Banner Corporation
ANNUAL2015
REPORT
Let’s create tomorrow, together.
We listen, learn and help people reach their goals.
WE LISTEN, LEARN AND HELP PEOPLE DREAM BIG.WE LISTEN, LEARN AND HELP PEOPLE DREAM BIG. We listen, learn and help people reach their goals.
WE LISTEN, LEARN AND HELP PEOPLE DREAM BIG.WE LISTEN, LEARN AND HELP PEOPLE DREAM BIG. More than 125 years ago, we started with
core values that will never go out of style.
As we grow, we’ll always work hard to help our
clients and our communities achieve their goals.
WE LISTEN, LEARN AND HELP PEOPLE DREAM BIG.WE LISTEN, LEARN AND HELP PEOPLE DREAM BIG. !
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SERVING THE COMMUNITY
since 1890
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SERVING THE COMMUNITY
Fellow Shareholders,
Since writing to you a year ago, Banner Corporation has nearly
doubled in size to $9.8 billion in total assets as a result of the
acquisitions we completed during the year as well as continued
strong organic growth. With such a change comes opportunity.
The opportunity to do more in more places, to do it better and
to continue building value for all our stakeholders. The key to
our ongoing success following such a transformational year is to
continue being who we are and to continue doing the things that
got us here. And we are.
We’re still a super community bank. We still have a broad product
offering serving a middle market, small business and consumer client
base. We still make decisions as close to our clients as possible.
We still invest in our communities. And our people are still
connected, knowledgeable and responsive.
Each quarter when we release our earnings, we hold a conference
call for all our employees, where we discuss our performance and
share some of our recent success stories. It’s very gratifying to hear
the enthusiasm of my colleagues as they relate their stories. These
are not always big victories. Often they are small wins, just getting
something done for a client. Consistently, though, the stories reveal
a culture of cooperation within Banner, with all eyes on our clients.
Those are the things that have not changed.
In March 2015, we completed the acquisition of Siuslaw Financial
Group, Inc., the holding company for Siuslaw Bank, with ten
branches in Lane County, Oregon, which expanded our franchise in
the Willamette Valley and along the Oregon Coast south of Portland
and complements our 2014 purchase of six branches in Coos and
Douglas Counties. In October 2015, we completed the acquisition
of Starbuck Bancshares, Inc., the holding company of
AmericanWest Bank, with 98 branches that expanded Banner’s
presence in Washington, Oregon and Idaho and introduced new
growth markets in California and Utah.
At December 31, 2015 Banner Corporation had $9.8 billion in assets,
$7.2 billion in net loans and $8.1 billion in deposits. Our expanded
balance sheet has solid core deposit funding, excellent asset quality
and a strong capital base. As we deploy our super community bank
business model across five western states through our 190 branches,
most of which are located in nine of the top 20 largest western
Metropolitan Statistical Areas by population, we will benefit from
our diversified geographic footprint and the growth opportunities
it offers. Following our successful core system conversion in
February 2016, we are poised to fully integrate AmericanWest Bank
into the Company and realize the expected operating synergies and
benefits to our expanding group of clients, communities, employees
and shareholders.
For the year ended December 31, 2015, Banner Corporation
reported net income of $45.2 million or $1.89 per diluted share,
compared to $54.1 million or $2.79 per diluted share in 2014.
Banner’s results for 2014 were augmented by a $9.1 million bargain
purchase gain in connection with the Oregon branch acquisition,
which net of taxes contributed $0.30 to net income per share.
Acquisition-related expenses were $26.1 million or $0.76 per share
net of tax benefit in 2015, compared to $4.3 million or $0.17 per
share net of tax benefit in 2014. Excluding the impact of merger
and acquisition expenses, gains and losses on the sale of securities,
changes in fair value of financial instruments, and the bargain
purchase gain, our earnings from core operations increased $13.4
million, or 26%, to $64.1 million in 2015 from $50.7 million in 2014.
Through purposeful strategic planning with a focus on revenue
growth initiatives, our revenues from core operations increased 36%
to $305.9 million in 2015 compared to $224.4 million in 2014. We
have improved our ability to consistently generate revenue during
2015 through:
• Outstanding client acquisition and new account growth, with
core deposit accounts up 114%, raising core deposits to 83% of
total deposits,
• Exceptional loan growth of 93% due to the AmericanWest Bank
and Siuslaw Bank acquisitions as well as strong organic growth,
• A strong net interest margin of 4.10% supported by growth of
102% in non-interest-bearing deposits,
• Strong mortgage banking revenue which continued to grow as
the year progressed, and
• A 58% increase in deposit fees and other services-based revenues,
reflecting substantial growth in our client base.
While these results are clearly enhanced by acquisitions, they also
reflect our proven ability to attract new clients, which produced
strong organic growth in loans and deposits, and underscores the
benefits of our super-community banking strategy implemented in
2010: Delivering a compelling value proposition to all our clients by
providing the financial sophistication and breadth of products of a
regional bank while retaining the appeal, responsiveness and superior
service level of a community bank.
Among other accomplishments we have realized this year, we are
especially pleased to have achieved a 1.00% return on average
assets before acquisition expenses and to have delivered our
19th consecutive quarter of profitability.
With an already strong loan loss reserve, net loan loss recoveries for
the year, and a decrease in non-performing assets to 0.28%, we did
not take a provision for loan losses in 2015 and still ended the year
with a very strong 1.67% reserve to total loans when including the net
loan discount on acquired loans. Combined with a tangible common
equity ratio of 10.68%, we have one of the strongest balance sheets in
the industry, providing considerable flexibility for strategic initiatives.
2015 was truly a transformational year for Banner Corporation.
Our core operating performance continued to reflect the success of
our proven client acquisition strategies and our two acquisitions had
a dramatic impact on the scale and reach of the Company, providing
a great opportunity for future revenue growth. Work still remains
to fully integrate AmericanWest Bank and achieve the expected
operating efficiencies, but we are exceptionally pleased with the
progress made to date. And, through the hard work of our employees
throughout the Company, we continue to successfully execute on
our strategic plan to deliver sustainable profitability and revenue
growth to Banner by expanding our balance sheet with strong
organic loan and deposit growth and opportunistic acquisitions.
In closing, I would like to congratulate my colleagues throughout
the Company and thank them for their hard work and success in
2015. I would also like to once again welcome the Siuslaw Bank and
AmericanWest Bank clients, employees and shareholders who joined
the Banner Bank team this past year.
Thank you for your continuing interest in and commitment to Banner.
We are pleased with our strong 2015 performance and the evidence
it provides that we are making substantial and sustainable progress on
our disciplined strategic plan to build shareholder value by executing
on our super community bank model precepts of growing new client
relationships, improving our core funding position, strengthening our
core operating performance and maintaining a moderate risk profile.
I look forward to reporting further progress for 2016.
Sincerely,
Mark J. Grescovich
President and Chief Executive Officer
Banner Corporation & Banner Bank
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2015
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE TRANSITION PERIOD FROM __________to__________
OR
Commission File Number 0-26584
BANNER CORPORATION
(Exact name of registrant as specified in its charter)
Washington
(State or other jurisdiction of incorporation
or organization)
91-1691604
(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:
Common Stock, par value $.01 per share
(Title of Each Class)
The NASDAQ Stock Market LLC
(Name of Each Exchange on Which Registered)
Securities registered pursuant to section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes __ No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes __No X
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 Web site, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. ____
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 definition 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 Act) Yes ____ No X
The aggregate market value of the voting and non-voting common equity held by nonaffiliates of the registrant based on the closing sales price
of the registrant’s common stock quoted on The NASDAQ Stock Market on June 30, 2015, was:
Common Stock – $979,733,679
(The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the Registrant
that such person is an affiliate of the Registrant.)
The number of shares outstanding of the registrant’s classes of common stock as of January 31, 2016:
Common Stock, $.01 par value – 32,817,789 shares
Non-voting Common Stock, $.01 par value – 1,424,466 shares
Documents Incorporated by Reference
Portions of Proxy Statement for Annual Meeting of Shareholders to be held April 26, 2016 are incorporated by reference into Part III.
BANNER CORPORATION AND SUBSIDIARIES
Table of Contents
PART I
Item 1.
Business
General
Recent Developments and significant events
Lending Activities
Asset Quality
Investment Activities
Deposit Activities and Other Sources of Funds
Personnel
Taxation
Competition
Regulation
Management Personnel
Corporate Information
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Item 6.
Item 7.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
Comparison of Financial Condition at December 31, 2015 and 2014
Comparison of Results of Operations
Years ended December 31, 2015 and 2014
Years ended December 31, 2014 and 2013
Market Risk and Asset/Liability Management
Liquidity and Capital Resources
Capital Requirements
Effect of Inflation and Changing Prices
Contractual Obligations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures
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Forward-Looking Statements
Certain matters in this Form 10-K 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 of Banner Bank and Siuslaw Bank
and of the merger 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 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, 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; 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, non-voting common stock and any preferred 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-K. 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
Item 1 – Business
PART 1
General
Banner Corporation (the Company) is a bank holding company incorporated in the State of Washington. We are primarily engaged in the business
of planning, directing and coordinating the business activities of our wholly-owned subsidiaries, Banner Bank and Islanders Bank. Banner Bank
is a Washington-chartered commercial bank that conducts business from its main office in Walla Walla, Washington and, as of December 31,
2015, its 199 branch offices and nine loan production offices located in Washington, Oregon, California, Utah and Idaho. Islanders Bank is also
a Washington-chartered commercial bank that conducts business from three locations in San Juan County, Washington. Banner Corporation is
subject to regulation by the the Federal Reserve Board. Banner Bank and Islanders Bank (the Banks) are subject to regulation by the Washington
DFI and the FDIC. As of December 31, 2015, we had total consolidated assets of $9.80 billion, net loans of $7.24 billion, total deposits of $8.06
billion and total shareholders’ equity of $1.30 billion. Our voting common stock is traded on the NASDAQ Global Select Market under the
ticker symbol “BANR.”
Banner Bank is a regional bank which offers a wide variety of commercial banking services and financial products to individuals, businesses
and public sector entities in its primary market areas. Islanders Bank is a community bank which offers similar banking services to individuals,
businesses and public entities located primarily in the San Juan Islands. The Banks' primary business is that of traditional banking institutions,
accepting deposits and originating loans in locations surrounding our offices in portions of Washington, Oregon, California, Utah and
Idaho. Banner Bank is also an active participant in the secondary market, engaging in mortgage banking operations largely through the origination
and sale of one- to four-family and multi-family residential loans. Lending activities include commercial business and commercial real estate
loans, agriculture business loans, construction and land development loans, one- to four-family residential loans and consumer loans.
Since becoming a public company in 1995, we have invested significantly in expanding our branch and distribution systems with a primary
emphasis on strengthening our market presence in our five primary markets in the Northwest. Those markets include the four largest metropolitan
areas in the Northwest: the Puget Sound region of Washington and the greater Portland, Oregon, Boise, Idaho, and Spokane, Washington markets,
as well as our historical base in the vibrant agricultural communities in the Columbia Basin region of Washington and Oregon. Our aggressive
franchise expansion during this period included the acquisition and consolidation of ten commercial banks, as well as the opening of 28 new
branches, the acquisition of seven branches and relocating 12 others. More recently, our acquisition activity, which included two whole bank
transactions in 2015 and the purchase of six branches in 2014, has expanded our geographic focus to include additional markets in southwest
Oregon, as well as select markets in California and Utah and more than doubled the size of the Company. The acquisition of Starbuck Bancshares,
Inc. (Starbuck), the holding company for AmericanWest, which closed on October 1, 2015, with 98 branches and approximately $4.46 billion
in assets, added scale to our operations, strengthened our Northwest presence and provided entry into attractive markets in California and Utah.
Prior to that, the acquisition of Siuslaw Financial Group (Siuslaw), holding company of Siuslaw Bank, which closed on March 6, 2015, with
ten branches and approximately $369.8 million in assets, added further market penetration in western Oregon, including the Eugene market.
Both the Starbuck and Siuslaw acquisitions complemented our June 2014 purchase of six branches on the southern Oregon coast (Branch
purchase), together giving us meaningful market share in the southwest Oregon market area and have had a significant impact on the operating
results of Banner. For additional details regarding these acquisitions and merger related expenses, see Note 3, Business Combinations, of the
Notes to Consolidated Financial Statements contained in Item 8 of this report.
In addition to the acquisitions, branch openings and relocations, since changing our name in 2001, we also have invested heavily in marketing
campaigns designed to significantly increase the brand awareness for Banner Bank as well as expanded product offerings. These investments,
which have been significant elements in our strategies to grow loans, deposits and customer relationships, have increased our presence within
desirable marketplaces and allow us to better serve existing and future customers. This emphasis on growth and development resulted in an
elevated level of non-interest expense during much of this period; however, we believe the expanded branch network, broader product line and
heightened brand awareness have created a franchise that is well positioned and is allowing us to successfully execute on our super community
bank model. That strategy is focused on delivering customers, including middle market and small businesses, business owners, their families
and employees, a compelling value proposition by providing the financial sophistication and breadth of products of a regional bank while retaining
the appeal, responsiveness, and superior service level of a community bank.
Banner Corporation's successful execution on its super community bank model and its strategic initiatives, have delivered solid profitability
and growth. We have made substantial progress on our goals to achieve and maintain the Company's moderate risk profile as well as to develop
and continue strong earnings momentum. Highlights of this success have included substantial improvement in our asset quality, outstanding
client acquisition and account growth, significantly increased non-interest-bearing deposit balances and strong revenue generation from core
operations.
Like most financial institutions, our operating results in recent years have been meaningfully impacted by the exceptionally low interest rate
environment and our future operating results and financial performance will be significantly affected by the course of economic activity. However,
over the past five years we have substantially added to our client relationships and account base, as well as significantly improved our risk profile
by aggressively managing and reducing our problem assets, which has resulted in stronger and sustainable revenues and low credit costs, and
which we believe has positioned the Company well to meet a challenging economic environment with continued success.
As a result of elevated expenses related to the acquisition of Starbuck and Siuslaw, for the year ended December 31, 2015, our net income
decreased to $45.2 million, or $1.89 earnings per diluted share, compared to $54.1 million, or $2.79 earnings per diluted share, for the prior year.
Our results for both years were significantly impacted by merger and acquisition activity and the related expenses. Acquisition-related expenses
4
were $26.1 million, or $0.76 per diluted share net of tax benefit, in 2015 compared to $4.3 million, or $0.17 per diluted share net of tax benefit,
in 2014. Results for 2014 also included a $9.1 million bargain purchase gain related to the Branch purchase, which net of taxes contributed
$0.30 to diluted net income per share.
Our operating results depend primarily on our net interest income, which is the difference between interest income on interest-earning assets,
consisting of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of customer deposits,
Federal Home Loan Bank of Des Moines (FHLB) advances, other borrowings and junior subordinated debentures. Net interest income is
primarily a function of our interest rate spread, which is the difference between the yield earned on interest-earning assets and the rate paid on
interest-bearing liabilities, as well as a function of the average balances of interest-earning assets and interest-bearing liabilities. Our net interest
income before provision for loan losses increased 35% to $242.3 million for the year ended December 31, 2015, compared to $179.9 million
for the year ended December 31, 2014.
Our net income also is affected by the level of our non-interest income, including deposit fees and service charges, results of mortgage banking
operations, which includes loan origination and servicing fees and gains and losses on the sale of loans, and gains and losses on the sale of
securities, as well as our non-interest expenses, provisions for loan losses and income tax provisions. In addition, net income is affected by the
net change in the value of certain financial instruments carried at fair value.
Our total revenues (net interest income before the provision for loan losses plus non-interest income) for 2015 increased to $304.6 million,
compared to $234.9 million for 2014. 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 $62.3 million for the year ended December 31, 2015,
compared to $55.0 million for the year ended December 31, 2014.
As a result of adequate reserves already in place as well as low levels of non-performing loans and net recoveries in both years, we did not record
a provision for loan losses in the years ended December 31, 2015 or 2014. Reflecting our continued focused efforts, non-performing loans
decreased by 9% to $15.2 million at December 31, 2015, compared to $16.7 million a year earlier. Our allowance for loan losses at December 31,
2015 was $78.0 million, representing 512% of non-performing loans. (See Note 5, Loans Receivable and the Allowance for Loan Losses, of
the Notes to the Consolidated Financial Statements as well as “Asset Quality” below.)
Our non-interest expense increased to $236.6 million for the year ended December 31, 2015, compared to $153.7 million for the year ended
December 31, 2014. The year-over-year increase in non-interest expense was largely attributable to acquisition-related expenses and incremental
costs associated with operating the 98 branches acquired in the AmericanWest acquisition on October 1, 2015 and the ten Siuslaw Bank branches
acquired in March 2015, as well as a full year's expense related to the Branch purchase and generally increased compensation, occupancy and
payment and card processing services reflecting increased transaction volume.
Acquisition of AmericanWest Bank
Recent Developments and Significant Events
As of the close of business on October 1, 2015, the Company completed its acquisition of Starbuck and its subsidiary, 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 equityholders of Starbuck received an
aggregate of $130.0 million in cash and 13.2 million shares of Banner common stock and non-voting common stock. At the time of closing,
Starbuck had $4.46 billion in assets, $3.00 billion in loans and $3.64 billion in deposits.
Acquisition of Siuslaw Financial Group, Inc.
On March 6, 2015, the Company completed its acquisition of Siuslaw, the holding company of Siuslaw Bank, an Oregon state charted commercial
bank. Siuslaw shareholders received consideration of $1.416 in cash plus 0.322 of a share of Banner common stock in exchange for each share
of Siuslaw common stock, which reflects a payment of approximately 90% stock and 10% cash. Upon closing of the transaction Siuslaw was
merged into Banner and Siuslaw Bank was merged into Banner Bank. At the time of closing, Siuslaw had $369.8 million in assets, $247.1
million in loans and $316.4 million in deposits.
Acquisition of Six Sterling Savings Bank Branches
Effective as of the close of business on June 20, 2014, Banner Bank completed the purchase of the six branches in Oregon from Umpqua Bank,
successor to Sterling Savings Bank. In the aggregate, Banner Bank acquired $212.1 million in deposit accounts, $87.9 million in loans, and
$3.1 million in branch properties. Banner Bank also received $127.6 million in cash from the transaction.
Lending Activities
General: All of our lending activities are conducted through Banner Bank, its subsidiary, Community Financial Corporation, a residential
construction lender located in Portland, Oregon, and Islanders Bank. We offer a wide range of loan products to meet the demands of our customers
and our loan portfolio is very diversified by product type, borrower and geographic location within our market area. We originate loans for our
own loan portfolio and for sale in the secondary market. Management’s strategy has been to maintain a well diversified portfolio with a significant
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percentage of assets in the loan portfolio having more frequent interest rate repricing terms or shorter maturities than traditional long-term fixed-
rate mortgage loans. As part of this effort, we offer a variety of floating or adjustable interest rate products that correlate more closely with our
cost of interest bearing funds, particularly loans for commercial business and real estate, agricultural business, and construction and development
purposes. However, in response to customer demand, we continue to originate fixed-rate loans, including fixed interest rate mortgage loans
with terms of up to 30 years. The relative amount of fixed-rate loans and adjustable-rate loans that can be originated at any time is largely
determined by the demand for each in a competitive environment. At December 31, 2015, our net loan portfolio totaled $7.24 billion compared
to $3.76 billion at December 31, 2014. The AmericanWest acquisition accounted for $2.82 billion of the year-end loan portfolio and the Siuslaw
Bank acquisition accounted for $227.1 million of the year-end loan portfolio, while organic loan growth accounted for $441.4 million of the
increase from the prior year.
Our lending activities are primarily directed toward the origination of real estate and commercial loans. Commercial real estate loans include
owner-occupied, investment properties, multifamily residential real estate and construction and development loans for these types of properties.
Although our level of activity and investment in commercial and multifamily real estate loans has been relatively stable for many years, we have
experienced an increase in new originations in recent periods resulting in growth in these loan balances. In addition, the AmericanWest and
Siuslaw Bank acquisitions substantially increased the balances of our commercial and multi-family real estate loans. Commercial real estate
loans increased by $1.77 billion and multifamily loans increased by $309.1 million during the year ended December 31, 2015. We also originate
residential construction, land and land development loans and, although our portfolio balances are well below the peak levels before the recent
recession, since 2011 we have experienced increased demand for one- to four-family construction loans. While our origination of construction
and development loans has been significant during this period, balances in this portion of the portfolio have only increased modestly in recent
periods as brisk sales of new homes have produced rapid turnover through repayments. Our commercial business lending is directed toward
meeting the credit and related deposit and treasury management needs of various small- to medium-sized business and agribusiness borrowers
operating in our primary market areas. In recent years, our commercial business lending has also included participation in certain national
syndicated loans. Reflecting the expanding Northwest economy, demand for these types of commercial business loans has strengthened and
our production levels have increased in recent periods. Largely as a result of the AmericanWest acquisition, commercial and agricultural business
loans increased by $622.0 million during the year ended December 31, 2015.
Our residential mortgage loan originations have been relatively strong in recent years, as exceptionally low interest rates have supported demand
for loans to refinance existing debt as well as loans to finance home purchases. However, most of the one- to four-family loans that we originate
are sold in the secondary markets with net gains on sales and loan servicing fees reflected in our revenues from mortgage banking. As a result,
excluding loans acquired through the acquisitions, growth in this portion of our portfolio has been modest. At December 31, 2015, our outstanding
balance for residential mortgages was $952.6 million, an increase of $415.5 million compared to a year earlier largely as a result of the acquisitions.
Our consumer loan activity is primarily directed at meeting demand from our existing deposit customers. We have increased our emphasis on
consumer lending in recent years, and while demand for consumer loans has been modest during most of this period as we believe many consumers
have been focused on reducing their personal debt, we had meaningful growth from originations in 2014 and 2015, primarily related to increased
home equity lines of credit. More recently, the AmericanWest acquisition nearly doubled the size of the consumer loan portfolio, although it
remains a relatively small portion of the total loan portfolio. At December 31, 2015, consumer loans, including consumer loans secured by one-
to four-family residences, increased to $636.9 million, an increase of $287.7 million compared to a year earlier largely as a result of the acquisitions
of AmericanWest and Siuslaw Bank.
For additional information concerning our loan portfolio, see Item 7 of this report, “Management’s Discussion and Analysis of Financial Condition
—Comparison of Financial Condition at December 31, 2015 and 2014—Loans and Lending” including Tables 3 and 4, which sets forth the
composition and geographic concentration of our loan portfolio, and Tables 5 and 6, which contain information regarding the loans maturing in
our portfolio.
One- to Four-Family Residential Real Estate Lending: At both Banner Bank and Islanders Bank, we originate loans secured by first mortgages
on one- to four-family residences in the markets we serve. Through our mortgage banking activities, we sell residential loans on either a servicing-
retained or servicing-released basis. In recent years, we have generally sold a significant portion of our conventional residential mortgage
originations and nearly all of our government insured loans in the secondary market. At December 31, 2015, $952.6 million, or 13% of our loan
portfolio, consisted of permanent loans on one- to four-family residences.
We offer fixed- and adjustable-rate mortgages (ARMs) at rates and terms competitive with market conditions, primarily with the intent of selling
these loans into the secondary market. Fixed-rate loans generally are offered on a fully amortizing basis for terms ranging from 10 to 30 years
at interest rates and fees that reflect current secondary market pricing. Most ARM products offered adjust annually after an initial period ranging
from one to five years, subject to a limitation on the annual adjustment and a lifetime rate cap. For a small portion of the portfolio, where the
initial period exceeds one year, the first interest rate change may exceed the annual limitation on subsequent adjustments. Our ARM products
most frequently adjust based upon the average yield on Treasury securities adjusted to a constant maturity of one year or certain London Interbank
Offered Rate (LIBOR) indices plus a margin or spread above the index. ARM loans held in our portfolio may allow for interest-only payments
for an initial period up to five years but do not provide for negative amortization of principal and carry no prepayment restrictions. The retention
of ARM loans in our loan portfolio can help reduce our exposure to changes in interest rates. However, borrower demand for ARM loans versus
fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the level of interest rates and the difference
between the initial interest rates and fees charged for each type of loan. In recent years, borrower demand for ARM loans has been limited and
we have chosen not to aggressively pursue ARM loans by offering minimally profitable, deeply discounted teaser rates or option-payment ARM
products. As a result, ARM loans have represented only a small portion of our loans originated during recent periods.
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Our residential loans are generally underwritten and documented in accordance with the guidelines established by the Federal Home Loan
Mortgage Corporation (Freddie Mac or FHLMC) and the Federal National Mortgage Association (Fannie Mae or FNMA). Government insured
loans are underwritten and documented in accordance with the guidelines established by the Department of Housing and Urban Development
(HUD) and the Veterans Administration (VA). In the loan approval process, we assess the borrower’s ability to repay the loan, the adequacy of
the proposed security, the employment stability of the borrower and the creditworthiness of the borrower. For ARM loans, our standard practice
provides for underwriting based upon fully indexed interest rates and payments. Generally, we will lend up to 95% of the lesser of the appraised
value or purchase price of the property on conventional loans, although higher loan-to-value ratios are available on secondary market
programs. We require private mortgage insurance on conventional residential loans with a loan-to-value ratio at origination exceeding 80%.
Construction and Land Lending: Historically, we have invested a significant portion of our loan portfolio in residential construction and land
loans to professional home builders and developers. We also make construction loans to qualified owner occupants, which upon completion of
the construction phase convert to long-term amortizing one-to-four family residential loans that are eligible for sale in the secondary market.
We regularly monitor our construction and land loan portfolios and the economic conditions and housing inventory in each of our markets and
increase or decrease this type of lending as we observe market conditions change. Beginning in 2011, in response to improvement in certain
sub-markets, our residential construction and land and land development lending has been increasing and has made a meaningful contribution
to our net interest income and profitability. To a lesser extent, we also originate construction loans for commercial and multifamily real estate.
Although well diversified with respect to sub-markets, price ranges and borrowers, our construction, land and land development loans are
significantly concentrated in the greater Puget Sound region of Washington State and the Portland, Oregon market area. At December 31, 2015,
construction, land and land development loans totaled $574.4 million, or 8% of total loans; the balance was primarily comprised of one- to four-
family construction and residential land or land development loans, and to a lesser extent commercial and multifamily real estate construction
loans and commercial land or land development loans.
Construction and land lending affords us the opportunity to achieve higher interest rates and fees with shorter terms to maturity than are usually
available on other types of lending. Construction and land lending, however, involves a higher degree of risk than other lending opportunities
because of the inherent difficulty in estimating both a property’s value at completion of the project and the estimated cost of the project. If the
estimate of construction cost proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit
completion of the project. If the estimate of value upon completion proves to be inaccurate, we may be confronted at, or prior to, the maturity
of the loan with a project the value of which is insufficient to assure full repayment. Disagreements between borrowers and builders and the
failure of builders to pay subcontractors may also jeopardize projects. Loans to builders to construct homes for which no purchaser has been
identified carry additional risk because the payoff for the loan is dependent on the builder’s ability to sell the property before the construction
loan is due. We attempt to address these risks by adhering to strict underwriting policies, disbursement procedures and monitoring practices.
Construction loans made by us include those with a sales contract or permanent loan in place for the finished homes and those for which purchasers
for the finished homes may be identified either during or following the construction period. We actively monitor the number of unsold homes
in our construction loan portfolio and local housing markets to attempt to maintain an appropriate balance between home sales and new loan
originations. The maximum number of speculative loans (loans that are not pre-sold) approved for each builder is based on a combination of
factors, including the financial capacity of the builder, the market demand for the finished product and the ratio of sold to unsold inventory the
builder maintains. We have attempted to diversify the risk associated with speculative construction lending by doing business with a large
number of small and mid-sized builders spread over a relatively large geographic region with numerous sub-markets within our service area.
Loans for the construction of one- to four-family residences are generally made for a term of twelve to eighteen months. Our loan policies
include maximum loan-to-value ratios of up to 80% for speculative loans. Individual speculative loan requests are supported by an independent
appraisal of the property, a set of plans, a cost breakdown and a completed specifications form. Underwriting is focused on the borrowers’
financial strength, credit history and demonstrated ability to produce a quality product and effectively market and manage their operations. All
speculative construction loans must be approved by senior loan officers.
On a more limited basis, we also make land loans to developers, builders and individuals to finance the acquisition and/or development of
improved lots or unimproved land. In making land loans, we follow underwriting policies and disbursement and monitoring procedures similar
to those for construction loans. The initial term on land loans is typically one to three years with interest only payments, payable monthly, and
provisions for principal reduction as lots are sold and released from the lien of the mortgage.
Commercial and Multifamily Real Estate Lending: We originate loans secured by multifamily and commercial real estate including, as noted
above, loans for construction of multifamily and commercial real estate projects. Commercial real estate loans are made for both owner-occupied
and investor properties. At December 31, 2015, our loan portfolio included $1.77 billion in non-owner-occupied commercial real estate loans,
$1.33 billion in owner-occupied commercial real estate loans and $473.0 million in multifamily loans which in aggregate comprised 49% of our
total loans. Multifamily and commercial real estate lending affords us an opportunity to receive interest at rates higher than those generally
available from one- to four-family residential lending. However, loans secured by multifamily and commercial properties are generally greater
in amount, more difficult to evaluate and monitor and, therefore, potentially riskier than one- to four-family residential mortgage loans. Because
payments on loans secured by multifamily and commercial properties are often dependent on the successful operation and management of the
properties, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. In addition, many of our
commercial and multifamily real estate loans often are not fully amortizing and contain large balloon payments upon maturity. Such balloon
payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the
risk of default or non-payment. In originating multifamily and commercial real estate loans, we consider the location, marketability and overall
attractiveness of the properties. Our underwriting guidelines for multifamily and commercial real estate loans require an appraisal from a qualified
independent appraiser and an economic analysis of each property with regard to the annual revenue and expenses, debt service coverage and
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fair value to determine the maximum loan amount. In the approval process we assess the borrowers’ willingness and ability to manage the
property and repay the loan and the adequacy of the collateral in relation to the loan amount.
Multifamily and commercial real estate loans originated by us are both fixed- and adjustable-rate loans generally with intermediate terms of five
to ten years. A significant portion of our multifamily and commercial real estate loans are linked to various FHLB advance rates, certain prime
rates or other market rate indices. Rates on these adjustable-rate loans generally adjust with a frequency of one to five years after an initial fixed-
rate period ranging from one to ten years. Our commercial real estate portfolio consists of loans on a variety of property types with no large
concentrations by property type, location or borrower. At December 31, 2015, the average size of our commercial real estate loans was $632,000
and the largest commercial real estate loan in our portfolio was approximately $19.3 million.
Commercial Business Lending: We are active in small- to medium-sized business lending and are engaged in agricultural lending primarily by
providing crop production loans. Our commercial bankers are focused on local markets and devote a great deal of effort to developing customer
relationships and providing these types of borrowers with a full array of products and services delivered in a thorough and responsive
manner. While also strengthening our commitment to small business lending, our experienced commercial bankers and and senior credit staff
focus on corporate lending opportunities for borrowers with credit needs generally in a $3 million to $15 million range. In addition to providing
earning assets, commercial business lending has helped us increase our deposit base. In recent years, our commercial business lending has
included modest participation in certain national syndicated loans, including shared national credits. We also originate smaller balance business
loans principally through our retail branch network, using our Quick Step business loan program, which is closely aligned with our consumer
lending operations and relies on centralized underwriting procedures. Quick Step business loans and lines of credit are available from $5,000
to $500,000 and owner-occupied real estate loans are available up to $1.0 million.
Commercial business loans may entail greater risk than other types of loans. Commercial business loans may be unsecured or secured by special
purpose or rapidly depreciating assets, such as equipment, inventory and receivables, which may not provide an adequate source of repayment
on defaulted loans. In addition, commercial business loans are dependent on the borrower’s continuing financial strength and management
ability, as well as market conditions for various products, services and commodities. For these reasons, commercial business loans generally
provide higher yields or related revenue opportunities than many other types of loans but also require more administrative and management
attention. Loan terms, including the fixed or adjustable interest rate, the loan maturity and the collateral considerations, vary significantly and
are negotiated on an individual loan basis.
We underwrite our commercial business loans on the basis of the borrower’s cash flow and ability to service the debt from earnings rather than
on the basis of the underlying collateral value. We seek to structure these loans so that they have more than one source of repayment. The
borrower is required to provide us with sufficient information to allow us to make a prudent lending determination. In most instances, this
information consists of at least three years of financial statements, tax returns, a statement of projected cash flows, current financial information
on any guarantor and information about the collateral. Loans to closely held businesses typically require personal guarantees by the
principals. Our commercial business loan portfolio is geographically dispersed across the market areas serviced by our branch network and
there are no significant concentrations by industry or products.
Our commercial business loans may be structured as term loans or as lines of credit. Commercial business term loans are generally made to
finance the purchase of fixed assets and have maturities of five years or less. Commercial business lines of credit are typically made for the
purpose of providing working capital and are usually approved with a term of one year. Adjustable- or floating-rate loans are primarily tied to
various prime rate or LIBOR indices. At December 31, 2015, commercial business loans totaled $1.21 billion, or 17% of our total loans, including
$123.7 million of shared national credits.
Agricultural Lending: Agriculture is a major industry in several of our markets. We make agricultural loans to borrowers with a strong capital
base, sufficient management depth, proven ability to operate through agricultural cycles, reliable cash flows and adequate financial
reporting. Payments on agricultural loans depend, to a large degree, on the results of operations of the related farm entity. The repayment is
also subject to other economic and weather conditions as well as market prices for agricultural products, which can be highly volatile. At
December 31, 2015, agricultural business loans, including collateral secured loans to purchase farm land and equipment, totaled $376.5 million,
or 5% of our loan portfolio.
