Document

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

FORM 10-Q 
(Mark One)

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016.
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 0-26584

BANNER CORPORATION
(Exact name of registrant as specified in its charter)

 
 
 
 
 
 
 
 
 
 
Washington
 
91-1691604
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
 
 
 
10 South First Avenue, Walla Walla, Washington 99362
 
 
(Address of principal executive offices and zip code)
 
 
 
 
 
 
 
Registrant's telephone number, including area code:  (509) 527-3636
 
 
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
 
 
 
 
 
 
 
Yes
[x]
 
No
[  ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Yes
[x]
 
No
[  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
 
 
Large accelerated filer  [x]
Accelerated filer    [ ]
Non-accelerated filer   [  ]
Smaller reporting company  [ ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
[  ]
 
No
[x]
 
APPLICABLE ONLY TO CORPORATE ISSUERS
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Title of class:
 
As of October 31, 2016
Common Stock, $.01 par value per share
 
33,424,524 shares
Non-voting Common Stock, $.01 par value per share
 
 
 
 
 
88,478 shares
 
 
 

1


BANNER CORPORATION AND SUBSIDIARIES

Table of Contents
PART I – FINANCIAL INFORMATION
 
 
 
Item 1 – Financial Statements.  The Unaudited Condensed Consolidated Financial Statements of Banner Corporation and Subsidiaries filed as a part of the report are as follows:
 
 
 
Consolidated Statements of Financial Condition as of September 30, 2016 and December 31, 2015
 
 
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015
 
 
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015
 
 
Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2016 and the Year Ended December 31, 2015
 
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015
 
 
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 September 30, 2016 and December 31, 2015
 
 
Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2016 and 2015
 
 
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, including, but not limited to: expected revenues, cost savings, synergies and other benefits from the merger and successful integration of Banner Bank and AmericanWest Bank (AmericanWest) might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters, including but not limited to customers, systems and employee retention, might be greater than expected; the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and non-performing assets, and may result in our allowance for loan losses not being adequate to cover actual losses and require us to materially increase our reserves; changes in economic conditions in general and in Washington, Idaho, Oregon, Utah and California in particular; changes in the levels of general interest rates and the relative differences between short and long-term interest rates, loan and deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of safety and soundness and compliance examinations of us by the Board of Governors of the Federal Reserve System (the Federal Reserve Board) and of our bank subsidiaries by the Federal Deposit Insurance Corporation (the FDIC), the Washington State Department of Financial Institutions, Division of Banks (the Washington DFI) or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require restitution or institute an informal or formal enforcement action against us or any of our bank subsidiaries which could require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds, or maintain or increase deposits, or impose additional requirements and restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including changes related to Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation; difficulties in reducing risk associated with the loans and securities on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; the failure or security breach of computer systems on which we depend; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; future goodwill impairment due to changes in our business, changes in market conditions, or other factors; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies and changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common stock and non-voting common stock, and interest or principal payments on our junior subordinated debentures; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and other risks detailed from time to time in our filings with the U.S. Securities and Exchange Commission, including this report on Form 10-Q.  Any forward-looking statements are based upon management’s beliefs and assumptions at the time they are made.  We do not undertake and specifically disclaim any obligation to update any forward-looking statements included in this report or the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise.  These risks could cause our actual results to differ materially from those expressed in any forward-looking statements by, or on behalf of, us.  In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.

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


3


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) (In thousands, except shares)
September 30, 2016 and December 31, 2015
ASSETS
September 30
2016

 
December 31
2015

Cash and due from banks
$
161,710

 
$
117,657

Interest bearing deposits
84,207

 
144,260

Total cash and cash equivalents
245,917

 
261,917

Securities—trading, amortized cost $36,119 and $39,344, respectively
30,889

 
34,134

Securities—available-for-sale, amortized cost $993,913 and $1,139,740, respectively
1,006,414

 
1,138,573

Securities—held-to-maturity, fair value $283,303 and $226,627, respectively
271,975

 
220,666

Federal Home Loan Bank (FHLB) stock
12,826

 
16,057

Loans held for sale
123,144

 
44,712

Loans receivable
7,398,637

 
7,314,504

Allowance for loan losses
(84,220
)
 
(78,008
)
Net loans
7,314,417

 
7,236,496

Accrued interest receivable
30,345

 
29,627

Real estate owned (REO), held for sale, net
4,717

 
11,627

Property and equipment, net
167,621

 
167,604

Goodwill
244,583

 
247,738

Other intangibles, net
31,934

 
37,472

Bank-owned life insurance (BOLI)
158,831

 
156,865

Deferred tax assets, net
124,830

 
134,970

Other assets
72,585

 
57,840

Total assets
$
9,841,028

 
$
9,796,298

LIABILITIES
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
3,190,293

 
$
2,619,618

Interest-bearing transaction and savings accounts
3,798,668

 
4,081,580

Interest-bearing certificates
1,123,011

 
1,353,870

Total deposits
8,111,972

 
8,055,068

Advances from FHLB at fair value
62,342

 
133,381

Other borrowings
108,911

 
98,325

Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)
94,364

 
92,480

Accrued expenses and other liabilities
92,783

 
76,511

Deferred compensation
39,385

 
40,474

Total liabilities
8,509,757

 
8,496,239

COMMITMENTS AND CONTINGENCIES (Note 13)

 

SHAREHOLDERS’ EQUITY
 
 
 
Preferred stock - $0.01 par value per share, 500,000 shares authorized; no shares outstanding at September 30, 2016 and December 31, 2015

 

Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized; 33,778,833 shares issued and outstanding at September 30, 2016; 32,817,789 shares issued and outstanding at December 31, 2015
1,241,816

 
1,195,755

Common stock (non-voting) and paid in capital- $0.01 par value per share, 5,000,000 shares authorized; 88,478 shares issued and outstanding at September 30, 2016; 1,424,466 shares issued and outstanding at December 31, 2015
1,389

 
65,419

Retained earnings
80,053

 
39,615

Carrying value of shares held in trust for stock related compensation plans
(7,241
)
 
