216 $3,046 $3,089 $2,484 $2,888 $442,660 $464,035 
30-59 Days Past Due64 193 207 464 
60-89 Days Past Due109 109 
90 Days + Past Due413 196 127 556 232 1,524 
Total Consumer—home equity revolving lines of credit$8,652 $1,216 $3,523 $3,285 $2,720 $3,637 $443,099 $466,132 
Consumer-other
Past Due Category
Current$2,738 $19,754 $11,549 $12,375 $9,931 $24,136 $23,893 $104,376 
30-59 Days Past Due13 56 60 131 
60-89 Days Past Due27 10 17 58 
90 Days + Past Due
Total Consumer-other$2,738 $19,754 $11,576 $12,392 $9,933 $24,202 $23,970 $104,565 





27


December 31, 2020
Term Loans by Year of OriginationRevolving LoansTotal Loans
By class:20202019201820172016Prior
Small balance CRE
Past Due Category
Current$56,544 $80,090 $84,749 $77,637 $68,791 $202,653 $2,550 $573,014 
30-59 Days Past Due
60-89 Days Past Due45 45 
90 Days + Past Due567 223 790 
Total small balance CRE$56,544 $80,090 $84,749 $78,249 $68,791 $202,876 $2,550 $573,849 
Small business scored
Past Due Category
Current$157,161 $145,037 $126,578 $89,734 $47,909 $63,347 $109,287 $739,053 
30-59 Days Past Due129 62 310 723 230 1,459 
60-89 Days Past Due98 147 140 352 151 891 
90 Days + Past Due73 228 800 484 169 248 46 2,048 
Total small business scored$157,461 $145,474 $127,691 $91,081 $48,082 $63,948 $109,714 $743,451 
One- to four- family residential
Past Due Category
Current$105,411 $90,425 $92,232 $101,491 $60,738 $254,850 $3,164 $708,311 
30-59 Days Past Due1,051 1,302 829 1,438 4,620 
60-89 Days Past Due19 936 955 
90 Days + Past Due114 1,185 456 169 2,129 4,053 
Total One- to four- family residential$106,462 $90,539 $94,738 $102,776 $60,907 $259,353 $3,164 $717,939 

28


December 31, 2020
Term Loans by Year of OriginationRevolving LoansTotal Loans
By class:20202019201820172016Prior
Consumer—home equity revolving lines of credit
Past Due Category
Current$10,522 $2,617 $2,553 $3,359 $1,372 $2,154 $466,490 $489,067 
30-59 Days Past Due50 409 459 
60-89 Days Past Due202 237 439 
90 Days + Past Due312 198 564 286 255 232 1,847 
Total Consumer—home equity revolving lines of credit$10,522 $3,131 $2,751 $3,923 $1,658 $2,696 $467,131 $491,812 
Consumer-other
Past Due Category
Current$21,811 $13,377 $13,936 $11,433 $8,575 $18,802 $25,460 $113,394 
30-59 Days Past Due48 35 15 22 46 26 44 236 
60-89 Days Past Due242 33 21 14 18 328 
90 Days + Past Due
Total Consumer-other$22,101 $13,412 $13,951 $11,488 $8,642 $18,842 $25,522 $113,958 

29


The following tables provide the amortized cost basis of collateral-dependent loans as of March 31, 2021 and December 31, 2020 (in thousands). Our collateral dependent loans presented in the tables below have no significant concentrations by property type or location.
 March 31, 2021
Real EstateAccounts ReceivableEquipmentInventoryTotal
Commercial real estate:  
Owner-occupied$4,684 $$$$4,684 
Investment properties12,568 12,568 
Small balance CRE3,090 3,090 
Commercial business
Commercial business557 73 630 
Small business scored43 47 90 
Agricultural business, including secured by farmland427 930 1,357 
Total$21,369 $$1,050 $$22,419 

 December 31, 2020
Real EstateAccounts ReceivableEquipmentInventoryTotal
Commercial real estate:  
Owner-occupied$7,506 $$$$7,506 
Investment properties8,979 8,979 
Small balance CRE567 567 
Land and land development302 302 
Commercial business
Commercial business557 557 
Small business scored44 47 91 
Agricultural business, including secured by farmland427 984 1,411 
One- to four-family residential196 196 
Total$18,578 $$1,031 $$19,609 

30



The following tables provide additional detail on the age analysis of the Company’s past due loans as of March 31, 2021 and December 31, 2020 (in thousands):
 March 31, 2021
 30-59 Days
Past Due
60-89 Days
Past Due
90 Days or More
Past Due
Total
Past Due
CurrentTotal LoansNon-accrual with no Allowance
Total Non-accrual (1)
Loans 90 Days or More Past Due and Accruing
Commercial real estate:       
Owner-occupied$14,824 $4,687 $587 $20,098 $1,025,558 $1,045,656 $4,687 $5,416 $
Investment properties1,322 3,709 5,032 1,926,773 1,931,805 12,568 12,568 
Small balance CRE895 1,978 781 3,654 635,676 639,330 3,086 3,631 
Multifamily real estate433,775 433,775 
Construction, land and land development:
Commercial construction98 98 198,939 199,037 98 
Multifamily construction— 305,694 305,694 
One- to four-family construction170 170 542,670 542,840 687 
Land and land development14 14 266,716 266,730 201 
Commercial business
Commercial business159 558 228 945 2,375,649 2,376,594 628 1,266 
Small business scored1,460 948 1,642 4,050 713,452 717,502 90 2,928 37 
Agricultural business, including secured by farmland1,536 1,536 260,874 262,410 1,357 1,536 
One- to four-family residential987 21 3,553 4,561 651,066 655,627 4,456 1,524 
Consumer:
Consumer—home equity revolving lines of credit464 109 1,524 2,097 464,035 466,132 2,234 
Consumer—other131 58 189 104,376 104,565 10 
Total$19,091 $9,681 $13,672 $42,444 $9,905,253 $9,947,697 $22,416 $35,031 $1,561 



31


 December 31, 2020
 30-59 Days
Past Due
60-89 Days
Past Due
90 Days or More
Past Due
Total
Past Due
CurrentTotal LoansNon-accrual with no Allowance
Total Non-accrual (1)
Loans 90 Days or More Past Due and Accruing
Commercial real estate:       
Owner-occupied$$182 $1,447 $1,629 $1,074,838 $1,076,467 $7,509 $8,429 $
Investment properties7,981 7,981 1,947,703 1,955,684 8,979 8,979 
Small balance CRE45 790 835 573,014 573,849 567 791 
Multifamily real estate428,223 428,223 
Construction, land and land development:
Commercial construction98 98 228,839 228,937 98 
Multifamily construction305,527 305,527 
One- to four-family construction356 331 687 507,123 507,810 331 
Land and land development317 317 248,598 248,915 302 507 
Commercial business
Commercial business3,247 31 2,088 5,366 2,173,095 2,178,461 555 1,988 889 
Small business scored1,459 891 2,048 4,398 739,053 743,451 91 3,419 136 
Agricultural business, including secured by farmland298 37 1,548 1,883 298,066 299,949 1,412 1,743 
One-to four-family residential4,620 955 4,053 9,628 708,311 717,939 171 3,556 1,899 
Consumer:
Consumer secured by one- to four-family459 439 1,847 2,745 489,067 491,812 2,697 130 
Consumer—other236 328 564 113,394 113,958 22 
Total$10,675 $2,908 $22,548 $36,131 $9,834,851 $9,870,982 $19,586 $32,560 $3,054 

(1)     The Company did not recognize any interest income on non-accrual loans during both the three months ended March 31, 2021 and the year ended December 31, 2020.
32