Agricultural operating loans generally are made as a percentage of the borrower’s anticipated income to support budgeted operating
expenses. These loans are secured by a blanket lien on all crops, livestock, equipment, accounts and products and proceeds thereof. In the case
of crops, consideration is given to projected yields and prices from each commodity. The interest rate is normally floating based on the prime
rate or a LIBOR index plus a negotiated margin. Because these loans are made to finance a farm or ranch’s annual operations, they are usually
written on a one-year review and renewable basis. The renewal is dependent upon the prior year’s performance and the forthcoming year’s
projections as well as the overall financial strength of the borrower. We carefully monitor these loans and related variance reports on income
and expenses compared to budget estimates. To meet the seasonal operating needs of a farm, borrowers may qualify for single payment notes,
revolving lines of credit and/or non-revolving lines of credit.
In underwriting agricultural operating loans, we consider the cash flow of the borrower based upon the expected operating results as well as the
value of collateral used to secure the loans. Collateral generally consists of cash crops produced by the farm, such as milk, grains, fruit, grass
seed, peas, sugar beets, mint, onions, potatoes, corn and alfalfa or livestock. In addition to considering cash flow and obtaining a blanket security
interest in the farm’s cash crop, we may also collateralize an operating loan with the farm’s operating equipment, breeding stock, real estate and
federal agricultural program payments to the borrower.
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We also originate loans to finance the purchase of farm equipment. Loans to purchase farm equipment are made for terms of up to seven
years. On occasion, we also originate agricultural real estate loans secured primarily by first liens on farmland and improvements thereon located
in our market areas, although generally only to service the needs of our existing customers. Loans are written in amounts ranging from 50% to
75% of the tax assessed or appraised value of the property for terms of five to 20 years. These loans generally have interest rates that adjust at
least every five years based upon a Treasury index or FHLB advance rate plus a negotiated margin. Fixed-rate loans are granted on terms usually
not to exceed five years. In originating agricultural real estate loans, we consider the debt service coverage of the borrower’s cash flow, the
appraised value of the underlying property, the experience and knowledge of the borrower, and the borrower’s past performance with us and/or
the market area. These loans normally are not made to start-up businesses and are reserved for existing customers with substantial equity and
a proven history.
Among the more common risks to agricultural lending can be weather conditions and disease. These risks may be mitigated through multi-peril
crop insurance. Commodity prices also present a risk, which may be reduced by the use of set price contracts. Normally, required beginning
and projected operating margins provide for reasonable reserves to offset unexpected yield and price deficiencies. In addition to these risks, we
also consider management succession, life insurance and business continuation plans when evaluating agricultural loans.
Consumer and Other Lending: We originate a variety of consumer loans, including home equity lines of credit, automobile, boat and recreational
vehicle loans and loans secured by deposit accounts. While consumer lending has traditionally been a small part of our business, with loans
made primarily to accommodate our existing customer base, it has received consistent emphasis in recent years. Part of this emphasis includes
a Banner Bank-owned credit card program. Similar to other consumer loan programs, we focus this credit card program on our existing customer
base to add to the depth of our customer relationships. In addition to earning balances, credit card accounts produce non-interest revenues
through interchange fees and other activity-based revenues. Our underwriting of consumer loans is focused on the borrower’s credit history and
ability to repay the debt as evidenced by documented sources of income. At December 31, 2015, we had $636.9 million, or 9% of our loan
portfolio, in consumer related loans, including $478.4 million, or 7% of our loan portfolio, in consumer loans secured by one- to four-family
residences.
Similar to commercial business loans, our consumer loans often entail greater risk than first-lien residential mortgage loans. Home equity lines
of credit generally entail greater risk than do one- to four-family residential mortgage loans where we are in the first lien position. For those
home equity lines secured by a second mortgage, it is less likely that we will be successful in recovering all of our loan proceeds in the event of
default. Our foreclosure on these loans requires that the value of the property be sufficient to cover the repayment of the first mortgage loan, as
well as the costs associated with foreclosure. In the case of consumer loans which are unsecured or secured by rapidly depreciating assets such
as automobiles, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding
loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial
stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on
these consumer loans. Loans that we purchased, or indirectly originated, may also give rise to claims and defenses by a consumer loan borrower
against an assignee of such loans such as us, and a borrower may be able to assert against the assignee claims and defenses that it has against
the seller of the underlying collateral.
Loan Solicitation and Processing: We originate real estate loans in our market areas by direct solicitation of real estate brokers, builders,
developers, depositors, walk-in customers and visitors to our Internet website. One- to four-family residential loan applications are taken by
our mortgage loan officers or through our Internet website and are processed in branch or regional locations. In addition, we have specialized
origination units, focused on construction and land development, commercial real estate and multifamily loans. Most underwriting and loan
administration functions for our real estate loans are performed by loan personnel at central locations.
In addition to commercial real estate loans, our commercial bankers solicit commercial and agricultural business loans through call programs
focused on local businesses and farmers. While commercial bankers are delegated reasonable commitment authority based upon their
qualifications, credit decisions on significant commercial and agricultural loans are made by senior loan officers or in certain instances by the
Board of Directors of Banner Bank and Islanders Bank.
We originate consumer loans and small business (including Quick Step) commercial business loans through various marketing efforts directed
primarily toward our existing deposit and loan customers. Consumer loans and Quick Step commercial business loan applications are primarily
underwritten and documented by centralized administrative personnel.
Loan Originations, Sales and Purchases
While we originate a variety of loans, our ability to originate each type of loan is dependent upon the relative customer demand and competition
in each market we serve. For the years ended December 31, 2015 and 2014, we originated loans, net of repayments, including our participation
in syndicated loans and loans held for sale of $741.7 million and $506.0 million, respectively. The increase in originations net of repayments
for 2015 compared with 2014 largely reflects increased production capacity, including production from the former AmericanWest and Siuslaw
Bank lending teams, with both periods being effected by high levels of repayments.
We sell many of our newly originated one- to four-family residential mortgage loans to secondary market purchasers as part of our interest rate
risk management strategy. In addition, beginning in 2015, in conjunction with the acquisition of AmericanWest, we began to sell many of our
newly originated multifamily loans to the secondary market purchasers. Originations of loans for sale increased to $709.0 million for the year
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ended December 31, 2015 from $361.9 million during 2014, reflecting low interest rates, strong housing markets and our increased production
capacity, including $41.2 million of multifamily held for sale loan production subsequent to the acquisition of AmericanWest. Sales of loans
generally are beneficial to us because these sales may generate income at the time of sale, provide funds for additional lending and other
investments, increase liquidity or reduce interest rate risk. During the year ended December 31, 2015, we sold $677.2 million of loans held for
sale compared to $367.9 million for the year ended December 31, 2014. The held for sale loans sold in 2015 were primarily one- to four-family
loans, although $66.8 million of multifamily loans held for sale were sold in the fourth quarter of 2015. In 2014 all held for sale loans sold were
one- to four-family loans. In addition, during the fourth quarter of 2015, we sold $85.1 million of portfolio multifamily loans acquired through
the merger with AmericanWest. We sell loans on both a servicing-retained and a servicing-released basis. All loans are sold without recourse.
The decision to hold or sell loans is based on asset liability management goals, strategies and policies and on market conditions. See “Loan
Servicing.”
We periodically purchase whole loans and loan participation interests or participate in syndicates originating new loans, including shared national
credits, primarily during periods of reduced loan demand in our primary market area and at times to support our Community Reinvestment Act
lending activities. Any such purchases or loan participations are made generally consistent with our underwriting standards; however, the loans
may be located outside of our normal lending area. During the years ended December 31, 2015 and 2014, we purchased $323.5 million and
$194.4 million, respectively, of loans and loan participation interests.
Loan Servicing
We receive fees from a variety of institutional owners in return for performing the traditional services of collecting individual payments and
managing portfolios of sold loans. At December 31, 2015, we were servicing $2.33 billion of loans for others. Loan servicing includes processing
payments, accounting for loan funds and collecting and paying real estate taxes, hazard insurance and other loan-related items such as private
mortgage insurance. In addition to earning fee income, we retain certain amounts in escrow for the benefit of the lender for which we incur no
interest expense but are able to invest the funds into earning assets.
Mortgage Servicing Rights: We record mortgage servicing rights (MSRs) with respect to loans we originate and sell in the secondary market
on a servicing-retained basis. The value of MSRs is capitalized and amortized in proportion to, and over the period of, the estimated future net
servicing income. Management periodically evaluates the estimates and assumptions used to determine the carrying values of MSRs and the
amortization of MSRs. MSRs generally are adversely affected by higher levels of current or anticipated prepayments resulting from decreasing
interest rates. These carrying values are adjusted when the valuation indicates the carrying value is impaired. At December 31, 2015, our MSRs
were carried at a value of $13.3 million, net of amortization. For additional information see Note 17, Goodwill, Other Intangible Assets and
Mortgage Servicing Rights, of the Notes to the Consolidated Financial Statements.
Asset Quality
Classified Assets: State and federal regulations require that the Banks review and classify their problem assets on a regular basis. In addition,
in connection with examinations of insured institutions, state and federal examiners have authority to identify problem assets and, if appropriate,
require them to be classified. Historically, we have not had any meaningful differences of opinion with the examiners with respect to asset
classification. Banner Bank’s Credit Policy Division reviews detailed information with respect to the composition and performance of the loan
portfolios, including information on risk concentrations, delinquencies and classified assets for both Banner Bank and Islanders Bank. The
Credit Policy Division approves all recommendations for new classified loans or, in the case of smaller-balance homogeneous loans including
residential real estate and consumer loans, it has approved policies governing such classifications, or changes in classifications, and develops
and monitors action plans to resolve the problems associated with the assets. The Credit Policy Division also approves recommendations for
establishing the appropriate level of the allowance for loan losses. Significant problem loans are transferred to Banner Bank’s Special Assets
Department for resolution or collection activities. The Banks’ and Banner Corporation’s Boards of Directors are given a detailed report on
classified assets and asset quality at least quarterly. For additional information regarding asset quality and non-performing loans, see Item 7 of
this report, “Management’s Discussion and Analysis of Financial Condition—Comparison of Financial Condition at December 31, 2015 and
2014—Asset Quality,” and Table 11 contained therein.
Allowance for Loan Losses: In originating loans, we recognize that losses will be experienced and that the risk of loss will vary with, among
other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in
the case of a secured loan, the quality of the security for the loan. As a result, we maintain an allowance for loan losses consistent with U.S.
generally accepted accounting principles (GAAP) guidelines. We increase our allowance for loan losses by charging provisions for possible
loan losses against our income. The allowance for losses on loans is maintained at a level which, in management’s judgment, is sufficient to
provide for probable losses based on evaluating known and inherent risks in the loan portfolio and upon continuing analysis of the factors
underlying the quality of the loan portfolio. For additional information concerning our allowance for loan losses, see Item 7 of this report,
“Management’s Discussion and Analysis of Financial Condition—Comparison of Results of Operations for the Years Ended December 31, 2015
and 2014—Provision and Allowance for Loan Losses,” and Tables 14 and 15 contained therein.
Real Estate Owned: Real estate owned (REO) is property acquired by foreclosure or receiving a deed in lieu of foreclosure, and is recorded at
the estimated fair value of the property, less expected selling costs. Development and improvement costs relating to the property are capitalized
to the extent they add value to the property. The carrying value of the property is periodically evaluated by management and, if necessary,
allowances are established to reduce the carrying value to net realizable value. Gains or losses at the time the property is sold are credited or
charged to operations in the period in which they are realized. The amounts we will ultimately recover from REO may differ substantially from
the carrying value of the assets because of market factors beyond our control or because of changes in our strategies for recovering the
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investment. For additional information on REO, see Item 7 of this report, “Management’s Discussion and Analysis of Financial Condition—
Comparison of Financial Condition at December 31, 2015 and 2014—Asset Quality” and Table 11 contained therein and Note 6, Real Estate
Owned, Held for Sale, Net, of the Notes to the Consolidated Financial Statements.
Investment Securities
Investment Activities
Under Washington state law, banks are permitted to invest in various types of marketable securities. Authorized securities include but are not
limited to Treasury obligations, securities of various federal agencies (including government-sponsored enterprises), mortgage-backed and asset-
backed securities, certain certificates of deposit of insured banks and savings institutions, bankers’ acceptances, repurchase agreements, federal
funds, commercial paper, corporate debt and equity securities and obligations of states and their political subdivisions. Our investment policies
are designed to provide and maintain adequate liquidity and to generate favorable rates of return without incurring undue interest rate or credit
risk. Our policies generally limit investments to U.S. Government and agency (including government-sponsored entities) securities, municipal
bonds, certificates of deposit, corporate debt obligations and mortgage-backed securities. Investment in mortgage-backed securities may include
those issued or guaranteed by Freddie Mac, Fannie Mae, Government National Mortgage Association (Ginnie Mae or GNMA) and investment
grade privately-issued mortgage-backed securities, as well as collateralized mortgage obligations (CMOs). All of our investment securities,
including those that have high credit ratings, are subject to market risk in so far as a change in market rates of interest or other conditions may
cause a change in an investment’s earnings performance and/or market value.
At December 31, 2015, our consolidated investment portfolio totaled $1.39 billion and consisted principally of U.S. Government agency
obligations, mortgage-backed securities, municipal bonds, corporate debt obligations, and asset-backed securities. From time to time, investment
levels may be increased or decrease in order to manage balance sheet liquidity, interest rate risk, market risk and provide appropriate risk adjusted
returns. The acquisition of AmericanWest significantly added to the size of our investment portfolio, in particular our residential mortgage-
backed securities and municipal bonds, although certain securities acquired in that transaction were sold prior to year-end, as we intentionally
reduced total assets below $10.0 billion by December 31, 2015 to avoid the additional regulatory consequences associated with exceeding that
asset size. For additional information regarding these regulatory consequences, see Item 1A, Risk Factors, "We may be subject to additional
regulatory scrutiny if and when Banner or Banner Bank's total assets exceed $10.0 billion."
For detailed information on our investment securities, see Item 7, “Management’s Discussion and Analysis of Financial Condition—Comparison
of Financial Condition at December 31, 2015 and 2014—Investments,” and Tables 1 and 2 contained therein.
Derivatives
The Company, through its Banner Bank subsidiary, is party to various derivative instruments that are used for asset and liability management
and customer financing needs. Derivative instruments are contracts between two or more parties that have a notional amount and an underlying
variable, require no net investment and allow for the net settlement of positions. The notional amount serves as the basis for the payment
provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents a specified interest rate, index,
or other component. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged
between the parties and influences the market value of the derivative contract. We obtain dealer quotations to value our derivative contracts.
Our 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 us manage exposure to market risk and meet customer financing needs.
Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors
such as market-driven interest rates and prices or other economic factors.
Derivatives Designated in Hedge Relationships
Our 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. We have hedged our 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.
Derivatives Not Designated in Hedge Relationships
Interest Rate Swaps: Banner Bank uses an interest rate swap program for commercial loan customers, in which, we provide the client with a
variable rate loan and enter into an interest rate swap in which the client receives a fixed rate payment in exchange for a variable rate payment.
We offset our 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.
Banner Bank also has a few interest rate swaps from a prior interest rate swap program that were also not designated in hedge relationships.
These swaps do not qualify as designated hedges; therefore, each swap is accounted for as a free standing derivative.
Mortgage Banking: In the normal course of business, we sell originated one- to four-family residential 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, we have exposure to
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movements in interest rates associated with written rate lock commitments with potential borrowers to originate loans that are intended to be
sold and for closed loans that are awaiting sale and delivery into the secondary market.
Written loan commitments that relate to the origination of mortgage loans that will be held for resale are considered free-standing derivatives
and do not qualify for hedge accounting. Written loan commitments generally have a term of up to 60 days before the closing of the loan. The
loan commitment does not bind the potential borrower to enter into the loan, nor does it guarantee that we will approve the potential borrower
for the loan. Therefore, when determining fair value, we make estimates of expected “fallout” (loan commitments not expected to close), using
models which consider cumulative historical fallout rates, current market interest rates and other factors.
Written loan commitments in which the borrower has locked in an interest rate results in market risk to us to the extent market interest rates
change from the rate quoted to the borrower. We economically hedge the risk of changing interest rates associated with our interest rate lock
commitments by entering into forward sales contracts.
Mortgage loans which are held for sale are subject to changes in fair value due to fluctuations in interest rates from the loan's closing date through
the date of sale of the loans into the secondary market. Typically, the fair value of these loans declines when interest rates increase and rises
when interest rates decrease. To mitigate this risk, we enter into forward sales contracts on a significant portion of these loans to provide an
economic hedge against those changes in fair value. The hedges associated with mortgage loans held for sale and the forward sales contracts
are recorded at fair value with ineffective changes in value recorded in current earnings as loan sales income.
We are 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 we do 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, we could be required to settle our obligations under certain of these
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 we had breached any of these provisions at December 31,
2015 or 2014, we could have been required to settle our obligations under the agreements at the termination value. We generally post collateral
against derivative liabilities in the form of government agency-issued bonds, mortgage-backed securities, or commercial mortgage-backed
securities.
Derivative assets and liabilities are recorded at fair value on the balance sheet and do not take into account the effects of master netting agreements.
Master netting agreements allow us 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.
Deposit Activities and Other Sources of Funds
General: Deposits, FHLB advances (or other borrowings) and loan repayments are our major sources of funds for lending and other investment
purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are
influenced by general economic, interest rate and money market conditions and may vary significantly. Borrowings may be used on a short-
term basis to compensate for reductions in the availability of funds from other sources. Borrowings may also be used on a longer-term basis to
fund loans and investments, as well as to manage interest rate risk.
We compete with other financial institutions and financial intermediaries in attracting deposits. There is strong competition for transaction
balances and savings deposits from commercial banks, credit unions and non-bank corporations, such as securities brokerage companies, mutual
funds and other diversified companies, some of which have nationwide networks of offices. Much of the focus of our branch expansion,
relocations and renovation and advertising and marketing campaigns has been directed toward attracting additional deposit customer relationships
and balances. In addition, our electronic banking activities including debit card and automated teller machine (ATM) programs, on-line Internet
banking services and, most recently, customer remote deposit and mobile banking capabilities are all directed at providing products and services
that enhance customer relationships and result in growing deposit balances as well as fee income. Growing core deposits (transaction and savings
accounts) is a fundamental element of our business strategy. Core deposits increased to 83% of total deposits at December 31, 2015 compared
to 80% a year earlier and 76% two years ago.
Deposit Accounts: We generally attract deposits from within our primary market areas by offering a broad selection of deposit instruments,
including demand checking accounts, interest-bearing checking accounts, money market deposit accounts, regular savings accounts, certificates
of deposit, cash management services and retirement savings plans. Deposit account terms vary according to the minimum balance required,
the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of deposit accounts, we
consider current market interest rates, profitability to us, matching deposit and loan products and customer preferences and concerns. At
December 31, 2015, we had $8.06 billion of deposits. In addition to our organic growth in deposits, the acquisitions of AmericanWest and
Siuslaw Bank resulted in a $3.82 billion increase in deposits, including $1.09 billion in non-interest bearing deposits, $2.11 billion in interest-
bearing transaction and savings accounts, and $620.8 million in certificates of deposit as of December 31, 2015. For additional information
concerning our deposit accounts, see Item 7 in this report, “Management’s Discussion and Analysis of Financial Condition—Comparison of
Financial Condition at December 31, 2015 and 2014—Deposit Accounts,” including Table 7 contained therein, which sets forth the balances
of deposits in the various types of accounts, and Table 8, which sets forth the amount of our certificates of deposit greater than $100,000 by time
remaining until maturity as of December 31, 2015. In addition, see Note 8, Deposits of the Notes to the Consolidated Financial Statements.
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Borrowings: While deposits are the primary source of funds for our lending and investment activities and for general business purposes, we
also use borrowings to supplement our supply of lendable funds, to meet deposit withdrawal requirements and to more efficiently leverage our
capital position. The FHLB serves as our primary borrowing source. Although in recent years we have significantly reduced our use of FHLB
advances, we assumed additional advances in connection with the AmericanWest acquisition. The FHLB provides credit for member financial
institutions such as Banner Bank and Islanders Bank. As members, the Banks are required to own capital stock in the FHLB and are authorized
to apply for advances on the security of that stock and certain of their mortgage loans and securities provided certain credit worthiness standards
have been met. Limitations on the amount of advances are based on the financial condition of the member institution, the adequacy of collateral
pledged to secure the credit, and FHLB stock ownership requirements. At December 31, 2015, we had $133.4 million of borrowings from the
FHLB. At that date, Banner Bank had been authorized by the FHLB to borrow up to $1.77 billion under a blanket floating lien security agreement,
while Islanders Bank was approved to borrow up to $28.0 million under a similar agreement. The Federal Reserve Bank also serves as an
important source of borrowing capacity. The Federal Reserve Bank provides credit based upon acceptable loan collateral, which includes certain
loan types not eligible for pledging to the FHLB. At December 31, 2015, based upon our available unencumbered collateral, Banner Bank was
eligible to borrow $735.0 million from the Federal Reserve Bank, although at that date we had no funds borrowed under this
arrangement. Although eligible to participate, Islanders Bank has not applied for approval to borrow from the Federal Reserve Bank. For
additional information concerning our borrowings, see Item 7 in this report, “Management’s Discussion and Analysis of Financial Condition—
Comparison of Financial Condition at December 31, 2015 and 2014—Borrowings,” and Table 10 contained therein, and Notes 9 and 10 of the
Notes to the Consolidated Financial Statements.
At December 31, 2015, Banner Bank had an uncommitted federal funds line of credit agreement with another financial institution totaling $25
million, while Islanders Bank had an uncommitted federal funds line of credit agreement with another financial institution total $5 million. No
balances were outstanding under these agreements as of December 31, 2015. Availability of lines is subject to federal funds balances available
for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs and the agreements may restrict
consecutive day usage.
We issue retail repurchase agreements, generally due within 90 days, as an additional source of funds, primarily in connection with cash
management services provided to our larger deposit customers. At December 31, 2015, we had issued retail repurchase agreements totaling
$93.3 million. We also may borrow funds through the use of secured wholesale repurchase agreements with securities brokers; at December 31,
2015, we had one wholesale repurchase borrowing with a carrying value of $5.0 million. The retail and wholesale repurchase borrowings were
secured by pledges of certain U.S. Government and agency notes and mortgage-backed securities with a market value of $110.1 million.
We have also issued $120.0 million of junior subordinated debentures in connection with the sale of trust preferred securities (TPS). The TPS
were issued from 2002 through 2007 by special purpose business trusts formed by Banner Corporation and were sold in private offerings to
pooled investment vehicles. In addition, Banner has $16.0 million of junior subordinated debentures that were acquired through the Siuslaw
Bank and AmericanWest acquisitions, for a total of $136.0 million in debentures at December 31, 2015. The junior subordinated debentures
associated with the TPS have been recorded as liabilities and are reported at fair value on our Consolidated Statements of Financial Condition.
As of December 31, 2015 the fair value of the junior subordinate debentures was $92.5 million. All of the debentures issued to the trusts,
measured at their fair value, less the common stock of the trusts, qualified as Tier I capital as of December 31, 2015, under guidance issued by
the Board of Governors of the Federal Reserve System. We invested substantially all of the proceeds from the issuance of the TPS as additional
paid in capital at Banner Bank. See Note 11, Junior Subordinated Debentures and Mandatorily Redeemable Trust Preferred Securities, of the
Notes to the Consolidated Financial Statements.
As of December 31, 2015, we had 1,918 full-time and 225 part-time employees. Banner Corporation has no employees except for those who
are also employees of Banner Bank, its subsidiaries, and Islanders Bank. The employees are not represented by a collective bargaining unit. We
believe our relationship with our employees is good.
Personnel
Tax-Sharing Agreement
Taxation
Banner Corporation files its federal and state income tax returns on a consolidated basis under a tax-sharing agreement between the Company
and each bank subsidiary. The Company prepares each subsidiary’s minimum income tax which would be required if the individual subsidiary
were to file federal and state income tax returns as a separate entity. Each subsidiary pays to the Company an amount equal to the estimated
income tax due if it were to file as a separate entity. The payment is made on or about the time the subsidiary would be required to make such
tax payments to the United States Treasury or the applicable State Departments of Revenue. In the event the computation of the subsidiary’s
federal or state income tax liability, after taking into account any estimated tax payments made, would result in a refund if the subsidiary were
filing income tax returns as a separate entity, then the Company pays to the subsidiary an amount equal to the hypothetical refund. The Company
is an agent for each subsidiary with respect to all matters related to the consolidated tax returns and refunds claims. If Banner's consolidated
federal or state income tax liability is adjusted for any period, the liability of each party under the tax-sharing agreement is recomputed to give
effect to such adjustments and any additional payments required as a result of the adjustments are made within an reasonable time after the
corresponding additional tax payments are made or refunds are received.
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Federal Taxation
General: For tax reporting purposes, we report our income on a calendar year basis using the accrual method of accounting on a consolidated
basis. We are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the
reserve for bad debts. Reference is made to Note 12, Income Taxes, of the Notes to the Consolidated Financial Statements for additional
information concerning the income taxes payable by us.
State Taxation
Washington Taxation: We are subject to a Business and Occupation (B&O) tax which is imposed under Washington law at the current rate of
1.50% of gross receipts. Interest received on loans secured by mortgages or deeds of trust on residential properties, residential mortgage-backed
securities, and certain U.S. Government and agency securities is not subject to this tax.
California, Oregon, Idaho and Utah Taxation: Corporations with nexus in the states of California, Oregon, Idaho and Utah are subject to a
corporate level income tax. As our operations in these states increase, the state income tax provision will have an increasing effect on our
effective tax rate and results of operations.
Competition
We encounter significant competition both in attracting deposits and in originating loans. Our most direct competition for deposits comes from
other commercial and savings banks, savings associations and credit unions with offices in our market areas. We also experience competition
from securities firms, insurance companies, money market and mutual funds, and other investment vehicles. We expect continued strong
competition from such financial institutions and investment vehicles in the foreseeable future, including competition from on-line Internet
banking competitors. Our ability to attract and retain deposits depends on our ability to provide transaction services and investment opportunities
that satisfy the requirements of depositors. We compete for deposits by offering a variety of accounts and financial services, including robust
electronic banking capabilities, with competitive rates and terms, at convenient locations and business hours, and delivered with a high level of
personal service and expertise.
Competition for loans comes principally from other commercial banks, loan brokers, mortgage banking companies, savings banks and credit
unions and for agricultural loans from the Farm Credit Administration. The competition for loans is intense as a result of the large number of
institutions competing in our market areas. We compete for loans primarily by offering competitive rates and fees and providing timely decisions
and excellent service to borrowers.
Banner Bank and Islanders Bank
Regulation
General: As state-chartered, federally insured commercial banks, Banner Bank and Islanders Bank (the Banks) are subject to extensive regulation
and must comply with various statutory and regulatory requirements, including prescribed minimum capital standards. The Banks are regularly
examined by the FDIC and the Washington DFI and file periodic reports concerning their activities and financial condition with these banking
regulators. The Banks' relationship with depositors and borrowers also is regulated to a great extent by both federal and state law, especially in
such matters as the ownership of deposit accounts and the form and content of mortgage and other loan documents.
Federal and state banking laws and regulations govern all areas of the operation of the Banks, including reserves, loans, investments, deposits,
capital, issuance of securities, payment of dividends and establishment of branches. Federal and state bank regulatory agencies also have the
general authority to limit the dividends paid by insured banks and bank holding companies if such payments should be deemed to constitute an
unsafe and unsound practice. The Federal Reserve Board and FDIC as the respective primary federal regulators of Banner Corporation and each
of Banner Bank and Islanders Bank have authority to impose penalties, initiate civil and administrative actions and take other steps intended to
prevent banks from engaging in unsafe or unsound practices.
The laws and regulations affecting banks and bank holding companies have changed significantly, particularly in connection with the enactment
of The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). Among other changes, the Dodd-Frank Act
established the Consumer Financial Protection Bureau (CFPB) as an independent bureau of the Federal Reserve Board. The CPFB assumed
responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations and has authority to
impose new requirements. Any change in applicable laws, regulations, or regulatory policies may have a material effect on our business,
operations, and prospects. We cannot predict the nature or the extent of the effects on our business and earnings that any fiscal or monetary
policies or new federal or state legislation may have in the future. For additional information concerning the Dodd-Frank Act and the CPFB,
see Item 1A., “Risk Factors—We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws
and regulations that are expected to increase our costs of operation” and “We may be subject to additional regulatory scrutiny if and when Banner
or Banner Bank’s total assets exceed $10.0 billion.”
The following is a summary discussion of certain laws and regulations applicable to Banner and the Banks which is qualified in its entirety by
reference to the actual laws and regulations.
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State Regulation and Supervision: As a Washington state-chartered commercial bank with branches in the States of Washington, Oregon, Idaho,
California, and Utah, Banner Bank is subject not only to the applicable provisions of Washington law and regulations, but is also subject to
Oregon, Idaho, California and Utah law and regulations. These state laws and regulations govern Banner Bank's ability to take deposits and pay
interest thereon, to make loans on or invest in residential and other real estate, to make consumer loans, to invest in securities, to offer various
banking services to its customers and to establish branch offices. In a similar fashion, Washington state laws and regulations for state-chartered
commercial banks also apply to Islanders Bank.
Deposit Insurance: The Deposit Insurance Fund of the FDIC insures deposit accounts of the Banks up to $250,000 per separately insured
depositor. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of, and to require reporting by,
FDIC-insured institutions.
The Dodd-Frank Act requires the FDIC's deposit insurance assessments to be based on assets instead of deposits. The FDIC has issued rules
which specify that the assessment base for a bank is equal to its total average consolidated assets less average tangible capital. The FDIC
assessment rates range from approximately five basis points to 35 basis points, depending on applicable adjustments for unsecured debt issued
by an institution and brokered deposits (and further adjustment for institutions that hold unsecured debt of other FDIC-insured institutions), until
such time as the FDIC's reserve ratio equals 1.15%. Once the FDIC's reserve ratio reaches 1.15% and the reserve ratio for the immediately prior
assessment period is less than 2.0%, the applicable assessment rates may range from three basis points to 30 basis points (subject to adjustments
as described above). If the reserve ratio for the prior assessment period is equal to, or greater than 2.0% and less than 2.5%, the assessment rates
may range from two basis points to 28 basis points and if the reserve ratio for the prior assessment period is greater than 2.5%, the assessment
rates may range from one basis point to 25 basis points (in each case subject to adjustments as described above). No institution may pay a
dividend if it is in default on its federal deposit insurance assessment.
The FDIC conducts examinations of and requires reporting by state non-member banks, such as the Banks. The FDIC also may prohibit any
insured institution from engaging in any activity determined by regulation or order to pose a serious risk to the deposit insurance fund.
The FDIC may terminate the deposit insurance of any insured depository institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance if the institution has no tangible capital. If insurance of accounts is terminated, the accounts
at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years,
as determined by the FDIC. Management is not aware of any existing circumstances which would result in termination of the deposit insurance
of either Banner Bank or Islanders Bank.
Standards for Safety and Soundness: The federal banking regulatory agencies have prescribed, by regulation, guidelines for all insured depository
institutions relating to internal controls, information systems and internal audit systems; loan documentation; credit underwriting; interest rate
risk exposure; asset growth; asset quality; earnings; and compensation, fees and benefits. The guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes
impaired. Each insured depository institution must implement a comprehensive written information security program that includes
administrative, technical, and physical safeguards appropriate to the institution's size and complexity and the nature and scope of its activities. The
information security program must be designed to ensure the security and confidentiality of customer information, protect against any
unanticipated threats or hazards to the security or integrity of such information, protect against unauthorized access to or use of such information
that could result in substantial harm or inconvenience to any customer, and ensure the proper disposal of customer and consumer information. Each
insured depository institution must also develop and implement a risk-based response program to address incidents of unauthorized access to
customer information in customer information systems. If the FDIC determines that an institution fails to meet any of these guidelines, it may
require an institution to submit to the FDIC an acceptable plan to achieve compliance.
Capital Requirements: Bank holding companies, such as Banner Corporation, and federally insured financial institutions, such as Banner Bank
and Islanders Bank, are required to maintain a minimum level of regulatory capital.
Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), Banner Corporation and the Banks
became subject to new capital regulations adopted by the Federal Reserve and the FDIC, which create a new required ratio for common equity
Tier 1 (“CET1”) capital, increase the minimum leverage and Tier 1 capital ratios, change the risk-weightings of certain assets for purposes of
the risk-based capital ratios, create an additional capital conservation buffer over the required capital ratios, and change what qualifies as capital
for purposes of meeting the capital requirements. These regulations implement the regulatory capital reforms required by the Dodd Frank Act
and the “Basel III” requirements.
Under the new capital regulations, the minimum capital ratios are: (1) a CET1 capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital
ratio of 6.0% of risk-weighted assets; (3) a total risk-based capital ratio of 8.0% of risk-weighted assets; and (4) a leverage ratio (the ratio of
Tier 1 capital to average total consolidated assets) of 4.0%. CET1 generally consists of common stock; retained earnings; accumulated other
comprehensive income (“AOCI”) unless an institution elects to exclude AOCI from regulatory capital; and certain minority interests; all subject
to applicable regulatory adjustments and deductions. Tier 1 capital generally consists of CET1 and noncumulative perpetual preferred stock.
Tier 2 capital generally consists of other preferred stock and subordinated debt meeting certain conditions plus an amount of the allowance for
loan and lease losses up to 1.25% of assets. Total capital is the sum of Tier 1 and Tier 2 capital.