(6,928
)
Liability for common stock issued to deferred, stock related, compensation plans
7,241

 
6,928

Accumulated other comprehensive income (loss)
8,013

 
(730
)
Total shareholders' equity
1,331,271

 
1,300,059

Total liabilities & shareholders' equity
$
9,841,028

 
$
9,796,298

See Selected Notes to the Consolidated Financial Statements

4


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands, except shares and per share amounts)
For the Three and Nine Months Ended September 30, 2016 and 2015
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016

 
2015

 
2016

 
2015

INTEREST INCOME:
 
 
 
 
 
 
 
Loans receivable
$
89,805

 
$
51,749

 
$
265,697

 
$
149,192

Mortgage-backed securities
4,803

 
1,307

 
15,467

 
3,609

Securities and cash equivalents
3,241

 
1,737

 
9,306

 
5,138

Total interest income
97,849

 
54,793

 
290,470

 
157,939

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
2,784

 
1,738

 
8,501

 
5,240

FHLB advances
256

 
4

 
874

 
24

Other borrowings
82

 
47

 
234

 
137

Junior subordinated debentures
1,019

 
816

 
2,962

 
2,357

Total interest expense
4,141

 
2,605

 
12,571

 
7,758

Net interest income
93,708

 
52,188

 
277,899

 
150,181

PROVISION FOR LOAN LOSSES
2,000

 

 
4,000

 

Net interest income after provision for loan losses
91,708

 
52,188

 
273,899

 
150,181

NON-INTEREST INCOME:
 
 
 
 
 
 
 
Deposit fees and other service charges
12,927

 
9,746

 
36,957

 
27,435

Mortgage banking operations
8,141

 
4,426

 
20,409

 
13,238

Bank-owned life insurance (BOLI)
1,333

 
550

 
3,646

 
1,441

Miscellaneous
1,344

 
489

 
3,936

 
1,623

 
23,745

 
15,211

 
64,948

 
43,737

Net gain (loss) on sale of securities
891

 

 
531

 
(537
)
Net change in valuation of financial instruments carried at fair value
(1,124
)
 
(1,113
)
 
(1,472
)
 
735

Total non-interest income
23,512

 
14,098

 
64,007

 
43,935

NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salary and employee benefits
44,758

 
27,026

 
136,497

 
78,057

Less capitalized loan origination costs
(4,953
)
 
(3,747
)
 
(14,110
)
 
(10,372
)
Occupancy and equipment
10,979

 
6,470

 
32,419

 
18,833

Information/computer data services
4,836

 
2,219

 
14,607

 
6,744

Payment and card processing expenses
5,878

 
4,168

 
16,164

 
10,926

Professional services
2,258

 
951

 
5,736

 
2,489

Advertising and marketing
2,282

 
1,959

 
6,489

 
5,767

Deposit insurance
890

 
713

 
3,539

 
1,905

State/municipal business and use taxes
956

 
475

 
2,564

 
1,383

REO operations
(21
)
 
(2
)
 
513

 
190

Amortization of core deposit intangibles
1,724

 
286

 
5,339

 
1,268

Miscellaneous
7,785

 
3,972

 
22,311

 
11,416

 
77,372

 
44,490

 
232,068

 
128,606

Acquisition-related costs
1,720

 
2,207

 
10,945

 
7,741

Total non-interest expense
79,092

 
46,697

 
243,013

 
136,347

Income before provision for income taxes
36,128

 
19,589

 
94,893

 
57,769

PROVISION FOR INCOME TAXES
12,277

 
6,642

 
32,312

 
19,440

NET INCOME
$
23,851

 
$
12,947

 
$
62,581

 
$
38,329

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.70

 
$
0.62

 
$
1.84

 
$
1.88

Diluted
$
0.70

 
$
0.62

 
$
1.83

 
$
1.87

Cumulative dividends declared per common share
$
0.23

 
$
0.18

 
$
0.65

 
$
0.54

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
34,045,225

 
20,755,394

 
34,050,459

 
20,417,601

Diluted
34,124,611

 
20,821,377

 
34,104,875

 
20,467,609

See Selected Notes to the Consolidated Financial Statements

5


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
For the Three and Nine Months Ended September 30, 2016 and 2015

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016

 
2015

 
2016

 
2015

NET INCOME
$
23,851

 
$
12,947

 
$
62,581

 
$
38,329

OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:
 
 
 
 
 
 
 
Unrealized holding gain (loss) on available-for-sale securities arising during the period
(4,659
)
 
1,169

 
14,043

 
2,051

Income tax benefit (expense) related to available-for-sale securities unrealized holding gain or loss
1,677

 
(421
)
 
(5,060
)
 
(738
)
Reclassification for net gains on available-for-sale securities realized in earnings
(735
)
 

 
(376
)
 
(125
)
Income tax expense related to available-for-sale securities realized gains
265

 

 
136

 
45

Other comprehensive income (loss)
(3,452
)
 
748

 
8,743

 
1,233

COMPREHENSIVE INCOME
$
20,399

 
$
13,695

 
$
71,324

 
$
39,562


See Selected Notes to the Consolidated Financial Statements

6


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited) (In thousands, except shares)
For the Nine Months Ended September 30, 2016 and the Year Ended December 31, 2015

 
Common Stock
and Paid in Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive Income (Loss)
 
Shareholders’
Equity
 
Shares
 
Amount
 
 
 
Balance, January 1, 2015
19,571,548

 
$
568,882

 
$
14,264

 
$
(258
)
 
$
582,888

Net income
 
 
 
 
45,222

 
 
 
45,222

Other comprehensive income, net of income tax
 
 
 
 
 
 
(472
)
 
(472
)
Accrual of dividends on common stock ($0.72/share cumulative)
 
 
 
 
(19,871
)
 
 
 
(19,871
)
Proceeds from issuance of common stock for shareholder reinvestment program
810

 
34

 
 
 
 
 
34

Issuance of restricted stock, net, and recognition of share-based compensation
120,043

 
3,088

 
 
 
 
 
3,088

Issuance of shares for acquisitions
14,549,854

 
688,773

 
 
 
 
