Then one of the knights took the king's banner from the hand of Gúthlaf the banner-bearer who lay dead, and he lifted it up.
–The Return of the King, The Battle of the Pelennor Fields
Banner bearers are hireable warrior units. They are very similar to normal warrior-type NPCs, except that they carry a banner, and improve the stats of nearby units of the same faction. There is one type of banner bearer for each faction (and sub-faction) that has a banner.
Since the Beta 19 update, banner bearers fight normally with a melee weapon. They hold their banner in the left hand at all times. In previous mod versions, they only fought with a dagger, and only when provoked, and they had to take down the banner when they fought.
These NPCs do not spawn naturally under normal circumstances, but they can spawn when there's an invasion. They can also be hired from their corresponding captains.
An NPC will receive stat boosts from nearby banner bearers as follows. Note that neither the NPC nor the banner bearers need to be hired for most of these effects to apply, and banner bearers can boost the stats of other banner bearers, though they do not boost their own stats.
Count the number of nearby banner bearers (of the same faction) in a cube of 'radius' 16 blocks centred on the NPC.
This value is capped at 5: if there are more than 5 banner bearers nearby, the effects described below will work as if there were only 5 nearby.
Melee attacks dealt by the NPC will deal 0.5 more damage for each banner bearer, for a maximum of 2.5 extra damage points. Note: 0.5 HP is not a 'half heart' - which is 1 HP - it is half of a 'half heart'.
Any damage dealt to the NPC will be reduced by a factor of 1/12 for each banner bearer. Thus, the maximum damage reduction from banner bearers is 5/12, or around 42% (meaning the damage dealt will be ~58% of the original value).
Only if the NPC is hired: For each banner bearer nearby, the NPC will heal 1 HP regularly in some time interval. This time interval is 10 seconds with one banner bearer, 8 seconds with two, 6 seconds with three, and so on.
Hired banner bearers will automatically attempt to follow and remain close to other hired units of the same faction, so as to maximise their benefits.