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There are a number of changes in what constitutes regulatory capital compared to the rules in effect prior to January 1, 2015, some of which are
subject to transition periods. These changes include the phasing-out of certain instruments as qualifying capital and eliminate or significantly
reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory capital. Trust preferred securities issued by a
company, such as the Company, with total consolidated assets of less than $15 billion before May 19, 2010 and treated as regulatory capital are
grandfathered, but any such securities issued later are not eligible as regulatory capital under the new regulations. Mortgage servicing assets
and deferred tax assets over designated percentages of CET1 will be deducted from capital. In addition, Tier 1 capital includes AOCI, which
includes all unrealized gains and losses on available for sale debt and equity securities. However, because of our asset size, we were eligible
for the one-time option of permanently opting out of the inclusion of unrealized gains and losses on available for sale debt and equity securities
in our capital calculations. We elected this option in the first quarter of 2015.
For purposes of determining risk-based capital, assets and certain off-balance sheet items are risk-weighted from 0% to 1,250%, depending on
the risk characteristics of the asset or item. The new regulations make certain changes in the risk-weighting of assets to better reflect credit risk
and other risk exposure compared to the earlier capital rules. These include a 150% risk weight (up from 100%) for certain high volatility
commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or
otherwise in nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity
of one year or less that is not unconditionally cancellable (up from 0%); and a 250% risk weight (up from 100%) for mortgage servicing and
deferred tax assets that are not deducted from capital.
In addition to the minimum CET1, Tier 1, leverage ratio and total capital ratios, Banner and each of the Banks must maintain a capital conservation
buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid
limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. The new capital conservation buffer requirement is to
be phased in beginning on January 1, 2016 when a buffer greater than 0.625% of risk-weighted assets will be required, which amount will
increase each year until the buffer requirement is fully implemented on January 1, 2019.
To be considered "well capitalized," a bank holding company must have, on a consolidated basis, a total risk-based capital ratio of 10.0% or
greater and a Tier 1 risk-based capital ratio of 6.0% or greater and must not be subject to an individual order, directive or agreement under which
the FRB requires it to maintain a specific capital level. To be consider “well capitalized,” a depository institution must have a Tier 1 risk-based
capital ratio of at least 8%, a total risk-based capital ratio of at least 10%, a CET1 capital ratio of at least 5% and a leverage ratio of at least 5%
and not be subject to an individualized order, directive or agreement under which its primary federal banking regulator requires it to maintain a
specific capital level.
As of December 31, 2015, Banner Corporation and each of the Banks met the requirements to be "well capitalized" and the fully phased-in
capital conservation buffer requirement.
Prompt Corrective Action: Federal statutes establish a supervisory framework for FDIC-insured institutions based on five capital categories: well
capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An institution's category
depends upon where its capital levels are in relation to relevant capital measures. The well-capitalized category is described above. An institution
that is not well capitalized is subject to certain restrictions on brokered deposits, including restrictions on the rates it can offer on its deposits
generally. To be considered adequately capitalized, an institution must have the minimum capital rations described above. Any institution which
is neither well capitalized nor adequately capitalized is considered undercapitalized.
Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions which become
more extensive as an institution becomes more severely undercapitalized. Failure by either Banner Bank and Islanders Bank to comply with
applicable capital requirements would, if unremedied, result in progressively more severe restrictions on its activities and lead to enforcement
actions, including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels and, ultimately, the
appointment of the FDIC as receiver or conservator. Banking regulators will take prompt corrective action with respect to depository institutions
that do not meet minimum capital requirements. Additionally, approval of any regulatory application filed for their review may be dependent
on compliance with capital requirements.
At December 31, 2015, both Banner Bank and Islanders Bank were categorized as “well capitalized” under the prompt corrective action regulations
of the FDIC. For additional information, see Note 16, Regulatory Capital Requirements, of the Notes to the Consolidated Financial Statements.
Commercial Real Estate Lending Concentrations: The federal banking agencies have issued guidance on sound risk management practices for
concentrations in commercial real estate lending. The particular focus is on exposure to commercial real estate loans that are dependent on the
cash flow from the real estate held as collateral and that are likely to be sensitive to conditions in the commercial real estate market (as opposed
to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is not to limit a
bank's commercial real estate lending but to guide banks in developing risk management practices and capital levels commensurate with the
level and nature of real estate concentrations. The guidance directs the FDIC and other bank regulatory agencies to focus their supervisory
resources on institutions that may have significant commercial real estate loan concentration risk. A bank that has experienced rapid growth in
commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding the following
supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk:
• Total reported loans for construction, land development and other land represent 100% or more of the bank's capital; or
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• Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank's total regulatory capital or the
outstanding balance of the bank's commercial real estate loan portfolio has increased 50% or more during the prior 36 months.
The guidance provides that the strength of an institution's lending and risk management practices with respect to such concentrations will be
taken into account in supervisory guidance on evaluation of capital adequacy. As of December 31, 2015, Banner Bank's and Islanders Bank's
aggregate recorded loan balances for construction, land development and land loans were 58% and 27% of total regulatory capital, respectively. In
addition, at December 31, 2015, Banner Bank's and Islanders Bank's loans on commercial real estate were 292% and 215% of total regulatory
capital, respectively.
Activities and Investments of Insured State-Chartered Financial Institutions: Federal law generally limits the activities and equity investments
of FDIC insured, state-chartered banks to those that are permissible for national banks. An insured state bank is not prohibited from, among
other things, (1) acquiring or retaining a majority interest in a subsidiary, (2) investing as a limited partner in a partnership the sole purpose of
which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such
limited partnership investments may not exceed 2% of the bank's total assets, (3) acquiring up to 10% of the voting stock of a company that
solely provides or re-insures directors', trustees' and officers' liability insurance coverage or bankers' blanket bond group insurance coverage for
insured depository institutions, and (4) acquiring or retaining the voting shares of a depository institution if certain requirements are met.
Washington State has enacted a law regarding financial institution parity. Primarily, the law affords Washington-chartered commercial banks
the same powers as Washington-chartered savings banks. In order for a bank to exercise these powers, it must provide 30 days notice to the
Director of the Washington Department of Financial Institutions and the Director must authorize the requested activity. In addition, the law
provides that Washington-chartered commercial banks may exercise any of the powers that the Federal Reserve has determined to be closely
related to the business of banking and the powers of national banks, subject to the approval of the Director in certain situations. Finally, the law
provides additional flexibility for Washington-chartered banks with respect to interest rates on loans and other extensions of credit. Specifically,
they may charge the maximum interest rate allowable for loans and other extensions of credit by federally-chartered financial institutions to
Washington residents.
Environmental Issues Associated With Real Estate Lending: The Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA) is a federal statute that generally imposes strict liability on all prior and present “owners and operators” of sites containing hazardous
waste. However, Congress acted to protect secured creditors by providing that the term “owner and operator” excludes a person whose ownership
is limited to protecting its security interest in the site. Since the enactment of the CERCLA, this “secured creditor exemption” has been the
subject of judicial interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property
that they hold as collateral for a loan. To the extent that legal uncertainty exists in this area, all creditors, including Banner Bank and Islanders
Bank, that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be
subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property.
Federal Reserve System: The Federal Reserve Board requires that all depository institutions maintain reserves on transaction accounts or non-
personal time deposits. These reserves may be in the form of cash or non-interest-bearing deposits with the regional Federal Reserve
Bank. Interest-bearing checking accounts and other types of accounts that permit payments or transfers to third parties fall within the definition
of transaction accounts and are subject to Regulation D reserve requirements, as are any non-personal time deposits at a bank. At December 31,
2015, the Banks' deposits with the Federal Reserve Bank and vault cash exceeded their reserve requirements.
Affiliate Transactions: Banner Corporation, Banner Bank and Islanders Bank are separate and distinct legal entities. Each Bank is an affiliate
of the other and Banner Corporation (and any non-bank subsidiary of Banner Corporation) is an affiliate of both Banks. Federal laws strictly
limit the ability of banks to engage in certain transactions with their affiliates. Transactions deemed to be a “covered transaction” under Section
23A of the Federal Reserve Act and between a bank and an affiliate are limited to 10% of the bank's capital and surplus and, with respect to all
affiliates, to an aggregate of 20% of the bank's capital and surplus. Further, covered transactions that are loans and extensions of credit generally
are required to be secured by eligible collateral in specified amounts. Federal law also requires that covered transactions and certain other
transactions listed in Section 23B of the Federal Reserve Act between a bank and its affiliates be on terms as favorable to the bank as transactions
with non-affiliates.
Community Reinvestment Act: Banner Bank and Islanders Bank are subject to the provisions of the Community Reinvestment Act of 1977
(CRA), which requires the appropriate federal bank regulatory agency to assess a bank's performance under the CRA in meeting the credit needs
of the community serviced by the bank, including low and moderate income neighborhoods. The regulatory agency's assessment of the bank's
record is made available to the public. Further, a bank's CRA performance rating must be considered in connection with a bank's application
to, among other things, to establish a new branch office that will accept deposits, relocate an existing office or merge or consolidate with, or
acquire the assets or assume the liabilities of, a federally regulated financial institution. Both Banner Bank and Islanders Bank received a
“satisfactory” rating during their most recently completed CRA examinations.
Dividends: The amount of dividends payable by the Banks to the Company depend upon their earnings and capital position, and is limited by
federal and state laws, regulations and policies. Federal law further provides that no insured depository institution may make any capital
distribution (which includes a cash dividend) if, after making the distribution, the institution would be “undercapitalized,” as defined in the
prompt corrective action regulations. Moreover, the federal bank regulatory agencies also have the general authority to limit the dividends paid
by insured banks if such payments should be deemed to constitute an unsafe and unsound practice. Dividends from Banner Bank to the Company
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require FDIC and DFI approval because Banner Bank remains in a cumulative negative retained earnings position primarily as a result of goodwill
impairment recorded in 2010 and more recently the special dividend paid to the Company to fund the acquisition of Starbuck.
Privacy Standards: The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (GLBA) modernized the financial services industry
by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other
financial service providers. Banner Bank and Islanders Bank are subject to FDIC regulations implementing the privacy protection provisions
of the GLBA. These regulations require the Banks to disclose their privacy policy, including informing consumers of their information sharing
practices and informing consumers of their rights to opt out of certain practices.
Anti-Money Laundering and Customer Identification: The Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) was signed into law on October 26, 2001. The USA PATRIOT and Bank Secrecy
Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist
activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of
Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the
identity of customers seeking to open new financial accounts. Bank regulators are directed to consider a holding company's effectiveness in
combating money laundering when ruling on Bank Holding Company Act and Bank Merger Act applications. Banner Bank's and Islanders
Bank's policies and procedures comply with the requirements of the USA Patriot Act.
Other Consumer Protection Laws and Regulations: The Dodd-Frank Act established the CFPB and empowered it to exercise broad regulatory,
supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. The Banks are subject to
consumer protection regulations issued by the CPFB, but as financial institutions with assets of less than $10 billion, the Banks are generally
subject to supervision and enforcement by the FDIC and the Washington DFI with respect to our compliance with consumer financial protection
laws and CPFB regulations.
The Banks are subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of their
business relationships with consumers. While the list set forth below is not exhaustive, these include the Truth-in-Lending Act, the Truth in
Savings Act, the Electronic Fund Transfers Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act,
the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Right to Financial Privacy
Act, the Home Ownership and Equity Protection Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the
21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and
state laws prohibiting unfair and deceptive business practices, and various regulations that implement some or all of the foregoing. These laws
and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when
taking deposits, making loans, collecting loans, and providing other services. Failure to comply with these laws and regulations can subject the
Banks to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages,
and the loss of certain contractual rights.
Banner Corporation
General: Banner Corporation, as sole shareholder of Banner Bank and Islanders Bank, is a bank holding company registered with the Federal
Reserve. Bank holding companies are subject to comprehensive regulation by the Federal Reserve under the Bank Holding Company Act of
1956, as amended, or the BHCA, and the regulations of the Federal Reserve. We are required to file quarterly reports with the Federal Reserve
and provide additional information as the Federal Reserve may require. The Federal Reserve may examine us, and any of our subsidiaries, and
charge us for the cost of the examination. The Federal Reserve also has extensive enforcement authority over bank holding companies, including,
among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company
divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and
unsafe or unsound practices. Banner Corporation is also required to file certain reports with, and otherwise comply with the rules and regulations
of the Securities and Exchange Commission.
The Bank Holding Company Act: Under the BHCA, we are supervised by the Federal Reserve. The Federal Reserve has a policy that a bank
holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations
in an unsafe or unsound manner. In addition, the Dodd-Frank Act and earlier Federal Reserve policy provide that a bank holding company
should serve as a source of strength to its subsidiary banks by having the ability to provide financial assistance to its subsidiary banks during
periods of financial distress to the banks. A bank holding company's failure to meet its obligation to serve as a source of strength to its subsidiary
banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve's
regulations or both. No regulations have yet been proposed by the Federal Reserve to implement the source of strength doctrine required by the
Dodd-Frank Act. Banner Corporation and any subsidiaries that it may control are considered “affiliates” within the meaning of the Federal
Reserve Act, and transactions between Banner Bank and affiliates are subject to numerous restrictions. With some exceptions, Banner Corporation
and its subsidiaries are prohibited from tying the provision of various services, such as extensions of credit, to other services offered by Banner
Corporation or by its affiliates.
Acquisitions: The BHCA prohibits a bank holding company, with certain exceptions, from acquiring ownership or control of more than 5% of
the voting shares of any company that is not a bank or bank holding company and from engaging in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. Under the BHCA, the Federal Reserve may approve the ownership of
shares by a bank holding company in any company, the activities of which the Federal Reserve has determined to be so closely related to the
18
business of banking or managing or controlling banks as to be a proper incident thereto. These activities include: operating a savings institution,
mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing
certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing
property on a full-payout, non-operating basis; selling money orders, travelers' checks and U.S. Savings Bonds; real estate and personal property
appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for
customers.
Federal Securities Laws: Banner Corporation's common stock is registered with the Securities and Exchange Commission under Section 12(b)
of the Securities Exchange Act of 1934, as amended. We are subject to information, proxy solicitation, insider trading restrictions and other
requirements under the Securities Exchange Act of 1934 (the Exchange Act).
The Dodd-Frank Act: On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank-Act imposes new restrictions and an expanded
framework of regulatory oversight for financial institutions, including depository institutions and implements new capital regulations for Banner
Corporation and the Banks are subject to and that are discussed above under the section entitled "Capital Requirements."
In addition, among other changes, the Dodd-Frank Act requires public companies, like Banner Corporation, to (i) provide their shareholders
with a non-binding vote (a) at least once every three years on the compensation paid to executive officers and (b) at least once every six years
on whether they should have a “say on pay” vote every one, two or three years; (ii) have a separate, non-binding shareholder vote regarding
golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions
that would trigger the parachute payments; (iii) provide disclosure in annual proxy materials concerning the relationship between the executive
compensation paid and the financial performance of the issuer; and (iv) amend Item 402 of Regulation S-K to require companies to disclose the
ratio of the Chief Executive Officer's annual total compensation to the median annual total compensation of all other employees. For certain of
these changes, the implementing regulations have not been promulgated, so the full impact of the Dodd-Frank Act on public companies cannot
be determined at this time.
The federal banking agencies have issued final rules to implement the provisions of Section 619 of the Dodd Frank Act commonly referred to
as the Volcker Rule. The regulations contain prohibitions and restrictions on the ability of financial institutions holding companies and their
affiliates to engage in proprietary trading and to hold certain interests in, or to have certain relationships with, various types of investment funds,
including hedge funds and private equity funds. The regulations became effective on April 1, 2014 with full compliance required by July 21,
2015. Banner Corporation is continuously reviewing its investment portfolio to determine if changes in its investment strategies are in compliance
with the various provisions of the Volcker Rule regulations.
Sarbanes-Oxley Act of 2002: As a public company that files periodic reports with the Securities and Exchange Commission (SEC), under the
Securities Exchange Act of 1934, Banner Corporation is subject to the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), which addresses,
among other issues, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosure of corporate
information. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such
as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management
and between a board of directors and its committees. Our policies and procedures have been updated to comply with the requirements of the
Sarbanes-Oxley Act.
Interstate Banking and Branching: The Federal Reserve must approve an application of a bank holding company to acquire control of, or acquire
all or substantially all of the assets of, a bank located in a state other than the holding company's home state, without regard to whether the
transaction is prohibited by the laws of any state. The Federal Reserve may not approve the acquisition of a bank that has not been in existence
for the minimum time period (not exceeding five years) specified by the statutory law of the host state. Nor may the Federal Reserve approve
an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the
United States or 30% or more of the deposits in the target bank's home state or in any state in which the target bank maintains a branch. Federal
law does not affect the authority of states to limit the percentage of total insured deposits in the state which may be held or controlled by a bank
holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. Individual states
may also waive the 30% state-wide concentration limit contained in the federal law.
The federal banking agencies are authorized to approve interstate merger transactions without regard to whether the transaction is prohibited by
the law of any state, unless the home state of one of the banks adopted a law prior to June 1, 1997 which applies equally to all out-of-state banks
and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches will be permitted only if the law
of the state in which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions will also be subject to the
nationwide and statewide insured deposit concentration amounts described above. Under the Dodd-Frank Act, the federal banking agencies
may generally approve interstate de novo branching.
Dividends: The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses
its view that although there are no specific regulations restricting dividend payments by bank holding companies other than state corporate laws,
a bank holding company must maintain an adequate capital position and generally should not pay cash dividends unless the company's net
income for the past year is sufficient to fully fund the cash dividends and that the prospective rate of earnings appears consistent with the
company's capital needs, asset quality, and overall financial condition. The Federal Reserve policy statement also indicates that it would be
inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. As described above under “Capital
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Requirements,” beginning January 1, 2016 the capital conversion buffer requirement can also restrict Banner Corporation’s and the Banks’ ability
to pay dividends.
Stock Repurchases: A bank holding company, except for certain “well-capitalized” and highly rated bank holding companies, is required to give
the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the
purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding twelve
months, is equal to 10% or more of its consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines
that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order or any condition
imposed by, or written agreement with, the Federal Reserve. During the year ended December 31, 2015, Banner Corporation had no repurchases
of its common stock.
Executive Officers
Management Personnel
The following table sets forth information with respect to the executive officers of Banner Corporation and Banner Bank as of December 31,
2015:
Name
Age
Position with Banner Corporation
Position with Banner Bank
Mark J. Grescovich
Lloyd W. Baker
Richard B. Barton
Douglas M. Bennett
Tyrone J. Bliss
James R. Claffee
Peter J. Conner
Kenneth A. Larsen
Cynthia D. Purcell
M. Kirk Quillin
James T. Reed, Jr.
Steven W. Rust
Gary W. Wagers
Keith A. Western
51
67
72
63
58
70
50
46
58
53
53
68
55
60
President, Chief Executive Officer,
Director
President, Chief Executive Officer, Director
Executive Vice President,
Chief Financial Officer
Executive Vice President
Executive Vice President,
Chief Lending Officer
Executive Vice President,
Real Estate Lending Operations
Executive Vice President,
Risk Management and Compliance Officer
Executive Vice President,
Chief Integration Officer
Executive Vice President,
Chief Financial Officer
Executive Vice President,
Mortgage Banking
Executive Vice President,
Retail Banking and Administration
Executive Vice President,
East Region, Commercial Banking
Executive Vice President,
West Region, Commercial Banking
Executive Vice President,
Chief Information Officer
Executive Vice President,
Retail Products and Services
Executive Vice President,
California & S. Oregon Commercial Banking
Biographical Information
Set forth below is certain information regarding the executive officers of Banner Corporation and Banner Bank. There are no family relationships
among or between the directors or executive officers.
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Mark J. Grescovich is President and Chief Executive Officer, and a director, of Banner Corporation and Banner Bank. Mr. Grescovich joined
Banner Bank in April 2010 and became Chief Executive Officer in August 2010 following an extensive banking career specializing in finance,
credit administration and risk management. Prior to joining Banner Bank, Mr. Grescovich was the Executive Vice President and Chief Corporate
Banking Officer for Akron, Ohio-based FirstMerit Corporation and FirstMerit Bank N.A., a commercial bank with $14.5 billion in assets and
over 200 branch offices in three states. He assumed the role and responsibility for FirstMerit’s commercial and regional line of business in 2007,
having served since 1994 in various commercial and corporate banking positions, including that of Chief Credit Officer. Prior to joining FirstMerit,
Mr. Grescovich was a Managing Partner in corporate finance with Sequoia Financial Group, Inc. of Akron, Ohio and a commercial and corporate
lending officer and credit analyst with Society National Bank of Cleveland, Ohio.
Lloyd W. Baker joined First Savings Bank of Washington (now Banner Bank) in 1995 as Asset/Liability Manager, has been a member of the
executive management committee since 1998 and has served as the Chief Financial Officer of Banner Corporation since 2000 and of Banner
Bank from 2000 to October 2015. His banking career began in 1973.
Richard B. Barton joined Banner Bank in 2002 as Chief Credit Officer. Mr. Barton’s banking career began in 1972 with Seafirst Bank and Bank
of America, where he served in a variety of commercial lending and credit risk management positions. In his last positions at Bank of America
before joining Banner Bank, he served as the senior real estate risk management executive for the Pacific Northwest and as the credit risk
management executive for the west coast home builder division. Mr. Barton was named Chief Lending Officer in 2008 and continues in his
role as Chief Credit Officer.
Douglas M. Bennett, who joined First Federal Savings and Loan (now Banner Bank) in 1974, has over 39 years of experience in real estate
lending. He has served as a member of Banner Bank’s executive management committee since 2004.
Tyrone J. Bliss joined Banner Bank in 2002 and has served in his current position since 2006. Mr. Bliss is a Certified Regulatory Compliance
Manager with more than 36 years of commercial banking experience. Prior to joining Banner Bank, his career included senior risk management
and compliance positions with Bank of America’s Consumer Finance Group, Barnett Banks, Inc., and Florida-based community banks.
James R. Claffee joined Banner Bank in 2015 upon the acquisition of AmericanWest. Mr. Claffee has more than 40 years of experience in
banking and has served in senior executive positions with banks located in Washington, Arizona, California and New England. Mr. Claffee was
President and Chief Operating Officer of AmericanWest and Starbuck, responsible for strategic growth in the region and for the integration of
nine acquisitions over the previous four years. Mr. Claffee is a graduate of Tufts University. He holds an M.B.A. from San Diego State University.
He also completed the Liberal Arts Program for Senior Managers at Stanford, The J.L. Kellogg School of International Management, and attended
the Stonier Graduate School of Banking. He has been active in charitable and philanthropic organizations throughout his career. Mr. Claffee
is a Vietnam veteran and served as an officer in the U.S. Navy.
Peter J. Conner joined Banner Bank in 2015 upon the acquisition of AmericanWest. Prior to joining Banner, Mr. Conner was the Chief Financial
Officer for SKBHC LLC, the holding company for Starbuck, (SKBHC) and AmericanWest from 2010 until he joined Banner Bank in 2015.
Mr. Conner has 25 years of experience in executive finance positions at Wells Fargo Bank as well as regional community banks. Additionally,
he spent time as a managing director for FSI Group, where he evaluated and placed equity fund investments in community banks. He earned a
B.S. in Quantitative Economics from the University of California at San Diego and a Masters of Business from the Haas School of Business at
U.C. Berkeley.
Kenneth A. Larsen joined Banner Bank in 2005 as the Real Estate Administration Manager and was promoted to Mortgage Banking Director in
2010. Mr. Larsen is responsible for Banner Bank’s mortgage banking activities from origination, administration, secondary marketing, through
loan servicing. Mr. Larsen has had a 24-year career in mortgage banking, including holding positions in all facets of operations and management.
A graduate of Eastern Washington University, he earned a Bachelor of Arts in Education with a degree in Social Science and earned certificates
from the Pacific Coast Banking School and the School of Mortgage Banking. He is also a Certified Mortgage Banker, the highest designation
recognized by the Mortgage Bankers Association. Mr. Larsen began his career at Action Mortgage/Sterling Savings, later moving to Peoples
Bank of Lynden where he managed the mortgage banking operation. Mr. Larsen also served as the 90th President of the Seattle Mortgage
Bankers Association. Currently he is the Chairman of the Washington Mortgage Bankers Association and a recent appointee by the Governor
of Washington State to serve as a commissioner on the Washington State Housing Finance Commission. He was promoted to Executive Vice
President in 2015.
Cynthia D. Purcell was formerly the Chief Financial Officer of Inland Empire Bank (now Banner Bank), which she joined in 1981. She has
served as Executive Vice President since 2000. Ms. Purcell is responsible for managing Retail Banking including Mortgage Banking, Small
Business Banking and Digital Delivery Channels, as well as administrative support functions for the organization.
M. Kirk Quillin joined Banner Bank’s commercial banking group in 2002 as a Senior Vice President and commercial loan manager and was
named to his current position as the East Region Commercial Banking Executive in July 2012. He is responsible for commercial and specialty
banking for all locations in Eastern Washington, Eastern Oregon and Idaho. Mr. Quillin began his career in the banking industry in 1984 with
Idaho First National Bank, which is now U.S. Bank. His career also included management positions in commercial lending with Washington
Mutual. He earned a B.S. in Finance and Economics from Boise State University and was certified by the Pacific Coast Banking School and
Northwest Intermediate Commercial Lending School.
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James T. Reed, Jr. joined Towne Bank (now Banner Bank) as a Vice President and Commercial Branch Manager in July 1995 and was named
to his current position as the West Region Commercial Banking Executive in July 2012. He is responsible for Commercial Banking in Western
Washington and Western Oregon, Treasury Management, as well as Specialty Banking. Mr. Reed began his banking career with Rainier Bank,
which later became Security Pacific Bank and later still West One Bank. He earned a Bachelor of Arts in Interdisciplinary Arts and Sciences
from the University of Washington and earned certificates from Pacific Coast Banking School, Northwest Intermediate Banking School and
Northwest Intermediate Commercial Lending School. Currently, Mr. Reed is a member of the University of Washington Bothell Advisory Board
and the Association of Washington Business Board of Directors.
Steven W. Rust joined Banner Bank in October 2005 as Senior Vice President and Chief Information Officer and was named to his current position
as Executive Vice President and Chief Information Officer in September 2007. Mr. Rust has over 37 years of relevant industry experience prior
to joining Banner Bank and was founder and President of InfoSoft Technology, through which he worked for nine years as a technology consultant
and interim Chief Information Officer for banks and insurance companies. He also worked 19 years with US Bank/West One Bancorp as Senior
Vice President & Manager of Information Systems.
Gary W. Wagers joined Banner Bank as Senior Vice President, Consumer Lending Administration in 2002 and was named to his current position
in Retail Products and Services in January 2008. Mr. Wagers began his banking career in 1982 at Idaho First National Bank. Prior to joining
Banner Bank, his career included senior management positions in retail lending and branch banking operations with West One Bank and US
Bank.
Keith A. Western is Executive Vice President, Commercial Banking for Banner Bank, joining Banner upon the merger of AmericanWest and
Banner Bank. Prior to the merger, Mr. Western was President of Northwest Banking for AmericanWest since 2011. Mr. Western has 38 years
of banking experience across multiple markets including the western, eastern and mid-western United States and Canada. The bulk of
Mr. Western’s career was with Bank of America (approximately 15 years) and Citibank (approximately 12 years) in a variety of assignments
including asset based lending, commercial and business banking, and credit risk management.
Corporate Information
Our principal executive offices are located at 10 South First Avenue, Walla Walla, Washington 99362. Our telephone number is (509)
527-3636. We maintain a website with the address www.bannerbank.com. The information contained on our website is not included as a part
of, or incorporated by reference into, this Annual Report on Form 10-K. Other than an investor’s own Internet access charges, we make available
free of charge through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and
amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material
to, the Securities and Exchange Commission.
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Item 1A – Risk Factors
An investment in our common stock is subject to risks inherent in our business. Before making an investment decision, you should
carefully consider the risks and uncertainties described below together with all of the other information included in this report. The
risks described below are not the only ones we face. Additional risks and uncertainties not currently known to us or that we currently
deem to be immaterial also may materially and adversely affect our business, financial condition, capital levels, cash flows, liquidity,
results of operations and prospects. The market price of our common stock could decline significantly due to any of these identified or
other risks, and you could lose some or all of your investment. The risks discussed below also include forward-looking statements, and
our actual results may differ substantially from those discussed in these forward-looking statements. This report is qualified in its
entirety by these risk factors.
Our business may be adversely affected by downturns in the national economy and the regional economies on which we depend.
Our operations are significantly affected by national and regional economic conditions. Weakness in the national economy or the economies of
the markets in which we operate could have a material adverse effect on our financial condition, results of operations and prospects. Most of
our loans are to businesses and individuals in the states of Washington, Oregon, California, Utah and Idaho. All of our branches and most of
our deposit customers are also located in these five states. Further, as a result of a high concentration of our customer base in the Puget Sound
area and eastern Washington state regions, the deterioration of businesses in these areas, or one or more businesses with a large employee base
in these areas, could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects. Weakness
in the global economy has adversely affected many businesses operating in our markets that are dependent upon international trade. In addition,
adverse weather conditions as well as decreases in market prices for agricultural products grown in our primary markets can adversely affect
agricultural businesses in our markets. As we expand our presence in areas such as San Diego and Sacramento, California and Salt Lake City,
Utah, we will be exposed to concentration risks in those areas as well.
A deterioration in economic conditions in the market areas we serve, in particular the Puget Sound area of Washington State, the Portland, Oregon
metropolitan area, Spokane, Washington, Boise, Idaho, Eugene and southwest Oregon, San Diego and Sacramento, California and Salt Lake
City, Utah and the agricultural regions of the Columbia Basin, could result in the following consequences, any of which could have a material
adverse effect on our business, financial condition, liquidity and results of operations:
• demand for our products and services may decline;
•
•
loan delinquencies, problem assets and foreclosures may increase;
collateral for loans, especially real estate, may decline in value, in turn reducing customers’ borrowing power, reducing the value of
assets and collateral associated with existing loans;
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and
the amount of our low-cost or non-interest-bearing deposits may decrease.
•
•
A return of recessionary conditions could result in increases in our level of non-performing loans and/or reduce demand for our products
and services, which could have adverse effect on our results of operations.
Economic conditions have improved since the end of the economic recession that officially ended in June, 2009; however, economic growth
has been slow and uneven, and concerns still exist over the federal deficit, government spending , along with the global economy and geopolitical
risks which have all contributed to diminished expectations for the economy. A return of recessionary conditions and/or negative developments
in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and
investments, and our ongoing operations, costs and profitability. Declines in real estate values and sales volumes and high unemployment levels
may result in higher than expected loan delinquencies and a decline in demand for our products and services. These negative events may cause
us to incur losses and may adversely affect our capital, liquidity, and financial condition.
Furthermore, the Board of Governors of the Federal Reserve System, in an attempt to help the economy, has, among other things, kept interest
rates low through its targeted federal funds rate and the purchase of U.S. Treasury and mortgage-backed securities. The Federal Reserve Board
has recently increased the federal funds rate by 25 basis points and indicated further increases in the federal funds rate in 2016. As the federal
funds rate increases, market interest rates would likely rise, which may negatively affect the housing markets and the U.S. economic recovery.
In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers,
especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.
Our loan portfolio includes loans with a higher risk of loss.
In addition to first-lien one- to four -family residential real estate lending, we originate construction and land loans, commercial and multifamily
mortgage loans, commercial business loans, agricultural mortgage loans and agricultural loans, and consumer loans, primarily within our market
areas. We had $6.36 billion outstanding in these types of higher risk loans at December 31, 2015 compared to $3.29 billion at December 31,
2014. These loans typically present different risks to us for a number of reasons, including those discussed below:
• Construction and Land Loans. At December 31, 2015, construction and land loans were $574.4 million or 8% of our total loan
portfolio. This type of lending contains the inherent difficulty in estimating both a property’s value at completion of the project and
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the estimated cost (including interest) of the project. If the estimate of construction cost proves to be inaccurate, we may be required
to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value upon completion
proves to be inaccurate, we may be confronted at, or prior to, the maturity of the loan with a project the value of which is insufficient
to assure full repayment. In addition, speculative construction loans to a builder are often associated with homes that are not pre-sold,
and thus pose a greater potential risk to us than construction loans to individuals on their personal residences. Loans on land under
development or held for future construction also pose additional risk because of the lack of income being produced by the property and
the potential illiquid nature of the collateral. These risks can be significantly impacted by supply and demand conditions. As a result,
this type of lending often involves the disbursement of substantial funds with repayment dependent on the success of the ultimate project
and the ability of the borrower to sell the property, rather than the ability of the borrower or guarantor to independently repay principal
and interest. While our origination of these types of loans has decreased significantly from earlier periods, as a result of the recent
improvement in real estate values in certain of our market areas, this category of lending has increased in recent years and our investment
in construction and land loans increased by $163.4 million or 40% in 2015. At December 31, 2015, construction and land loans that
were non-performing were $2.3 million, or 15% of our total non-performing loans.
• Commercial and Multifamily Real Estate Loans. At December 31, 2015, commercial and multifamily real estate loans were $3.57
billion, or 49% of our total loan portfolio. These loans typically involve higher principal amounts than other types of loans and some
of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one
loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to
a one- to four-family residential mortgage loan. Repayment of these loans is dependent upon income being generated from the property
securing the loan in amounts sufficient to cover operating expenses and debt service, which may be adversely affected by changes in
the economy or local market conditions. In addition, many of our commercial and multifamily real estate loans are not fully amortizing
and contain large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the
underlying property in order to make the payment, which may increase the risk of default or non-payment. This risk was exacerbated
in the recent recession and could remain an elevated risk in the current slow recovery economic environment. At December 31, 2015,
commercial and multifamily real estate loans that were non-performing were $3.8 million, or 25% of our total non-performing loans.