 
688,773

Excess tax benefit on stock-based compensation
 
 
397

 
 
 
 
 
397

Balance, December 31, 2015
34,242,255

 
$
1,261,174

 
$
39,615

 
$
(730
)
 
$
1,300,059


Balance, January 1, 2016
34,242,255

 
$
1,261,174

 
$
39,615

 
$
(730
)
 
$
1,300,059

Net income
 
 
 
 
62,581

 
 
 
62,581

Other comprehensive income, net of income tax
 
 
 
 
 
 
8,743

 
8,743

Accrual of dividends on common stock ($0.65/share cumulative)
 
 
 
 
(22,143
)
 
 
 
(22,143
)
Repurchase of common stock under the terms of the repurchase plan
(484,350
)
 
(21,098
)
 
 
 
 
 
(21,098
)
Issuance of restricted stock, net, and recognition of share-based compensation
109,406

 
3,129

 
 
 
 
 
3,129

Balance, September 30, 2016
33,867,311

 
$
1,243,205

 
$
80,053

 
$
8,013

 
$
1,331,271



See Selected Notes to the Consolidated Financial Statements

7


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
For the Nine Months Ended September 30, 2016 and 2015
 
Nine Months Ended
September 30,
 
2016

 
2015

OPERATING ACTIVITIES:
 
 
 
Net income
$
62,581

 
$
38,329

Adjustments to reconcile net income to net cash provided from operating activities:
 
 
 
Depreciation
9,219

 
6,279

Deferred income and expense, net of amortization
419

 
2,194

Amortization of core deposit intangibles
5,339

 
1,268

(Gain) loss on sale of securities
(531
)
 
537

Net change in valuation of financial instruments carried at fair value
1,472

 
(735
)
Purchases of securities—trading
(1,725
)
 
(6,337
)
Proceeds from sales of securities—trading
1,682

 
2,485

Principal repayments and maturities of securities—trading
3,527

 
7,905

Decrease in deferred taxes
10,747

 
97

Increase in current taxes payable
2,108

 
2,800

Equity-based compensation
3,129

 
1,944

Increase in cash surrender value of BOLI
(3,628
)
 
(1,425
)
Gain on sale of loans, net of capitalized servicing rights
(14,583
)
 
(8,139
)
Gain on disposal of real estate held for sale and property and equipment
(748
)
 
(338
)
Provision for loan losses
4,000

 

Provision for losses on real estate held for sale
804

 
216

Origination of loans held for sale
(753,714
)
 
(455,178
)
Proceeds from sales of loans held for sale
691,355

 
462,967

Net change in:
 
 
 
Other assets
(20,428
)
 
(5,888
)
Other liabilities
13,560

 
1,625

Net cash provided from operating activities
14,585

 
50,606

INVESTING ACTIVITIES:
 
 
 
Purchases of securities—available-for-sale
(242,222
)
 
(93,508
)
Principal repayments and maturities of securities—available-for-sale
143,244

 
57,301

Proceeds from sales of securities—available-for-sale
233,252

 
40,293

Purchases of securitiesheld-to-maturity
(60,344
)
 
(11,490
)
Principal repayments and maturities of securities—held-to-maturity
7,458

 
9,609

Loan originations, net of principal repayments
(34,328
)
 
(78,947
)
Purchases of loans and participating interest in loans
(230,778
)
 
(243,282
)
Proceeds from sales of other loans
193,939

 
29,238

Net cash received from acquisitions

 
78,599

Purchases of property and equipment
(9,223
)
 
(9,847
)
Proceeds from sale of real estate held for sale, net
8,021

 
3,155

Proceeds from FHLB stock repurchase program
70,237

 
21,453

Purchase of FHLB stock
(67,006
)
 
(648
)
Other
1,922

 
241

Net cash provided from (used by) investing activities
14,172

 
(197,833
)
FINANCING ACTIVITIES:
 
 
 
Increase in deposits, net
56,904

 
172,298

Repayment of FHLB advances
(70,607
)
 
(15,806
)
Increase in other borrowings, net
10,586

 
10,899

Cash dividends paid
(20,542
)
 
(11,031
)
Cash proceeds from issuance of common stock for shareholder reinvestment plan

 
34

Cash paid for the repurchase of common stock
(21,098
)
 

Net cash (used by) provided from financing activities
(44,757
)
 
156,394

NET CHANGE IN CASH AND CASH EQUIVALENTS
(16,000
)
 
9,167

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
261,917

 
126,072

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
245,917

 
$
135,239


(Continued on next page)

8


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Nine Months Ended September 30, 2016 and 2015
 
Nine Months Ended
September 30,
 
2016

 
2015

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Interest paid in cash
$
12,781

 
$
7,825

Taxes paid, net of refunds received in cash
23,751

 
16,491

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
758

 
3,251

ACQUISITIONS (Note 3):
 
 
 
   Assets acquired

 
370,306

   Liabilities assumed

 
327,548


See Selected Notes to the Consolidated Financial Statements

9


BANNER CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1:  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

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

These unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (SEC). In preparing these financial statements, the Company has evaluated events and transactions subsequent to September 30, 2016 for potential recognition or disclosure. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC and the accounting standards for interim financial statements. Certain reclassifications have been made to the 2015 Consolidated Financial Statements and/or schedules to conform to the 2016 presentation. These reclassifications may have affected certain ratios for the prior periods. The effect of these reclassifications is considered immaterial. All significant intercompany transactions and balances have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are significant to an understanding of Banner’s financial statements. These policies relate to (i) the methodology for the recognition of interest income, (ii) determination of the provision and allowance for loan losses, (iii) the valuation of financial assets and liabilities recorded at fair value, including other-than-temporary impairment (OTTI) losses, (iv) the valuation of intangibles, such as goodwill, core deposit intangibles (CDI) and mortgage servicing rights, (v) the valuation of real estate held for sale, (vi) the valuation of assets and liabilities acquired 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, 2015 filed with the SEC.  There have been no significant changes in our application of accounting policies during the first nine months of 2016.