The following tables provide the activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2021 and 2020 (in thousands):
 For the Three Months Ended March 31, 2021
 Commercial
Real Estate
Multifamily
Real Estate
Construction and LandCommercial BusinessAgricultural BusinessOne- to Four-Family ResidentialConsumerUnallocatedTotal
Allowance for credit losses:        
Beginning balance$57,791 $3,893 $41,295 $35,007 $4,914 $9,913 $14,466 $$167,279 
Provision/(recapture) for credit losses5,359 474 (4,955)(3,786)(297)(2,038)(2,792)(8,035)
Recoveries24 100 979 113 296 1,512 
Charge-offs(3,763)(789)(150)(4,702)
Ending balance$59,411 $4,367 $36,440 $31,411 $4,617 $7,988 $11,820 $$156,054 

The changes in the allowance for credit losses during the three months ended March 31, 2021 were primarily the result of the $8.0 million recapture of provision for credit losses recorded as well as the net charge offs of $3.2 million recognized during the current quarter. The recapture of provision for credit losses for the current quarter primarily reflects the decrease in loan balances, excluding the increase in PPP loans, as well as improvement in the forecasted economic indicators.
 For the Three Months Ended March 31, 2020
 Commercial
 Real Estate
Multifamily
Real Estate
Construction and LandCommercial BusinessAgricultural BusinessOne- to Four-Family ResidentialConsumerUnallocatedTotal
Allowance for credit losses:         
Beginning balance$30,591 $4,754 $22,994 $23,370 $4,120 $4,136 $8,202 $2,392 $100,559 
Impact of Adopting ASC 326(2,864)(2,204)2,515 3,010 (351)7,125 2,973 (2,392)7,812 
Provision/(recapture) for credit losses1,545 321 8,708 6,447 (1,006)539 5,159 21,713 
Recoveries167 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 

33


Note 5:  REAL ESTATE OWNED, NET

The following table presents the changes in REO for the three months ended March 31, 2021 and 2020 (in thousands):
 Three Months Ended
March 31,
 20212020
Balance, beginning of the period$816 $814 
Additions from loan foreclosures1,588 
Proceeds from dispositions of REO(783)
Gain on sale of REO307 
Balance, end of the period$340 $2,402 

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 0 foreclosed one- to four-family residential real estate properties held as REO at March 31, 2021 or December 31, 2020. The Company had $609,000 of one- to four-family residential loans in the process of foreclosure at both March 31, 2021 and December 31, 2020.

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

Goodwill and Other Intangible Assets:  At March 31, 2021, intangible assets are comprised of goodwill and 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. The Company completed an assessment of qualitative factors as of December 31, 2020 and as a result of the economic impact of the COVID-19 pandemic concluded further analysis was required. The Company completed a quantitative goodwill impairment test and concluded the fair value of Banner Bank, the reporting unit, exceeded the carrying value of the reporting unit including goodwill and therefore no impairment existed as of December 31, 2020.

CDI represents the value of transaction-related deposits and the value of the client relationships associated with the deposits. The Company amortizes CDI 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 three months ended March 31, 2021 and the year ended December 31, 2020 (in thousands):
 GoodwillCDITotal
Balance, December 31, 2019$373,121 $29,158 $402,279 
Amortization— (7,732)(7,732)
Balance, December 31, 2020373,121 21,426 394,547 
Amortization— (1,711)(1,711)
Balance, March 31, 2021$373,121 $19,715 $392,836 

The following table presents the estimated amortization expense with respect to CDI as of March 31, 2021 for the periods indicated (in thousands):
Estimated Amortization
Remainder of 2021$4,860 
20225,317 
20233,814 
20242,659 
20251,575 
Thereafter1,490 
 $19,715 

34


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 months ended March 31, 2021 and 2020, 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 $2.65 billion and $2.64 billion at March 31, 2021 and December 31, 2020, respectively.  Custodial accounts maintained in connection with this servicing totaled $3.7 million and $3.8 million at March 31, 2021 and December 31, 2020, respectively.

An analysis of our mortgage servicing rights for the three months ended March 31, 2021 and 2020 is presented below (in thousands):
 Three Months Ended
March 31,
 20212020
Balance, beginning of the period$15,223 $14,148 
Additions—amounts capitalized2,010 1,420 
Additions—through purchase27 63 
Amortization (1)
(1,853)(1,354)
Balance, end of the period (2)
$15,407 $14,277 

(1)    Amortization of mortgage servicing rights is recorded as a reduction of loan servicing income within mortgage banking operations and any unamortized balance is fully amortized if the loan repays in full.
(2)    There was 0 valuation allowance as of both March 31, 2021 and 2020.

Note 7:  DEPOSITS

Deposits consisted of the following at March 31, 2021 and December 31, 2020 (in thousands):
 March 31, 2021December 31, 2020
Non-interest-bearing accounts$5,994,693 $5,492,924 
Interest-bearing checking1,722,085 1,569,435 
Regular savings accounts2,597,731 2,398,482 
Money market accounts2,327,380 2,191,135 
Total interest-bearing transaction and saving accounts6,647,196 6,159,052 
Certificates of deposit:
Certificates of deposit less than or equal to $250,000711,424 718,256 
Certificates of deposit greater than $250,000195,554 197,064 
Total certificates of deposit(1)
906,978 915,320 
Total deposits$13,548,867 $12,567,296 
Included in total deposits:  
Public fund transaction and savings accounts$321,042 $302,875 
Public fund interest-bearing certificates51,021 59,127 
Total public deposits$372,063 $362,002 
Total brokered deposits$$

(1)     Certificates of deposit include $34,000 and $58,000 of acquisition premiums at March 31, 2021 and December 31, 2020, respectively.
35



At March 31, 2021 and December 31, 2020, the Company had certificates of deposit of $200.8 million and $203.6 million, respectively, that were equal to or greater than $250,000.

Scheduled maturities and weighted average interest rates of certificates of deposit at March 31, 2021 are as follows (dollars in thousands):
March 31, 2021
AmountWeighted Average Rate
Maturing in one year or less$705,004 0.71 %
Maturing after one year through two years116,565 1.29 
Maturing after two years through three years61,618 0.81 
Maturing after three years through four years13,244 1.89 
Maturing after four years through five years8,684 0.72 
Maturing after five years1,863 0.95 
Total certificates of deposit$906,978 0.81 %
Note 8:  FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents estimated fair values of the Company’s financial instruments as of March 31, 2021 and December 31, 2020, whether or not measured at fair value in the Consolidated Statements of Financial Condition (dollars in thousands):
 March 31, 2021December 31, 2020
 LevelCarrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
Assets:    
Cash and cash equivalents1$1,649,927 $1,649,927 $1,234,183 $1,234,183 
Securities—trading325,039 25,039 24,980 24,980 
Securities—available-for-sale22,989,760 2,989,760 2,322,593 2,322,593 
Securities—held-to-maturity2418,871 436,484 410,038 436,882 
Securities—held-to-maturity323,084 23,111 11,769 11,799 
Loans held for sale2135,263 136,873 243,795 245,667 
Loans receivable39,947,697 9,967,242 9,870,982 9,810,293 
FHLB stock314,001 14,001 16,358 16,358 
Bank-owned life insurance1191,388 191,388 191,830 191,830 
Mortgage servicing rights315,407 21,176 15,223 18,084 
Derivatives:
Interest rate swaps225,246 25,246 39,066 39,066 
Interest rate lock and forward sales commitments2,36,186 6,186 5,641 5,641 
Liabilities:    
Demand, interest checking and money market accounts210,044,158 10,044,158 9,253,494 9,253,494 
Regular savings22,597,731 2,597,731 2,398,482 2,398,482 
Certificates of deposit2906,978 910,069 915,320 919,920 
FHLB advances2100,000 101,908 150,000 152,779 
Other borrowings2216,260 216,260 184,785 184,785 
Subordinated notes, net398,290 98,290 98,201 98,201 
Junior subordinated debentures3117,248 117,248 116,974 116,974 
Derivatives:
Interest rate swaps217,923 17,923 22,336 22,336 
Interest rate lock and forward sales commitments285 85 1,755 1,755 