• Commercial Business Loans. At December 31, 2015, commercial business loans were $1.21 billion, or 17% of our total loan portfolio.
Our commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral
provided by the borrower. The borrowers’ cash flow may prove to be unpredictable, and collateral securing these loans may fluctuate
in value. Most often, this collateral is accounts receivable, inventory, equipment or real estate. In the case of loans secured by accounts
receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to
collect amounts due from its customers. Other collateral securing loans may depreciate over time, may be difficult to appraise, may be
illiquid and may fluctuate in value based on the success of the business. At December 31, 2015, commercial business loans that were
non-performing were $2.2 million, or 14% of our total non-performing loans.
• Agricultural Loans. At December 31, 2015, agricultural loans were $376.5 million, or 5% of our total loan portfolio. Repayment is
dependent upon the successful operation of the business, which is greatly dependent on many things outside the control of either us or
the borrowers. These factors include weather, commodity prices, and interest rates among others. Collateral securing these loans may
be difficult to evaluate, manage or liquidate and may not provide an adequate source of repayment. At December 31, 2015, there were
$697,000 of agricultural loans that were non-performing or 5% of total non-performing loans.
• Consumer Loans. At December 31, 2015, consumer loans were $636.9 million, or 9% of our total loan portfolio. Consumer loans (such
as personal lines of credit) are collateralized, if at all, with assets that may not provide an adequate source of payment of the loan due
to depreciation, damage, or loss. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability,
and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered
on these loans. At December 31, 2015, consumer loans that were non-performing were $748,000, or 5% of our total non-performing
loans.
Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio, which would cause our results of
operations, liquidity and financial condition to be adversely affected.
Lending money is a substantial part of our business and each loan carries a certain risk that it will not be repaid in accordance with its terms or
that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:
•
•
•
•
•
cash flow of the borrower and/or the project being financed;
in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral;
the duration of the loan;
the character and creditworthiness of a particular borrower; and
changes in economic and industry conditions.
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We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, which we believe
is appropriate to provide for probable losses in our loan portfolio. The amount of this allowance is determined by our management through
periodic reviews and consideration of several factors, including, but not limited to:
• our general reserve, based on our historical default and loss experience, certain macroeconomic factors, and management’s expectations
of future events;
• our specific reserve, based on our evaluation of non-performing loans and their underlying collateral; and
•
an unallocated reserve to provide for other credit losses inherent in our portfolio that may not have been contemplated in the other loss
factors.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to
make significant estimates of current credit risks and future trends, all of which may undergo material changes. Deterioration in economic
conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both
within and outside of our control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically
review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan
charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan
losses, we may need additional provisions to replenish the allowance for loan losses. Any increases in the allowance for loan losses will result
in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.
We pursue a strategy of supplementing internal growth by acquiring other financial companies or their assets and liabilities that we
believe will help us fulfill our strategic objectives and enhance our earnings. There are risks associated with this strategy, including the
following:
• We may be exposed to potential asset quality issues or unknown or contingent liabilities of the banks, businesses, assets, and liabilities
we acquire. If these issues or liabilities exceed our estimates, our results of operations and financial condition may be materially
negatively affected;
• Prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could
not be made in specific markets at prices we considered acceptable and expect that we will experience this condition in the future;
• The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity into our
company to make the transaction economically successful. This integration process is complicated and time consuming and can also
be disruptive to the customers of the acquired business. If the integration process is not conducted successfully and with minimal
adverse effect on the acquired business and its customers, we may not realize the anticipated economic benefits of particular acquisitions
within the expected time frame, and we may lose customers or employees of the acquired business. We may also experience greater
than anticipated customer losses even if the integration process is successful;
• To the extent our costs of an acquisition exceed the fair value of the net assets acquired, the acquisition will generate goodwill. As
discussed below, we are required to assess our goodwill for impairment at least annually, and any goodwill impairment charge could
have a material adverse effect on our results of operations and financial condition;
• To finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional
capital, which could dilute the interests of our existing shareholders; and
• We have completed various acquisitions in the past few years that enhanced our rate of growth. We may not be able to continue to
sustain our past rate of growth or to grow at all in the future.
The success of our acquisitions of Siuslaw Bank and of AmericanWest is dependent on a number of factors beyond our control.
The success of our acquisitions of Siuslaw Bank and AmericanWest, including Greater Sacramento Bancorp ("GSB"), which was recently
acquired by AmericanWest prior to its merger with Banner Bank, is subject to a number of uncertain factors, including, but not limited to:
•
•
our ability to realize expected revenues, cost savings, synergies and other benefits from the Siuslaw Bank and AmericanWest acquisitions
within the expected time frames or at all, and costs or difficulties relating to integration matters, including but not limited to customer
and employee retention, might be greater than expected; and
the credit quality of loans and other assets acquired from AmericanWest and Siuslaw Bank.
Banner, AmericanWest and Siuslaw Bank each operated independently before the completion of the relevant acquisition. The success of the
acquisitions, including anticipated benefits and cost savings, will depend, in part, on Banner’s ability to successfully combine the businesses of
Banner, AmericanWest and Siuslaw Bank. To realize these anticipated benefits and cost savings, Banner has begun to integrate AmericanWest’s
and Siuslaw Bank's businesses into its own. It is possible that as we continue to fully integrate these businesses, the process could result in the
loss of key employees, the disruption of our ongoing business or inconsistencies in standards, controls, procedures and policies that adversely
affect the combined company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated
benefits and cost savings of the mergers. The loss of key employees could adversely affect Banner’s ability to successfully conduct its business
in the markets in which AmericanWest or Siuslaw Bank's branches have operated and could have an adverse effect on Banner’s financial results
and the value of its common stock.
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Prior to the acquisitions, neither Starbuck nor Siuslaw nor their respective subsidiaries were subject to the requirements of the Exchange Act
with respect to internal controls over financial reporting. If the internal controls over financial reporting by Starbuck or Siuslaw or their respective
subsidiaries was found to be ineffective, a material weakness in internal controls could result and the integrity of our financial reporting could
be compromised, which could result in a material adverse effect on our reported financial results. In addition, the integration of the financial
reporting functions of each of Starbuck, Siuslaw and their respective subsidiaries into our own will require significant effort and any failure
could affect the quality of our financial reporting, and could result in a material adverse effect on our reported financial results.
If Banner experiences difficulties with the integration process, the anticipated benefits of the acquisitions may not be realized fully or at all, or
may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions, including upon
the conversion of customers from the legacy systems of AmericanWest or Siuslaw Bank to our own, that cause Banner, AmericanWest or Siuslaw
Bank to lose customers or cause customers to close their accounts with Banner, AmericanWest or Siuslaw Bank and move their business to
competing financial institutions. Integration efforts between the companies will also divert management attention and require significant
resources, including an increase in compliance costs. Any such distraction on the part of management, if significant, could affect Banner’s ability
to service existing business and develop new business and adversely affect our business and earnings.
These acquisitions may also have an effect on the value of Banner common stock because market participants may look at factors different
from those currently affecting the values of Banner common stock. See also “ We may be subject to additional regulatory scrutiny if and
when Banner Bank’s total assets exceed $10.0 billion.”
In connection with any acquisition, we may incur material acquisition-related or restructuring charges, which may have a material adverse effect
on our results of operations. These charges relate to items such as severance and benefits costs, expenses related to branch consolidation charges,
vendor contract termination costs, expenses related to IT systems integration and conversion, incurrence of professional services and consulting
fees and other items.
The required accounting treatment of loans we acquire through acquisitions including purchase credit impaired loans could result in
higher net interest margins and interest income in current periods and lower net interest margins and interest income in future periods.
Under GAAP, we are required to record loans acquired through acquisitions, including purchase credit impaired loans, at fair value. Estimating
the fair value of such loans requires management to make estimates based on available information and facts and circumstances on the acquisition
date. Actual performance could differ from management’s initial estimates. If these loans outperform our original fair value estimates, the
difference between our original estimate and the actual performance of the loan (the “discount”) is accreted into net interest income. Thus, our
net interest margins may initially increase due to the discount accretion. We expect the yields on our loans to decline as our acquired loan
portfolio pays down or matures and the discount decreases, and we expect downward pressure on our interest income to the extent that the runoff
on our acquired loan portfolio is not replaced with comparable high-yielding loans. This could result in higher net interest margins and interest
income in current periods and lower net interest rate margins and lower interest income in future periods.
Our expansion into new market areas in California and Utah may present increased risk.
AmericanWest’s lending operations were concentrated in the states of California, Utah, Oregon, Idaho and Washington. The merger with
AmericanWest resulted in Banner’s initial entry into the states of California and Utah where Banner has little or no operating experience. Although
Banner retained a number of AmericanWest’s lending and business development officers with experience in these markets, Banner is new to
these market areas and has conducted only limited banking business in California and Utah. Our entry into these markets presents us with different
competitive conditions, customer preferences and banking products than we have experienced in the Pacific Northwest markets we know. As
a result, it is possible that our operations in these states may be less successful than our operations in the Pacific Northwest. In addition, our
financial condition and results of operations will be subject to general economic conditions and the conditions in the real estate markets prevailing
in California and Utah as well as the Pacific Northwest markets we know. If economic conditions in any one of these states worsens or if the
real estate market declines, we may suffer decreased net income or losses associated with higher default rates and decreased collateral values
on our existing portfolio, and we may not be able to originate loans at acceptable risk levels and upon acceptable terms to maintain our risk
profile and asset quality.
Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is
needed or the cost of that capital may be very high.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. We may at some point, however,
need to raise additional capital to support continued growth or be required by our regulators to increase our capital resources. Any capital we
obtain may result in the dilution of the interests of existing holders of our common stock. Our ability to raise additional capital, if needed, will
depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and
performance. Accordingly, we cannot make assurances that we will be able to raise additional capital if needed on terms that are acceptable to
us, or at all. If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired and
our financial condition and liquidity could be materially and adversely affected. In addition, if we are unable to raise additional capital when
required by our bank regulators, we may be subject to adverse regulatory action.
If our investments in real estate are not properly valued or sufficiently reserved to cover actual losses, or if we are required to increase
our valuation reserves, our earnings could be reduced.
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We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed and the property taken in as
REO and at certain other times during the assets holding period. Our net book value (NBV) in the loan at the time of foreclosure and thereafter
is compared to the updated market value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any
excess in the asset’s NBV over its fair value. If our valuation process is incorrect, or if property values decline, the fair value of the investments
in real estate may not be sufficient to recover our carrying value in such assets, resulting in the need for additional write-downs. Significant
write-downs to our investments in real estate could have a material adverse effect on our financial condition, liquidity and results of operations.
In addition, bank regulators periodically review our REO and may require us to recognize further write-downs. Any increase in our write-downs,
as required by the bank regulators, may have a material adverse effect on our financial condition, liquidity and results of operations.
Our securities portfolio may be negatively impacted by fluctuations in market value and interest rates.
Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/
or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited
investor demand. Our securities portfolio is evaluated for other-than-temporary impairment. If this evaluation shows impairment to the actual
or projected cash flows associated with one or more securities, a potential loss to earnings may occur. Changes in interest rates can also have
an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are
impacted by fluctuations in interest rates. We increase or decrease our shareholders' equity by the amount of change in the estimated fair value
of the available-for-sale securities, net of taxes. There can be no assurance that the declines in market value will not result in other-than-temporary
impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital
levels.
An increase in interest rates, change in the programs offered by secondary market purchasers or our ability to qualify for their programs
may reduce our mortgage banking revenues, which would negatively impact our non-interest income.
Our mortgage banking operations provide a significant portion of our non-interest income. We generate mortgage banking revenues primarily
from gains on the sale of one- to four-family and multifamily mortgage loans. The one- to four-family mortgage loans are sold pursuant to
programs currently offered by Fannie Mae, Freddie Mac, Ginnie Mae and non-Government Sponsored Enterprise (GSE) investors. These entities
account for a substantial portion of the secondary market in residential one- to four-mortgage loans. Multifamily mortgage loans are sold
primarily to non-GSE investors.
Any future changes in the one- to four-family programs, our eligibility to participate in these programs, the criteria for loans to be accepted or
laws that significantly affect the activity of such entities, or a reduction in the size of the secondary market for multifamily loans could, in turn,
materially adversely affect our results of operations. Mortgage banking is generally considered a volatile source of income because it depends
largely on the level of loan volume which, in turn, depends largely on prevailing market interest rates. In a rising or higher interest rate environment,
our originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold to investors. This would result in a decrease
in mortgage banking revenues and a corresponding decrease in non-interest income. In addition, our results of operations are affected by the
amount of non-interest expense associated with mortgage banking activities, such as salaries and employee benefits, occupancy, equipment and
data processing expense and other operating costs. During periods of reduced loan demand, our results of operations may be adversely affected
to the extent that we are unable to reduce expenses commensurate with the decline in loan originations. In addition, although we sell loans into
the secondary market without recourse, we are required to give customary representations and warranties about the loans to the buyers. If we
breach those representations and warranties, the buyers may require us to repurchase the loans and we may incur a loss on the repurchase.
Our results of operations, liquidity and cash flows are subject to interest rate risk.
Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to many factors that are
beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the
Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on
loans and investments and the amount of interest we pay on deposits and borrowings, but these changes could also affect (i) our ability to originate
loans and obtain deposits, (ii) the fair value of our financial assets and liabilities and (iii) the average duration of our mortgage-backed securities
portfolio and other interest-earning assets. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest
rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected.
A prolonged period of exceptionally low market interest rates, such as we are currently experiencing, limits our ability to lower our interest
expense, while the average yield on our loan portfolio may continue to decrease as our loans reprice or are originated at these low market rates,
which could have an adverse effect on our results of operations. As a result of the exceptionally low interest rate environment, an increasing
percentage of our deposits have been comprised of deposits bearing no or a relatively low rate of interest. We would incur a higher cost of funds
to retain these deposits in a rising interest rate environment. In addition, a substantial amount of our loans have adjustable interest rates. As a
result, these loans may experience a higher rate of default in a rising interest rate environment. Further, a significant portion of our adjustable
rate loans have interest rate floors below which the loan’s contractual interest rate may not adjust. Approximately 66% of our loan portfolio
was comprised of adjustable or floating-rate loans at December 31, 2015, and approximately $2.5 billion, or 52%, of those loans contained
interest rate floors, below which the loans’ contractual interest rate may not adjust. At December 31, 2015, the weighted average floor interest
rate of these loans was 4.78%. At that date, approximately $1.58 billion, or 63%, of these loans were at their floor interest rate. The inability
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of our loans to adjust downward can contribute to increased income in periods of declining interest rates, although this result is subject to the
risks that borrowers may refinance these loans during periods of declining interest rates. Also, when loans are at their floors, there is a further
risk that our interest income may not increase as rapidly as our cost of funds during periods of increasing interest rates which could have a
material adverse effect on our results of operations.
Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity
and results of operations. Also, our interest rate risk modeling techniques and assumptions may not fully predict or capture the impact of actual
interest rate changes on our balance sheet or projected operating results.
We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations that
are expected to increase our costs of operations.
As state-chartered, federally insured commercial banks, Banner Bank and Islanders Bank (the Banks) are currently subject to extensive
examination, supervision and comprehensive regulation by the FDIC and the Washington DFI and as a bank holding company Banner is subject
to examination, supervision and regulation by the FRB. These regulatory authorities have extensive discretion in connection with their supervisory
and enforcement activities, including the ability to impose restrictions on an institution's operations, reclassify assets, determine the adequacy
of an institution's allowance for loan losses and determine the level of deposit insurance premiums assessed.
Additionally, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) has significantly changed the bank
regulatory structure and affected the lending, deposit, investment, trading and operating activities of financial institutions and their holding
companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations and to
prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and
regulations, and consequently many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.
Certain provisions of the Dodd-Frank Act may have an indeterminable impact on us in the near term. For example, a provision of the Dodd-
Frank Act eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking
accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense.
The Dodd-Frank Act created a new Consumer Financial Protection Bureau (the CFPB) with broad powers to supervise and enforce consumer
protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings
institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement
authority over all banks and savings institutions with more than $10 billion in assets. Financial institutions such as Banner Bank with $10 billion
or less in assets will continue to be examined for compliance with the consumer laws by their primary bank regulators but are subject to the
rules of the CFPB. See “ We may be subject to additional regulatory scrutiny if and when Banner or Banner Bank’s total assets exceed $10.0
billion.”
The CFPB has issued a number of final regulations and changes to certain consumer protections under existing laws. These final rules generally
prohibit creditors from extending mortgage loans without regard for the consumer’s ability-to-repay and add restrictions and requirements to
mortgage origination and servicing practices. In addition, these rules limit prepayment penalties and require the creditor to retain evidence of
compliance with the ability-to-repay requirement for three years. Compliance with these rules has increased our overall regulatory compliance
costs and may require changes to our underwriting practices with respect to mortgage loans. This includes compliance with The Truth in Lending
Act and the Real Estate Settlement Procedures Act Integrated Disclosure (TRID) rule, which combines certain disclosures that consumers receive
in connection with applying for and closing a mortgage loan. Moreover, these rules may adversely affect the volume of mortgage loans that we
underwrite and may subject us to increased potential liabilities related to such residential loan origination activities.
The Dodd-Frank Act requires minimum leverage (Tier 1) and risk-based capital requirements for bank holding companies that are no less stringent
than those applicable to banks, which could limit our ability to borrow at the holding company level and invest the proceeds from such borrowings
as capital in the Banks, and excludes certain instruments that previously have been eligible for inclusion by bank holding companies as Tier 1
capital, such as trust preferred securities.
It is difficult to predict at this time what specific impact the Dodd-Frank Act and the rules and regulations implementing it will have on community
banks. However, it is expected that at a minimum they will increase our operating and compliance costs, which could adversely affect key
operating efficiency ratios, and could increase our interest expense. See “Business - Regulation” contained in Part I, Item I of this report.
New or changing tax, accounting, and regulatory rules and interpretations could significantly impact strategic initiatives, results of
operations, cash flows, and financial condition.
The banking industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit insurance
funds and consumers, not to benefit a company’s shareholders. These regulations may sometimes impose significant limitations on operations.
The significant federal and state banking regulations that affect us are described in this report under the heading “Item 1. Business-Regulation.”
These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards,
policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax
compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly
evolving and may change significantly over time. Any new regulations or legislation, change in existing regulations or oversight, whether a
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change in regulatory policy or a change in a regulator's interpretation of a law or regulation, could have a material impact on our operations,
increase our costs of regulatory compliance and of doing business and or otherwise adversely affect us and our profitability. Further, changes
in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent
registered public accounting firm. These changes could materially impact, potentially even retroactively, how we report our financial condition
and results of our operations as could our interpretation of those changes.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions and
limit our ability to get regulatory approval of acquisitions.
The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used
for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports
with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for
identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result
in fines or sanctions and limit our ability to get regulatory approval of acquisitions. Recently several banking institutions have received large
fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance
with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these
laws and regulations.
We may be subject to additional regulatory scrutiny if and when Banner or Banner Bank’s total assets exceed $10.0 billion.
Banner's total assets were $9.80 billion and Banner Bank's total assets were $9.52 billion at December 31, 2015. As a result of the closing of
their respective mergers with Starbuck and AmericanWest, Banner and Banner Bank’s assets are approaching $10 billion. Following the fourth
consecutive quarter where the total assets of Banner or Banner Bank exceed $10 billion, Banner or Banner Bank, as applicable, will become
subject to a number of additional requirements (such as annual stress testing requirements implemented pursuant to the Dodd-Frank Act and
general oversight by the CFPB) that will impose additional compliance costs on our business. As a result, there may also be additional higher
expectations from regulators. The CFPB has near exclusive supervision authority, including examination authority, over institutions of that size
and their affiliates to assess compliance with federal consumer financial laws, to obtain information about the institutions’ activities and compliance
systems and procedures, and to detect and assess risks to consumers and markets.
Under the Dodd-Frank Act, the minimum ratio of net worth to insured deposits of the Deposit Insurance Fund was increased from 1.15% to
1.35% and the FDIC is required, in setting deposit insurance assessments, to offset the effect of the increase on institutions with assets of less
than $10 billion, which results in institutions with assets greater than $10 billion paying higher assessments. In addition, if Banner Bank exceeds
$10 billion in assets, its assessment base for federal deposit insurance would change from the amount of insured deposits to consolidated average
assets less tangible capital to a scorecard method. The scorecard method uses a performance score and a loss severity score, which are combined
and converted into an initial base assessment rate. The performance score is based on measures of the bank’s ability to withstand asset-related
stress and funding-related stress and weighted CAMELS ratings, which are ratings ascribed under the CAMELS supervisory rating system and
assigned based on a supervisory authority’s analysis of a bank’s financial statements and on-site examinations. The loss severity score is a
measure of potential losses to the FDIC in the event of the bank’s failure. Under a formula, the performance score and loss severity score are
combined and converted to a total score that determines the bank’s initial base assessment rate. The FDIC has the discretion to alter the total
score based on factors not captured by the scorecard. The resulting initial base assessment rate is also subject to adjustments downward based
on long term unsecured debt issued by the bank, to adjustment upward based on long term unsecured debt held by the bank that is issued by
other FDIC-insured institutions, and to further adjustment upward if the bank’s brokered deposits exceed 10% of its domestic deposits.
Further, Banner Bank and Islanders Bank may be affected by the Durbin Amendment to the Dodd-Frank Act regarding limits on debit card
interchange fees. The Durbin Amendment gave the Federal Reserve Board the authority to establish rules regarding interchange fees charged
for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion or more and to enforce a new
statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. The Federal Reserve Board
has adopted rules under this provision that limit the swipe fees that a debit card issuer can charge a merchant for a transaction to the sum of 21
cents and five basis points times the value of the transaction, plus up to one cent for fraud prevention costs. Based on expected debit card volume,
we believe we could experience a reduction of approximately $10 million a year in debit card related fee income and pre-tax earnings following
the implementation of the Durbin Amendment.
The Dodd-Frank Act also requires publicly-traded bank holding companies with assets of $10 billion or more to perform capital stress testing
and establish a risk committee responsible for enterprise-wide risk management practices, comprised of independent directors, including one
risk management expert.
As a result of the above, if and when Banner's or Banner Bank’s total assets exceed $10 billion, deposit insurance assessments, expenses related
to regulatory compliance are likely to increase, and interchange fee income will decrease, the cumulative effect of which may be significant.
We may experience future goodwill impairment.
In accordance with GAAP, we record assets acquired and liabilities assumed at their fair value with the excess of the purchase consideration
over the net assets acquired resulting in the recognition of goodwill. As a result, acquisitions typically result in recording goodwill. We perform
a goodwill evaluation at least annually to test for goodwill impairment. As part of our testing, we first assess qualitative factors to determine
29
whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine the fair value of a
reporting unit is less than its carrying amount using these qualitative factors, we then compare the fair value of goodwill with its carrying amount,
and then measures impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. Adverse conditions
in our business climate, including a significant decline in future operating cash flows, a significant change in our stock price or market
capitalization, or a deviation from our expected growth rate and performance may significantly affect the fair value of our goodwill and may
trigger additional impairment losses, which could be materially adverse to our operating results and financial position.
We cannot provide assurance that we will not be required to take an impairment charge in the future. Any impairment charge has an adverse
effect on our results of shareholders’ equity and financial results and could cause a decline in our stock price. The recent acquisitions of Starbuck,
Siuslaw and their subsidiaries, AmericanWest and Siuslaw Bank, respectively, has substantially increased our goodwill.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. We rely on a number of different sources in order to meet our potential liquidity demands. Our primary
sources of liquidity are increases in deposit accounts, cash flows from loan payments and our securities portfolio. Borrowings also provide us
with a source of funds to meet liquidity demands. An inability to raise funds through deposits, borrowings, the sale of loans or investment
securities and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to
finance our activities or on terms which are acceptable to us could be impaired by factors that affect us specifically, or the financial services
industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our
business activity as a result of a downturn in the markets in which our loans are concentrated, negative operating results, or adverse regulatory
action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets
or negative views and expectations about the prospects for the financial services industry or deterioration in credit markets.
Additionally, collateralized public funds are bank deposits of state and local municipalities. These deposits are required to be secured by certain
investment grade securities to ensure repayment, which on the one hand tends to reduce our contingent liquidity risk by making these funds
somewhat less credit sensitive, but on the other hand reduces standby liquidity by restricting the potential liquidity of the pledged collateral.
Although these funds historically have been a relatively stable source of funds for us, availability depends on the individual municipality's fiscal
policies and cash flow needs.
We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.
Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with
knowledge of, and experience in, the community banking industry where the Banks conduct their business. The process of recruiting personnel
with the combination of skills and attributes required to carry out our strategies is often lengthy. Our success depends to a significant degree
upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel and
upon the continued contributions of our management and personnel. In particular, our success has been and continues to be highly dependent
upon the abilities of key executives, including our President, and certain other employees. Our ability to retain our key employees throughout
the integration process following our recent acquisitions, including the recent acquisition of AmericanWest, may be challenging. In addition,
our success has been and continues to be highly dependent upon the services of our directors, many of whom are at or nearing retirement age,
and we may not be able to identify and attract suitable candidates to replace such directors. The loss of these key persons could negatively
impact the affected banking operations.
Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.
Our loans to businesses and individuals and our deposit relationships and related transactions are subject to exposure to the risk of loss due to
fraud and other financial crimes. Nationally, reported incidents of fraud and other financial crimes have increased. We have also experienced
losses due to apparent fraud and other financial crimes. While we have policies and procedures designed to prevent such losses, there can be
no assurance that such losses will not occur.
Managing reputational risk is important to attracting and maintaining customers, investors and employees.
Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices,
employee misconduct, failure to deliver minimum standards of service or quality or operational failures due to integration or conversion challenges
as a result of acquisitions we undertake, compliance deficiencies, and questionable or fraudulent activities of our customers. We have policies
and procedures in place to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully
effective. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers,
investors and employees, costly litigation, a decline in revenues and increased governmental regulation.
Our exposure to operational risks may adversely affect us.
Similar to other financial institutions, we are exposed to many types of operational risk, including reputational risk, legal and compliance risk,
the risk of fraud or theft by employees or outsiders, the risk that sensitive customer data or other data is compromised, and the risk of unauthorized
transactions by employees or operational errors, including clerical or record-keeping errors. Nationally, reported incidents of fraud and other
30
financial crimes have increased. While we have policies and procedures designed to prevent such losses, there can be no assurance that such
losses will not occur. If any of these risks occur, it could result in material adverse consequences for us.
We are subject to certain risks in connection with our use of technology.
Our security measures may not be sufficient to mitigate the risk of a cyber attack. Communications and information systems are essential to the
conduct of our business, as we use such systems to manage our customer relationships, our general ledger and virtually all other aspects of our
business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems
and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer
systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and
cyber attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our customers' confidential
and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions
or malfunctions in our operations or the operations of our customers or counterparties. We may be required to expend significant additional
resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation
and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant
reputational damage.
Security breaches in our Internet banking activities could further expose us to possible liability and damage our reputation. Any compromise
of our security also could deter customers from using our Internet banking services that involve the transmission of confidential information.
We rely on standard Internet security systems to provide the security and authentication necessary to effect secure transmission of data. These
precautions may not protect our systems from compromises or breaches of our security measures, which could result in significant legal liability
and significant damage to our reputation and our business.
Our security measures may not protect us from systems failures or interruptions. While we have established policies and procedures to prevent
or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately
addressed if they do. The conversion of customers from legacy AmericanWest communication and information systems to our systems will be
challenging and the complexity of the conversion may result in systems failures and interruptions. In addition, we outsource certain aspects of
our data processing and other operational functions to certain third-party providers. If our third-party providers encounter difficulties, or if we
have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our business
operations could be adversely impacted. Threats to information security also exist in the processing of customer information through various
other vendors and their personnel.
The occurrence of any failures or interruptions may require us to identify alternative sources of such services, and we cannot assure you that we
could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the
need to expend substantial resources, if at all. Further, the occurrence of any systems failure or interruption could damage our reputation and
result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these
occurrences could have a material adverse effect on our financial condition and results of operations.
Sales of substantial amounts of Banner’s common stock in the open market by former Siuslaw and SKBHC shareholders could depress
Banner’s stock price.
Sales of a substantial number of shares of our common stock in the public markets and the availability of those shares for sale could adversely
affect the market price of our common stock. The 1.32 million shares of Banner common stock that were issued to shareholders of Siuslaw in
the Siuslaw merger are freely tradeable without restrictions or further registration under the Securities Act of 1933. The 13.23 million shares
of Banner common stock and non-voting common stock that were issued to equity holders of SKBHC in the merger of Banner and AmericanWest
who did not become affiliates of Banner will be freely tradeable without restrictions or further registration in April 2016. In addition, certain of
such equity holders of SKBHC benefit from registration rights that permit them to cause Banner to register their shares of Banner common stock
and non-voting common stock for resale. Although the holders of the currently outstanding 1,424,466 shares of Banner non-voting common
stock issued in connection with the acquisition of AmericanWest cannot vote on most matters today, upon a permitted transfer, such shares of
non-voting common stock will convert into Banner common stock. Permitted transfers include, among others, transfers as part of a widely
distributed public offering of Banner common stock. A registration statement contemplating such a public offering is currently on file with the
SEC. That offering and any future sales of our common stock by former shareholders of Siuslaw and SKBHC, or anticipation that such sales
may occur, may cause the market price of Banner common stock to decrease. These sales might also make it more difficult for Banner to sell
equity or equity related securities at a time and price that it otherwise would deem appropriate.
We rely on dividends from Banner Bank for substantially all of our revenue at the holding company level.
We are an entity separate and distinct from our principal subsidiary, Banner Bank, and derive substantially all of our revenue at the holding
company level in the form of dividends from that subsidiary. Accordingly, we are, and will be, dependent upon dividends from Banner Bank
to pay the principal of and interest on our indebtedness, to satisfy our other cash needs and to pay dividends on our common stock. Banner
Bank's ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements. In the event Banner Bank
is unable to pay dividends to us, we may not be able to pay dividends on our common stock. Also, our right to participate in a distribution of
assets upon a subsidiary's liquidation or reorganization is subject to the prior claims of the subsidiary's creditors.
31
Our articles of incorporation contains a provision which could limit the voting rights of a holder of our common stock.
Our charter provides that any person or group who acquires beneficial ownership of our common stock in excess of 10.0% of the outstanding
shares may not vote the excess shares. Accordingly, if you acquire beneficial ownership of more than 10.0% of the outstanding shares of our
common stock, your voting rights with respect to our common stock will not be commensurate with your economic interest in our company.
Anti-takeover provisions could negatively affect our shareholders.
Provisions in our articles of incorporation and bylaws, the corporate laws of the state of Washington and federal laws and regulations could delay
or prevent a third party from acquiring us, despite the possible benefit to our shareholders, or otherwise negatively affect the market value of
our stock. These provisions, among others, include: a prohibition on voting shares of our common stock beneficially owned in excess of 10.0%
of total shares outstanding; advance notice requirements for nominations for election to our board of directors and for proposing matters that
shareholders may act on at shareholder meetings; and staggered three-year terms for directors. Our articles of incorporation also authorize our
board of directors to issue preferred or other stock, and preferred or other stock could be issued as a defensive measure in response to a takeover
proposal. In addition, because we are a bank holding company, the ability of a third party to acquire us is limited by applicable banking laws
and regulations. The Bank Holding Company Act requires any bank holding company to obtain the approval of the Federal Reserve Board
before acquiring 5% or more of any class of our voting securities. Any entity that is a holder of 25% or more of any class of our voting securities,
or in some circumstances a holder of a lesser percentage, is subject to regulation as a bank holding company under the Bank Holding Company
Act. Under the Change in Bank Control Act of 1978, as amended, any person (or persons acting in concert), other than a bank holding company,
is required to notify the Federal Reserve Board before acquiring 10% or more of any class of our voting securities.
Item 1B – Unresolved Staff Comments
None.
Item 2 – Properties
Banner Corporation maintains its administrative offices and main branch office, which is owned by us, in Walla Walla, Washington. In total, as
of December 31, 2015, we have 202 branch offices located in Washington, Oregon, California, Utah and Idaho. One hundred ninety-nine branches
are Banner Bank branches and three of those 202 are Islanders Bank branches. Ninety-eight branches are located in Washington, 45 in Oregon,
37 in California, seven in Utah, and 15 in Idaho. Of these branch locations, approximately half are owned and the other half are leased facilities. In
addition to the branch locations, we also have nine loan production offices spread throughout the same five-state area. All loan production offices
are leased facilities. The lease terms for our branch and loan production offices are not individually material. Lease expirations range from one
to 25 years. Administrative support offices are primarily in Washington, where we have eight facilities, of which we own four and lease
four. Additionally, we have one leased administrative support office in Idaho and own one located in Oregon. In the opinion of management,
all properties are adequately covered by insurance, are in a good state of repair and are appropriately designed for their present and future use.
Item 3 – Legal Proceedings
In the normal course of business, we have various legal proceedings and other contingent matters outstanding. These proceedings and the
associated legal claims are often contested and the outcome of individual matters is not always predictable. These claims and counter-claims
typically arise during the course of collection efforts on problem loans or with respect to action to enforce liens on properties in which we hold
a security interest. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial
condition or operations.