During the nine months ended September 30, 2016, the 1.3 million shares of non-voting common stock issued in connection with the acquisition of Starbuck Bancshares, Inc. and its subsidiary, AmericanWest Bank were sold by the original holder of the shares. These shares contained a provision where they would automatically convert from non-voting to voting upon a permitted transfer of the shares. Therefore, these shares are included in Banner's voting common stock outstanding as of September 30, 2016.

The information included in this Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2015 as filed with the SEC (2015 Form 10-K).  Interim results are not necessarily indicative of results for a full year or any other interim period.

Note 2:  ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which creates Accounting Standard Codification (ASC) Topic 606 and supersedes ASC Topic 605, Revenue Recognition. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, the new guidance requires companies to use more judgment and make more estimates than under current guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. Under the terms of ASU 2015-14 the standard is effective for interim and annual periods beginning after December 15, 2017. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company is currently evaluating the provisions of ASU No. 2014-09 to determine the potential impact the standard will have on the Company’s Consolidated Financial Statements.

In April 2016, FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing. The amendments in this ASU do not change the core principle of the guidance in Topic 606. Rather, the amendments in this ASU clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The amendments in this ASU affect the guidance in ASU 2014-09, discussed above, which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition requirements in Topic 606 (Revenues from Contracts with Customers).

10


The Company is evaluating the provisions of this ASU in conjunction with ASU No. 2014-09 to determine the potential impact Topic 606 and its amendments will have on the Company’s Consolidated Financial Statements.

In May 2016, FASB issued ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients, amending ASC Topic 606 (Revenue from Contracts with Customers). The core principle of the guidance in Topic 606 is that an entity should recognize revenue to represent the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this ASU do not change the core principle of the guidance in Topic 606. Rather, the amendments in this ASU affect only several narrow aspects of Topic 606. The amendments in this ASU affect the guidance in ASU 2014-09, discussed above, which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition requirements in Topic 606 (Revenues from Contracts with Customers). The Company is evaluating the provisions of this ASU in conjunction with ASU No. 2014-09 to determine the potential impact Topic 606 and its amendments will have on the Company’s Consolidated Financial Statements.

Recognition and Measurement of Financial Assets and Financial Liabilities

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

Leases (Topic 842)

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this ASU require lessees to recognize the following for all leases (with the exception of short-term) at the commencement date; a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The amendments in this ASU leave lessor accounting largely unchanged, although certain targeted improvements were made to align lessor accounting with the lessee accounting model. This ASU simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently evaluating the provisions of ASU No. 2016-02 to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.

Derivatives and Hedging (Topic 815)

In March 2016, FASB issued ASU No. 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The amendments in this ASU clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 (Derivatives and Hedging) does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. An entity has an option to apply the amendments in this ASU on either a prospective basis or a modified retrospective basis. Early adoption is permitted, including adoption in an interim period. At September 30, 2016, Banner had four swap relationships using hedge accounting with a total market value of $868,000. This ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.

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

11


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

Compensation—Stock Compensation (Topic 718)

In March 2016, FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. FASB issued this ASU as part of its Simplification Initiative. The areas for simplification in this ASU involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. Amendments in this ASU relate to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments in this ASU require recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments in this ASU related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. This ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.

Financial Instruments—Credit Losses (Topic 326)

In June 2016, FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU require a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amendments in this ASU broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. The amendments in this ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is still evaluating the effects this ASU will have on the Company’s Consolidated Financial Statements.

Statement of Cash Flows (Topic 230)

In August 2016, FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. There is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230 and other Topics. This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. Those eight issues are 1) debt prepayment or debt extinguishment costs, 2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, 3) contingent consideration payments made after a business combination, 4) proceeds from the settlement of insurance claims, 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, 6) distributions received from equity method investees, 7) beneficial interests in securitization transactions, and 8) separately identifiable cash flows and application of the predominance principle. Current GAAP either is unclear or does not include specific guidance on these eight cash flow classification issues. These amendments provide guidance for each of the eight issues, thereby reducing current and potential future diversity in practice. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. This ASU is not expected to have a material impact on the Company's Consolidated Financial Statements.


12


Note 3:  BUSINESS COMBINATIONS

All business combinations are accounted for using the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed, both tangible and intangible, and consideration exchanged were recorded at acquisition date fair values. The excess cost over fair value of net assets acquired is recorded as goodwill. In the event that the fair value of net assets acquired exceeds the purchase price, including fair value of liabilities assumed, a bargain purchase gain is recorded on the acquisition. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available.

Acquisition of Starbuck Bancshares, Inc.
Effective as of the close of business on October 1, 2015, the Company acquired Starbuck Bancshares, Inc. and its subsidiary, AmericanWest Bank (AmericanWest), a Washington state chartered commercial bank headquartered in Spokane, Washington with 98 branches serving markets in Washington, Oregon, Idaho, California and Utah. On that date, Starbuck merged with and into Banner and AmericanWest merged with and into Banner Bank. The merged banks are operating as Banner Bank. Pursuant to the previously announced terms of the merger, the equity holders of Starbuck received an aggregate of $130.0 million in cash and 13.23 million shares of Banner voting common stock and non-voting common stock. The acquisition provided $4.46 billion in assets, $3.64 billion in deposits and $3.00 billion in loans to Banner. At the closing date, the combined company had approximately $9.9 billion in assets and 203 branches.

The application of the acquisition method of accounting resulted in recognition of a CDI asset of $33.5 million and goodwill of $222.9 million. The acquired CDI has been determined to have a useful life of approximately ten years and will be amortized on an accelerated basis. Goodwill is not amortized but will be evaluated for impairment on an annual basis or more often if circumstances dictate to determine if the carrying value remains appropriate. Goodwill will not be deductible for income tax purposes as the acquisition is accounted for as a tax-free exchange for tax purposes.