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:
36



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. In developing Level 3 measurements, management incorporates whatever market data might be available and uses discounted cash flow models where appropriate. These calculations include projections of future cash flows, including appropriate default and loss assumptions, and market-based discount rates

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 many of the 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 March 31, 2021 and December 31, 2020 (in thousands):
 March 31, 2021
 Level 1Level 2Level 3Total
Assets:    
Securities—trading    
Corporate bonds (Trust Preferred Securities)$$$25,039 $25,039 
Securities—available-for-sale    
U.S. Government and agency obligations62,846 62,846 
Municipal bonds300,735 300,735 
Corporate bonds245,428 245,428 
Mortgage-backed or related securities2,377,003 2,377,003 
Asset-backed securities3,748 3,748 
 2,989,760 2,989,760 
Loans held for sale59,993 59,993 
Derivatives    
Interest rate swaps25,246 25,246 
Interest rate lock and forward sales commitments3,249 2,937 6,186 
$$3,078,248 $27,976 $3,106,224 
Liabilities:    
Junior subordinated debentures$$$117,248 $117,248 
Derivatives    
Interest rate swaps17,923 17,923 
Interest rate lock and forward sales commitments85 85 
 $$18,008 $117,248 $135,256 
37


 December 31, 2020
 Level 1Level 2Level 3Total
Assets:    
Securities—trading    
Corporate bonds (Trust Preferred Securities)$$$24,980 $24,980 
Securities—available-for-sale    
U.S. Government and agency obligations141,735 141,735 
Municipal bonds303,518 303,518 
Corporate bonds221,769 221,769 
Mortgage-backed securities1,646,152 1,646,152 
Asset-backed securities9,419 9,419 
 2,322,593 2,322,593 
Loans held for sale133,554 133,554 
Derivatives    
Interest rate swaps39,066 39,066 
Interest rate lock and forward sales commitments420 5,221 5,641 
 $$2,495,633 $30,201 $2,525,834 
Liabilities:    
Junior subordinated debentures, net of unamortized deferred issuance costs$$$116,974 $116,974 
Derivatives    
Interest rate swaps22,336 22,336 
Interest rate lock and forward sales commitments1,755 1,755 
 $$24,091 $116,974 $141,065 

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 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 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 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 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.
38



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

Limitations: The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2021 and December 31, 2020.  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 March 31, 2021 and December 31, 2020:
Weighted Average Rate / Range
Financial InstrumentsValuation TechniquesUnobservable InputsMarch 31, 2021December 31, 2020
Corporate bonds (TPS securities)Discounted cash flowsDiscount rate4.19 %4.24 %
Junior subordinated debenturesDiscounted cash flowsDiscount rate4.19 %4.24 %
Loans individually evaluatedCollateral valuationsDiscount to appraised value8.5% to 20.0%0.0% to 20.0%
REOAppraisalsDiscount to appraised value68.35 %51.86 %
Interest rate lock commitmentsPricing modelPull-through rate89.15 %86.35 %

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 March 31, 2021, or the passage of time, will result in negative fair value adjustments. At March 31, 2021, the discount rate utilized was based on a credit spread of 400 basis points and three-month LIBOR of 19 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.
39


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 months ended March 31, 2021 and 2020 (in thousands):
Three Months Ended
March 31, 2021
 Level 3 Fair Value Inputs
 TPS SecuritiesBorrowings—Junior Subordinated DebenturesInterest Rate Lock Commitments
Beginning balance$24,980 $116,974 $5,221 
Total gains or losses recognized  
Assets gains (losses)59 — (2,284)
Liabilities losses— 274 — 
Ending balance at March 31, 2021$25,039 $117,248 $2,937 
Three Months Ended
March 31, 2020
 Level 3 Fair Value Inputs
 TPS SecuritiesBorrowings—Junior Subordinated DebenturesInterest Rate Lock Commitments
Beginning balance$25,636 $119,304 $791 
Total gains or losses recognized  
Assets (losses) gains(4,596)— 1,726 
Liabilities gains— (19,509)— 
Ending balance at March 31, 2020$21,040 $99,795 $2,517 

Interest income and dividends from the TPS securities are recorded as a component of interest income. Interest expense related to the junior subordinated debentures is measured based on contractual interest rates and reported in interest expense.  The change in fair value of the junior subordinated debentures, which represents changes in instrument specific credit risk, is recorded in other comprehensive income. See Note 13, Derivatives and Hedging, for detail on gains and losses on Level 3 interest rate lock commitments.

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

The following tables present financial assets measured at fair value on a non-recurring basis and the level within the fair value hierarchy of the fair value measurements for those assets as of March 31, 2021 and December 31, 2020 (in thousands):
 March 31, 2021
 Level 1Level 2Level 3Total
Loans individually evaluated$$$627 $627 
REO340 340 
 December 31, 2020
 Level 1Level 2Level 3Total
Loans individually evaluated$$$3,482 $3,482 
REO816 816 

40


The following table presents the losses resulting from non-recurring fair value adjustments for the three months ended March 31, 2021 and 2020 (in thousands):
Three Months Ended March 31,
20212020
Loans individually evaluated$302 $
REO
Total loss from non-recurring measurements$302 $

Loans individually evaluated: Expected credit losses for loans evaluated individually are measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or when the Bank determines that foreclosure is probable, the expected credit loss is measured based on the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. 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, the Bank will recognize an allowance as the difference between the fair value of the collateral, less costs to sell (if applicable), at the reporting date and the amortized cost basis of the loan. If the fair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis will be limited to the amount previously charged-off by the subsequent changes in the expected credit losses for loans evaluated individually are included within the provision for credit losses in the same manner in which the expected credit loss initially was recognized or as a reduction in the provision that would otherwise be reported.
REO: The Company records REO (acquired through a lending relationship) at fair value on a non-recurring basis. Fair value adjustments on REO are based on updated real estate appraisals which are based on current market conditions. All REO properties are recorded at the lower of the estimated fair value of the real estate, less expected selling costs, or the carrying amount of the defaulted loans. From time to time, non-recurring fair value adjustments to REO are recorded to reflect partial write-downs based on an observable market price or current appraised value of property. Banner considers any valuation inputs related to REO to be Level 3 inputs. The individual carrying values of these assets are reviewed for impairment at least annually and any additional impairment charges are expensed to operations.

Note 9:  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 March 31, 2021, the Company has recognized $450,000 of unrecognized tax benefits for uncertain tax positions. The Company does not anticipate that there are additional uncertain tax positions or that any uncertain tax position which has not been recognized would materially affect the effective tax rate if recognized. 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.

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The following table presents the balances of the Company’s tax credit investments and related unfunded commitments at March 31, 2021 and December 31, 2020 (in thousands):
March 31, 2021December 31, 2020
Tax credit investments$32,613 $33,528 
Unfunded commitments—tax credit investments15,383 18,306 

The following table presents other information related to the Company’s tax credit investments for the three months ended March 31, 2021 and 2020 (in thousands):
Three Months Ended March 31,
20212020
Tax credits and other tax benefits recognized$1,068 $1,007 
Tax credit amortization expense included in provision for income taxes915 809 

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

The following table reconciles basic to diluted weighted average shares outstanding used to calculate earnings per share data for the three months ended March 31, 2021 and 2020 (in thousands, except shares and per share data):
 Three Months Ended
March 31,
 20212020
Net income$46,855 $16,882 
Basic weighted average shares outstanding34,973,383 35,463,541 
Dilutive effect of unvested restricted stock330,100 176,922 
Diluted weighted shares outstanding35,303,483 35,640,463 
Earnings per common share  
Basic$1.34 $0.48 
Diluted$1.33 $0.47 

Note 11:  STOCK-BASED COMPENSATION PLANS

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

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 March 31, 2021, 300,015 restricted stock shares and 403,440 restricted stock units have been granted under the 2014 Plan of which 3,884 restricted stock shares and 148,093 restricted stock units are unvested.