Item 4 – Mine Safety Disclosures
Not applicable.
32
PART II
Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Price Range of Common Stock and Dividend Information
Our voting common stock is principally traded on the NASDAQ Global Select Market under the symbol “BANR.” Shareholders of record as
of December 31, 2015 totaled 1,717 based upon securities position listings furnished to us by our transfer agent. This total does not reflect the
number of persons or entities who hold stock in nominee or “street” name through various brokerage firms. The following tables show the
reported high and low sale prices of our listed voting common stock for the periods presented as well as the cash dividends declared per share
of common stock for each of those periods.
Year Ended December 31, 2015
High
Low
First quarter
Second quarter
Third quarter
Fourth quarter
First quarter
Second quarter
Third quarter
Fourth quarter
Year Ended December 31, 2014
$
$
$
$
53.55
50.16
50.50
46.26
44.88
42.02
40.69
43.70
High
Low
Cash Dividend
Declared
0.18
0.18
0.18
0.18
Cash Dividend
Declared
0.18
0.18
0.18
0.18
$
$
44.13
42.42
43.87
39.00
35.64
37.59
37.77
37.77
The timing and amount of cash dividends paid on our common stock depends on our earnings, capital requirements, financial condition and
other relevant factors and is subject to the discretion of our board of directors. As a result of improved earnings, levels of capital, asset quality
and financial condition, beginning in the first quarter of 2013 we increased the dividend, further increased it in the third quarter of 2013 and
again increased it in the first quarter of 2014. There can be no assurance that we will pay dividends on our common stock in the future.
Our ability to pay dividends on our common stock depends primarily on dividends we receive from Banner Bank and Islanders Bank. Under
federal regulations, the dollar amount of dividends the Banks may pay depends upon their capital position and recent net income. Generally, if
a bank satisfies its regulatory capital requirements, it may make dividend payments up to the limits prescribed under state law and FDIC
regulations. In addition, an institution that has converted to a stock form of ownership may not declare or pay a dividend on, or repurchase any
of, its common stock if the effect thereof would cause the regulatory capital of the institution to be reduced below the amount required for the
liquidation account which was established in connection with the conversion. Banner Bank, our primary subsidiary, converted to a stock form
of ownership and is therefore subject to the limitation described in the preceding sentence. In addition, under Washington law, no bank may
declare or pay any dividend in an amount greater than its retained earnings without the prior approval of the Washington DFI. The Washington
DFI also has the power to require any bank to suspend the payment of any and all dividends.
Further, under Washington law, Banner Corporation is prohibited from paying a dividend if, after making such dividend payment, it would be
unable to pay its debts as they become due in the usual course of business, or if its total liabilities, plus the amount that would be needed, in the
event Banner Corporation were to be dissolved at the time of the dividend payment, to satisfy preferential rights on dissolution of holders of
preferred stock ranking senior in right of payment to the capital stock on which the applicable distribution is to be made, exceed our total assets.
In addition to the foregoing regulatory considerations, there are numerous governmental requirements and regulations that affect our business
activities. A change in applicable statutes, regulations or regulatory policy may have a material effect on our business and on our ability to pay
dividends on our common stock.
Payments of the distributions on our trust preferred securities (TPS) from the special purpose subsidiary trusts we sponsored are fully and
unconditionally guaranteed by us. The junior subordinated debentures that we have issued to our subsidiary trusts are ranked senior to our shares
of common stock. We must make required payments on the junior subordinated debentures before any dividends can be paid on our TPS and
our common stock and, in the event of our bankruptcy, dissolution or liquidation, the interest and principal obligations under the junior subordinated
debentures must be satisfied before any distributions can be made on our common stock. We may defer the payment of interest on each of the
junior subordinated debentures for a period not to exceed 20 consecutive quarters, provided that the deferral period does not extend beyond the
stated maturity. During such deferral period, distributions on the corresponding TPSs will also be deferred and we may not pay cash dividends
to the holders of shares of our common stock. At December 31, 2015, we were current on all interest payments.
33
Issuer Purchases of Equity Securities
There were no repurchases of common stock by the Company during the quarter ended December 31, 2015. Further, no shares were surrendered
by employees to satisfy tax withholding obligations upon the vesting of restricted stock grants in the fourth quarter of 2015.
On March 25, 2015, the Company announced that its Board of Directors had authorized the repurchase of up to 1,044,922 shares of the Company's
common stock, or 5% of the Company's outstanding shares, all of which remain available for repurchase at December 31, 2015. Under the plan,
shares may be repurchased by the Company in open market purchases. The extent to which the Company repurchases its shares and the timing
of such repurchases will depend upon market conditions and other corporate considerations.
34
Equity Compensation Plan Information
The equity compensation plan information presented under Part III, Item 12 of this report is incorporated herein by reference.
Performance Graph. The following graph compares the cumulative total shareholder return on Banner Corporation common stock with the
cumulative total return on the NASDAQ (U.S. Stock) Index, a peer group of the SNL $1 Billion to $5 Billion Asset Bank Index and a peer group
of the SNL NASDAQ Bank Index. Total return assumes the reinvestment of all dividends.
Index
Banner Corporation
NASDAQ Composite
SNL Bank $1B-$5B
SNL Bank NASDAQ
Period Ended
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
100.00
100.00
100.00
100.00
106.64
99.21
99.24
88.73
191.45
116.82
116.73
105.75
283.47
163.75
180.10
152.00
276.94
188.03
185.52
157.42
299.80
201.40
211.33
169.94
*Assumes $100 invested in Banner Corporation common stock and each index at the close of business on December 31, 2010 and that all
dividends were reinvested. Information for the graph was provided by SNL Financial L.C. © 2016.
35
Item 6 – Selected Financial Data
The following condensed consolidated statements of financial condition and operations and selected performance ratios as of December 31,
2015, 2014, 2013, 2012, and 2011 and for the years then ended have been derived from our audited consolidated financial statements.
The information below is qualified in its entirety by the detailed information included elsewhere herein and should be read along with “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8, Financial Statement and Supplementary
Data.”
FINANCIAL CONDITION DATA:
(In thousands)
Total assets
Cash and securities (1)
Loans receivable, net
Deposits
Borrowings
Common shareholders’ equity
Preferred shareholders' equity
Total shareholders’ equity
Shares outstanding
Shares outstanding excluding unearned, restricted
shares held in ESOP
OPERATING DATA:
(In thousands)
Interest income
Interest expense
2015
2014
$ 9,796,298
1,655,290
7,236,496
8,055,068
324,186
1,300,059
—
1,300,059
34,242
$ 4,723,163
708,609
3,755,127
3,898,950
187,436
582,888
—
582,888
19,572
December 31
2013
$ 4,388,257
772,614
3,344,187
3,617,926
184,234
538,331
—
538,331
19,544
2012
2011
$ 4,265,264
811,902
3,158,223
3,557,804
160,000
506,919
—
506,919
19,455
$ 4,257,312
754,396
3,210,419
3,475,654
212,649
411,748
120,702
532,450
17,553
34,242
19,572
19,509
19,421
17,519
2015
For the Year Ended December 31
2013
2012
2014
$
$
254,433
12,154
$
190,661
10,789
$
179,712
12,996
$
187,162
19,514
Net interest income before provision for loan losses
Provision for loan losses
Net interest income
Deposit fees and other service charges
Mortgage banking operations revenue
Other-than-temporary impairment recoveries (losses)
Net change in valuation of financial instruments carried at
fair value
All other non-interest income
Total non-interest income
REO operations expense (recoveries), net
All other non-interest expenses
Total non-interest expense
Income before provision for income tax expense (benefit)
Provision for income tax expense (benefit)
242,279
—
242,279
40,607
17,720
—
(813)
4,778
62,292
397
236,203
236,600
67,971
22,749
179,872
—
179,872
30,553
10,249
—
1,374
12,815
54,991
(446)
154,187
153,741
81,122
27,052
166,716
—
166,716
26,581
11,170
409
(2,278)
8,780
44,662
(689)
141,664
140,975
70,403
24,189
167,648
13,000
154,648
25,266
13,812
(409)
(16,515)
5,136
27,290
3,354
138,099
141,453
40,485
(24,372)
Net income
$
45,222
$
54,070
$
46,214
$
64,857
$
(footnotes follow)
36
2011
197,563
32,992
164,571
35,000
129,571
22,962
6,146
3,000
(624)
3,531
35,015
22,262
135,842
158,104
6,482
1,025
5,457
PER COMMON SHARE DATA:
Net income (loss):
Basic
Diluted
Common shareholders’ equity per share (2)(9)
Common shareholders’ tangible equity per share (2)(9)
Cash dividends
2015
At or For the Years Ended December 31
2013
2014
2012
$
$
1.90
1.89
37.97
29.66
0.72
$
2.79
2.79
29.78
29.64
0.72
$
2.39
2.38
27.59
27.42
0.54
$
3.17
3.16
26.09
25.87
0.04
2011
(0.15)
(0.15)
23.50
23.14
0.10
Dividend payout ratio (basic)
Dividend payout ratio (diluted)
37.89%
38.10%
25.78%
25.84%
22.62%
22.67%
1.26%
1.27%
(66.67)%
(66.67)%
OTHER DATA:
Full time equivalent employees
Number of branches
2,063
202
1,150
93
1,084
88
1,074
88
1,078
89
2015
2014
As of December 31
2013
2012
2011
(footnotes follow)
37
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average assets (3)
Return on average common equity (4)
Average common equity to average assets
Interest rate spread (5)
Net interest margin (6)
Non-interest income to average assets
Non-interest expense to average assets
Efficiency ratio (7)
Average interest-earning assets to funding liabilities
Selected Financial Ratios:
Allowance for loan losses as a percent of total loans at
end of period
Net charge-offs (recoveries) as a percent of average
outstanding loans during the period
Non-performing assets as a percent of total assets
Allowance for loan losses as a percent of non-
performing loans (8)
Common shareholders’ tangible equity to tangible
assets (9)
2015
At or For the Years Ended December 31
2013
2014
2012
2011
0.72%
5.56
12.87
4.09
4.10
0.99
3.75
77.68
107.59
1.07
0.04
0.28
1.17%
9.59
12.20
4.04
4.07
1.19
3.32
65.46
108.78
1.98
0.05
0.43
1.09%
8.79
12.35
4.08
4.11
1.05
3.31
67.11
108.28
2.17
0.08
0.66
1.54%
11.63
13.22
4.13
4.17
0.65
3.35
72.71
109.11
2.37
0.57
1.18
0.13%
1.37
9.31
3.99
4.05
0.79
3.69
79.62
106.90
2.52
1.50
2.79
512.47
453.56
299.81
223.20
110.09
10.68
12.29
12.23
11.80
9.54
Consolidated Capital Ratios:
Total capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Tier 1 capital to average leverage assets
Common equity tier I capital to risk-weighted assets
13.63
12.65
11.06
12.13
16.80
15.54
13.41
16.99
15.73
13.64
16.96
15.70
12.74
18.07
16.80
13.44
Includes securities available-for-sale and held-to-maturity.
(1)
(2) Calculated using shares outstanding excluding unearned restricted shares held in ESOP and adjusted for 1-for-7 reverse stock split.
(3) Net income divided by average assets.
(4) Net income divided by average common equity.
(5) Difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(6) Net interest income before provision for loan losses as a percent of average interest-earning assets.
(7) Non-interest expenses divided by the total of net interest income before loan losses and non-interest income.
(8) Non-performing loans consist of nonaccrual and 90 days past due loans.
(9) Common shareholders’ tangible equity per share and the ratio of tangible common shareholders’ equity to tangible assets are non-GAAP
financial measures. We calculate tangible common equity by excluding the balance of goodwill, other intangible assets and preferred
equity 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. In addition, excluding preferred equity, the level of which may vary from company
to company, allows investors to more easily compare our capital adequacy to other companies in the industry that also use this
measure. Management believes that these non-GAAP financial measures provide information to investors that is useful in understanding
the basis of our capital position. However, these non-GAAP financial measures are supplemental and are not a substitute for any analysis
based on GAAP. Because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may
not be comparable to other similarly titled measures as calculated by other companies. For a reconciliation of these non–GAAP measures,
see Item 7, "Management's Discussion and Analysis of Financial Condition—Executive Overview."
38
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of 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
Notes to the Consolidated Financial Statements of this Form 10-K.
Executive Overview
Banner Corporation's successful execution of its strategic plan and operating initiatives continued in 2015, as evidenced by our solid operating
results and profitability. Highlights for the year included further improvement in our asset quality, substantially increased core deposits (transaction
and savings accounts) and loans, significantly increased revenues from core operations and additional client acquisition. The year ended
December 31, 2015 was also highlighted by the completed acquisitions of Siuslaw Bank and AmericanWest Bank. In addition to these acquisitions,
over the past five years we have significantly added to our client relationships and account base, as well as substantially improved our risk profile
by aggressively managing and reducing our problem assets, which has resulted in lower credit costs and stronger and sustainable revenues.
For the year ended December 31, 2015, our net income was $45.2 million or $1.89 per diluted share, compared to net income of $54.1 million,
or $2.79 per diluted share for the year ended December 31, 2014 and $46.2 million or $2.38 per diluted share for the year ended December 31,
2013. While our results for both years were significantly impacted by merger and acquisition activity and the related expenses, the decline in
net income from the prior year was largely due to expenses related to the acquisition of AmericanWest. Acquisition-related expenses were $26.1
million, or $0.76 per diluted share net of tax benefit, in 2015 compared to $4.3 million, or $0.17 per diluted share net of tax benefit, in 2014.
Results for 2014 also included a $9.1 million bargain purchase gain related to the Branch purchase, which net of taxes contributed $0.30 to
diluted net income per share.
Aside from the acquisition related expenses, our operating results depend primarily on our net interest income, which is the difference between
interest income on interest-earning assets, consisting of loans and investment securities, and interest expense on interest-bearing liabilities,
composed primarily of customer deposits, FHLB advances, other borrowings and junior subordinated debentures. Net interest income is primarily
a function of our interest rate spread, which is the difference between the yield earned on interest-earning assets and the rate paid on interest-
bearing liabilities, as well as a function of the average balances of interest-earning assets and interest-bearing liabilities. Our net interest income
before provision for loan losses increased 35% to $242.3 million for the year ended December 31, 2015, compared to $179.9 million for the
year earlier. This increase in net interest income reflects the acquisitions of Siuslaw Bank in March 2015 and AmericanWest in October 2015,
as well as the Branch purchase in June 2014, and significant organic loan and deposit growth from the legacy Banner Bank franchise. During
the year ended December 31, 2015, our interest spread increased to 4.09% from 4.04% for the prior year while our net interest margin increased
to 4.10% compared to 4.07% for the prior year. Our net interest margin was modestly enhanced in 2015 by the amortization of acquisition
accounting discounts on purchased loans received in the acquisitions, which are accreted into loan interest income, as well as by net premiums
on non-market-rate certificate of deposit liabilities assumed in the acquisitions which are amortized as a reduction to deposit interest expense;
however, setting aside acquisition accounting adjustments, our net interest margin demonstrated remarkable relative stability despite continuing
pressure on asset yields in the very low interest rate environment.
As a result of adequate reserves already in place and declining loan charge-offs, as well as net recoveries for the past two years, we did not record
a provision for loan losses in the years ended December 31, 2015, 2014, and 2013. By contrast, we recorded substantially larger provisions in
the three years immediately prior to 2013. The decrease in loan loss provisioning in recent years compared to the earlier years reflects our
significant progress in reducing the levels of delinquencies, non-performing loans and net charge-offs. As a result of our continued focused
efforts, non-performing loans decreased by 9% to $15.2 million at December 31, 2015, compared to $16.7 million a year earlier. Our allowance
for loan losses at December 31, 2015 was $78.0 million, representing 512% of non-performing loans. (See Note 5, Loans Receivable and the
Allowance for Loan Losses, of the Notes to the Consolidated Financial Statements as well as “Asset Quality” below in this Form 10-K.)
Our net income also is affected by the level of our non-interest income, including deposit fees and service charges, results of mortgage banking
operations, which includes loan origination and servicing fees and gains and losses on the sale of loans, and gains and losses on the sale of loans
and securities, as well as our non-interest expense and income tax provisions. In addition, our net income is affected by the net change in the
value of certain financial instruments carried at fair value, and in certain periods by other-than-temporary impairment (OTTI) charges or recoveries.
Our total non-interest income was $62.3 million for the year ended December 31, 2015, compared to $55.0 million for the year ended December 31,
2014, including the acquisition bargain purchase gain. For the year ended December 31, 2015, we recorded a net charge of $813,000 for fair
value adjustments and $540,000 in net losses on the sale of securities. In comparison, for the year ended December 31, 2014, we recorded a
positive net change of $1.4 million for fair value adjustments, $42,000 in net gains on the sale of securities, and a $9.1 million bargain purchase
gain. Non-interest income excluding the net gain on sale of securities, OTTI adjustments, changes in the value of financial instruments carried
at fair value, and the acquisition bargain purchase gain, which we believe is more indicative of our core operations, increased 43% to $63.6
million for the year ended December 31, 2015 compared to $44.5 million for the same period a year earlier, as we experienced meaningful
increases in deposit fees and service charges and mortgage banking revenues.
Our total revenues (net interest income before the provision for loan losses plus total non-interest income) for the year ended December 31, 2015
increased $69.7 million, or 30%, to $304.6 million, compared to $234.9 million for the same period a year earlier, largely as a result of the
benefits from our acquisitions and organic growth more than offsetting the bargain purchase gain and favorable fair value adjustments recorded
in the prior year. Our total revenues from core operations, which excludes net gains on sale of securities, fair value adjustments and the bargain
purchase gain, increased by $81.6 million, or 36%, to $305.9 million for the year ended December 31, 2015, compared to $224.4 million for the
same period a year earlier.
39
For the year ended December 31, 2015, non-interest expense increased 54% to $236.6 million, compared to $153.7 million for the year ended
December 31, 2014, largely attributable to our acquisition-related expenses and incremental costs associated with operating the 98 branches
acquired in the AmericanWest acquisition on October 1, 2015 and the ten Siuslaw Bank branches acquired in March 2015, as well as generally
increased compensation, occupancy and payment and card processing services reflecting increased transaction volume.
Non-interest income, revenues and other earnings information excluding fair value adjustments, OTTI losses or recoveries, net gains or losses
on sale of securities and, in certain periods, acquisition-related bargain purchase gains and costs, are non-GAAP financial measures. Management
has presented these non-GAAP financial measures in this discussion and analysis because it believes that they provide useful and comparative
information to assess trends in our core operations and in understanding our capital position. However, these non-GAAP financial measures are
supplemental and are not a substitute for any analysis based on GAAP. Where applicable, we have also presented comparable earnings information
using GAAP financial measures. For a reconciliation of these non-GAAP financial measures, see the tables below. Because not all companies
use the same calculations, our presentation may not be comparable to other similarly titled measures as calculated by other companies. See
“Comparison of Results of Operations for the Years Ended December 31, 2015 and 2014” for more detailed information about our financial
performance.
40
The following tables set forth reconciliations of non-GAAP financial measures discussed in this report (dollars in thousands, except share and
per share data):
Total non-interest income (GAAP)
Exclude net loss (gain) on sale of securities
Exclude other-than-temporary impairment (recovery) loss
Exclude change in valuation of financial instruments carried at fair value
Exclude one-time acquisition termination fee
Exclude acquisition bargain purchase gain
Total non-interest income from core operations (non-GAAP)
Net interest income before provision for loan losses
Total non-interest income
Total GAAP revenue
Exclude net loss (gain) on sale of securities
Exclude other-than-temporary impairment (recovery) loss
Exclude change in valuation of financial instruments carried at fair value
Exclude one-time acquisition termination fee
Exclude acquisition bargain purchase gain
Revenue from core operations (non-GAAP)
Income before provision for taxes (GAAP)
Exclude net loss (gain) on sale of securities
Exclude other-than-temporary impairment (recovery) loss
Exclude change in valuation of financial instruments carried at fair value
Exclude one-time acquisition termination fee
Exclude acquisition bargain purchase gain
Exclude acquisition related costs
Income from core operations before provision for taxes (non-GAAP)
Net income (GAAP)
Exclude net loss (gain) on sale of securities
Exclude other-than-temporary impairment (recovery) loss
Exclude change in valuation of financial instruments carried at fair value
Exclude one-time acquisition termination fee
Exclude acquisition bargain purchase gain
Exclude acquisition related costs
Exclude related tax expense (benefit)
Total earnings from core operations (non-GAAP)
Acquisition bargain purchase gain
Acquisition termination fee
Acquisition related costs
Related tax expense
Total net effect of acquisitions (including proposed acquisitions) on earnings
Diluted weighted shares outstanding
Total net effect of acquisitions on diluted earnings per share
41
For the Years Ended December 31
2015
2014
2013
$
62,292
540
—
813
—
—
$
54,991
(42)
—
(1,374)
—
(9,079)
44,662
(1,022)
(409)
2,278
(2,954)
—
63,645
$
44,496
$
42,555
$
242,279
62,292
304,571
540
—
813
—
—
$
179,872
54,991
234,863
(42)
—
(1,374)
—
(9,079)
166,716
44,662
211,378
(1,022)
(409)
2,278
(2,954)
—
305,924
$
224,368
$
209,271
$
67,971
540
—
813
—
—
26,110
$
81,122
(42)
—
(1,374)
—
(9,079)
4,325
70,403
(1,022)
(409)
2,278
(2,954)
—
550
95,434
$
74,952
$
68,846
$
45,222
540
—
813
—
—
26,110
(8,552)
$
54,070
(42)
—
(1,374)
—
(9,079)
4,325
3,166
46,214
(1,022)
(409)
2,278
(2,954)
—
550
561
64,133
$
51,066
$
45,218
— $
—
(26,110)
8,065
$
9,079
—
(4,325)
(2,656)
(18,045) $
2,098
$
—
2,954
(550)
(865)
1,539
23,866,621
19,402,656
19,397,360
(0.76) $
0.11
$
0.08
$
$
$
$
$
$
$
$
$
$
$
Loans receivable (GAAP)
Net loan discount on acquired loans
Adjusted loans (non-GAAP)
Allowance for loan losses (GAAP)
Net loan discount on acquired loans
Adjusted allowance for loan losses (non-GAAP)
December 31
2015
2014
2013
$
7,314,504
$
3,831,034
$
3,415,711
43,657
—
—
7,358,161
3,831,034
3,415,711
78,008
43,657
121,665
75,907
—
75,907
74,258
—
74,258
Adjusted allowance for loan losses/Adjusted total loans (non-GAAP)
1.65%
1.98%
2.17%
Net interest income before provision for loan losses (GAAP)
Exclude discount accretion on purchased loans
Excluded premium amortization on acquired certificates of deposit
2015
242,279
(3.566)
(748)
December 31
2014
179,872
(223)
(139)
2013
166,716
—
—
Net interest income before discount accretion (non-GAAP)
237,965
179,510
166,716
Net interest margin (GAAP)
Exclude impact on net interest margin from discount accretion
Excluded impact on net interest margin from CD premium amortization
Net margin before discount accretion (non-GAAP)
4.10 %
(0.06)%
(0.01)%
4.03 %
4.07 %
(0.01)%
— %
4.06 %
4.11%
—%
—%
4.11%
Common shareholders' tangible equity per share and the ratio of tangible common shareholders' equity to tangible assets referred to in footnote
(9) to Item 6 - Selected Financial Data above are also non-GAAP financial measures. We calculate tangible common equity by excluding other
intangible assets from shareholders' equity. We calculate tangible assets by excluding the balance of 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 our capital position (dollars in thousands).
Shareholders’ equity (GAAP)
Exclude other intangible assets, net
Tangible common shareholders’ equity (non-GAAP)
Total assets (GAAP)
Exclude other intangible assets, net
Total tangible assets (non-GAAP)
December 31
2015
2014
2013
$
$
$
1,300,059
284,500
1,015,559
9,796,298
284,500
$
$
$
582,888
2,831
580,057
4,723,163
2,831
$
$
$
538,331
2,449
535,882
4,388,257
2,449
$
9,511,798
$
4,720,332
$
4,385,808
Tangible common shareholders’ equity to tangible assets (non-GAAP)
10.68%
12.29%
12.22%
Common shares outstanding
34,242,255
19,571,548
19,543,769
Common shareholders' tangible equity per share (non-GAAP)
$
29.66
$
29.64
$
27.42
Loans and lending: Loans are our most significant and generally highest yielding earning assets. We attempt to maintain a portfolio of loans in
a range of 90% to 95% of total deposits to enhance our revenues, while adhering to sound underwriting practices and appropriate diversification
guidelines in order to maintain a moderate risk profile. At December 31, 2015, our net loan portfolio totaled $7.24 billion compared to $3.76
42
billion at December 31, 2014, with much of the increase coming from the AmericanWest and Siuslaw Bank acquisitions. The AmericanWest
and Siuslaw Bank acquisitions accounted for $2.82 billion and $227.1 million, respectively, of the total loan portfolio at December 31, 2015.
Our lending activities are primarily directed toward the origination of real estate and commercial loans. Commercial real estate loans for both
owner-occupied and investment properties, including construction and development loans for these types of properties, totaled $3.20 billion, or
approximately 44% of our loan portfolio at December 31, 2015. In addition, multifamily residential real estate loans, including construction
and development loans for these types of properties, totaled $536.8 million and comprise approximately 7% of our loan portfolio at that date.
While our level of activity and investment in commercial and multifamily real estate loans has been relatively stable for many years, we have
experienced an increase in new originations in recent periods resulting in growth in these loan balances. In addition, both Siuslaw Bank and
AmericanWest had significant commercial real estate loan portfolios at the time of their respective acquisitions. AmericanWest also had a
significant portfolio of multifamily loans. Commercial real estate loans increased by $1.77 billion and multifamily loans increased by $309.1
million during the year ended December 31, 2015.
We also originate residential construction, land and land development loans and, although our portfolio balances are well below the peak levels
before the financial crisis, in recent years we have experienced increased demand for one-to four-family construction loans and our origination
activity has been significant. Outstanding residential construction, land and land development balances increased $82.9 million, or 26%, to
$405.2 million at December 31, 2015 compared to $322.3 million at December 31, 2014. Still, residential construction, land and land development
loans represented only approximately 6% of our total loan portfolio at December 31, 2015.
Our commercial business lending is directed toward meeting the credit and related deposit needs of various small- to medium-sized business
and agribusiness borrowers operating in our primary market areas. In recent years our commercial lending has also included participation in
certain national syndicated loans, including share national credits, which totaled $123.7 million at December 31, 2015. Reflecting the recovering
national economy and more robust activity in the Northwest, demand for these types of commercial business loans has increased significantly
in recent periods and our balances have increased from organic growth as well as from the acquisitions of AmericanWest and Siuslaw Bank.
Commercial and agricultural business loans increased $622.0 million, or 65%, to $1.58 billion at December 31, 2015, compared to $962.5 million
at December 31, 2014. Commercial and agricultural business loans represented approximately 22% of our portfolio at December 31, 2015.
Our residential mortgage loan originations have been relatively strong in recent years, as exceptionally low interest rates have supported demand
for loans to refinance existing debt as well as loans to finance home purchases. At December 31, 2015, our outstanding balances for residential
mortgages increased $415.5 million to $952.6 million, compared to $537.1 million at December 31, 2014. The increase from the prior year
primarily reflects the loans acquired in the acquisition of AmericanWest, as the majority of loans originated during the year were sold. One- to
four-family residential real estate loans represented nearly 13% of our loan portfolio at December 31, 2015. Most of the one- to four-family
loans that we originate are sold in the secondary markets with net gains on sales and loan servicing fees reflected in our revenues from mortgage
banking.
Our consumer loan activity is primarily directed at meeting demand from our existing deposit customers. We have increased our emphasis on
consumer lending in recent years, and while demand for consumer loans has been modest during this period as we believe many consumers have
been focused on reducing their personal debt, we began to see some meaningful growth in 2014. For the year 2015, consumer loans, including
consumer loans secured by one- to four-family residences, increased $287.7 million to $636.9 million, or 9% of our portfolio at December 31,
2015, with most of the increase arising from the AmericanWest acquisition and increased usage of our home equity lines of credit.
Deposits, customer retail repurchase agreements and loan repayments are the major sources of our funds for lending and other investment
purposes. We compete with other financial institutions and financial intermediaries in attracting deposits and we generally attract deposits within
our primary market areas. Much of the focus of our branch expansion over many years, including the Branch purchase, and our current marketing
efforts have been directed toward attracting additional deposit customer relationships and balances. This effort has been particularly directed
towards increasing transaction and savings accounts and for the past three years we have been very successful in increasing these core deposit
balances. The long-term success of our deposit gathering activities is reflected not only in the growth of deposit balances, but also in increases
in the level of deposit fees, service charges and other payment processing revenues compared to periods prior to that expansion.
Total deposits were $8.06 billion at December 31, 2015 compared to $3.90 billion a year earlier. Non-interest-bearing account balances increased
102% to $2.62 billion at December 31, 2015, compared to $1.30 billion a year ago. Interest-bearing transaction and savings accounts totaled
$4.08 billion at December 31, 2015, compared to $1.83 billion a year ago, while certificates of deposit increased to $1.35 billion compared to
$770.5 million a year earlier. Non-certificate core deposits represented 83% of total deposits at December 31, 2015, compared to 80% of total
deposits a year ago and 76% two years earlier. The AmericanWest and Siuslaw Bank acquisitions accounted for $3.50 billion and $324.2 million,
respectively, of the total deposit portfolio at December 31, 2015.
Critical Accounting Policies
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
43
inherent in those policies, are critical to an understanding of our financial statements. These policies relate to (i) the methodology for the
recognition of interest income, (ii) determination of the provision and allowance for loan and lease losses, (iii) the valuation of financial assets
and liabilities recorded at fair value, including OTTI losses, (iv) the valuation of intangibles, such as 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, 2014. For additional information concerning critical accounting policies,
see Notes 1, 3, 5, 12, 17 and 18 of the Notes to the Consolidated Financial Statements and the following:
Interest Income: (Notes 1 and 5) Interest on loans and securities is accrued as earned unless management doubts the collectability of the asset
or the unpaid interest. Interest accruals on loans are generally discontinued when loans become 90 days past due for payment of interest and
the loans are then placed on nonaccrual status. All previously accrued but uncollected interest is deducted from interest income upon transfer
to nonaccrual status. For any future payments collected, interest income is recognized only upon management’s assessment that there is a strong
likelihood that the full amount of a loan will be repaid or recovered. 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.
Provision and Allowance for Loan Losses: (Notes 1 and 5) The provision for loan losses reflects the amount required to maintain the allowance
for losses at an appropriate level based upon management’s evaluation of the adequacy of general and specific loss reserves. We have established
systematic methodologies for the determination of the adequacy of our allowance for loan losses. The methodologies are set forth in a formal
policy and take into consideration the need for an overall general valuation allowance as well as specific allowances that are tied to individual
problem loans. We increase our allowance for loan losses by charging provisions for probable loan losses against our income and value impaired
loans.
The allowance for loan losses is maintained at a level sufficient to provide for probable losses based on evaluating known and inherent risks in
the loan portfolio and upon our continuing analysis of the factors underlying the quality of the loan portfolio. These factors include, among
others, changes in the size and composition of the loan portfolio, delinquency rates, actual loan loss experience, current and economic conditions,
detailed analysis of individual loans for which full collectability may not be assured, and determination of the existence and realizable value of
the collateral and guarantees securing the loans. Realized losses related to specific assets are applied as a reduction of the carrying value of the
assets and charged immediately against the allowance for loan loss reserve. Recoveries on previously charged off loans are credited to the
allowance for loan losses. The reserve is based upon factors and trends identified by us at the time financial statements are prepared. Although
we use the best information available, future adjustments to the allowance for loan losses may be necessary due to economic, operating, regulatory
and other conditions beyond our control. The adequacy of general and specific reserves is based on our continuing evaluation of the pertinent
factors underlying the quality of the loan portfolio as well as individual review of certain large balance loans. Loans are considered impaired
when, based on current information and events, we determine that it is probable that we will be unable to collect all amounts due according to
the contractual terms of the loan agreement. Factors involved in determining impairment include, but are not limited to, the financial condition
of the borrower, the value of the underlying collateral less selling costs and the current status of the economy. Impaired loans are measured
based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s
observable market price or the fair value of collateral if the loan is collateral dependent. Subsequent changes in the value of impaired loans are
included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision
that would otherwise be reported. Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. Loans that
are collectively evaluated for impairment include residential real estate and consumer loans and, as appropriate, smaller balance non-homogeneous
loans. Larger balance non-homogeneous residential construction and land, commercial real estate, commercial business loans and unsecured
loans are individually evaluated for impairment.
Our methodology for assessing the appropriateness of the allowance for loan losses consists of several key elements, which include specific
allowances, an allocated formula allowance and an unallocated allowance. Losses on specific loans are provided for when the losses are probable
and estimable. General loan loss reserves are established to provide for inherent loan portfolio risks not specifically provided for. The level of
general reserves is based on analysis of potential exposures existing in our loan portfolio including evaluation of historical trends, current market
conditions and other relevant factors identified by us at the time the financial statements are prepared. The formula allowance is calculated by
applying loss factors to outstanding loans, excluding those loans that are subject to individual analysis for specific allowances. Loss factors are
based on our historical loss experience adjusted for significant environmental considerations, including the experience of other banking
organizations, which in our judgment affect the collectability of the loan portfolio as of the evaluation date. The unallocated allowance is based
upon our evaluation of various factors that are not directly measured in the determination of the formula and specific allowances. This
methodology may result in actual losses or recoveries differing significantly from the allowance for loan losses in the Consolidated Financial
Statements.