The following table presents a summary of the consideration paid and the estimated fair values as of the acquisition date for each major class of assets acquired and liabilities assumed (in thousands):
 
Starbuck
 
October 1, 2015
Consideration to Starbuck equityholders:
 
 
 
Cash paid
 
 
$
130,000

Fair value of common shares issued
 
 
630,674

Total consideration
 
 
760,674

Fair value of assets acquired:
 
 
 
Cash and cash equivalents
$
95,821

 
 
Securities
1,037,238

 
 
Loans receivable (contractual amount of $3.04 billion)
2,999,130

 
 
REO, held for sale
6,105

 
 
Property and equipment
66,728

 
 
CDI
33,500

 
 
Deferred tax asset
108,454

 
 
Other assets
113,009

 
 
Total assets acquired
4,459,985

 
 
Fair value of liabilities assumed:
 
 
 
Deposits
3,638,596

 
 
FHLB advances
221,442

 
 
Junior subordinated debentures
5,806

 
 
Other liabilities
56,359

 
 
Total liabilities assumed
3,922,203

 
 
Net assets acquired
 
 
537,782

Goodwill
 
 
$
222,892

Acquired goodwill represents the premium the Company paid over the fair value of the net tangible and intangible assets acquired. The acquisition complemented the Company's growth strategy, including expanding our geographic footprint in markets throughout the Northwest, Utah and California. The Company paid this premium for a number of reasons, including growing the Company's customer base, acquiring assembled workforces, and expanding its presence in new markets. See Note 7, Goodwill, Other Intangible Assets and Mortgage Servicing Rights for the accounting for goodwill and other intangible assets.


13


As of October 1, 2015, the unpaid principal balance on purchased non-credit-impaired loans was $2.95 billion. The fair value of the purchased non-credit-impaired loans was $2.94 billion, resulting in a discount of $17.7 million recorded on these loans. The principal cash flows not expected to be collected on these loans was estimated to be $44.1 million. This discount is being accreted into income over the life of the loans on an effective yield basis.

The following table presents the acquired purchased credit-impaired (PCI) loans as of the acquisition date (in thousands):
 
 
Starbuck
 
 
October 1, 2015
Acquired PCI loans:
 
 
Contractually required principal and interest payments
 
$
98,746

Nonaccretable difference
 
(26,162
)
Cash flows expected to be collected
 
72,584

Accretable yield
 
(11,071
)
Fair value of PCI loans
 
$
61,513


The following table presents certain unaudited pro forma information for illustrative purposes only, for the three and nine months ended September 30, 2015 as if Starbuck had been acquired on January 1, 2014. This unaudited estimated pro forma financial information combines the historical results of Starbuck with the Company’s consolidated historical results. Pro forma adjustments include accretion of loan discount, accretion of investment premiums, amortization of deposit premium, amortization of CDI, reversal of acquisition expense, and reversal of historical recorded amounts for similar items, with all adjustments tax effected. The pro forma information is not indicative of what would have occurred had the acquisition actually occurred on January 1, 2014. In particular, no adjustments have been made to eliminate the impact of other-than-temporary impairment losses and losses recognized on the sale of securities that may not have been necessary had the investment securities been recorded at fair value as of January 1, 2014. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loan assets at fair value. Additionally, Banner expects to achieve further operating cost savings and other business synergies, including revenue growth, as a result of the acquisition which are not reflected in the pro forma amounts that follow. As a result, actual amounts would have differed from the unaudited pro forma information presented (in thousands except per share amounts):
 
Pro Forma
 
Three months ended
September 30
 
Nine months ended
September 30
 
2015
 
2015
Total revenues (net interest income plus non-interest income)
$
117,141

 
$
345,454

Net income
$
26,289

 
$
70,225

Earnings per share - basic
$
0.81

 
$
2.09

Earnings per share - diluted
$
0.81

 
$
2.08

The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities of Starbuck since October 2, 2015. Disclosure of the amount of Starbuck's revenue and net income (excluding integration costs) included in the Company’s Consolidated Statements of Operations is impracticable due to the integration of the operations, systems and accounting for this acquisition occurring in different stages.

Acquisition of Siuslaw Financial Group, Inc.

Effective as of the close of business on March 6, 2015, the Company completed the acquisition of Siuslaw, the holding company of Siuslaw Bank. Siuslaw merged with and into the Company and, immediately following, Siuslaw Bank merged with and into Banner Bank. Siuslaw shareholders received 0.32231 shares of the Company's common stock and $1.41622 in cash in exchange for each share of Siuslaw common stock. The acquisition provided $369.8 million in assets, $316.4 million in deposits and $247.1 million in loans.

The application of the acquisition method of accounting resulted in recognition of a CDI asset of $3.9 million and goodwill of $21.7 million. The acquired CDI has been determined to have a useful life of approximately eight years and will be amortized on an accelerated basis. Goodwill is not amortized but will be evaluated for impairment on an annual basis or more often if circumstances dictate to determine if the carrying value remains appropriate. Goodwill will not be deductible for income tax purposes as the acquisition is accounted for as a tax-free exchange for tax purposes.

14



The following table presents a summary of the consideration paid and the estimated fair values as of the acquisition date for each major class of assets acquired and liabilities assumed (in thousands):
 
Siuslaw
 
March 6, 2015
Consideration to Siuslaw shareholders:
 
 
 
Cash paid
 
 
$
5,806

Fair value of common shares issued
 
 
58,100

Total consideration
 
 
63,906

Fair value of assets acquired:
 
 
 
Cash and cash equivalents
$
84,405

 
 
Securities—available-for-sale
12,865

 
 
Loans receivable (contractual amount of $252.2 million)
247,098

 
 
REO, held for sale
2,525

 
 
Property and equipment
8,127

 
 
Core deposit intangible
3,895

 
 
Other assets
10,848

 
 
Total assets acquired
369,763

 
 
Fair value of liabilities assumed:
 
 
 
Deposits
316,406

 
 
Junior subordinated debentures
5,959

 
 
Other liabilities
5,183

 
 
Total liabilities assumed
327,548

 
 
Net assets acquired
 
 
42,215

Goodwill
 
 
$
21,691


Acquired goodwill represents the premium the Company paid over the fair value of the net tangible and intangible assets acquired. The acquisition complemented the Company's growth strategy, including expanding our geographic footprint in markets throughout the Northwest. The Company paid this premium for a number of reasons, including growing the Company's customer base, acquiring assembled workforces, and expanding its presence in new markets. See Note 7, Goodwill, Other Intangible Assets and Mortgage Servicing Rights for the accounting for goodwill and other intangible assets.