2018 Omnibus Incentive Plan

The 2018 Plan was approved by shareholders on April 24, 2018. The 2018 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, other stock-based awards and other cash awards, and provides for vesting requirements which may include time-based or performance-based conditions. The Company reserved 900,000 shares of common stock for issuance under the 2018 Plan in connection with the exercise of awards. As of March 31, 2021, 503,955 restricted stock units have been granted under the 2018 Plan of which 417,555 restricted stock units are unvested.
42



The expense associated with all restricted stock grants (including restricted stock shares and restricted stock units) was $2.2 million and $1.9 million for the three month periods ended March 31, 2021 and March 31, 2020, respectively. Unrecognized compensation expense for these awards as of March 31, 2021 was $18.5 million and will be amortized over the next 36 months.

Note 12:  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 clients.  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
March 31, 2021December 31, 2020
Commitments to extend credit$3,357,135 $3,207,072 
Standby letters of credit and financial guarantees21,493 18,415 
Commitments to originate loans134,759 101,426 
Risk participation agreement40,789 40,949 
Derivatives also included in Note 14:
Commitments to originate loans held for sale165,236 169,653 
Commitments to sell loans secured by one- to four-family residential properties82,963 79,414 
Commitments to sell securities related to mortgage banking activities199,500 204,000 

In addition to the commitments disclosed in the table above, the Company is committed to funding its’ unfunded tax credit investments (see Note 10, Income Taxes). During 2019, the Company entered into an agreement to invest $10 million in a limited partnership. The Company had funded $4.2 million of the commitment, with $5.8 million of the commitment remaining to be funded at March 31, 2021, compared to $2.8 million of the commitment funded, with $7.2 million to be funded at December 31, 2020. During the first quarter of 2021, the Company entered into an agreement to invest $4.5 million in another limited partnership. At March 31, 2021 the Company had not invested any funds pursuant to this commitment.

Commitments to extend credit are agreements to lend to a client, as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Many of the commitments may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements. Each client’s creditworthiness is evaluated on a case-by-case basis.  The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the client. The type of collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties. The Company’s allowance for credit losses - unfunded loan commitments at March 31, 2021 and December 31, 2020 was $12.1 million and $13.3 million, respectively.

Standby letters of credit are conditional commitments issued to guarantee a client’s performance or payment to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. Banner Bank has a risk participation agreement under which 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 clients 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 client. Banner Bank then attempts to deliver these loans before their rate locks expired. This arrangement generally required delivery of the loans prior to the expiration of the rate lock. Delays in funding the loans would require a lock extension. The cost of a lock extension at times was borne by the client and at times by Banner Bank. These lock extension costs have not had a material impact to the Company’s operations. For mandatory delivery commitments 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 0 counterparty default losses on forward contracts during the three months
43


ended March 31, 2021 or March 31, 2020. 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 clients and forward contracts with market investors and securities broker/dealers. In the event the Company has forward delivery contract commitments in excess of available mortgage loans, the transaction is completed by either paying or receiving a fee to or from the investor or broker/dealer equal to the increase or decrease in the market value of the forward contract.

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 Bank holds a security interest.  Based upon the information known to management at this time, the Company and the Bank 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 March 31, 2021.

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

NOTE 13: 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 client financing needs. Derivative instruments are contracts between two or more parties that have a notional amount and an underlying variable, require no net investment and allow for the net settlement of positions. 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 client financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors such as market-driven interest rates and prices or other economic factors.

Derivatives Designated in Hedge Relationships

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

Under a prior program, clients received fixed interest rate commercial loans and Banner Bank subsequently hedged that fixed-rate loan by entering into an interest rate swap with a dealer counterparty. Banner Bank receives fixed-rate payments from the clients on the loans and makes similar fixed-rate payments to the dealer counterparty on the swaps in exchange for variable-rate payments based on the one-month LIBOR index. Some of these interest rate swaps are designated as fair value hedges. 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 March 31, 2021 and December 31, 2020, the notional values or contractual amounts and fair values of the Company’s derivatives designated in hedge relationships were as follows (in thousands):
Asset DerivativesLiability Derivatives
March 31, 2021December 31, 2020March 31, 2021December 31, 2020
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$248 $$338 $$248 $$338 $

(1)    Included in Loans receivable on the Consolidated Statements of Financial Condition.
(2)    Included in Accrued expenses and other liabilities on the Consolidated Statements of Financial Condition.

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Derivatives Not Designated in Hedge Relationships

Interest Rate Swaps: Banner Bank uses an interest rate swap program for commercial loan clients that provides the client with a variable-rate loan and enters into an interest rate swap in which the client receives a variable-rate payment in exchange for a fixed-rate payment. The Bank offsets its risk exposure by entering into an offsetting interest rate swap with a dealer counterparty for the same notional amount and length of term as the client interest rate swap providing the dealer counterparty with a fixed-rate payment in exchange for a variable-rate payment. These swaps do not qualify as designated hedges; therefore, each swap is accounted for as a free standing derivative.

Mortgage Banking: The Company sells originated one- to four-family 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 mortgage loans held for sale, for which fair value accounting has been elected, that are awaiting sale and delivery into the secondary market. The Company economically hedges the risk of changing interest rates associated with these mortgage loan commitments by entering into forward sales contracts to sell one- to four-family mortgage loans or mortgage-backed securities to broker/dealers at specific prices and dates.

As of March 31, 2021 and December 31, 2020, 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 DerivativesLiability Derivatives
March 31, 2021December 31, 2020March 31, 2021December 31, 2020
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$458,118 $25,241 $451,760 $39,057 $458,118 $17,918 $451,760 $22,327 
Mortgage loan commitments139,668 2,937 140,390 5,221 62,267 85 72,511 199 
Forward sales contracts282,463 3,249 79,414 420 204,000 1,556 
$880,249 $31,427 $671,564 $44,698 $520,385 $18,003 $728,271 $24,082 

(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 $246,000 at March 31, 2021 and $231,000 at December 31, 2020), which are included in Loans receivable.
(2)Included in Accrued expenses and other liabilities on the Consolidated Statements of Financial Condition.

Gains (losses) recognized in income on derivatives not designated in hedge relationships for the three months ended March 31, 2021 and 2020 were as follows (in thousands):
Location on Consolidated
Statements of Operations
Three Months Ended
March 31,
20212020
Mortgage loan commitmentsMortgage banking operations$(2,284)$1,726 
Forward sales contractsMortgage banking operations3,011 (3,068)
$727 $(1,342)

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 March 31, 2021 or December 31, 2020, it could have been required to settle its obligations under the agreements at the termination value. As of March 31, 2021 and December 31, 2020, the termination value of derivatives in a net liability position related to these agreements was $24.1 million and $48.6 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 $55.7 million and $47.1 million as of March 31, 2021 and December 31, 2020, respectively.
45



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, 2021 and December 31, 2020, the variation margin adjustment was a negative adjustment of $6.0 million and $16.9 million, respectively.