While we believe the estimates and assumptions used in our determination of the adequacy of the allowance for loan losses are reasonable, there
can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions
will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial
condition and results of operations. In addition, the determination of the amount of the Banks’ allowance for loan losses is subject to review by
44
bank regulators as part of the routine examination process, which may result in the adjustment of reserves based upon their judgment of information
available to them at the time of their examination.
Fair Value Accounting and Measurement: (Notes 1 and 18) We use fair value measurements to record fair value adjustments to certain financial
assets and liabilities and to determine fair value disclosures. We include in the Notes to the Consolidated Financial Statements information about
the extent to which fair value is used to measure financial assets and liabilities, the valuation methodologies used and the impact on our results
of operations and financial condition. Additionally, for financial instruments not recorded at fair value we disclose, where appropriate, our
estimate of their fair value. For more information regarding fair value accounting, please refer to Note 18 in the Notes to the Consolidated
Financial Statements.
Business Combinations: (Notes 1 and 3) 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 are recorded at acquisition date fair values.
The excess purchase consideration 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 that acquisition. Expenses
incurred in connection with a business combination are expensed as incurred. Changes in deferred tax asset valuation allowances related to
acquired tax uncertainties are recognized in net income after the measurement period.
Acquired Loans: (Notes 3 and 5) 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 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. Purchased 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 accounting for PCI loans is periodically updated for changes in
cash flow expectations, and reflected in interest income over the life of the loans as accretable yield. Any subsequent decreases in expected cash
flows attributable to credit deterioration are recognized by recording a provision for loan losses.
For purchased non-credit-impaired 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. Any subsequent deterioration in credit quality is recognized by recording
a provision for loan losses.
Goodwill: (Notes 1 and 17) Goodwill represents the excess of the purchase considerations 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. If the qualitative analysis concludes that further analysis is required,
then a quantitative impairment test would be completed. The quantitative goodwill impairment test is a two-step process. The first step compares
the reporting unit's estimated fair values, including goodwill, to its carrying amount. If the carrying amount exceeds its fair value, then goodwill
impairment may be indicated. The second step allocates the reporting units fair value to its assets and liabilities. If the unallocated fair value
does not exceed the carrying amount of goodwill then an impairment loss would be recognized as a charge to earnings.
Other Intangible Assets: (Notes 1 and 17) Other intangible assets consists primarily of core deposit intangibles (CDI), which are amounts
recorded in business combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the
customer relationships associated with the deposits. Core deposit intangibles are being amortized on an accelerated basis over a weighted average
estimated useful life of eight years. 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 17) 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. 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: (Notes 1 and 6) Property acquired by foreclosure or deed in lieu of foreclosure is recorded at the lower of
the estimated fair value of the property, less expected selling costs, or the carrying value of the defaulted loan. 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 and, if necessary, allowances are established to reduce the carrying value to net realizable value. Gains or losses at
the time the property is sold are charged or credited to operations in the period in which they are realized. The amounts the Banks will ultimately
recover from real estate held for sale may differ substantially from the carrying value of the assets because of market factors beyond the Banks’
control or because of changes in the Banks’ strategies for recovering the investment.
Income Taxes and Deferred Taxes: (Note 12) The Company and its wholly-owned subsidiaries file consolidated U.S. federal income tax returns,
as well as state income tax returns in Oregon and Idaho. 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. A valuation
45
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
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.
Accounting Standards Recently Adopted or Issued - See Note 2 of the Notes to the Consolidated Financial Statements for a description of
recently adopted and new accounting pronouncements, including the respective dates of adoption and expected effects on the Company's financial
position and results of operations.
Comparison of Financial Condition at December 31, 2015 and 2014
General. Total assets increased $5.07 billion, or 107%, to $9.80 billion at December 31, 2015, compared to $4.72 billion at December 31,
2014. During 2015, we completed acquisitions of AmericanWest, which at the time of acquisition included $4.46 billion of assets, $3.00 billion
of net loans, and $3.64 billion of deposits, and of Siuslaw Bank which at the time of acquisition included $369.8 million of assets, $247.1 million
of loans, and $316.4 million of deposits. Net loans receivable (gross loans less deferred fees and discounts, and allowance for loan losses)
increased $3.48 billion, or 93%, to $7.24 billion at December 31, 2015, from $3.76 billion at December 31, 2014. The increase in net loans
included increases of $1.69 billion in commercial real estate loans, $305.5 million in multifamily real estate loans, $58.6 million in one- to four-
family construction loans, $58.4 million in multifamily and commercial construction loans and $46.4 million in land and land development
loans. Commercial business loans increased by $484.0 million while agricultural business loans increased $138.0 million. Consumer loans
increased by $287.7 million and one- to four-family real estate loans increased by $415.5 million.
The increase in commercial real estate loans included $908.4 million for investment properties and $781.0 million for owner-occupied properties
and was largely influenced by the two bank acquisitions. The increase in multifamily loans, which was almost entirely a result of the AmericanWest
acquisition, was net of a sale of $151.9 million from the acquired loan portfolio subsequent to the acquisition date. The increase in construction
and development loans was particularly helpful to the net interest margin as interest rates, loan fees and the velocity of turnover in this lending
activity are generally higher than for most other categories of loans. The increase in one-to four-family loans was also primarily a result of the
AmericanWest acquisition. While much of the year-over-year growth in the loan portfolios was a result of the two bank acquisitions, our organic
production of new commercial real estate, construction and development, and commercial business loans was solid throughout the year and
generally reflected the robust Northwest economy.
Securities increased to $1.39 billion at December 31, 2015, from $582.5 million at December 31, 2014, and the aggregate total of securities and
interest-bearing deposits increased $900.1 million, or 141%, to $1.54 billion at December 31, 2015, compared to $637.5 million a year earlier. The
increase in securities balances reflects the $1.04 billion of securities acquired in the AmericanWest acquisition which were primarily MBS and
municipals. Securities purchases during 2015 were modest and were primarily mortgage-backed securities and intermediate-term taxable and
tax-exempt municipal securities. Securities sales also were modest and were primarily sales of mortgage-backed securities following the
AmericanWest acquisition which were undertaken in part to insure that our total assets remained below $10.0 billion at December 31, 2015.
The average effective duration of Banner's securities portfolio was approximately 3.3 years at December 31, 2015. Primarily reflecting significant
adjustments in prior years, the fair value of our trading securities was $5.2 million less than their amortized cost at December 31, 2015. In
addition, fair value adjustments for securities designated as available-for-sale reflected a decrease of $645,000 for the year ended December 31,
2015, which was included net of the associated tax benefit of $249,000 as a component of other comprehensive income and largely occurred as
a result of slightly increased market interest rates. Periodically, we also acquire securities (primarily municipal bonds) which are designated as
held-to-maturity and this portfolio increased by $89.4 million from the prior year-end balances largely as result of additions from the AmericanWest
portfolio. (See Notes 4 and 18 of the Notes to the Consolidated Financial Statements.)
REO increased $8.3 million, to $11.6 million at December 31, 2015 compared to $3.4 million at December 31, 2014 and $4.0 million at
December 31, 2013. The increase largely reflects REO acquired from the two bank acquisitions in 2015. During the year ended December 31,
2015, we transferred $4.4 million of loans into REO, capitalized additional investments of $298,000 in previously acquired properties, added
$8.2 million of properties as a result of the acquisitions, disposed of approximately $4.7 million of properties and recognized $135,000 of gains
in current earnings, net of valuation adjustments, for REO properties sold. (See “Asset Quality” discussion below.)
Deposits increased $4.16 billion, or 107%, to $8.06 billion at December 31, 2015, from $3.90 billion at December 31, 2014, largely as a result
of the acquisitions of AmericanWest and Siuslaw, but also augmented by continued strong organic growth. Non-interest-bearing deposits
increased by $1.32 billion, or 102%, to $2.62 billion from $1.30 billion, interest-bearing transaction and savings accounts increased by $2.25
billion, or 123%, to $4.08 billion at December 31, 2015 from $1.83 billion at December 31, 2014, and certificates of deposit increased $583.4
million, or 76%, to $1.35 billion at December 31, 2015 from $770.5 million at December 31, 2014. Core deposits increased to 83% of total
deposits at December 31, 2015, compared to 80% of total deposits one year earlier. In addition to our organic growth in deposits, the acquisitions
of AmericanWest and Siuslaw resulted in a $3.82 billion increase in deposits, including $1.09 billion in non-interest bearing deposits, $2.11
billion in interest-bearing transactions and savings accounts, and $620.8 million in certificates of deposit as of December 31, 2015.
FHLB advances increased $101.1 million, to $133.4 million at December 31, 2015 from $32.3 million at December 31, 2014. The increase
primarily reflects FHLB advances assumed in the acquisition of AmericanWest that are still outstanding as of the end of the year. Other borrowings,
consisting of retail and wholesale repurchase agreements primarily related to customer cash management accounts, increased $21.1 million to
$98.3 million at December 31, 2015, compared to $77.2 million at December 31, 2014. Junior subordinated debentures, which are carried at
fair value, increased $14.5 million to $92.5 million at December 31, 2015 from $78.0 million a year ago, primarily as a result of the $11.8
million assumed in the acquisitions of AmericanWest and Siuslaw Bank. For more information, see Notes 9, 10 and 11 of the Notes to the
Consolidated Financial Statements.
46
Total shareholders’ equity increased $717.2 million, or 123%, to $1.30 billion at December 31, 2015 compared to $582.9 million at December 31,
2014. The increase primarily reflects the $688.8 million value of the 14.6 million common shares issued for the acquisitions of Starbuck and
Siuslaw and $45.2 million of earnings from operations, which was partially offset by the declaration and accrual of $19.9 million in cash dividends
to common shareholders. Tangible common shareholders' equity, which excludes intangible assets, also increased $435.5 million to $1.02 billion,
or 10.68% of tangible assets at December 31, 2015, compared to $580.1 million, or 12.29% at December 31, 2014.
Investments. At December 31, 2015, our consolidated investment portfolio totaled $1.39 billion and consisted principally of U.S. Government
and agency obligations, mortgage-backed and mortgage-related securities, municipal bonds, corporate debt obligations, and asset-backed
securities. From time to time, our investment levels may be increased or decreased depending upon yields available on investment alternatives
and management’s projections as to the demand for funds to be used in our loan origination, deposit and other activities. During the year ended
December 31, 2015, our aggregate investment in securities increased $810.8 million primarily due to the $1.04 billion of securities acquired in
the AmericanWest acquisition. Holdings of mortgage-backed securities increased $658.1 million, municipal bonds increased $135.0 million,
corporate bonds increased $13.0 million and asset-backed securities increased $5.3 million. Partially offsetting those increases, U.S. Government
and agency obligations decreased $716,000.
U.S. Government and Agency Obligations: Our portfolio of U.S. Government and agency obligations had a carrying value of $32.7 million
(also with an amortized cost of $32.5 million) at December 31, 2015, a weighted average contractual maturity of 8.8 years and a weighted average
coupon rate of 3.08%. Nearly half of the U.S. Government and agency obligations we own include call features which allow the issuing agency
the right to call the securities at various dates prior to the final maturity.
Mortgage-Backed Obligations: At December 31, 2015, our mortgage-backed and mortgage-related securities had a carrying value of $984.4
million ($984.5 million at amortized cost, with a net fair value adjustment of $100,000). The weighted average coupon rate of these securities
was 3.54% and the weighted average contractual maturity was 14.5 years, although we receive principal payments on these securities each period
resulting in a much shorter expected average life. As of December 31, 2015, 96% of the mortgage-backed and mortgage-related securities pay
interest at a fixed rate and 4% pay at an adjustable interest rate.
Municipal Bonds: The carrying value of our tax-exempt bonds at December 31, 2015 was $170.8 million ($170.2 million at amortized cost,
with a net fair value adjustment of $563,000), and was comprised of general obligation bonds (i.e., backed by the general credit of the issuer)
and revenue bonds (i.e., backed by revenues from the specific project being financed) issued by cities and counties and various housing authorities,
and hospital, school, water and sanitation districts. We also had taxable bonds in our municipal bond portfolio, which at December 31, 2015
had a carrying value of $135.7 million (also $135.8 million at amortized cost). Many of our qualifying municipal bonds are not rated by a
nationally recognized credit rating agency due to the smaller size of the total issuance and a portion of these bonds have been acquired through
direct private placement by the issuers. We have not experienced any defaults or payment deferrals on our current portfolio of municipal
bonds. Our combined municipal bond portfolio is geographically diverse, with over half within our geographic footprint. At December 31,
2015, our municipal bond portfolio, including taxable and tax-exempt, had a weighted average maturity of approximately 9.6 years and a weighted
average coupon rate of 4.50%.
Corporate Bonds: Our corporate bond portfolio had a carrying value of $39.0 million ($45.3 million at amortized cost, with a net fair value
adjustment of $6.3 million) at December 31, 2015. Long-term adjustable-rate capital securities issued by financial institutions make up nearly
half of our corporate bond portfolio. The market for these capital securities deteriorated significantly in 2008 and 2009 and in our opinion is
still not currently functioning in a meaningful manner. As a result, the fair value estimates for many of these securities are more
subjective. Nonetheless, it is apparent that the values have declined appreciably since purchase, which is reflected in our financial statements
and results of operations, although values have recently improved. During 2015 and 2014 we had approximately $1.9 million and $5.1 million,
respectively, of recovery in our fair value adjustments as a result of the full payoff and sales of several investments in similar collateralized debt
obligations that had previously been valued substantially below their amortized cost. (See “Critical Accounting Policies” above and Note 18 of
the Notes to the Consolidated Financial Statements.) At December 31, 2015, the portfolio had a weighted average maturity of 16.5 years and a
weighted average coupon rate of 2.50%.
Asset-Backed Securities: At December 31, 2015, our asset-backed securities portfolio had a carrying value of $30.7 million (also with an
amortized cost of $31.3 million), and was comprised of securitized pools of student loans issued or guaranteed by the Student Loan Marketing
Association (SLMA) and credit card receivables. The weighted average coupon rate of these securities was 1.67% and the weighted average
contractual maturity was 9.7 years. Approximately 68% of these securities have adjustable interest rates tied to three-month LIBOR while the
remaining securities have fixed interest rates.
47
The following tables set forth certain information regarding carrying values and percentage of total carrying values of our portfolio of securities
—trading and securities—available-for-sale, both carried at estimated fair market value, and securities—held-to-maturity, carried at amortized
cost as of December 31, 2015, 2014 and 2013 (dollars in thousands):
Table 1: Securities
Trading
U.S. Government and agency obligations
Municipal bonds
Corporate bonds
Mortgage-backed or related securities:
Equity securities
Total securities—trading
Available-for-Sale
U.S. Government and agency obligations
Municipal bonds
Corporate bonds
Mortgage-backed or related securities
Asset-backed securities
Equity securities
$
$
$
2015
December 31
2014
2013
Carrying
Value
Percent of
Total
Carrying
Value
Percent of
Total
Carrying
Value
Percent of
Total
1,368
341
18,699
13,663
63
4.0% $
1.0
54.8
40.0
0.2
1,505
1,440
19,118
18,136
59
3.7% $
3.6
47.5
45.1
0.1
1,481
5,023
35,140
20,760
68
2.4%
8.0
56.2
33.3
0.1
34,134
100.0% $
40,258
100.0% $
62,472
100.0%
30,231
143,319
15,981
918,259
30,685
98
2.7% $
12.6
1.4
80.6
2.7
—
29,770
50,028
5,018
300,810
25,395
—
7.2% $
12.2
1.2
73.2
6.2
—
58,660
52,855
6,964
326,610
25,191
—
12.5%
11.2
1.5
69.5
5.3
—
Total securities—available-for-sale
$ 1,138,573
100.0% $
411,021
100.0% $
470,280
100.0%
Held-to-Maturity
U.S. Government and agency obligations
$
1,106
0.5% $
2,146
1.6% $
Municipal bonds
Corporate bonds
Mortgage-backed or related securities
Total securities—held-to-maturity
Estimated market value
162,778
4,273
52,509
73.8
1.9
23.8
119,951
1,800
7,361
91.4
1.4
5.6
1,186
95,926
2,050
3,351
1.2%
93.6
2.0
3.2
$
$
220,666
100.0% $
131,258
100.0% $
102,513
100.0%
226,627
$
137,608
$
103,610
48
The following table shows the maturity or period to repricing of our consolidated portfolio of securities as of December 31, 2015 (dollars in thousands):
Table 2: Securities—Maturity/Repricing and Rates
One Year or Less
After One to Five
Years
After Five to Ten
Years
After Ten to Twenty
Years
After Twenty Years
Total
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
December 31, 2015
$
—
11,152
11,152
—% $ 15,168
458
15,626
1.87
1.87
1.19% $
1.00
1.19
1,338
—
1,338
8,049
4,052
—
12,101
250
29,527
29,777
4,994
16,027
21,021
—
20,893
20,893
161
2.58
2.21
—
2.46
3.00
2.63
2.63
1.25
2.37
2.10
—
1.60
1.60
—
39,644
18,040
—
57,684
5,653
—
5,653
206,174
17,237
223,411
—
—
—
—
1.19
1.65
—
1.93
2.75
—
2.75
1.50
2.05
1.54
—
—
—
—
79,798
26,983
—
106,781
1,050
—
1,050
129,297
4,921
134,218
9,792
—
9,792
—
5.19% $
—
5.19
2.84
2.66
—
2.79
3.52
—
3.52
2.26
2.63
2.28
1.65
—
1.65
—
3,786
803
4,589
1.38% $
1.96
1.48
—
—
—
—% $
—
—
20,292
12,413
32,705
1.46%
1.84
1.61
8,166
110,827
—
118,993
—
—
—
302,582
—
302,582
—
—
—
—
3.61
3.20
—
3.23
—
—
—
2.33
—
2.33
—
—
—
—
—
—
1,833
10,879
2,473
—
2,473
303,199
—
303,199
—
—
—
—
—
2.48
3.15
2.60
—
—
—
2.50
—
2.50
—
—
—
—
135,657
168,948
1,833
306,438
9,426
29,527
38,953
946,246
38,185
984,431
9,792
20,893
30,685
161
2.64
2.88
3.15
2.78
2.12
2.63
2.52
2.19
2.26
2.19
1.65
1.60
1.62
—
U.S. Government and agency
obligations:
Fixed-rate
Adjustable-rate
Municipal bonds:
Fixed-rate taxable
Fixed-rate tax exempt
Adjustable-rate tax exempt
Corporate bonds:
Fixed-rate
Adjustable-rate
Mortgage-backed or related
securities:
Fixed-rate
Adjustable-rate
Asset-backed securities:
Fixed-rate
Adjustable-rate
Equity securities
Total securities—carrying value
$ 95,105
2.20
$ 302,374
1.62
$ 253,179
2.49
$ 426,164
2.57
$ 316,551
2.48
$ 1,393,373
2.30
Total securities—estimated market
value
$ 95,155
$ 302,477
$ 253,860
$ 431,009
$ 316,833
$ 1,399,334
49
Loans and Lending. Our loan portfolio increased $3.48 billion, or 91%, during the year ended December 31, 2015, compared to an increase
of $415.0 million, or 12%, during the year ended December 31, 2014. The AmericanWest acquisition accounted for $2.82 billion of the year-
end loan portfolio and the Siuslaw acquisition accounted for $227.1 million of the year-end loan portfolio, while organic loan growth accounted
for $441.4 million of the increase from the prior year. While we originate a variety of loans, our ability to originate each type of loan is dependent
upon the relative customer demand and competition in each market we serve. We have implemented strategies designed to capture more market
share and achieve increases in targeted loans resulting in strong loan originations in 2015 and 2014. Nonetheless, looking forward, new loan
originations and portfolio balances will continue to be significantly affected by the course of economic activity. For the years ended December 31,
2015, 2014 and 2013, we originated loans, net of repayments and charge-offs, of $741.7 million, $506.0 million and $594.6 million,
respectively. The level of net originations during all three years was significantly impacted by a substantial amount of loan repayments. We
generally sell a significant portion of our newly originated one- to four-family residential mortgage loans to secondary market purchasers. As
a result of the acquisition of AmericanWest Bank in 2015, we began originating multifamily loans for sale, in addition to the multifamily loans
originated for portfolio. Proceeds from sales of loans for the years ended December 31, 2015, 2014 and 2013 totaled $801.6 million (including
$151.9 million from the sale of multifamily loans acquired through the merger with AmericanWest), $379.2 million and $462.5 million,
respectively. See “Loan Servicing Portfolio” below. Loans held for sale increased $41.9 million to $44.7 million at December 31, 2015,
compared to $2.8 million at December 31, 2014.
At various times, we also purchase whole loans and participation interests in loans. During the years ended December 31, 2015, 2014 and 2013,
we purchased $323.5 million, $194.4 million and $48.7 million, respectively, of loans and loan participation interests. The significant increase
in loan purchases in the current year primarily reflects participations in commercial real estate loans.
One- to Four-Family Residential Real Estate Lending: At December 31, 2015, $952.6 million, or 13%, of our loan portfolio, consisted of
permanent loans on one- to four-family residences. We are active originators of one- to four-family residential loans in most communities where
we have established offices in Washington, Oregon, California, Idaho and Utah. Our one- to four-family loan originations, including loans held
for sale and originated for portfolio, totaled $710.7 million for the year ended December 31, 2015, compared to $410.0 million and $511.0
million for the years ended December 31, 2014 and 2013, respectively. Despite the majority of our loan origination volume being sold during
the year, our balance of loans for one- to four-family residences increased by $415.5 million in 2015, largely as a result of loans acquired in the
acquisition of AmericanWest.
Construction and Land Lending: Our construction loan originations have increased for each of the past three years as builders have expanded
production and experienced strong sales in many markets where we operate. We have also experienced a meaningful increase in originations
of construction loans for owner occupants, although construction balances for these loans are modest as the loans convert to one-to-four family
loans upon completion of the homes. As a result, one-to four-family construction loans have increased by $40.0 million in 2013, $19.0 million
in 2014 and $58.6 million in 2015, to total $278.5 million at December 31, 2015. In addition, during the year ended December 31, 2015, land
development loans (both residential and commercial) increased by $46.4 million to $160.0 million at December 31, 2015. Our construction and
land development loan originations including loans for residential and commercial properties totaled $987.5 million for the year ended
December 31, 2015, compared to $684.4 million for the year ended December 31, 2014, and $655.3 million for the year ended December 31,
2013. At December 31, 2015, construction and land loans totaled $574.4 million (including $278.5 million of one- to four-family construction
loans, $126.8 million of residential land or land development loans, $135.9 million of commercial and multifamily real estate construction loans
and $33.2 million of commercial land or land development loans), or 8% of total loans, compared to $411.0 million, or 11%, at December 31,
2014. At December 31, 2015, only $2.3 million of these loans were non-performing. For the years ended December 31, 2015 and 2014,
performing construction loans contributed significantly to our net interest income and profitability.
Commercial and Multifamily Real Estate Lending: We also originate loans secured by multifamily and commercial real estate. Multifamily
and commercial real estate loans originated by us are both fixed- and adjustable-rate loans generally with intermediate terms of five to ten
years. Our commercial real estate portfolio consists of loans on a variety of property types with no significant concentrations by property type,
borrowers or locations. Total balances of multifamily and commercial real estate loans increased $1.99 billion or 127% from the prior year end,
largely as a result of the two bank acquisitions and strong organic growth. At December 31, 2015, our loan portfolio included $3.09 billion of
commercial real estate loans, or 42% of the total loan portfolio. Our portfolio of multifamily loans was much smaller, at $473.0 million, or 6%
of total loans.
Commercial Business Lending: We are active in small- to medium-sized business lending. In addition to providing earning assets, this type of
lending has helped increase our deposit base. For 2015, the acquisitions of AmericanWest and Siuslaw Bank and good production levels for
targeted business loans resulted in a $484.0 million, or 67%, increase in commercial business loans. Although business credit line utilizations
remain low, the increase in commercial business loans is an encouraging sign of improving economic activity as well as additional successful
sales results for our lending offices. At December 31, 2015, commercial business loans totaled $1.21 billion, or 17% of total loans, compared
to $724.0 million, or 19%, at December 31, 2014.
Agricultural Lending: Agriculture is a major industry in many Washington, Oregon, California, Idaho and Utah locations in our service
area. While agricultural loans are not a large part of our portfolio, we routinely make agricultural loans to borrowers with a strong capital base,
sufficient management depth, proven ability to operate through agricultural cycles, reliable cash flows and adequate financial reporting. Payments
on agricultural loans depend, to a large degree, on the results of operation of the related farm entity. The repayment is also subject to other
economic and weather conditions as well as market prices for agricultural products, which can be highly volatile at times. Generally, in recent
years, weather conditions, production levels and market prices have been good for most of our agricultural borrowers. Our 2015 production
levels for agricultural loans were consistent with recent years and at December 31, 2015, agricultural loans totaled $376.5 million, or 5% of the
loan portfolio, compared to $238.5 million, or 6%, at December 31, 2014.
50
Consumer and Other Lending: Consumer lending has traditionally been a modest part of our business with loans made primarily to accommodate
our existing customer base. In recent years, demand for consumer loans has been restrained; however, outstanding balances have increased
modestly from organic production despite mortgage refinancing activity that has resulted in elevated repayments on home equity lines of
credit. The significant increase in consumer loan balances in 2015 and 2014 largely reflects loans acquired as part of the bank acquisitions in
2015 and the Branch purchase in 2014. At December 31, 2015, our consumer loans increased $287.7 million to $636.9 million, or 9% of our
loan portfolio, compared to $349.2 million, or 9%, at December 31, 2014. As of December 31, 2015, 75% of our consumer loans were secured
by one- to four-family real estate, including home equity lines of credit. Credit card balances totaled $28 million at December 31, 2015 compared
to $24 million a year earlier.
Loan Servicing Portfolio: At December 31, 2015, we were servicing $2.33 billion of loans serviced for others and held $9.6 million in escrow
for our portfolio of loans serviced for others. The loan servicing portfolio at December 31, 2015 was composed of $976.8 million of Freddie
Mac residential mortgage loans, $700.8 million of Fannie Mae residential mortgage loans, $404.6 million of Oregon Housing residential mortgage
loans and $251.1 million of other loans serviced for a variety of investors. The portfolio included loans secured by property located primarily
in the states of Washington, Oregon and Idaho. For the year ended December 31, 2015, we recognized $1.7 million of loan servicing fees in
our results of operations, which was net of $3.2 million of amortization for mortgage servicing rights (MSRs) and included no impairment
charges or reversals for a valuation adjustment to MSRs.
Mortgage Servicing Rights: For the years ended December 31, 2015, 2014 and 2013, we capitalized $5.3 million, $3.0 million, and $2.9 million,
respectively, of MSRs relating to loans sold with servicing retained. We acquired $2.2 million in MSRs from Siuslaw Bank in 2015, while no
MSRs were purchased in 2014 and 2013. Amortization of MSRs for the years ended December 31, 2015, 2014 and 2013 was $3.2 million, $2.1
million, and $2.4 million, respectively. Management periodically evaluates the estimates and assumptions used to determine the carrying values
of MSRs and the amortization of MSRs. At December 31, 2015, our MSRs were carried at a value of $13.3 million, net of amortization, compared
to $9.0 million at December 31, 2014.
51
The following table sets forth the composition of the Company’s loan portfolio, by type of loan as of the dates indicated (dollars in thousands):
Table 3: Loan Portfolio Analysis
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
Commercial construction
Multifamily construction
One- to four-family construction
Land and land development:
2015
2014
December 31
2013
2012
2011
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
$ 1,327,807
1,765,353
472,976
72,103
63,846
278,469
18.2% $
24.1
6.5
1.0
0.9
3.8
546,783
856,942
167,524
17,337
60,193
219,889
102,435
11,152
723,964
238,499
537,108
222,205
127,003
14.3% $
22.4
4.4
0.5
1.6
5.7
2.7
0.3
18.9
6.2
14.0
5.8
3.3
502,601
692,457
137,153
12,168
52,081
200,864
75,695
10,450
682,169
228,291
529,494
173,188
121,834
14.7% $
20.2
4.0
0.4
1.5
5.9
2.2
0.3
20.0
6.7
15.5
5.1
3.5
489,581
583,641
137,504
30,229
22,581
160,815
77,010
13,982
618,049
230,031
581,670
170,123
120,498
15.1% $
18.0
4.3
0.9
0.7
5.0
2.4
0.4
19.1
7.1
18.0
5.3
3.7
469,806
621,622
139,710
42,391
19,436
144,177
97,491
15,197
601,440
218,171
642,501
181,049
103,347
14.2%
18.9
4.2
1.3
0.6
4.4
3.0
0.5
18.2
6.6
19.5
5.5
3.1
Residential
Commercial
Commercial business
Agricultural business, including secured by
farmland
One- to four-family real estate
Consumer secured by one- to four-family real
estate
Consumer—other
126,773
33,179
1,207,944
376,531
952,633
478,420
158,470
1.7
0.5
16.5
5.1
13.0
6.5
2.2
Total loans outstanding
7,314,504
100.0%
3,831,034
100.0%
3,418,445
100.0%
3,235,714
100.0%
3,296,338
100.0%
Less allowance for loan losses
(78,008)
(75,907)
(74,258)
(77,491)
(82,912)
Net loans
$ 7,236,496
$ 3,755,127
$ 3,344,187
$ 3,158,223
$ 3,213,426
52
The following table sets forth the Company’s loans by geographic concentration at December 31, 2015 (dollars in thousands):
Table 4: Loans by Geographic Concentration
Washington
Oregon
California
Idaho
Utah
Other
Total
Total loans outstanding
$3,343,112
$1,446,531
$1,234,016
$ 496,870
$ 325,011
$ 468,964
$7,314,504
Percent of total loans
45.7%
19.8%
16.9%
6.8%
4.4%
6.4%
100.0%
The following table sets forth certain information at December 31, 2015 regarding the dollar amount of loans maturing in our portfolio based
on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances are net of unamortized
premiums and discounts, include loans held for sale and exclude the allowance for loan losses (in thousands):
Table 5: Loans by Maturity
Maturing in
One Year or
Less
Maturing
After One to
Three Years
Maturing
After Three
to Five Years
Maturing
After Five to
Ten Years
Maturing
After Ten
Years
$
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
Commercial construction
Multifamily construction
One- to four-family construction
Land and land development:
Residential
Commercial
Commercial business
Agricultural business, including secured
by farmland
One- to four-family real estate
Consumer secured by one- to four-family
real estate
Consumer—other
$
60,326
98,208
25,049
40,786
40,430
252,422
65,667
16,331
543,500
157,467
24,428
7,050
23,643
$
147,167
225,880
31,451
19,520
23,172
20,127
57,953
10,097
167,435
56,539
20,839
9,738
18,026
$
109,230
124,114
10,054
—
—
—
3,153
2,996
233,738
48,575
22,326
5,376
16,586
$
756,519
895,065
131,689
6,273
244
3,962
—
3,230
199,789
98,867
56,935
23,896
34,951
254,565
422,086
274,733
5,524
—
1,958
—
525
63,482
15,083
828,105
432,360
65,264
Total
$ 1,327,807
1,765,353
472,976
72,103
63,846
278,469
126,773
33,179
1,207,944
376,531
952,633
478,420
158,470
Total loans
$ 1,355,307
$
807,944
$
576,148
$ 2,211,420
$ 2,363,685
$ 7,314,504
Contractual maturities of loans do not necessarily reflect the actual life of such assets. The average life of loans typically is substantially less
than their contractual maturities because of principal repayments and prepayments. In addition, due-on-sale clauses on certain mortgage loans
generally give us the right to declare loans immediately due and payable in the event that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends to increase however when current mortgage loan market rates are
substantially higher than rates on existing mortgage loans and, conversely, decreases when rates on existing mortgage loans are substantially
higher than current mortgage loan market rates.
53
The following table sets forth the dollar amount of all loans maturing after December 31, 2016 which have fixed interest rates and floating or
adjustable interest rates (in thousands):
Table 6: Loans Maturing after One Year
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
Commercial construction
Multifamily construction
One- to four-family construction
Land and land development:
Residential
Commercial
Commercial business
Agricultural business, including secured by farmland
One- to four-family real estate
Consumer secured by one- to four-family real estate
Consumer—other
Fixed Rates
Floating or
Adjustable
Rates
$
290,340
643,872
102,312
1,850
7,608
5,980
9,063
9,437
354,907
80,415
612,953
19,003
88,934
$
$
977,141
1,023,273
345,615
29,467
15,809
20,066
52,043
7,410
309,538
138,649
315,252
452,367
45,893
Total
1,267,481
1,667,145
447,927
31,317
23,417
26,046
61,106
16,847
664,445
219,064
928,205
471,370
134,827
Total loans maturing after one year
$
2,226,674
$
3,732,523
$
5,959,197
Deposits. We made further progress in 2015 implementing our strategies to strengthen our franchise by remixing our deposits away from higher
cost certificates of deposit and emphasizing core deposit activity in non-interest-bearing and other transaction and savings accounts. This progress
was significantly augmented by the acquisitions of Siuslaw Bank and AmericanWest, as both banks had strong core deposit balances and
franchises. Increasing core deposits (transaction and savings accounts) is a fundamental element of our business strategy. This strategy continues
to improve our cost of funds and increase the opportunity for deposit fee revenues, while stabilizing our funding base. Total deposits increased
$4.16 billion, or 107%, to $8.06 billion at December 31, 2015 from $3.90 billion at December 31, 2014, non-interest-bearing deposits increased
by $1.32 billion, or 102%, to $2.62 billion at year end from $1.30 billion at December 31, 2014, and interest-bearing transaction and savings
accounts increased by $2.25 billion, or 123%, to $4.08 billion at December 31, 2015 compared to $1.83 billion a year earlier. Our organic growth
of core deposits followed similarly strong results in 2014 and, coupled with the acquired deposits, was primarily responsible for the reduced
deposit costs and helped us to achieve the strong net interest margin we experienced in 2015 and a 33% increase in deposit fees and service
charges compared to the preceding year. Certificates of deposit increased $583.4 million, or 76%, to $1.35 billion at December 31, 2015 from
$770.5 million at December 31, 2014. The increase in certificate balances in 2015 includes a $158.1 million increase in brokered deposits to
$162.9 million at December 31, 2015, reflecting brokered deposits acquired in the AmericanWest acquisition. In addition to our organic growth
in deposits, the acquisitions of AmericanWest and Siuslaw resulted in a $3.82 billion increase in deposits, including $1.09 billion in non-interest
bearing deposits, $2.11 billion in interest-bearing transaction and savings accounts, and $620.8 million in certificates of deposit as of December 31,
2015.