As of March 6, 2015, the unpaid principal balance on purchased non-credit-impaired loans was $244.2 million. The fair value of the purchased non-credit-impaired loans was $241.4 million, resulting in a discount of $2.8 million recorded on these loans. This discount is being accreted into income over the life of the loans on an effective yield basis.

The following table presents the acquired purchased credit-impaired loans as of the acquisition date (in thousands):
 
 
Siuslaw
 
 
March 6, 2015
Acquired purchased credit-impaired loans:
 
 
Contractually required principal and interest payments
 
$
11,134

Nonaccretable difference
 
(3,238
)
Cash flows expected to be collected
 
7,896

Accretable yield
 
(2,239
)
Fair value of purchased credit-impaired loans
 
$
5,657

 
The following table presents certain unaudited pro forma information for illustrative purposes only, for the three and nine months ended September 30, 2015 as if Siuslaw had been acquired on January 1, 2014. This unaudited estimated pro forma financial information combines the historical results of Siuslaw with the Company’s consolidated historical results. Pro forma adjustments include accretion of loan discount, accretion of investment premiums, amortization of deposit premium, amortization of CDI, reversal of acquisition expense, and reversal of historical recorded amounts for similar items, with all adjustments tax effected. The pro forma information is not indicative of what would have occurred had the acquisition actually occurred on January 1, 2014. In particular, no adjustments have been made to eliminate the impact of other-than-temporary impairment losses and losses recognized on the sale of securities that may not have been necessary had the investment securities been recorded at fair value as of January 1, 2014. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loan assets at fair value. Additionally, Banner expects to achieve further operating cost savings and

15


other business synergies, including revenue growth, as a result of the acquisition which are not reflected in the pro forma amounts that follow. As a result, actual amounts would have differed from the unaudited pro forma information presented (in thousands except per share amounts):
 
Pro Forma
 
Three Months Ended
September 30
 
Nine Months Ended
September 30,
 
2015
 
2015
Total revenues (net interest income plus non-interest income)
$
66,286

 
$
197,048

Net income
$
12,947

 
$
38,714

Earnings per share - basic
$
0.62

 
$
1.87

Earnings per share - diluted
$
0.62

 
$
1.86


The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities of Siuslaw since March 7, 2015. Disclosure of the amount of Siuslaw’s revenue and net income (excluding integration costs) included in the Company’s Consolidated Statements of Operations is impracticable due to the integration of the operations and accounting for this acquisition.

Acquisition-Related Costs

The following tables present the key components of acquisition-related costs in connection with the acquisition of Siuslaw and the acquisition of Starbuck, including AmericanWest, for the three and nine months ended September 30, 2016 and 2015 (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Acquisition-related costs recognized in non-interest expenses:
 
 
 
 
 
 
 
Personnel severance/retention fees
$
16

 
$
227

 
$
1,304

 
$
443

Branch consolidation and other occupancy expenses
94

 
5

 
2,517

 
55

Client communications
527

 
151

 
904

 
221

Information/computer data services
459

 
301

 
2,409

 
807

Payment and processing expenses

 
16

 

 
16

Professional services
687

 
1,185

 
2,138

 
5,411

Miscellaneous
(63
)
 
322

 
1,673

 
788

 
$
1,720

 
$
2,207

 
$
10,945

 
$
7,741

 
 
 
 
 
 
 
 
Siuslaw
$
1

 
$
340

 
95

 
1,867

Starbuck
1,719

 
1,867

 
10,850

 
5,874

 
$
1,720

 
$
2,207

 
$
10,945

 
$
7,741



16


Note 4:  SECURITIES

The amortized cost, gross unrealized gains and losses and estimated fair value of securities at September 30, 2016 and December 31, 2015 are summarized as follows (in thousands):
 
September 30, 2016
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair
Value
Trading:
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
1,230

 
 
 
 
 
$
1,366

Municipal bonds
331

 
 
 
 
 
336

Corporate bonds
26,916

 
 
 
 
 
20,925

Mortgage-backed or related securities
7,628

 
 
 
 
 
8,173

Equity securities
14

 
 
 
 
 
89

 
$
36,119

 
 
 
 
 
$
30,889

Available-for-Sale:
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
57,900

 
$
298

 
$
(28
)
 
$
58,170

Municipal bonds
142,234

 
3,236

 
(69
)
 
145,401

Corporate bonds
10,386

 
39

 
(52
)
 
10,373

Mortgage-backed or related securities
753,344

 
10,094

 
(786
)
 
762,652

Asset-backed securities
29,961

 
21

 
(262
)
 
29,720

Equity securities
88

 
10

 

 
98

 
$
993,913

 
$
13,698

 
$
(1,197
)
 
$
1,006,414

Held-to-Maturity:
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
1,076

 
$

 
$
(2
)
 
$
1,074

Municipal bonds:
199,606

 
8,841

 
(12
)
 
208,435

Corporate bonds
4,162

 

 

 
4,162

Mortgage-backed or related securities
67,131

 
2,501

 

 
69,632

 
$
271,975

 
$
11,342

 
$
(14
)
 
$
283,303




17


 
December 31, 2015
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair
Value
Trading:
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
1,230

 
 
 
 
 
$
1,368

Municipal bonds
332

 
 
 
 
 
341

Corporate bonds
25,063

 
 
 
 
 
18,699

Mortgage-backed or related securities
12,705

 
 
 
 
 
13,663

Equity securities
14

 
 
 
 
 
63

 
$
39,344

 
 
 
 
 
$
34,134

Available-for-Sale:
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
30,211

 
$
213

 
$
(193
)
 
$
30,231

Municipal bonds
142,898

 
853

 
(432
)
 
143,319

Corporate bonds
15,937

 
56

 
(12
)
 
15,981

Mortgage-backed or related securities
919,318

 
4,056

 
(5,115
)
 
918,259

Asset-backed securities
31,288

 

 
(603
)
 