The following tables present additional information related to the Company’s derivative contracts, by type of financial instrument, as of March 31, 2021 and December 31, 2020 (in thousands):
March 31, 2021
Gross Amounts of Financial Instruments Not Offset in the Consolidated Statements of Financial Condition
Gross Amounts RecognizedAmounts offset
in the Statement
of Financial Condition
Net Amounts
in the Statement
of Financial Condition
Netting Adjustment Per Applicable Master Netting AgreementsFair Value
of Financial Collateral
in the Statement
of Financial Condition
Net Amount
Derivative assets
Interest rate swaps$25,246 $$25,246 $$$25,246 
$25,246 $$25,246 $$$25,246 
Derivative liabilities
Interest rate swaps$23,877 $(5,954)$17,923 $$(12,881)$5,042 
$23,877 $(5,954)$17,923 $$(12,881)$5,042 
December 31, 2020
Gross Amounts of Financial Instruments Not Offset in the Consolidated Statements of Financial Condition
Gross Amounts RecognizedAmounts offset
in the Statement
of Financial Condition
Net Amounts
in the Statement
of Financial Condition
Netting Adjustment Per Applicable Master Netting AgreementsFair Value
of Financial Collateral
in the Statement
of Financial Condition
Net Amount
Derivative assets
Interest rate swaps$39,066 $$39,066 $$$39,066 
$39,066 $$39,066 $$$39,066 
Derivative liabilities
Interest rate swaps$39,204 $(16,868)$22,336 $$(22,220)$116 
$39,204 $(16,868)$22,336 $$(22,220)$116 

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NOTE 14: REVENUE FROM CONTRACTS WITH CLIENTS

Disaggregation of Revenue:

Deposit fees and other service charges for the three months ended March 31, 2021 and 2020 are summarized as follows (in thousands):
Three Months Ended
March 31,
20212020
Deposit service charges$4,113 $4,832 
Debit and credit card interchange fees5,290 4,884 
Debit and credit card expense(2,520)(1,932)
Merchant services income3,142 3,002 
Merchant services expense(2,532)(2,436)
Other service charges1,446 1,453 
Total deposit fees and other service charges$8,939 $9,803 

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 clients for specific services provided to the client. These fees include such items as wire fees, official check fees, and overdraft fees. These are contract specific to each individual transaction and do not extend beyond the individual transaction. The performance obligation is completed and the fees are recognized at the time the specific transactional service is provided to the client. 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 Bank is used to purchase goods or services at a merchant. The merchant’s bank pays the Bank a default interchange rate set by MasterCard on a transaction by transaction basis. The merchant acquiring bank can stop accepting the Bank’s cards at any time and the Bank 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 Bank’s 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 Bank for card payment services provided to its merchant clients. The Bank has a contract with a third party to provide card payment services to the Bank’s merchants that contract for those services. The third party provider has contracts with the Bank’s merchants to provide the card payment services. The Bank does not have a direct contractual relationship with its merchants for these services. The Bank sets the rates for the services provided by the third party. The third party provider passes the payments made by the Bank’s merchants through to the Bank. The Bank, in turn, pays the third party provider for the services it provides to the Bank’s 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 Bank 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.


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 one subsidiary bank, Banner Bank. Banner Bank is a Washington-chartered commercial bank that conducts business from its main office in Walla Walla, Washington and, as of March 31, 2021, it had 155 branch offices and 18 loan production offices located in Washington, Oregon, California, Idaho and Utah.  Banner Corporation is subject to regulation by the Board of Governors of the Federal Reserve System (the Federal Reserve Board).  Banner Bank (the Bank) is subject to regulation by the Washington State Department of Financial Institutions, Division of Banks and the Federal Deposit Insurance Corporation (the FDIC).  As of March 31, 2021, we had total consolidated assets of $16.12 billion, total loans of $9.95 billion, total deposits of $13.55 billion and total shareholders’ equity of $1.62 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.  The Bank’s primary business is that of traditional banking institutions, accepting deposits and originating loans in locations surrounding their offices in 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
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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, U.S. Small Business Administration (SBA) 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 over the last several years. Despite the impact of the COVID-19 pandemic, Banner’s longer term strategic initiatives continue to focus on originating high quality assets and client acquisition, which we believe will continue to generate strong revenue while maintaining the Company's moderate risk profile.

Our financial results for the quarter ended March 31, 2021 reflect the low interest rate environment, the unprecedented level of market liquidity and the reduction in business activity in many of our markets due the continuing impacts of the COVID-19 pandemic. While we are continuing to offer payment and financial relief programs for borrowers impacted by COVID-19, the number of loans deferred under these programs have decreased significantly since the start of the COVID-19 pandemic. At March 31, 2021, we had 91 loans totaling $33.9 million still on deferral. Of the loans still on deferral, 79 loans totaling $25.7 million are mortgage loans operating under forbearance agreements. Since these loans were performing loans that were current on their payments prior to the COVID-19 pandemic, these modifications are not considered to be troubled debt restructurings pursuant to applicable accounting and regulatory guidance. In addition, the SBA provides assistance to small businesses impacted by COVID-19 through the Paycheck Protection Program (PPP), which was designed to provide near-term relief to help small businesses sustain operations. Under the initial PPP program, Banner funded 9,103 applications totaling $1.15 billion of loans in its service area. In January 2021, Banner began accepting and processing loan applications under the second PPP program enacted in December 2020. As of March 31, 2021, Banner had funded 4,107 applications totaling $410.8 million of loans under the second PPP program. As of March 31, 2021, Banner had received SBA forgiveness for 1,255 PPP loans totaling $259.9 million.

Banner has been taking steps to resume more normal branch activities with specific guidelines in place to help protect the safety of our clients and personnel. To further the well-being of staff and clients, Banner implemented measures to allow employees to work from home to the extent practicable. To facilitate this approach, Banner allocated additional computer equipment to staff and enhanced Banner’s network capabilities with several upgrades. These expenses plus other expenses incurred in response to the COVID-19 pandemic resulted in $148,000 of related costs during the first quarter of 2021, compared to $239,000 of related costs in the first quarter a year ago.

For the quarter ended March 31, 2021, our net income was $46.9 million, or $1.33 per diluted share, compared to net income of $16.9 million, or $0.47 per diluted share, for the quarter ended March 31, 2020. The current quarter was positively impacted by increased production of one- to four-family held-for-sale loans, decreased funding costs, the recapture of provision for credit losses, and increased capitalized loan origination costs primarily related to the origination of PPP loans during the current quarter, partially offset by increased salary and employee benefits expense and lower net interest margin. The year-over-year increase in salary and employee benefits expense includes $1.3 million of severance expense related to a reduction in staffing and a $1.2 million adjustment recorded in the current quarter to increase the liability related to deferred compensation plans. The recapture of provision for credit losses for the current quarter primarily reflects the decrease in loan balances, excluding the increase in PPP loans, as well as improvement in the forecasted economic indicators utilized to calculate the allowance for credit losses.

Our operating results depend primarily on our net interest income, which is the difference between interest income on interest-earning assets, consisting primarily of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of client deposits, FHLB advances, other borrowings, subordinated notes, and junior subordinated debentures. Net interest income is primarily a function of our interest rate spread, which is the difference between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, as well as a function of the average balances of interest-earning assets, interest-bearing liabilities and non-interest-bearing funding sources including non-interest-bearing deposits. Our net interest income decreased $1.6 million, or 1%, to $117.7 million for the quarter ended March 31, 2021, compared to $119.3 million for the same quarter one year earlier. This decrease in net interest income is a result of lower yields on interest-earning assets due to declines in market interest rates as well as a higher percentage of our earnings assets being invested in low yielding short term investments partially offset by decreases in the cost of funding liabilities. The growth in core deposits was largely the result of PPP loan funds deposited into client accounts and an increase in general client liquidity due to reduced business investment and consumer spending during the COVID-19 pandemic.