54
The following table sets forth the balances of deposits in the various types of accounts offered by the Banks at the dates indicated (dollars in thousands):
Table 7: Deposits
Non-interest-bearing checking
Interest-bearing checking
Regular savings
Money market
Total transaction and savings accounts
Certificates maturing:
Within one year
After one year, but within two years
After two years, but within five years
After five years
Total certificate accounts
December 31
2015
Percent of
Total
Increase
(Decrease)
Amount
2014
Percent of
Total
2013
Increase
(Decrease)
Amount
Percent of
Total
32.5% $ 1,320,752
720,366
14.4
383,500
16.0
1,148,146
20.3
3,572,764
83.2
$ 1,298,866
439,480
901,142
488,946
3,128,434
33.3% $
11.3
23.1
12.5
80.2
183,520
16,570
102,378
80,735
383,203
$ 1,115,346
422,910
798,764
408,211
2,745,231
12.2
2.8
1.7
0.1
16.8
420,692
108,657
55,350
(1,345)
583,354
564,501
117,724
83,732
4,559
770,516
14.5
3.1
2.1
0.1
19.8
(95,893)
(65)
(7,148)
927
(102,179)
660,394
117,789
90,880
3,632
872,695
30.8%
11.7
22.1
11.3
75.9
18.2
3.3
2.5
0.1
24.1
Amount
$ 2,619,618
1,159,846
1,284,642
1,637,092
6,701,198
985,193
226,381
139,082
3,214
1,353,870
Total Deposits
$ 8,055,068
100.0% $ 4,156,118
$ 3,898,950
100.0% $
281,024
$ 3,617,926
100.0%
Included in Total Deposits:
Public transaction accounts
Public interest-bearing certificates
Total public deposits
Total brokered deposits
$
$
$
209,430
31,281
240,711
2.6% $
0.4
106,576
(4,065)
$
102,854
35,346
2.6% $
0.9
15,333
(16,119)
$
87,521
51,465
3.0% $
102,511
$
138,200
3.5% $
(786) $
138,986
2.4%
1.4
3.8%
162,936
2.0% $
158,137
$
4,799
0.1% $
508
$
4,291
0.1%
55
The following table indicates the amount of the Banks’ certificates of deposit with balances equal to or greater than $100,000 by time remaining
until maturity as of December 31, 2015 (in thousands):
Table 8: Maturity Period—$100,000 or greater CDs
Maturing in three months or less
Maturing after three months through six months
Maturing after six months through twelve months
Maturing after twelve months
Total
Certificates of
Deposit $100,000
or Greater
$
$
229,253
82,908
164,022
173,391
649,574
The following table provides additional detail on geographic concentrations of our deposits at December 31, 2015 (in thousands):
Table 9: Geographic Concentration of Deposits
Washington
Oregon
California
Idaho
Utah
Total
Total deposits
$
4,219,304
$
1,648,421
$
1,592,365
$
435,099
$
159,879
$
8,055,068
Percent of total deposits
52.4%
20.4%
19.8%
5.4%
2.0%
100.0%
Borrowings. The FHLB-Des Moines serves as our primary borrowing source. To access funds, we are required to own a sufficient level of
capital stock in the FHLB-Des Moines and may apply for advances on the security of such stock and certain of our mortgage loans and securities
provided that certain creditworthiness standards have been met. At December 31, 2015, we had $133.4 million of FHLB advances outstanding
(at fair value) at a weighted average rate of 0.68%, an increase of $101.1 million compared to a year earlier. Also at December 31, 2015, we
had an investment of $16.1 million in FHLB capital stock. At that date, Banner Bank was authorized by the FHLB-Des Moines to borrow up
to $1.77 billion under a blanket floating lien security agreement, while Islanders Bank was approved to borrow up to $28.0 million under a
similar agreement.
The following table provides additional detail on our FHLB advances as of December 31, 2015 and 2014 (dollars in thousands):
Table 10: FHLB Advances Outstanding
December 31
2015
2014
Amount
Weighted
Average Rate
Amount
Weighted
Average Rate
Maturing in one year or less
Maturing after one year through three years
Maturing after three years through five years
Maturing after five years
$
Total FHLB advances, at par
Fair value adjustment
Total FHLB advances, carried at fair value
$
107,600
25,000
—
188
132,788
593
133,381
0.55% $
1.19
—
5.94
0.68
$
32,000
—
—
196
32,196
54
32,250
0.27%
—
—
5.94
0.27
At certain times the Federal Reserve Bank has also served as an important source of borrowings. The Federal Reserve Bank provides credit
based upon acceptable loan collateral, which includes certain loan types not eligible for pledging to the FHLB-Des Moines. At December 31,
2015, based upon our available unencumbered collateral, Banner Bank was eligible to borrow $735.0 million from the Federal Reserve Bank;
however, at that date we had no funds borrowed under this arrangement.
We also issue retail repurchase agreements to customers that are primarily related to customer cash management accounts and in the past have
borrowed funds through the use of secured wholesale repurchase agreements with securities brokers. In each case, the repurchase agreements
are generally due within 90 days. At December 31, 2015, retail and wholesale repurchase agreements totaling $98.3 million, with a weighted
average rate of 0.29%, were secured by pledges of certain mortgage-backed securities and agency securities. Retail repurchase agreement
balances, which are primarily associated with customer sweep account arrangements, increased $16.1 million, or 21%, from the 2014 year-end
balance. We had $5.0 million of borrowings under wholesale repurchase agreements at December 31, 2015, compared to none at December 31,
2014.
56
We have an aggregate of $136.0 million, net of repayments, of trust preferred securities (TPS). This includes $120.0 million issued by us and
$16.0 million acquired in the acquisitions of Starbuck and Siuslaw. The junior subordinated debentures associated with the TPS have been
recorded as liabilities on our Consolidated Statements of Financial Condition, although portions of the TPS qualify as Tier 1 or Tier II capital
for regulatory capital purposes. The junior subordinated debentures are carried at fair value on our Consolidated Statements of Financial Condition
and have an estimated fair value of $92.5 million at December 31, 2015. At December 31, 2015, the TPS had a weighted average rate of
2.76%. See Note 11, Junior Subordinated Debentures and Mandatorily Redeemable Trust Preferred Trust Preferred Securities, of the Notes to
the Consolidated Financial Statements for additional information with respect to the TPS.
Asset Quality. Achieving and maintaining a moderate risk profile by employing appropriate underwriting standards, avoiding excessive asset
concentrations and aggressively managing troubled assets has been and will continue to be a primary focus for us. As a result, our non-performing
assets declined substantially from 2011 to 2014. The increase in non-performing assets in 2015 was primarily the result of REO properties
acquired in the acquisitions of AmericanWest and Siuslaw Bank. All of our key credit quality metrics have improved compared to a year ago,
and as a result our collection costs have been further reduced. In addition, our reserve levels are substantial and, as a result of our impairment
analysis and charge-off actions, reflect current appraisals and valuation estimates as well as recent regulatory examination results. While our
non-performing assets and credit costs have been materially reduced, we continue to be actively engaged with our borrowers in resolving
remaining problem assets and with the effective management of real estate owned as a result of foreclosures.
Non-performing assets increased to $27.1 million, or 0.28% of total assets, at December 31, 2015, from $20.2 million, or 0.43% of total assets,
at December 31, 2014, and decreased from $28.9 million, or 0.66% of total assets, at December 31, 2013. Reflecting lingering weakness in
certain segments of the economy and property values which now have generally stabilized but are lower than when many of the related loans
were originated, we continued to maintain a strong allowance for loan losses at year end even though non-performing loans declined. At
December 31, 2015, our allowance for loan losses was $78.0 million, or 512% of non-performing loans, compared to $75.9 million, or 454%
of non-performing loans at December 31, 2014. We continue to believe our level of non-performing loans and assets is manageable and further
believe that we have sufficient capital and human resources to manage the collection of our non-performing assets in an orderly fashion.
Loans are reported as restructured when we grant concessions to a borrower experiencing financial difficulties that we would not otherwise
consider. As a result of these concessions, restructured loans or TDRs are impaired as the Banks will not collect all amounts due, both principal
and interest, in accordance with the terms of the original loan agreement. If any restructured loan becomes delinquent or other matters call into
question the borrower's ability to repay full interest and principal in accordance with the restructured terms, the restructured loan(s) would be
reclassified as nonaccrual. At December 31, 2015, we had $21.8 million of restructured loans currently performing under their restructured
terms.
Loans acquired in the merger transactions with deteriorated credit quality are accounted for as purchased credit impaired pools. Typically this
would include loans that were considered non-performing or restructured as of the acquisition date. Accordingly, subsequent to acquisition, loans
included in the purchased credit impaired pools are not reported as non-performing loans based upon their individual performance status, so the
categories of nonaccrual, impaired and 90 day past due and accruing do not include any purchased credit impaired loans. Purchase credit impaired
loans were $58.6 million at December 31, 2015, compared to none in the prior years.
57
The following table sets forth information with respect to our non-performing assets and restructured loans, at the dates indicated (dollars in
thousands):
Table 11: Non-Performing Assets
Nonaccrual loans: (1)
Secured by real estate:
Commercial
Multifamily
Construction/land
One- to four-family
Commercial business
Agricultural business, including secured by farmland
Consumer
Loans more than 90 days delinquent, still on accrual:
Secured by real estate:
One- to four-family
Commercial business
Agricultural business, including secured by farmland
Consumer
Total non-performing loans
Securities on nonaccrual
REO assets held for sale, net (2)
Other repossessed assets held for sale, net
2015
2014
2013
2012
2011
December 31
$
3,751
—
2,260
4,700
2,159
697
703
14,270
899
8
—
45
952
15,222
—
11,627
268
$
1,132
—
1,275
8,834
537
1,597
1,187
14,562
2,095
—
—
79
2,174
$
6,287
—
1,193
12,532
723
—
1,173
21,908
2,611
—
105
144
2,860
16,736
24,768
—
3,352
76
—
4,044
115
$
6,579
—
3,672
12,964
4,750
—
3,396
31,361
2,877
—
—
152
3,029
34,390
—
15,778
75
$
9,226
362
27,731
17,408
13,460
1,896
2,905
72,988
2,147
4
—
173
2,324
75,312
500
42,965
74
Total non-performing assets
$
27,117
$
20,164
$
28,927
$
50,243
$ 118,851
Total non-performing loans to net loans before allowance for
loan losses
Total non-performing loans to total assets
Total non-performing assets to total assets
Restructured loans (3)
Loans 30-89 days past due and on accrual
0.21%
0.16%
0.28%
0.44%
0.35%
0.43%
0.72%
0.56%
0.66%
1.06%
0.81%
1.18%
2.28%
1.77%
2.79%
$
$
21,786
18,834
$
$
29,154
8,387
$
$
47,428
8,784
$
$
57,462
11,685
$
$
54,533
9,962
(1)
Includes $2.3 million of non-accrual restructured loans. For the year ended December 31, 2015, $1.1 million in interest income would
have been recorded had nonaccrual loans been current, and no interest income on these loans was included in net income for this period.
(2) Real estate acquired by us as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate held for sale until it is
sold. When property is acquired, it is recorded at the lower of the estimated fair value of the property, less expected selling costs, or the
carrying value of the defaulted loan. Subsequent to foreclosure, the property is carried at the lower of the foreclosed amount or net
realizable value. Upon receipt of a new appraisal and market analysis, the carrying value is written down through the establishment of
a specific reserve to the anticipated sales price, less selling and holding costs.
(3) These loans are performing under their restructured terms.
In addition to the non-performing loans noted in Table 11 and purchased credit impaired loans as of December 31, 2015, we had other classified
loans with an aggregate outstanding balance of $35.8 million that are not on nonaccrual status with respect to which known information concerning
possible credit problems with the borrowers or the cash flows of the properties securing the respective loans has caused management to be
concerned about the ability of the borrowers to comply with present loan repayment terms. This may result in the future inclusion of such loans
in the nonaccrual loan category.
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. The individual carrying values of these assets are reviewed for impairment at least annually and any
additional impairment charges are expensed to operations. For the years ended December 31, 2015, 2014 and 2013, we recognized $216,000,
$36,000 and $785,000, respectively, of these impairment charges. During the years ended December 31, 2015, 2014 and 2013, we received net
58
proceeds from the sale of REO of $4.7 million, $4.9 million and $16.9 million, respectively, and recorded net gains on those sales of $351,000,
$973,000 and $2.5 million, respectively. At December 31, 2015, REO totaled $11.6 million.
Comparison of Results of Operations for the Years Ended December 31, 2015 and 2014
For the year ended December 31, 2015, we had net income of $45.2 million, or $1.89 per diluted share. This compares to net income of $54.1
million, or $2.79 per diluted share, for the year ended December 31, 2014. Results for 2014 included a $9.1 million bargain purchase gain ($5.8
million net of income tax) related to the Branch purchase, which net of related acquisition expenses and taxes contributed $0.30 to diluted net
income per share. Acquisition-related expenses were $26.1 million, or $0.76 per diluted share net of tax benefit, in 2015 compared to $4.3
million, or $0.17 per diluted share net of tax benefit, in 2014.
Our operating results depend largely on our net interest income which, as explained below, increased by $62.4 million to $242.3 million, primarily
because of the acquisition of AmericanWest and Siuslaw Bank, as well as significant organic loan and deposit growth. Our operating results for
the year ended December 31, 2015 also reflected an increase in non-interest income, as strong growth in deposit fees and other service charges
and revenues from mortgage banking operations more than offset the adverse variance from changes in valuation of financial instruments carried
at fair value and the nonrecurring 2014 bargain purchase gain . Excluding fair value and OTTI adjustments, net gains on sale of securities and
the bargain purchase gain in 2014, our non-interest income from core operations increased by $19.1 million to $63.6 million for the year ended
December 31, 2015 compared to $44.5 million the preceding year, primarily as a result of a $10.1 million increase in deposit fees and other
service charges and a $7.5 million increase in mortgage banking operations. This increase in non-interest income from core operations, coupled
with the increase in net interest income, produced an increase of $81.6 million, or 36%, in revenue from core operations to $305.9 million for
the year ended December 31, 2015 compared to $224.4 million for the year ended December 31, 2014. Non-interest expense increased to $236.6
million for the year ended December 31, 2015 compared with $153.7 million for the year ended December 31, 2014 largely as a result of
acquisition-related expenses and incremental costs associated with acquiring and operating the 98 branches acquired in the AmericanWest
acquisition on October 1, 2015 and the ten Siuslaw branches acquired in March 2015, as well as a full year's expense related to the Branch
purchase in June 2014 and generally increased compensation, occupancy and payment and card processing services reflecting increased transaction
volume.
Net Interest Income. Net interest income before provision for loan losses increased by $62.4 million, or 35%, to $242.3 million for the year
ended December 31, 2015, compared to $179.9 million one year earlier largely reflecting the acquisitions of AmericanWest and Siuslaw Bank
and continued client acquisition. Net interest margin was enhanced by the amortization of acquisition accounting discounts on purchased loans
received in Banner's acquisitions, which is accreted into loan interest income, as well as by net premiums on non-market-rate certificate of
deposit liabilities assumed which are amortized as a reduction to deposit interest expense. The net interest margin of 4.10% for the year ended
December 31, 2015 was three basis points higher than the prior year reflecting seven basis points from acquisition accounting adjustments,
compared to just one basis point from acquisition accounting adjustments in 2014. The average yield on interest-earning assets for the year
ended December 31, 2015 of 4.31% was flat compared to the prior year as favorable purchase accounting adjustments and modest changes in
the mix of earning assets offset the impact of the low interest rate environment on loan yields. Funding costs were lower, as the average cost of
funding liabilities decreased by five basis points to 0.22% as compared to the prior year. As a result, the net interest spread increased to 4.09%
for the year ended December 31, 2015 compared to 4.04% for the prior year.
Interest Income. Interest income for the year ended December 31, 2015 was $254.4 million, compared to $190.7 million for the prior year, an
increase of $63.8 million, or 33%. The increase in interest income occurred as a result of the significant increase in the average balances of
interest-earning assets. The average balance of interest-earning assets was $5.90 billion for the year ended December 31, 2015, an increase of
$1.48 billion, or 34%, compared to $4.42 billion one year earlier. The yield on average interest-earning assets was 4.31% for both the years
ended December 31, 2015 and 2014. The flat yield on earning assets reflects the continuing erosion of yields as loans mature or prepay and are
replaced by lower yielding assets in the current low interest rate environment partially offset by the positive impact of the purchase accounting
loan discount accretion, as well as modest improvement in securities yields and changes in the asset mix. Loan yields decreased five basis points
to 4.78% for the year ended December 31, 2015 compared to 4.83% in the preceding year, reflecting a further decline in average loan rates which
was only partially offset by the loan discount accretion. Average loans receivable for the year ended December 31, 2015 increased $1.28 billion,
or 35%, to $4.96 billion, compared to $3.68 billion for the prior year. Interest income on loans increased by $59.8 million, or 34%, to $237.3
million for the year ended December 31, 2015, from $177.5 million for the prior year, reflecting the impact of the $1.28 billion increase in
average loan balances and the five basis point decrease in the average yield on loans.
The combined average balance of mortgage-backed securities, other investment securities, daily interest-bearing deposits and FHLB stock
increased to $941.0 million for the year ended December 31, 2015 (excluding the effect of fair value adjustments), compared to $740.3 million
for the year ended December 31, 2014, accounting for most of the $4.0 million increase in interest and dividend income compared to the prior
year. The average yield on the combined portfolio increased to 1.82% for the year ended December 31, 2015, from 1.77% for the prior year.
Portfolio yields improved from higher interest rates on the securities acquired in the AmericanWest acquisition. The average yield on this
portfolio also benefited from a $15.2 million reduction in the average balance of FHLB stock which had a very low 0.67% dividend yield. For
the year ended December 31, 2015, the average yield on mortgage-backed securities increased 17 basis points to 1.85% compared to the prior
year, while the yield on other securities increased four basis points to 2.45% compared to the prior year.
Interest Expense. Interest expense for the year ended December 31, 2015 was $12.2 million, compared to $10.8 million for the prior year, an
increase of $1.4 million, or 13%. The increase in interest expense occurred as a result of a $1.42 billion, or 35%, increase in average funding
liabilities, partially offset by a five basis point decrease in the average cost of all funding liabilities to 0.22% for the year ended December 31,
2015, from 0.27% for the year ended December 31, 2014. This increase in average funding liabilities reflects increases in core deposits, including
59
non-interest-bearing deposits, interest-bearing transaction and savings accounts, and certificates of deposits reflecting the acquisitions of
AmericanWest and Siuslaw Bank as well as organic growth. The growth in non-interest-bearing deposits and other core deposits continues to
significantly contribute to our reduced funding costs.
Deposit interest expense increased $807,000, or 11%, to $8.4 million for the year ended December 31, 2015 compared to $7.6 million for the
prior year as a result of a $1.39 billion, or 37%, increase in the average balance of deposits, partially offset by a four basis point decrease in the
cost of deposits. Average deposit balances increased to $5.21 billion for the year ended December 31, 2015, from $3.82 billion for the year
ended December 31, 2014, while the average rate paid on deposit balances decreased to 0.16% in the current year from 0.20% for the prior
year. The cost of interest-bearing deposits decreased by five basis points to 0.24% for the year ended December 3, 2015 compared to 0.29% in
the prior year. Also contributing to the decrease in total deposit costs was a $570.9 million increase in the average balances of non-interest-
bearing accounts during 2015. In addition, amortization of acquisition accounting net premiums on certificates of deposit reduced the cost of
deposits by three basis points in the fourth quarter 2015 and by one basis point for the full year. Deposit costs are significantly affected by
changes in the level of market interest rates; however, changes in the average rate paid for interest-bearing deposits frequently tend to lag changes
in market interest rates and there was no noticeable effect from the recent increase in certain short-term market rates on our cost of deposits.
Further, continuing changes in our deposit mix, especially growth in lower cost transaction and savings accounts, in particular non-interest-
bearing deposits, through both acquisitions and organic growth meaningfully contributed to the decrease in our funding costs.
Average FHLB advances (excluding the effect of fair value adjustments) increased to $49.8 million for the year ended December 31, 2015,
compared to $39.1 million for the prior year, and the average rate paid on FHLB advances for the year ended December 31, 2015 increased to
0.62% from 0.32% for the year ended December 31, 2014. Average FHLB advances increased primarily as a result of the acquisition of
AmericanWest. The increases in average balances and the average rate paid on FHLB advances were responsible for the $186,000 increase in
the related interest expense to $311,000 for the year ended December 31, 2015, from $125,000 in the prior year.
Other borrowings consist primarily of retail repurchase agreements with customers secured by certain investment securities. The average balance
for other borrowings increased $10.1 million to $94.2 million during the current year from $84.1 million one year earlier, and the average rate
on other borrowings increased to 0.22% from 0.20% a year earlier. As a result, interest expense for other borrowing increased to $211,000 for
the year ended December 31, 2015, compared to $172,000 for the year ended December 31, 2014.
Junior subordinated debentures which were issued in connection with trust preferred securities had an average balance of $132.6 million (excluding
the effect of fair value adjustments) for the year ended December 31, 2015, compared to $123.7 million for the year ended December 31, 2014.
The increase in the average balance of junior subordinated debentures compared to a year earlier reflects the obligations assumed in connection
with the two bank acquisitions. During 2015, the average rate increased to 2.45% compared to 2.36% for 2014. Our junior subordinated
debentures are adjustable-rate instruments with repricing frequencies of three months based upon the three-month LIBOR index. A higher level
of LIBOR, particularly in the fourth quarter of 2015, resulted in the higher cost of the junior subordinated debentures for the year ended
December 31, 2015 compared to the prior year.
Table 12, Analysis of Net Interest Spread, presents, for the periods indicated, our condensed average balance sheet information, together with
interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing
liabilities. Average balances are computed using daily average balances. (See the footnotes to the tables for more information on average
balances.)
60
The following table provides an analysis of our net interest spread for the last three years (dollars in thousands):
Table 12: Analysis of Net Interest Spread
Interest-earning assets:
Mortgage loans
Commercial/agricultural loans
Consumer and other loans
Total loans (1)
Mortgage-backed securities
Other securities
Interest-bearing deposits with banks
FHLB stock
Total investment securities
Total interest-earning assets
Non-interest-earning assets
Total assets
Deposits:
Interest-bearing checking accounts
Savings accounts
Money market accounts
Certificates of deposit
Total interest-bearing deposits
Non-interest-bearing deposits
Total deposits
Other interest-bearing liabilities:
FHLB advances
Other borrowings
Junior subordinated debentures
Total borrowings
Total funding liabilities
Other non-interest-bearing liabilities (2)
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest income/rate spread
Net interest margin
Average interest-earning assets / average interest-
bearing liabilities
Average interest-earning assets / average funding
liabilities
Year Ended December 31, 2015
Year Ended December 31, 2014
Year Ended December 31, 2013
Average
Balance
Interest and
Dividends
Yield/
Cost (3)
Average
Balance
Interest and
Dividends
Yield/
Cost (3)
Average
Balance
Interest and
Dividends
Yield/
Cost (3)
183,260
46,053
7,979
237,292
9,049
7,646
334
112
17,141
254,433
518
1,511
1,538
4,818
8,385
—
8,385
311
211
3,247
3,769
12,154
$
$
$ 3,754,386
1,076,440
130,367
4,961,193
490,002
311,701
122,479
16,768
940,950
5,902,143
413,503
$ 6,315,646
$
634,398
1,134,849
747,019
928,545
3,444,811
1,764,539
5,209,350
49,808
94,176
132,597
276,581
5,485,931
17,051
5,502,982
812,664
$ 6,315,646
133,576
36,793
7,172
177,541
5,779
7,103
204
34
13,120
190,661
347
1,310
776
5,145
7,578
—
7,578
125
172
2,914
3,211
10,789
$
$
4.88% $ 2,681,747
882,291
4.28
115,226
6.12
3,679,264
4.78
344,571
1.85
295,082
2.45
68,696
0.27
31,981
0.67
740,330
1.82
4,419,594
4.31
205,378
$ 4,624,972
0.08
0.13
0.21
0.52
0.24
—
0.16
0.62
0.22
2.45
1.36
0.22
$
428,875
856,736
461,372
875,340
2,622,323
1,193,656
3,815,979
39,121
84,126
123,716
246,963
4,062,942
(1,991)
4,060,951
564,021
$ 4,624,972
124,859
35,622
6,723
167,204
5,168
7,108
214
18
12,508
179,712
380
1,572
950
6,835
9,737
—
9,737
99
192
2,968
3,259
12,996
$
$
4.98% $ 2,388,222
783,076
4.17
104,469
6.22
3,275,767
4.83
335,680
1.68
320,283
2.41
85,178
0.30
36,154
0.11
777,295
1.77
4,053,062
4.31
204,077
$ 4,257,139
0.08
0.15
0.17
0.59
0.29
—
0.20
0.32
0.20
2.36
1.30
0.27
$
398,668
763,318
410,031
943,268
2,515,285
1,000,208
3,515,493
18,935
84,961
123,716
227,612
3,743,105
(11,970)
3,731,135
526,004
$ 4,257,139
5.23%
4.55
6.44
5.10
1.54
2.22
0.25
0.05
1.61
4.43
0.10
0.21
0.23
0.72
0.39
—
0.28
0.52
0.23
2.40
1.43
0.35
$
242,279
4.09%
4.10%
158.60%
107.59%
(footnotes follow)
$
179,872
4.04%
4.07%
154.03%
108.78%
$
166,716
4.08%
4.11%
147.77%
108.28%
61
(1) Average balances include loans accounted for on a nonaccrual basis and loans 90 days or more past due. Amortization of net deferred
loan fees/costs is included with interest on loans.
(2) Average other non-interest-bearing liabilities include fair value adjustments related to FHLB advances and junior subordinated debentures.
(3) Yields and costs have not been adjusted for the effect of tax-exempt interest.
The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown (in
thousands). Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied
by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Effects on interest
income attributable to changes in rate and volume (changes in rate multiplied by changes in volume) have been allocated between changes in
rate and changes in volume (in thousands):
Table 13: Rate/Volume Analysis
Interest-earning assets:
Mortgage loans
Commercial/agricultural loans
Consumer and other loans
Total loans (1)
Mortgage-backed securities
Other securities
Interest-bearing deposits with banks
FHLB stock
Total investment securities
Year Ended December 31, 2015
Compared to Year Ended
December 31, 2014
Increase (Decrease) in
Income/Expense Due to
Year Ended December 31, 2014
Compared to Year Ended
December 31, 2013
Increase (Decrease) in
Income/Expense Due to
Rate
Volume
Net
Rate
Volume
Net
$
$
(2,725) $
977
(123)
(1,871)
52,408
8,284
928
61,620
632
137
(18)
180
931
2,638
406
148
(102)
3,090
49,683
9,261
805
59,749
3,270
543
130
78
4,021
$
(6,105) $
(3,116)
(226)
(9,447)
14,822
4,286
675
19,783
$
8,717
1,170
449
10,336
471
579
35
20
1,105
139
(582)
(45)
(4)
(492)
610
(3)
(10)
16
613
Total net change in interest income on interest-earning
assets
(940)
64,710
63,770
(8,342)
19,291
10,949
Interest-bearing liabilities:
Deposits (2)
FHLB advances
Other borrowings
Junior subordinated debentures
Total borrowings
(608)
1,413
145
17
119
281
41
22
214
277
805
186
39
333
558
(2,033)
(126)
(2,159)
(49)
(18)
(54)
(121)
75
(2)
—
73
26
(20)
(54)
(48)
Total net change in interest expense on interest-bearing
liabilities
(327)
1,690
1,363
(2,154)
(53)
(2,207)
Net change in net interest income
$
(613) $
63,020
$
62,407
$
(6,188) $
19,344
$
13,156
(1)
(2)
Includes loans accounted for on a nonaccrual basis and loans 90 days or more past due. Amortization of net deferred loan fees/costs is
included with interest on loans.
Includes non-interest-bearing deposits.
Provision and Allowance for Loan Losses. As a result of adequate reserves already in place and declining delinquencies and loan charge-offs,
as well as net recoveries for the past two years, we did not record a provision for loan losses in the year ended December 31, 2015. Similarly,
we did not record a provision for the year ended December 31, 2014. As discussed in the “Summary of Critical Accounting Policies” section
above and in Note 1 of the Notes to the Consolidated Financial Statements, the provision and allowance for loan losses is one of the most critical
accounting estimates included in our Consolidated Financial Statements.
The provision for loan losses reflects the amount required to maintain the allowance for losses at an appropriate level based upon management’s
evaluation of the adequacy of general and specific loss reserves, trends in delinquencies, net charge-offs and current economic conditions. Our
credit quality indicators have continued to improve, eliminating the need for a provision for loan losses for the years ended December 31, 2015
and 2014. Nonetheless, we continue to maintain a strong allowance for loan losses at December 31, 2015.
62
In accordance with acquisition accounting, loans acquired from AmericanWest and Siuslaw Bank were recorded at their estimated fair value,
which resulted in a net discount to the loans contractual amounts, of which a portion reflects a discount for possible credit losses. Credit discounts
are included in the determination of fair value and as a result no allowance for loan and lease losses is recorded for acquired loans at the acquisition
date. Although the discount recorded on the acquired loans is not reflected in the allowance for loan losses, or related allowance coverage ratios,
we believe it should be considered when comparing the current ratios to similar ratios in periods prior to the acquisitions of AmericanWest and
Siuslaw Bank.
We recorded net recoveries of $2.1 million for the year ended December 31, 2015, compared to net recoveries of $1.6 million for the prior year,
and non-performing loans decreased by $1.5 million during the year to $15.2 million at December 31, 2015, compared to $16.7 million at
December 31, 2014. A comparison of the allowance for loan losses at December 31, 2015 and 2014 reflects an increase of $2.1 million, or 3%,
to $78.0 million at December 31, 2015, from $75.9 million at December 31, 2014. Included in our allowance at December 31, 2015 was an
unallocated portion of $2.8 million, which was based upon our evaluation of various factors that were not directly measured in the determination
of the formula and specific allowances. The allowance for loan losses as a percentage of total loans (loans receivable excluding allowance for
losses) decreased to 1.07% at December 31, 2015, compared to 1.98% at December 31, 2014. If the allowance for loan losses and loans were
grossed up for the remaining acquisition accounting loan discount, the adjusted allowance for loans to adjusted loans would have been 1.65%
as of December 31, 2015.
We believe that the allowance for loan losses was adequate to absorb the known and inherent risks of loss in the loan portfolio as of December 31,
2015. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, there can be
no assurance that these estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will
not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition
and results of operations. In addition, the determination of the amount of the allowance for loan losses is subject to review by bank regulators
as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of information
available to them at the time of their examination.
63
The following table sets forth an analysis of our allowance for loan losses for the periods indicated (dollars in thousands):
Table 14: Changes in Allowance for Loan Losses
Balance, beginning of period
$
75,907
$
74,258
$
76,759
$
82,180
$
96,669
Provision
—
—
—
13,000
35,000
Years Ended December 31
2015
2014
2013
2012
2011
Recoveries of loans previously charged off:
Commercial real estate
Multifamily real estate
Construction and land
Commercial business
Agricultural business, including secured by farmland
One- to four-family real estate
Consumer
Loans charged off:
Commercial real estate
Multifamily real estate
Construction and land
Commercial business
Agricultural business, including secured by farmland
One- to four-family real estate
Consumer
Net (charge-offs) recoveries
819
113
1,811
772
948
1,927
570
6,960
(64)
—
(891)
(419)
(746)
(1,225)
(1,514)
(4,859)
2,101
1,507
—
1,776
988
1,576
618
528
6,993
(1,239)
(20)
(207)
(1,344)
(179)
(885)
(1,470)
(5,344)
2,367
—
2,275
1,673
697
145
340
7,497
(2,569)
—
(1,821)
(1,782)
(248)
(2,139)
(1,439)
(9,998)
921
—
2,954
2,425
49
586
531
7,466
(4,065)
—
(6,546)
(6,485)
(456)
(5,328)
(3,007)
(25,887)
53
—
1,602
1,082
20
356
304
3,417
(6,079)
(682)
(26,328)
(8,396)
(477)
(9,910)
(1,034)
(52,906)
1,649
(2,501)
(18,421)
(49,489)
Balance, end of period
$
78,008
$
75,907
$
74,258
$
76,759
$
82,180
Allowance for loan losses as a percent of total loans
Net loan (charge-offs) recoveries as a percent of average
outstanding loans during the period
Allowance for loan losses as a percent of non-performing
loans
Net loan discount on acquired loans
Adjusted allowance for loan losses/Adjusted loans (non-
GAAP)
1.07%
0.04%
512%
1.98%
0.04%
454%
2.17 %
2.37 %
2.49 %
(0.08)%
(0.57)%
(1.50)%
300 %
223 %
109 %
$
43,657
$
— $
— $
— $
—
1.65%
1.98%
2.17 %
2.37 %
2.49 %
64
The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated (dollars in thousands):
Table 15: Allocation of Allowance for Loan Losses
2015
2014
December 31
2013
2012
2011
Specific or allocated loss allowances (1):
Commercial real estate
Multifamily real estate
Construction and land
One-to-four-family real estate
Commercial business
Agricultural business, including secured by
farmland
Consumer
Total allocated
Unallocated (1)
Amount
$
20,716
4,195
27,131
4,732
13,856
3,645
902
75,177
2,831
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Percent
of Loans
in Each
Category
to Total
Loans
42.3% $
6.5
7.9
13.0
16.5
5.1
8.7
18,784
4,562
23,545
12,043
2,821
8,447
483
70,685
36.7% $
4.4
10.8
18.9
6.2
14.0
9.0
16,759
5,306
17,640
11,773
2,841
11,486
1,335
67,140
34.9% $
4.0
10.3
20.0
6.7
15.5
8.6
15,322
4,506
14,991
9,957
2,295
16,475
1,348
64,894
33.1% $
4.3
9.4
19.1
7.1
18.0
9.0
16,457
3,952
18,184
15,159
1,548
12,299
1,253
68,852
33.1%
4.2
9.8
18.2
6.6
19.5
8.6
n/a
5,222
n/a
7,118
n/a
11,865
n/a
13,328
n/a
Total allowance for loan losses
$
78,008
100.0% $
75,907
100.0% $
74,258
100.0% $
76,759
100.0% $
82,180
100.0%
(1) We establish specific loss allowances when individual loans are identified that present a possibility of loss (i.e., that full collectability is not reasonably assured). The remainder of the
allocated and unallocated allowance for loan losses is established for the purpose of providing for estimated losses which are inherent in the loan portfolio.