30,685

Equity securities
88

 
10

 

 
98

 
$
1,139,740

 
$
5,188

 
$
(6,355
)
 
$
1,138,573

Held-to-Maturity:
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
1,106

 
$
5

 
$

 
$
1,111

Municipal bonds:
162,778

 
6,219

 
(191
)
 
168,806

Corporate bonds
4,273

 

 

 
4,273

Mortgage-backed or related securities
52,509

 
253

 
(325
)
 
52,437

 
$
220,666

 
$
6,477

 
$
(516
)
 
$
226,627



18


At September 30, 2016 and December 31, 2015, the gross unrealized losses and the fair value for securities available-for-sale and held-to-maturity aggregated by the length of time that individual securities have been in a continuous unrealized loss position was as follows (in thousands):
 
September 30, 2016
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
5,784

 
$
(16
)
 
$
1,078

 
$
(12
)
 
$
6,862

 
$
(28
)
Municipal bonds
18,503

 
(67
)
 
1,060

 
(2
)
 
19,563

 
(69
)
Corporate bonds
5,334

 
(52
)
 

 

 
5,334

 
(52
)
Mortgage-backed or related securities
152,276

 
(600
)
 
32,760

 
(186
)
 
185,036

 
(786
)
Asset-backed securities

 

 
19,667

 
(262
)
 
19,667

 
(262
)
 
$
181,897

 
$
(735
)
 
$
54,565

 
$
(462
)
 
$
236,462

 
$
(1,197
)
Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
1,074

 
$
(2
)
 
$

 
$

 
$
1,074

 
$
(2
)
Municipal bonds
$
4,494

 
$
(12
)
 
$

 
$

 
$
4,494

 
$
(12
)
 
$
5,568

 
$
(14
)
 
$

 
$

 
$
5,568

 
$
(14
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
8,707

 
$
(97
)
 
$
10,489

 
$
(96
)
 
$
19,196

 
$
(193
)
Municipal bonds
69,848

 
(426
)
 
905

 
(6
)
 
70,753

 
(432
)
Corporate bonds
5,153

 
(12
)
 

 

 
5,153

 
(12
)
Mortgage-backed or related securities
533,143

 
(4,380
)
 
68,562

 
(735
)
 
601,705

 
(5,115
)
Asset-backed securities
20,893

 
(355
)
 
9,792

 
(248
)
 
30,685

 
(603
)
 
$
637,744

 
$
(5,270
)
 
$
89,748

 
$
(1,085
)
 
$
727,492

 
$
(6,355
)
Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds
$
28,545

 
$
(188
)
 
$
254

 
$
(3
)
 
$
28,799

 
$
(191
)
Mortgage-backed or related securities
34,493

 
(323
)
 
255

 
(2
)
 
34,748

 
(325
)
 
$
63,038

 
$
(511
)
 
$
509

 
$
(5
)
 
$
63,547

 
$
(516
)

At September 30, 2016, there were 91 securities—available-for-sale with unrealized losses, compared to 242 at December 31, 2015.  At September 30, 2016, there were six securities—held-to-maturity with unrealized losses, compared to 32 at December 31, 2015.  Management does not believe that any individual unrealized loss as of September 30, 2016, or December 31, 2015 represented other-than-temporary impairment (OTTI).  The decline in fair market value of these securities was generally due to changes in interest rates and changes in market-desired spreads subsequent to their purchase.

Sales of securities—trading totaled $1.7 million with a resulting net gain of $156,000 for the nine months ended September 30, 2016 compared to $2.5 million with a resulting net loss of $690,000 for the nine months ended September 30, 2015. The Company did not recognize any OTTI charges or recoveries on securities—trading during the nine months ended September 30, 2016, or the nine months ended September 30, 2015. There were no securities—trading in a nonaccrual status at September 30, 2016, or December 31, 2015.  Net unrealized holding gains of $112,000 were recognized during the nine months ended September 30, 2016.

Sales of securities—available-for-sale totaled $233.3 million with a resulting net gain of $374,000 for the nine months ended September 30, 2016.  Sales of securities—available-for-sale totaled $40.3 million with a resulting net gain of $126,000 for the nine months ended September 30, 2015. There were no securities—available-for-sale in a nonaccrual status at September 30, 2016 or December 31, 2015.


19


There were no sales of securities—held-to-maturity during the nine months ended September 30, 2016, or September 30, 2015. There were no securities—held-to-maturity in a nonaccrual status at September 30, 2016 or December 31, 2015.

The amortized cost and estimated fair value of securities at September 30, 2016, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because some securities may be called or prepaid with or without call or prepayment penalties.
 
September 30, 2016
 
Trading
 
Available-for-Sale
 
Held-to-Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Maturing in one year or less
$

 
$

 
$
13,178

 
$
13,175

 
$
2,561

 
$
2,583

Maturing after one year through five years
5,668

 
5,969

 
179,161

 
180,625

 
15,252

 
15,500

Maturing after five years through ten years
3,245

 
3,596

 
203,970

 
206,203

 
112,199

 
116,736

Maturing after ten years through twenty years
276

 
310

 
240,518

 
244,927

 
96,601

 
102,641

Maturing after twenty years
26,916

 
20,925

 
356,998

 
361,386

 
45,362

 
45,843

 
36,105

 
30,800

 
993,825

 
1,006,316

 
271,975

 
283,303

Equity securities
14

 
89

 
88

 
98

 

 

 
$
36,119

 
$
30,889

 
$
993,913

 
$
1,006,414

 
$
271,975

 
$
283,303


The following table presents, as of September 30, 2016, investment securities which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law (in thousands):
 
September 30, 2016
 
Carrying Value
 
Amortized Cost
 
Fair
Value
Purpose or beneficiary:
 
 
 
 
 
State and local governments public deposits
$
204,765

 
$
203,838

 
$
213,382

Interest rate swap counterparties
24,754

 
24,669

 
25,501

Repurchase agreements
126,873

 
125,666

 
127,958

Other
1,890

 
1,884

 
1,889

Total pledged securities
$
358,282

 
$
356,057

 
$
368,730



20


Note 5: LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES

Loans receivable at September 30, 2016 and December 31, 2015 are summarized as follows (dollars in thousands):
 