Our net income is also affected by the level of our non-interest income, including deposit fees and other service charges, results of mortgage banking operations, which includes gains and losses on the sale of loans and servicing fees, gains and losses on the sale of securities, as well as our non-interest expenses and provisions for credit 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 plus total non-interest income) for the first quarter of 2021 increased $3.5 million, or 3%, to $141.9 million, compared to $138.4 million for the same period a year earlier, largely as a result of an increase in non-interest income, partially offset by a decrease in 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 $24.3 million for the quarter ended March 31, 2021, compared to $19.2 million for the quarter ended March 31, 2020, primarily due to recording a $4.6 million reduction in the fair value of financial instruments carried at fair value during the year ago quarter.

Our non-interest expense decreased in the first quarter of 2021 compared to a year earlier largely as a result of increased capitalized loan origination costs, primarily related to the origination of PPP loans during the current quarter, partially offset by increased salary and employee
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benefits expense compared to the same quarter a year ago. Non-interest expense was $93.5 million for both the quarter ended March 31, 2021 and the same quarter a year earlier.

We recorded an $8.0 million recapture of provision for credit losses - loans in the quarter ended March 31, 2021, compared to a $21.7 million provision for credit losses - loans for the quarter ended March 31, 2020. The recapture of provision for credit losses for the current quarter primarily reflects the decrease in loan balances, excluding the increase in PPP loans, as well as improvement in the forecasted economic indicators. The provision for credit losses recorded in the first quarter a year ago reflected the deterioration in forecasted economic indicators and the economic outlook that existed at March 31, 2020 as a result of the COVID-19 pandemic. The allowance for credit losses - loans at March 31, 2021 was $156.1 million, representing 426% of non-performing loans compared to $167.3 million, or 470% of non-performing loans at December 31, 2020. In addition to the allowance for credit losses - loans, Banner maintains an allowance for credit losses - unfunded loan commitments which was $12.1 million at March 31, 2021 compared to $13.3 million at December 31, 2020. We recorded a $1.2 million recapture of provision for credits losses – unfunded commitments in the first quarter of 2021 compared to a $1.7 million provision for credit losses – unfunded commitments during the year ago quarter. Non-performing loans were $36.6 million at March 31, 2021, compared to $35.6 million at December 31, 2020 and $43.7 million a year earlier. (See Note 4, Loans Receivable and the Allowance for Credit Losses, as well as “Asset Quality” below in this Form 10-Q.)

*Non-GAAP financial measures: Net income, revenues and other earnings and expense information excluding fair value adjustments, gains or losses on the sale of securities, merger and acquisition-related expenses, COVID-19 expenses, amortization of CDI, REO operations, state/municipal tax expense and the related tax benefit, are non-GAAP financial measures.  Management has presented these and other non-GAAP financial measures in this discussion and analysis because it believes that they provide useful and comparative information to assess trends in our core operations and to facilitate the comparison of our performance with the performance of our peers.  However, these non-GAAP financial measures are supplemental and are not a substitute for any analysis based on GAAP. Where applicable, we have also presented comparable earnings information using GAAP financial measures.  For a reconciliation of these non-GAAP financial measures, see the tables below.  Because not all companies use the same calculations, our presentation may not be comparable to other similarly titled measures as calculated by other companies. See “Comparison of Results of Operations for the Three Months Ended March 31, 2021 and 2020” 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
March 31,
20212020
ADJUSTED REVENUE
Net interest income (GAAP)$117,661 $119,258 
Total non-interest income24,272 19,165 
Total GAAP revenue141,933 138,423 
Exclude net gain on sale of securities(485)(78)
Exclude change in valuation of financial instruments carried at fair value(59)4,596 
Adjusted Revenue (non-GAAP)$141,389 $142,941 
For the Three Months Ended
March 31,
20212020
ADJUSTED EARNINGS
Net income (GAAP)$46,855 $16,882 
Exclude net gain on sale of securities(485)(78)
Exclude change in valuation of financial instruments carried at fair value(59)4,596 
Exclude merger and acquisition-related costs571 1,142 
Exclude COVID-19 expenses148 239 
Exclude related tax benefit(42)(1,405)
Total adjusted earnings (non-GAAP)$46,988 $21,376 
Diluted earnings per share (GAAP)$1.33 $0.47 
Diluted adjusted earnings per share (non-GAAP)$1.33 $0.60 
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For the Three Months Ended
March 31,
20212020
ADJUSTED EFFICIENCY RATIO
Non-interest expense (GAAP)$93,527 $93,463 
Exclude merger and acquisition-related costs(571)(1,142)
Exclude COVID-19 expenses(148)(239)
Exclude CDI amortization(1,711)(2,001)
Exclude state/municipal tax expense(1,065)(984)
Exclude REO operations242 (100)
Adjusted non-interest expense (non-GAAP)$90,274 $88,997 
Net interest income (GAAP)$117,661 $119,258 
Non-interest income (GAAP)24,272 19,165 
Total revenue141,933 138,423 
Exclude net gain on sale of securities(485)(78)
Exclude net change in valuation of financial instruments carried at fair value(59)4,596 
Adjusted revenue (non-GAAP)$141,389 $142,941 
Efficiency ratio (GAAP)65.90 %67.52 %
Adjusted efficiency ratio (non-GAAP)63.85 %62.26 %



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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
March 31, 2021December 31, 2020March 31, 2020
Shareholders’ equity (GAAP)$1,618,817 $1,666,264 $1,601,700 
   Exclude goodwill and other intangible assets, net392,836 394,547 400,278 
Tangible common shareholders’ equity (non-GAAP)$1,225,981 $1,271,717 $1,201,422 
Total assets (GAAP)$16,119,792 $15,031,623 $12,780,950 
   Exclude goodwill and other intangible assets, net392,836 394,547 400,278 
Total tangible assets (non-GAAP)$15,726,956 $14,637,076 $12,380,672 
Common shareholders’ equity to total assets (GAAP)10.04 %11.09 %12.53 %
Tangible common shareholders’ equity to tangible assets (non-GAAP)7.80 %8.69 %9.70 %
TANGIBLE COMMON SHAREHOLDERS’ EQUITY PER SHARE
Tangible common shareholders’ equity (non-GAAP)$1,225,981 $1,271,717 $1,201,422 
Common shares outstanding at end of period34,735,343 35,159,200 35,102,459 
Common shareholders’ equity (book value) per share (GAAP)$46.60 $47.39 $45.63 
Tangible common shareholders’ equity (tangible book value) per share (non-GAAP)$35.29 $36.17 $34.23 

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 credit losses, (iii) the valuation of financial assets and liabilities recorded at fair value, (iv) the valuation of intangibles, such as goodwill, core deposit intangibles and mortgage servicing rights, (v) the valuation of real estate held for sale, (vi) the valuation of assets and liabilities acquired in business combinations and subsequent recognition of related income and expense, and (vii) the valuation of or recognition of deferred tax assets and liabilities.  These policies and judgments, estimates and assumptions are described in greater detail below.  Management believes the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate based on the factual circumstances at the time.  However, given the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition.  Further, subsequent changes in economic or market conditions could have a material impact on these estimates and our financial condition and operating results in future periods.  There have been no significant changes in our application of accounting policies since December 31, 2020.  For additional information concerning critical accounting policies, see the Selected Notes to the Consolidated Financial Statements and the following:

Interest Income: (Notes 3 and 4) 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
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the loans are then placed on nonaccrual status.  All previously accrued but uncollected interest is deducted from interest income upon transfer to nonaccrual status.  For any future payments collected, interest income is recognized only upon management’s assessment that there is a strong likelihood that the full amount of a loan will be repaid or recovered.  Management’s assessment of the likelihood of full repayment involves judgment including determining the fair value of the underlying collateral which can be impacted by the economic environment. A loan may be put on nonaccrual status sooner than this policy would dictate if, in management’s judgment, the amounts owed, principal or interest, may be uncollectable.  While less common, similar interest reversal and nonaccrual treatment is applied to investment securities if their ultimate collectability becomes questionable. Loans modified due to the COVID-19 pandemic are considered current if they are less than 30 days past due on the contractual payments at the time the loan modification program was put in place and therefore continue to accrue interest unless the interest is being waived.

Provision and Allowance for Credit Losses - Loans: (Note 4) The methodology for determining the allowance for credit losses - loans is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for credit losses. Among the material estimates required to establish the allowance for credit losses - loans are: a reasonable and supportable forecast; a reasonable and supportable forecast period and the reversion period; value of collateral; strength of guarantors; the amount and timing of future cash flows for loans individually evaluated; and determination of the qualitative loss factors. All of these estimates are susceptible to significant change. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. The Bank has elected to exclude accrued interest receivable from the amortized cost basis in their estimate of the allowance for credit losses. The provision for credit losses reflects the amount required to maintain the allowance for credit losses at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves.  The Company has established systematic methodologies for the determination of the adequacy of the Company’s allowance for credit losses.  The methodologies are set forth in a formal policy and take into consideration the need for a valuation allowance for loans evaluated on a collective (pool) basis which have similar risk characteristics as well as allowances that are tied to individual loans that do not share risk characteristics.  The Company increases its allowance for credit losses by charging provisions for credit losses on its consolidated statement of operations. Losses related to specific assets are applied as a reduction of the carrying value of the assets and charged against the allowance for credit loss reserve when management believes the uncollectibility of a loan balance is confirmed.  Recoveries on previously charged off loans are credited to the allowance for credit losses.  

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

The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. In estimating the component of the allowance for credit losses for loans that share common risk characteristics, loans are pooled based on loan type and areas of risk 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
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and volume of the loans, the remaining terms and the extent of prepayments on the loans, the volume and severity of past due and classified loans as well as the value of the underlying collateral on loans in which the collateral dependent practical expedient has not been used. Management also considers the Company’s lending policies, the quality of the Company’s credit review system, the quality of the Company’s management and lending staff, and the regulatory and economic environments in the areas in which the Company’s lending activities are concentrated.

Loans that do not share risk characteristics with other loans in the portfolio are individually evaluated for impairment and are not included in the collective evaluation.  Factors involved in determining whether a loan should be individually evaluated include, but are not limited to, the financial condition of the borrower and the value of the underlying collateral.  Expected credit losses for loans evaluated individually are measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or when the 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, the Bank 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 Bank.

Some of the Bank’s loans are reported as troubled debt restructures (TDRs).  Loans are reported as TDRs when the Bank grants a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider.  Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for a transaction of similar risk.  The allowance for credit losses on a TDR is determined using the same method as all other loans held for investment, except when the value of the concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method the allowance for credit losses is determined by discounting the expected future cash flows at the original interest rate of the loan. The Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) and the Consolidated Appropriations Act, 2021 (CAA) 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 and regulatory guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. The CAA extends relief offered under the CARES Act related to TDRs as a result of COVID-19 through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever is earlier.

Fair Value Accounting and Measurement: (Note 8) 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 in Business Combinations: (Notes 2 and 4) Loans acquired in business combinations are recorded at their fair value at the acquisition date. Establishing the fair value of acquired loans involves a significant amount of judgment, including determining the credit discount based upon historical data adjusted for current economic conditions and other factors. If any of these assumptions are inaccurate actual credit losses could vary significantly from the credit discount used to calculate the fair value of the acquired loans. Acquired loans are evaluated upon acquisition and classified as either purchased credit-deteriorated or purchased non-credit-deteriorated. Purchased credit-deteriorated (PCD) loans have experienced more than insignificant credit deterioration since origination. For PCD loans, an allowance for credit losses is determined at the acquisition date using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The loan’s fair value grossed up for the allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through a provision for credit losses.

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

Goodwill: (Note 6) Goodwill represents the excess of the purchase consideration paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination and is not amortized but is reviewed annually, or more frequently as current circumstances and conditions warrant, for impairment. An assessment of qualitative factors is completed to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The qualitative assessment involves judgment by management on determining whether there have been any triggering events that have occurred which would indicate potential impairment. If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed. The quantitative goodwill impairment test is used to identify the existence of impairment and the amount of impairment loss and compares the reporting unit’s estimated fair values, including goodwill, to its carrying amount. If the fair value exceeds the carry amount then goodwill is not considered impaired. If the carrying amount exceeds its fair value, an impairment loss would be recognized equal to the amount of excess, limited to the amount of total goodwill allocated to the reporting unit. The impairment loss would be recognized as a charge to earnings. The Company completed an assessment of qualitative factors as of December 31, 2020 and as a result of the economic impact of the COVID-19 pandemic concluded further analysis was required. The Company completed a quantitative goodwill impairment test and concluded the fair value of the reporting unit, Banner Bank, exceeded the carrying value of the reporting unit including goodwill and therefore no impairment existed as of December 31, 2020. Changes in the economic environment, operations of the reporting unit or other adverse events could result in future impairment charges which could have a material adverse impact on the Company’s operating results.

Other Intangible Assets: (Note 6) Other intangible assets consists primarily of core deposit intangibles (CDI), which are amounts recorded in business combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the client relationships associated with the deposits.  Core deposit intangibles are being amortized on an accelerated basis over a weighted average estimated useful life of eight years.  The determination of the estimated useful life of the core deposit intangible involves judgment by management. The actual life of the core deposit intangible could vary significantly from the estimated life. These assets are reviewed at least annually for events or circumstances that could impact their recoverability.  These events could include loss of the underlying core deposits, increased competition or adverse changes in the economy.  To the extent other identifiable intangible assets are deemed unrecoverable, impairment losses are recorded in other non-interest expense to reduce the carrying amount of the assets.

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

Real Estate Owned Held for Sale: (Note 5) 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 Bank 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 Bank’s control or because of changes in the Bank’s strategies for recovering the investment.

Income Taxes and Deferred Taxes: (Note 9) The Company and its wholly-owned subsidiaries file consolidated U.S. federal income tax returns, as well as state income tax returns in Oregon, California, Utah, Idaho and Montana.  Income taxes are accounted for using the asset and liability method.  Under this method a deferred tax asset or liability is determined based on the enacted tax rates which are expected to be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’s income tax returns.  The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.  We assess the appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other pertinent information and maintain tax accruals consistent with our evaluation. Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations by the tax authorities and newly enacted statutory, judicial and regulatory guidance that could impact the relative merits of tax positions. These changes, when they occur, impact accrued taxes and can materially affect our operating results. A valuation allowance is required to be recognized if it is more likely than not that all or a portion of our deferred tax assets will not be realized. The evaluation pertaining to the tax expense and related deferred tax asset and liability balances involves a high degree of judgment and subjectivity around the measurement and resolution of these matters. The ultimate realization of the deferred tax assets is dependent upon the existence, or generation, of taxable income in the periods when those temporary differences and net operating loss and credit carryforwards are deductible.