September 30, 2016
 
December 31, 2015
 
Amount
 
Percent of Total
 
Amount
 
Percent of Total
Commercial real estate:
 
 
 
 
 
 
 
Owner-occupied
$
1,340,577

 
18.1
%
 
$
1,327,807

 
18.2
%
Investment properties
1,918,639

 
25.9

 
1,765,353

 
24.1

Multifamily real estate
266,883

 
3.6

 
472,976

 
6.5

Commercial construction
135,487

 
1.8

 
72,103

 
1.0

Multifamily construction
105,669

 
1.4

 
63,846

 
0.9

One- to four-family construction
363,586

 
4.9

 
278,469

 
3.8

Land and land development:
 

 
 
 
 

 
 
Residential
162,029

 
2.2

 
126,773

 
1.7

Commercial
30,556

 
0.4

 
33,179

 
0.5

Commercial business
1,187,848

 
16.1

 
1,207,944

 
16.5

Agricultural business, including secured by farmland
383,275

 
5.2

 
376,531

 
5.1

One- to four-family residential
846,899

 
11.5

 
952,633

 
13.0

Consumer:
 
 
 
 
 
 
 
Consumer secured by one- to four-family
497,643

 
6.7

 
478,420

 
6.5

Consumer—other
159,546

 
2.2

 
158,470

 
2.2

Total loans
7,398,637

 
100.0
%
 
7,314,504

 
100.0
%
Less allowance for loan losses
(84,220
)
 
 

 
(78,008
)
 
 

Net loans
$
7,314,417

 
 

 
$
7,236,496

 
 


Loan amounts are net of unearned loan fees in excess of unamortized costs of $5.6 million as of September 30, 2016 and $5.5 million as of December 31, 2015. Net loans include net discounts on acquired loans of $34.9 million and $43.7 million as of September 30, 2016 and December 31, 2015, respectively.

Purchased credit-impaired loans and purchased non-credit-impaired loans. Purchased loans, including loans acquired in business combinations, are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan and lease losses is not recorded at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased credit-impaired or purchased non-credit-impaired. PCI loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments. The outstanding contractual unpaid principal balance of purchased credit-impaired loans, excluding acquisition accounting adjustments, was $57.3 million at September 30, 2016 and $83.4 million at December 31, 2015. The carrying balance of purchased credit-impaired loans was $38.7 million at September 30, 2016 and $58.6 million at December 31, 2015.
The following table presents the changes in the accretable yield for purchased credit-impaired loans for the three and nine months ended September 30, 2016 and 2015 (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Balance, beginning of period
$
11,035

 
$
2,149

 
$
10,375

 
$

Additions

 

 

 
2,239

Accretion to interest income
(1,811
)
 
(68
)
 
(6,349
)
 
(158
)
Disposals
(899
)
 

 
(1,018
)
 

Reclassifications from non-accretable difference
1,120

 

 
6,437

 

Balance, end of period
$
9,445

 
$
2,081

 
$
9,445

 
$
2,081


As of September 30, 2016 and December 31, 2015, the non-accretable difference between the contractually required payments and cash flows expected to be collected were $19.2 million and $29.5 million, respectively.


21


Impaired Loans and the Allowance for Loan Losses.  A loan is considered impaired when, based on current information and circumstances, the Company determines it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments.  Factors involved in determining impairment include, but are not limited to, the financial condition of the borrower, the value of the underlying collateral and the current status of the economy. Impaired loans are comprised of loans on nonaccrual, troubled debt restructures (TDRs) that are performing under their restructured terms, and loans that are 90 days or more past due, but are still on accrual. Purchased credit-impaired loans are considered performing within the scope of the purchased credit-impaired accounting guidance and are not included in the impaired loan tables.

The following tables provide information on impaired loans, excluding PCI loans, with and without allowance reserves at September 30, 2016 and December 31, 2015. Recorded investment includes the unpaid principal balance or the carrying amount of loans less charge-offs and net deferred loan fees (in thousands):
 
September 30, 2016
 
Unpaid Principal Balance
 
Recorded Investment
 
Related Allowance
 
 
Without Allowance (1)
 
With Allowance (2)
 
Commercial real estate:
 
 
 
 
 
 
 
Owner-occupied
$
1,589

 
$

 
$
1,541

 
$
105

Investment properties
17,537

 
9,691

 
7,431

 
739

Multifamily real estate
541

 

 
529

 
69

One- to four-family construction
1,176

 

 
1,176

 
157

Land and land development:
 
 
 
 
 
 
 
Residential
3,119

 
750

 
1,213

 
236

Commercial
1,608

 
997

 

 

Commercial business
3,398

 
1,057

 
2,228

 
346

Agricultural business/farmland
4,452

 
3,896

 
476

 
30

One- to four-family residential
12,262

 
1,878

 
10,045

 
451

Consumer:
 
 
 
 
 
 
 
Consumer secured by one- to four-family
1,591

 

 
1,547

 
11

Consumer—other
490

 
7

 
485

 
3

 
$
47,763

 
$
18,276

 
$
26,671

 
$
2,147

 
 
 
 
 
 
 
 
 
December 31, 2015
 
Unpaid Principal Balance
 
Recorded Investment
 
Related Allowance
 
 
Without Allowance (1)
 
With Allowance (2)
 
Commercial real estate:
 
 
 
 
 
 
 
Owner-occupied
$
1,465

 
$

 
$
1,416

 
$
70

Investment properties
8,740

 
2,503

 
5,846

 
602

Multifamily real estate
359

 

 
357

 
71

Commercial construction
1,141

 
1,069

 

 

One- to four-family construction
1,741

 

 
1,741

 
161

Land and land development:
 
 
 
 
 
 
 
Residential
3,540

 
750

 
1,634

 
444

Commercial
1,628

 
1,027

 

 

Commercial business
2,266

 
538

 
1,184

 
150

Agricultural business/farmland
1,309

 
544

 
697

 
43

One- to four-family residential
17,897

 
2,206