Legal Contingencies: In the normal course of our business, we have various legal proceedings and other contingent matters pending. We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We assess our potential liability by analyzing our litigation and regulatory matters using available information. We develop our views on estimated losses in consultation with outside counsel handling our defense in these matters, which involves an analysis
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of potential results, assuming a combination of litigation and settlement strategies. The estimated losses often involve a level of subjectivity and usually are a range of reasonable losses and not an exact number, in those situations we accrue the best estimate within the range or the low end of the range if no estimate within the range is better than another.
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Comparison of Financial Condition at March 31, 2021 and December 31, 2020

General:  Total assets increased $1.09 billion, to $16.12 billion at March 31, 2021, from $15.03 billion at December 31, 2020. The increase was largely the result of an increase in retail deposits during the first quarter of 2021, as well as the origination of PPP loans.
Loans and lending: Loans are our most significant and generally highest yielding earning assets. Under normal economic conditions, 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. Our loan to deposit ratio at March 31, 2020 was 74%, which reflects the unprecedented level of market liquidity and decrease in business activity due to the impacts of the COVID-19 pandemic. We offer a wide range of loan products to meet the demands of our clients. Our lending activities are primarily directed toward the origination of real estate and commercial loans. Total loans receivable increased $76.7 million during the three months ended March 31, 2021, primarily reflecting increased commercial business loan balances due to PPP loan originations and, to a lesser extent, increased commercial real estate, multifamily real estate, multifamily construction loan, one-to-four family construction, and land and land development balances, partially offset by decreased commercial construction, one-to-four family residential, consumer, and agricultural business loan balances due to lower demand for certain loan types as a result of the COVID-19 pandemic as well seasonal and other market factors. Excluding PPP loans, total loans receivable decreased $195.4 million during the three months ended March 31, 2021. At March 31, 2021, our loans receivable totaled $9.95 billion compared to $9.87 billion at December 31, 2020 and $9.29 billion at March 31, 2020.

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
Mar 31, 2021Dec 31, 2020Mar 31, 2020Prior Year EndPrior Year
Commercial real estate:
Owner-occupied$1,045,656 $1,076,467 $1,024,089 (2.9)%2.1 %
Investment properties1,931,805 1,955,684 2,007,537 (1.2)(3.8)
Small balance CRE639,330 573,849 591,783 11.4 8.0 
Multifamily real estate433,775 428,223 400,206 1.3 8.4 
Construction, land and land development:
Commercial construction199,037 228,937 205,476 (13.1)(3.1)
Multifamily construction305,694 305,527 250,410 0.1 22.1 
One- to four-family construction542,840 507,810 534,956 6.9 1.5 
Land and land development266,730 248,915 232,506 7.2 14.7 
Commercial business:
Commercial business1,096,303 1,133,989 1,357,817 (3.3)(19.3)
PPP1,280,291 1,044,472 — 22.6 — 
Small business scored717,502 743,451 807,539 (3.5)(11.1)
Agricultural business, including secured by farmland:
Agricultural business, including secured by farmland226,094 299,949 330,257 (24.6)(31.5)
PPP36,316 — — nmnm
One- to four-family residential655,627 717,939 881,387 (8.7)(25.6)
Consumer:
Consumer—home equity revolving lines of credit466,132 491,812 521,618 (5.2)(10.6)
Consumer—other104,565 113,958 140,163 (8.2)(25.4)
Total loans receivable$9,947,697 $9,870,982 $9,285,744 0.8 %7.1 %

Our commercial real estate loans for owner-occupied, investment properties, and small balance CRE totaled $3.62 billion, or 36% of our loan portfolio at March 31, 2021. In addition, multifamily residential real estate loans totaled $433.8 million and comprised 4% of our loan portfolio. Commercial real estate loans increased by $10.8 million during the first three months of 2021 while multifamily real estate loans increased by $5.6 million.

We also originate commercial, multifamily, and residential construction, land and land development loans, which totaled $1.31 billion, or 13% of our loan portfolio at March 31, 2021, compared to $1.29 billion at December 31, 2020 and $1.22 billion at March 31, 2020. Residential construction balances increased $35.0 million, or 7%, to $542.8 million at March 31, 2021 compared to $507.8 million at December 31, 2020 and increased $7.9 million, or 1%, compared to $535.0 million at March 31, 2020. 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
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residential loans upon completion of the homes and are often sold in the secondary market. Residential construction loans represented approximately 5% of our total loan portfolio at March 31, 2021.

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.  Our commercial business lending, to a lesser extent, includes participation in certain syndicated loans, including shared national credits, which totaled $116.9 million at March 31, 2021. Our commercial and agricultural business loans increased $134.6 million to $3.36 billion at March 31, 2021, compared to $3.22 billion at December 31, 2020, and increased $860.9 million, or 34%, compared to $2.50 billion at March 31, 2020. The increase reflects growth in SBA PPP loans during the first three months of 2021 and the second quarter of 2020, offset partially by declines in commercial line of credit utilization, a decline in new loan production and seasonal decreases in agricultural loan balances. Commercial and agricultural business loans represented approximately 34% of our portfolio at March 31, 2021.

Our one- to four-family residential loan originations have been strong, as interest rates have declined during the last year. We are active originators of one- to four-family residential loans in most communities where we have established offices in Washington, Oregon, California and Idaho. Most of the one- to four-family residential 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 March 31, 2021, our outstanding balance of one- to four-family residential loans retained in our portfolio decreased $62.3 million, to $655.6 million, compared to $717.9 million at December 31, 2020, and decreased $225.8 million, or 26%, compared to $881.4 million at March 31, 2020. The decrease in one-to-four family real estate loans since March 31, 2020 primarily reflects portfolio loans being refinanced and sold as held for sale loans. One- to four-family residential loans represented 7% of our loan portfolio at March 31, 2021.

Our consumer loan activity is primarily directed at meeting demand from our existing deposit clients. At March 31, 2021, consumer loans, including home equity revolving lines of credit, decreased $35.1 million to $570.7 million, compared to $605.8 million at December 31, 2020, and decreased $91.1 million compared to $661.8 million at March 31, 2020.

The following table shows loan origination (excluding loans held for sale) activity for the three months ended March 31, 2021 and March 31, 2020 (in thousands):
 Three Months Ended
Mar 31, 2021Mar 31, 2020
Commercial real estate$91,217 $76,359 
Multifamily real estate12,878 10,171 
Construction and land447,369 369,613 
Commercial business:
Commercial business115,911 199,873 
PPP428,180 — 
Agricultural business27,167 31,261 
One-to four- family residential57,731 31,041 
Consumer87,322 67,357 
Total loan originations (excluding loans held for sale)$1,267,775 $785,675 

The origination table above includes loan participations and loan purchases. There were no loan purchases during the three months ended March 31, 2021 or March 31, 2020.

Loans held for sale decreased to $135.3 million at March 31, 2021, compared to $243.8 million at December 31, 2020, as the sales of held-for-sale loans exceeded originations of held-for-sale loans during the three months ended March 31, 2021. Loans held for sale were $182.4 million at March 31, 2020. Originations of loans held for sale increased to $301.4 million for the three months ended March 31, 2021 compared to $296.7 million for the same period last year, primarily due to increased refinance activity for one- to four-family residential mortgage loans, partially offset by lower originations of multifamily held for sale loans. The volume of one- to four-family residential mortgage loans sold was $300.3 million during the three months ended March 31, 2021, compared to $204.0 million in the same period a year ago. During the three months ended March 31, 2021, we sold $107.7 million in multifamily loans compared to $119.7 million for the same period last year. Loans held for sale at March 31, 2021 included $54.5 million of multifamily loans and $80.8 million of one- to four-family loans compared to $105.4 million of multifamily loans and $77.1 million of one- to four-family loans at March 31, 2020.

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The following table presents loans by geographic concentration at March 31, 2021, December 31, 2020 and March 31, 2020 (dollars in thousands):
Mar 31, 2021Dec 31, 2020Mar 31, 2020Percentage Change
AmountPercentageAmountAmountPrior Year EndPrior Year Qtr
Washington$4,683,600 47.1 %$4,647,553 $4,350,273 0.8 %7.7 %
California2,320,384 23.3 2,279,749 2,140,895 1.8 8.4 
Oregon1,801,104 18.1 1,792,156 1,664,652 0.5 8.2 
Idaho539,061 5.4 537,996 524,663 0.2 2.7 
Utah92,399 0.9 80,704 52,747 14.5 75.2 
Other511,149