65
Bank owned life insurance
Miscellaneous
Net gain on sale of securities
Other-than-temporary impairment
recovery (loss)
Net change in valuation of
financial instruments carried at
fair value
Proposed acquisition termination
fee
Acquisition bargain purchase gain
Non-interest Income. The following table presents the key components of non-interest income for the years ended December 31, 2015, 2014,
2013 (dollars in thousands):
Table 16: Non-interest Income
2015 compared to 2014
2014 compared to 2013
2015
2014
Change
Amount
Change
Percent
2014
2013
Change
Amount
Change
Percent
Deposit fees and other service
charges
$ 40,607
$ 30,553
$ 10,054
32.9 % $
30,553
$ 26,581
$
3,972
Mortgage banking operations
17,720
10,249
7,471
10,249
11,170
2,497
2,821
(540)
—
1,809
1,885
42
—
72.9 %
38.0 %
49.7 %
688
936
(582)
(1,385.7)%
—
— %
2,020
2,784
1,022
1,809
1,885
42
—
14.9 %
(8.2 )%
(10.4 )%
(32.3)%
(95.9 )%
(921)
(211)
(899)
(980)
409
(409)
(100.0 )%
(813)
1,374
(2,187)
(159.2)%
1,374
(2,278)
3,652
(160.3 )%
—
—
—
—
— %
9,079
(9,079)
(100.0)%
—
9,079
2,954
—
(2,954)
(100.0 )%
9,079
100.0 %
Total non-interest income
$ 62,292
$ 54,991
$
7,301
13.3 % $
54,991
$ 44,662
$
10,329
23.1 %
Non-interest income, which includes changes in the valuation of financial instruments carried at fair value, net gain on sale of securities, and an
acquisition bargain purchase gain in 2014, as well as non-interest revenues from core operations, increased $7.3 million, or 13%, to $62.3 million
for the year ended December 31, 2015, compared to $55.0 million for the year ended December 31, 2014. This increase was primarily due to
the strong growth in deposit fees and other service charges and mortgage banking operations, more than offsetting the $9.1 million bargain
purchase gain on the Branch purchase recorded in 2014. Excluding fair value adjustments, net gains on the sale of securities and the bargain
purchase gain in the prior year, non-interest income from core operations increased $19.1 million to $63.6 million for the year ended December 31,
2015 compared to $44.5 million at December 31, 2014. Reflecting growth in the number of deposit accounts both through the acquisitions and
organic growth as well as increased transaction activity, income from deposit fees and other service charges increased by $10.1 million, or 33%,
to $40.6 million for the year ended December 31, 2015, compared to $30.6 million for the prior year. Mortgage banking revenues increased by
$7.5 million to $17.7 million for the year ended December 31, 2015, compared to $10.2 million in the prior year. Sales of one-to-four family
loans held for sale for the year ended December 31, 2015 totaled $610.4 million compared to $367.9 million for the year ended December 31,
2014, reflecting increased refinancing activity, as well as a strong home purchase market and our increased market presence.
For the year ended December 31, 2015, we recorded a net loss of $813,000 for changes in the valuation of financial instruments carried at fair
value, compared to a net gain of $1.4 million for the year ended December 31, 2014. The adjustments in 2015 primarily reflect changes in the
valuation of certain investment securities, which resulted in $2.0 million in net gains, as well as changes in the valuation of the junior subordinated
debentures we have issued, which resulted in $2.7 million in charges. The net fair value gains in 2014 primarily reflected changes in the valuation
of certain investment securities resulting in $5.5 million in net gains and changes in the valuation of the junior subordinated debentures, which
resulted in $4.1 million in charges. As discussed more thoroughly in Note 18 of the Notes to the Consolidated Financial Statements, the valuation
for many of these financial instruments has been difficult and more subjective in recent periods as current and reliable observable transaction
data is very limited.
66
Non-interest Expense. The following table represents key elements of non-interest expense for the years ended December 31, 2015, 2014,
2013 (dollars in thousands).
Table 17: Non-interest Expense
2015 compared to 2014
2014 compared to 2013
2015
2014
Change
Amount
Change
Percent
2014
2013
Change
Amount
Change
Percent
Salaries and employee benefits
$ 127,282
$ 89,778
$ 37,504
41.8% $
89,778
$ 84,388
$
5,390
6.4 %
Less capitalized loan origination
costs
(14,379)
(11,730)
(2,649)
Occupancy and equipment
30,366
22,743
7,623
22.6%
33.5%
(11,730)
(11,227)
22,743
21,423
(503)
1,320
4.5 %
6.2 %
Information/computer data
services
Payment and card processing
expenses
12,110
8,131
3,979
48.9%
8,131
7,309
822
11.2 %
16,430
11,460
4,970
43.4%
11,460
9,870
1,590
16.1 %
Professional services
4,828
3,753
1,075
28.6%
3,753
3,781
(28)
(0.7)%
Advertising and marketing
7,649
6,266
1,383
22.1%
6,266
6,885
(619)
(9.0)%
Deposit insurance
3,189
2,415
State/Municipal business and use
taxes
REO operations
Amortization of core deposit
intangibles
Acquisition related costs
Miscellaneous
1,889
397
3,164
26,110
17,565
1,437
(446)
1,990
4,325
13,619
774
452
843
1,174
21,785
3,946
32.0%
2,415
2,329
86
3.7 %
31.5%
189.0%
59.0%
503.7%
1,437
(446)
1,990
4,325
1,941
(689)
1,941
550
29.0%
13,619
12,474
(504)
243
49
3,775
1,145
(26.0)%
35.3 %
2.5 %
686.4 %
9.2 %
9.06 %
Total non-interest expense
$ 236,600
$ 153,741
$ 82,859
53.9% $ 153,741
$ 140,975
$
12,766
Non-interest expense for the year ended December 31, 2015 was $236.6 million, an increase of $82.9 million, or 54%, as compared to the same
period in 2014. The increase is largely attributable to acquisition-related expenses and incremental costs associated with the acquired branches,
support facilities and yet to be consolidated operation systems, as well as generally increased compensation, occupancy and payment and card
processing services reflecting increased transaction volume. Acquisition-related costs added $26.1 million to non-interest expense in the current
year compared to $4.3 million in the year ended December 31, 2014. Compensation expense increased $37.5 million to $127.3 million for the
year ended December 31, 2015 from $89.8 million for the year ended December 31, 2014, primarily reflecting additional staffing as a result of
our acquisitions and to a lesser extent normal salary and wage adjustments, partially offset by a $2.6 million increase in the amount of the credit
for capitalized loan origination costs, reflecting an increase in loan originations. Payment and card processing expenses increased by $5.0
million, reflecting the significant growth in core deposits and account activity from acquisitions and organic growth. Occupancy and equipment
expenses increased $7.6 million, or 34%, to $30.4 million in 2015, compared to $22.7 million in 2014 largely as a result of the branches and
support facilities acquired. Information and computer data services expense increased $4.0 million, or 49%, to $12.1 million in the current year,
compared to $8.1 million in the prior year, reflecting additional costs required for expanding systems and operations associated with the
acquisitions and the Branch purchase, and the additional expense of operating two core systems prior to the AmericanWest system conversion.
REO operations for the year ended December 31, 2015 resulted in expense of $397,000, compared to a net credit of $446,000 in the prior year,
and included $216,000 of valuation adjustments and $351,000 of net gains on the sale of properties in addition to the carrying costs related to
repossessed properties.
Income Taxes. For the year ended December 31, 2015, we recognized $22.7 million in income tax expense for an effective rate of 33.5%, which
reflects our normal statutory rate reduced by the impact of tax-exempt income and certain tax credits partially offset by certain non-deductible
acquisition expense. Our normal, expected statutory income tax rate is 37.2%, representing a blend of the statutory federal income tax rate of
35.0% and apportioned effects of the state and local jurisdictions where we do business. For the year ended December 31, 2014, we recognized
$27.1 million in income tax expense for an effective tax rate of 33.3%. For more information on income taxes and deferred taxes, see Note 12
of the Notes to the Consolidated Financial Statements.
Comparison of Results of Operations for the Years Ended December 31, 2014 and 2013
For the year ended December 31, 2014, we had net income of $54.1 million, or $2.79 per diluted share. This compared to net income of $46.2
million, or $2.38 per diluted share, for the year ended December 31, 2013. Our 2014 operating results were influenced by very low interest rates
67
which produced downward pressure on asset yields. Nonetheless, significant growth in earning assets, as well as changes in the asset mix and
further reductions in funding costs combined to offset this yield pressure. In addition, credit costs remained low and deposit fees and other
payment processing revenues increased compared to the prior year reflecting growth in client relationships. In the year ended December 31,
2014, net income was also significantly augmented by a $9.1 million bargain purchase gain ($5.8 million net of income tax) realized from the
Branch purchase. As a result, Banner's net income for the year ended December 31, 2014 increased 17% compared to a year earlier, and produced
a return on average assets of 1.17%, an improvement from 1.09% for the year ended December 31, 2013.
Our net interest income, as explained below, increased by $13.2 million to $179.9 million, primarily because of a significant increase in average
interest-earning assets and reductions in deposit and funding costs, despite a reduction in loan yields. Our operating results for the year ended
December 31, 2014 also reflected a significant increase in non-interest income, which was particularly influenced by the bargain purchase gain
related to the Branch purchase and a $3.7 million favorable variance in the net change in valuation of financial instruments carried at fair value.
Excluding fair value and OTTI adjustments, net gains on sale of securities, the bargain purchase gain in 2014, and, in 2013 a proposed acquisition
termination fee, our non-interest income from core operations increased by $1.9 million to $44.5 million for the year ended December 31, 2014
compared to $42.6 million the preceding year, primarily as a result of a $4.0 million increase in deposit fees and other service charges. This
increase in non-interest income from core operations, coupled with the increase in net interest income, produced an increase of $15.1 million,
or 7%, in revenue from core operations to $224.4 million for the year ended December 31, 2014 compared to $209.3 million for the year ended
December 31, 2013. Non-interest expense increased to $153.7 million for the year ended December 31, 2014 compared with $141.0 million
for the year ended December 31, 2013 largely as a result of costs related to transaction, integration and conversion expenses for the Branch
purchase, acquisition expenses related to the Siuslaw and Starbuck transactions and increased compensation expense.
Net Interest Income. Net interest income before provision for loan losses increased by $13.2 million, or 8%, to $179.9 million for the year
ended December 31, 2014, compared to $166.7 million one year earlier, as a decrease in the net interest margin was more than offset by an
increase in the average balance of interest-earning assets. The net interest margin of 4.07% for the year ended December 31, 2014 was four
basis points lower than the prior year reflecting the impact of persistently low market interest rates on earning asset yields, which was only
partially offset by changes in the earning asset mix and reductions in deposit and other funding costs. As a result of low market interest rates,
the yield on interest-earning assets for the year ended December 31, 2014 decreased by 12 basis points compared to the prior year. Funding
costs were also significantly lower, although not enough to offset the entire decline in asset yields, as the cost of funding liabilities decreased
by eight basis points compared to the prior year. As a result, the net interest spread decreased to 4.04% for the year ended December 31, 2014
compared to 4.08% for the prior year.
Interest Income. Interest income for the year ended December 31, 2014 was $190.7 million, compared to $179.7 million for the prior year, an
increase of $10.9 million, or 6%. The increase in interest income occurred as a result of an increase in the average balances of interest-earning
assets, which was partially offset by a decline in the average yield. The average balance of interest-earning assets was $4.42 billion for the year
ended December 31, 2014, an increase of $366.5 million, or 9%, compared to $4.05 billion one year earlier. The yield on average interest-
earning assets decreased 12 basis points to 4.31% for the year ended December 31, 2014, compared to 4.43% one year earlier. The decrease in
the yield on earning assets reflected the erosion of yields as loans matured or prepaid and are replaced by lower yielding assets in the low interest
rate environment. The pressure from lower market interest rates was particularly evident as our loan yields decreased 27 basis points to 4.83%
for the year ended December 31, 2014 compared to 5.10% in the preceding year. Average loans receivable for the year ended December 31,
2014 increased $403.5 million, or 12%, to $3.68 billion, compared to $3.28 billion for the prior year. Interest income on loans increased by
$10.3 million, or 6%, to $177.5 million for the year ended December 31, 2014, from $167.2 million for the prior year, reflecting the impact of
the $403.5 million increase in average loan balances, partially offset by the 27 basis point decrease in the average yield on loans.
The combined average balance of mortgage-backed securities, other investment securities, daily interest-bearing deposits and FHLB stock
decreased to $740.3 million for the year ended December 31, 2014 (excluding the effect of fair value adjustments), compared to $777.3 million
for the year ended December 31, 2013; however, the interest and dividend income from those investments increased by $612,000 compared to
the prior year. The average yield on the combined portfolio increased to 1.77% for the year ended December 31, 2014, from 1.61% for the prior
year. Portfolio yields improved from higher rates on new purchases and from the maturity or sale of some lower yielding securities. The yield
on this portfolio also benefited from a $4.2 million reduction in the average balance of FHLB stock which had a very low 0.11% dividend yield.
Interest Expense. Interest expense for the year ended December 31, 2014 was $10.8 million, compared to $13.0 million for the prior year, a
decrease of $2.2 million, or 17%. The decrease in interest expense occurred as a result of an eight basis point decrease in the average cost of
all funding liabilities to 0.27% for the year ended December 31, 2014, from 0.35% one year earlier, partially offset by a $319.8 million, or 9%,
increase in average funding liabilities. The increase in average funding liabilities reflected increases in core deposits including non-interest-
bearing accounts and advances from the FHLB, partially offset by a continued decline in certificates of deposits. The growth in non-interest-
bearing deposits and other core deposits during both years significantly contributed to the reduced funding costs.
Deposit interest expense decreased $2.1 million, or 22%, to $7.6 million for the year ended December 31, 2014 compared to $9.7 million for
the prior year as a result of an eight basis point decrease in the cost of deposits, partially offset by a $300.5 million, or 9%, increase in the average
balance of deposits. Average deposit balances increased to $3.82 billion for the year ended December 31, 2014, from $3.52 billion for the year
ended December 31, 2013, while the average rate paid on deposit balances decreased to 0.20% in the current year from 0.28% for the prior
year. The cost of interest-bearing deposits decreased by ten basis points to 0.29% for the year ended December 31, 2014, compared to 0.39%
in the prior year. Also contributing to the decrease in total deposit costs was a $193.4 million increase in the average balances of non-interest-
bearing accounts. Deposit costs are significantly affected by changes in the level of market interest rates; however, changes in the average rate
paid for interest-bearing deposits frequently tend to lag changes in market interest rates as evidenced by the continuing decline in deposit costs
despite relatively stable short-term market interest rates during the year ended December 31, 2014. Further, changes in our deposit mix, especially
68
growth in lower cost transaction and savings accounts, in particular non-interest-bearing deposits, meaningfully contributed to the decrease in
our funding costs compared to earlier periods.
Average FHLB advances (excluding the effect of fair value adjustments) increased to $39.1 million for the year ended December 31, 2014,
compared to $18.9 million for the prior year, while the average rate paid on FHLB advances for the year ended December 31, 2014 decreased
to 0.32% from 0.52% for the year ended December 31, 2013. Average FHLB advances increased as a result of certain cash management activities
at Banner Bank, while the cost of the advances declined as a result of the maturity of a higher rate fixed-term advance in February 2013. The
increase in average balances on FHLB advances was responsible for the $26,000 increase in the related interest expense to $125,000 for the year
ended December 31, 2014, from $99,000 in the prior year, despite the decrease in the average rate paid for the year.
Other borrowings consisted primarily of retail repurchase agreements with customers secured by certain investment securities. The average
balance for other borrowings decreased $835,000 to $84.1 million during the year ended December 31, 2014 from $85.0 million one year earlier,
while the average rate on other borrowings decreased to 0.20% from 0.23% a year earlier. As a result, interest expense for other borrowing
decreased to $172,000 for the year ended December 31, 2014, compared to $192,000 for the year ended December 31, 2013.
Our junior subordinated debentures had an average balance of $123.7 million (excluding the effect of fair value adjustments) for both the years
ended December 31, 2014 and 2013. During 2014, the average rate decreased to 2.36% compared to 2.40% for 2013. A modestly lower level
of LIBOR resulted in the lower cost of the junior subordinated debentures for the year ended December 31, 2014 compared to the prior year.
Non-interest Income. Non-interest income, which includes changes in the valuation of financial instruments carried at fair value, OTTI charges
and recoveries, net gain on sale of securities, an acquisition bargain purchase gain in 2014 and a proposed acquisition termination fee in 2013,
as well as non-interest revenues from core operations, increased $10.3 million to $54.9 million for the year ended December 31, 2014, compared
to $44.7 million for the year ended December 31, 2013. This increase was primarily due to a $9.1 million bargain purchase gain on the Branch
purchase. Excluding fair value and OTTI adjustments, net gains on the sale of securities, the bargain purchase gain in 2014, and, in the prior
year a fee received from the termination of a proposed acquisition, non-interest income from core operations increased $1.9 million to $44.5
million for the year ended December 31, 2014 compared to $42.6 million at December 31, 2013, largely as a result of increased revenues from
deposit fees and other service charges. Reflecting growth in the number of deposit accounts, increased transaction activity and our decision to
change our debit card relationship to MasterCard®, income from deposit fees and other service charges increased by $4.0 million, or approximately
15%, to $30.6 million for the year ended December 31, 2014, compared to $26.6 million for the prior year. Mortgage banking revenues decreased
by $921,000 to $10.2 million for the year ended December 31, 2014, compared to $11.2 million in the prior year; however, revenues from
mortgage banking operations for the year ended December 31, 2013 included $1.3 million as a result of reversing prior-period valuation
adjustments for mortgage servicing rights. Loan sales for the year ended December 31, 2014 totaled $379.2 million, compared to $462.5 million
for the year ended December 31, 2013 reflecting reduced refinancing activity. Miscellaneous revenues decreased $527,000, largely because of
a $450,000 recovery from the IRS as a result of amending certain prior-period income tax returns that was recorded in income in 2013.
For the year ended December 31, 2014, we recorded a net gain of $1.4 million for changes in the valuation of financial instruments carried at
fair value, compared to a net charge of $2.3 million for the year ended December 31, 2013. The adjustments in 2014 primarily reflected changes
in the valuation of certain investment securities, which resulted in $5.5 million in net gains, as well as changes in the valuation of the junior
subordinated debentures we have issued, which resulted in $4.1 million in charges. The net fair value loss in 2013 primarily reflected changes
in the valuation of certain investment securities resulting in $1.5 million in net charges and changes in the valuation of the junior subordinated
debentures, which resulted in $865,000 in charges.
Non-interest Expense. Non-interest expense for the year ended December 31, 2014 totaled $153.7 million compared to $141.0 million in 2013,
an increase of $12.8 million, or 9%, compared to the prior year, largely attributable to acquisition-related costs and incremental costs associated
with operating the six acquired branches, as well as generally increased compensation and activity-based expenses. Acquisition-related costs
added $4.3 million to non-interest expense in 2014 compared to $550,000 in the year ended December 31, 2013. Compensation expense increased
$5.4 million to $89.8 million for the year ended December 31, 2014 from $84.4 million for the year ended December 31, 2013, primarily reflecting
salary and wage adjustments, increased staffing and higher benefit costs, partially offset by a $503,000 increase in the amount of the credit for
capitalized loan origination costs, reflecting an increase in loan originations. Payment and card processing expenses increased by $1.6 million,
reflecting the significant growth in core deposits and account activity. Occupancy and equipment expenses increased $1.3 million, or 6%, to
$22.7 million in 2014, compared to $21.4 million in 2013 largely as a result of the Branch purchase. Information and computer data services
expense increased $822,000, or 11%, to $8.1 million in 2014, compared to $7.3 million in the prior year. REO operations for the year ended
December 31, 2014 resulted in a net credit of $446,000, compared to a net credit of $689,000 in the prior year, and included $36,000 of valuation
adjustments and $973,000 of net gains on the sale of properties. Partially offsetting these increases, advertising and marketing decreased $619,000
(9%) and state/municipal business and use taxes decreased $504,000 (26%) for the year ended December 31, 2014 compared to the prior year.
Most other categories of non-interest expense were little changed from a year earlier.
Income Taxes. For the year ended December 31, 2014, we recognized $27.1 million in income tax expense for an effective rate of 33.3%, which
reflects our normal statutory rate reduced by the impact of tax-exempt income and certain tax credits. Our normal, expected statutory income
tax rate is 33.3%, representing a blend of the statutory federal income tax rate of 35.0% and apportioned effects of the 7.6% Oregon and 7.4%
Idaho income tax rates. For the year ended December 31, 2013, we recognized $24.2 million in income tax expense for an effective tax rate of
34.4%.
69
Market Risk and Asset/Liability Management
Our financial condition and operations are influenced significantly by general economic conditions, including the absolute level of interest rates
as well as changes in interest rates and the slope of the yield curve. Our profitability is dependent to a large extent on our net interest income,
which is the difference between the interest received from our interest-earning assets and the interest expense incurred on our interest-bearing
liabilities.
Our activities, like all financial institutions, inherently involve the assumption of interest rate risk. Interest rate risk is the risk that changes in
market interest rates will have an adverse impact on the institution’s earnings and underlying economic value. Interest rate risk is determined
by the maturity and repricing characteristics of an institution’s assets, liabilities and off-balance-sheet contracts. Interest rate risk is measured
by the variability of financial performance and economic value resulting from changes in interest rates. Interest rate risk is the primary market
risk affecting our financial performance.
The greatest source of interest rate risk to us results from the mismatch of maturities or repricing intervals for rate sensitive assets, liabilities
and off-balance sheet contracts. This mismatch or gap is generally characterized by a substantially shorter maturity structure for interest-bearing
liabilities than interest-earning assets, although our floating-rate assets tend to be more immediately responsive to changes in market rates than
most funding deposit liabilities. Additional interest rate risk results from mismatched repricing indices and formula (basis risk and yield curve
risk), and product caps and floors and early repayment or withdrawal provisions (option risk), which may be contractual or market driven, that
are generally more favorable to customers than to us. An exception to this generalization is the beneficial effect of interest rate floors on a
substantial portion of our performing floating-rate loans, which help us maintain higher loan yields in periods when market interest rates decline
significantly. However, in a declining interest rate environment, as loans with floors are repaid they generally are replaced with new loans which
have lower interest rate floors. As of December 31, 2015, our loans with interest rate floors totaled approximately $2.50 billion and had a
weighted average floor rate of 4.78%. An additional source of interest rate risk, which is currently of concern, is a prolonged period of exceptionally
low market interest rates. Because interest-bearing deposit costs have been reduced to nominal levels, there is very little possibility that they
will be significantly further reduced and our non-interest-bearing deposits are an increasingly significant percentage of total deposits. By contrast,
if market rates remain very low, loan and securities yields will likely continue to decline as longer-term instruments mature or are repaid. As a
result, a prolonged period of very low interest rates will likely result in compression of our net interest margin. While this pressure on the margin
may be mitigated by further changes in the mix of assets and deposits, particularly increases in non-interest-bearing deposits, a prolonged period
of low interest rates will present a very difficult operating environment for most banks, including us.
The principal objectives of asset/liability management are: to evaluate the interest rate risk exposure; to determine the level of risk appropriate
given our operating environment, business plan strategies, performance objectives, capital and liquidity constraints, and asset and liability
allocation alternatives; and to manage our interest rate risk consistent with regulatory guidelines and policies approved by the Board of
Directors. Through such management, we seek to reduce the vulnerability of our earnings and capital position to changes in the level of interest
rates. Our actions in this regard are taken under the guidance of the Asset/Liability Management Committee, which is comprised of members
of our senior management. The Committee closely monitors our interest sensitivity exposure, asset and liability allocation decisions, liquidity
and capital positions, and local and national economic conditions and attempts to structure the loan and investment portfolios and funding sources
to maximize earnings within acceptable risk tolerances.
Sensitivity Analysis
Our primary monitoring tool for assessing interest rate risk is asset/liability simulation modeling, which is designed to capture the dynamics of
balance sheet, interest rate and spread movements and to quantify variations in net interest income resulting from those movements under different
rate environments. The sensitivity of net interest income to changes in the modeled interest rate environments provides a measurement of interest
rate risk. We also utilize economic value analysis, which addresses changes in estimated net economic value of equity arising from changes in
the level of interest rates. The net economic value of equity is estimated by separately valuing our assets and liabilities under varying interest
rate environments. The extent to which assets gain or lose value in relation to the gains or losses of liability values under the various interest
rate assumptions determines the sensitivity of net economic value to changes in interest rates and provides an additional measure of interest rate
risk.
The interest rate sensitivity analysis performed by us incorporates beginning-of-the-period rate, balance and maturity data, using various levels
of aggregation of that data, as well as certain assumptions concerning the maturity, repricing, amortization and prepayment characteristics of
loans and other interest-earning assets and the repricing and withdrawal of deposits and other interest-bearing liabilities into an asset/liability
computer simulation model. We update and prepare simulation modeling at least quarterly for review by senior management and the directors.
We believe the data and assumptions are realistic representations of our portfolio and possible outcomes under the various interest rate
scenarios. Nonetheless, the interest rate sensitivity of our net interest income and net economic value of equity could vary substantially if
different assumptions were used or if actual experience differs from the assumptions used.
70
The following table sets forth as of December 31, 2015 and 2014, the estimated changes in our net interest income over one-year and two-year
time horizons and the estimated changes in economic value of equity based on the indicated interest rate environments (dollars in thousands):
Table 21: Interest Rate Risk Indicators
Change (in Basis Points) in Interest Rates (1)
Net Interest Income
Next 12 Months
Net Interest Income
Next 24 Months
Economic Value of
Equity
December 31, 2015
Estimated Increase (Decrease) in
+400
+300
+200
+100
0
-25
Change (in Basis Points) in Interest Rates (1)
+400
+300
+200
+100
0
-25
$
$
(9,589)
(7,233)
(4,950)
(2,382)
—
(514)
(2.7)% $
(2.0)
(1.4)
(0.7)
—
(0.1)
(235)
265
627
1,218
—
(3,631)
—% $ (97,268)
(55,534)
—
(21,436)
0.1
3,988
0.2
—
—
(32,013)
(0.5)
(6.6)%
(3.8)
(1.5)
0.3
—
(2.2)
December 31, 2014
Estimated Increase (Decrease) in
Net Interest Income
Next 12 Months
Net Interest Income
Next 24 Months
Economic Value of
Equity
(2,541)
(1,807)
(1,040)
(1,088)
—
264
(1.4)% $
(1.0)
(0.6)
(0.6)
—
0.1
7,254
6,201
5,157
2,088
—
(826)
2.0% $ (49,388)
(30,791)
1.7
(15,628)
1.4
(2,209)
0.6
—
—
(9,681)
(0.2)
(6.3)%
(3.9)
(2.0)
(0.3)
—
(1.2)
(1) Assumes an instantaneous and sustained uniform change in market interest rates at all maturities; however, no rates are allowed to go
below zero. The current targeted federal funds rate is between 0.25% and 0.50%.
Another (although less reliable) monitoring tool for assessing interest rate risk is gap analysis. The matching of the repricing characteristics of
assets and liabilities may be analyzed by examining the extent to which assets and liabilities are interest sensitive and by monitoring an institution’s
interest sensitivity gap. An asset or liability is said to be interest sensitive within a specific time period if it will mature or reprice within that
time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated, based upon
certain assumptions, to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated to mature or
reprice, based upon certain assumptions, within that same time period. A gap is considered positive when the amount of interest-sensitive assets
exceeds the amount of interest-sensitive liabilities. A gap is considered negative when the amount of interest-sensitive liabilities exceeds the
amount of interest-sensitive assets. Generally, during a period of rising rates, a negative gap would tend to adversely affect net interest income
while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would
tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income.
Certain shortcomings are inherent in gap analysis. For example, although certain assets and liabilities may have similar maturities or periods
of repricing, they may react in different degrees to changes in market rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain
assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the
event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating
the table. Finally, the ability of some borrowers to service their debt may decrease in the event of a severe change in market rates.
Table 22, Interest Sensitivity Gap, presents our interest sensitivity gap between interest-earning assets and interest-bearing liabilities at
December 31, 2015 and 2014. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities which are
anticipated by us, based upon certain assumptions, to reprice or mature in each of the future periods shown. At December 31, 2015, total interest-
earning assets maturing or repricing within one year exceeded total interest-bearing liabilities maturing or repricing in the same time period by
$723.3 million, representing a one-year cumulative gap to total assets ratio of 7.38%.
Management is aware of the sources of interest rate risk and in its opinion actively monitors and manages it to the extent possible. The interest
rate risk indicators and interest sensitivity gaps as of December 31, 2015 and 2014 are within our internal policy guidelines and management
considers that our current level of interest rate risk is reasonable.
71
The following tables provide a GAP analysis as of December 31, 2015 and 2014 (dollars in thousands):
Table 22: Interest Sensitivity Gap
Interest-earning assets: (1)
Construction loans
Fixed-rate mortgage loans
Adjustable-rate mortgage loans
Fixed-rate mortgage-backed securities
Adjustable-rate mortgage-backed securities
Fixed-rate commercial/agricultural loans
Adjustable-rate commercial/agricultural loans
Consumer and other loans
Investment securities and interest-earning deposits
Total rate sensitive assets
Interest-bearing liabilities: (2)
Regular savings
Interest-bearing checking accounts
Money market deposit accounts
Certificates of deposit
FHLB advances
Other borrowings
Trust preferred securities
Retail repurchase agreements
Total rate sensitive liabilities
Within
6 Months
After 6
Months
Within 1 Year
After 1 Year
Within 3
Years
After 3 Years
Within 5
Years
After 5 Years
Within 10
Years
Over
10 Years
Total
December 31, 2015
$ 298,602
228,392
984,844
114,691
—
95,694
908,505
434,670
192,606
3,258,004
192,696
180,737
818,547
569,205
107,600
5,000
140,212
93,325
2,107,322
$
36,319
171,715
340,300
97,844
—
81,036
22,225
27,209
14,361
791,009
192,696
172,784
491,128
361,810
—
—
—
—
1,218,418
$
$
31,000
480,522
1,112,548
289,341
—
178,125
18,345
79,210
41,411
2,230,502
$
6,656
283,369
615,662
153,941
—
89,924
41,520
27,596
143,727
1,362,395
449,625
403,163
327,419
313,619
25,000
—
—
—
1,518,826
449,625
403,163
—
90,152
—
—
—
—
942,940
2,609
364,149
146,183
184,217
—
28,199
3,992
29,543
130,975
889,867
—
—
17,184
—
—
—
—
17,184
$
491
163,960
232
101,420
—
10,690
—
14,160
29,646
320,599
$ 375,677
1,692,107
3,199,769
941,454
—
483,668
994,587
612,388
552,726
8,852,376
—
—
44
—
—
—
—
44
1,284,642
1,159,847
1,637,094
1,352,014
132,600
5,000
140,212
93,325
5,804,734
Excess (deficiency) of interest-sensitive assets over interest-sensitive
liabilities
$ 1,150,682
$ (427,409)
$
711,676
$
419,455
$
872,683
$
320,555
$ 3,047,642
Cumulative excess of interest-sensitive assets
$ 1,150,682
$
723,273
$ 1,434,949
$ 1,854,404
$ 2,727,087
$ 3,047,642
$ 3,047,642
Cumulative ratio of interest-earning assets to interest-bearing liabilities
154.60%
121.75 %
129.62%
132.04%
146.98%
152.50%
152.50%
Interest sensitivity gap to total assets
11.75%
(4.36)%
7.26%
4.28%
8.91%
3.27%
31.11%
Ratio of cumulative gap to total assets
11.75%
7.38 %
14.65%
18.93%
27.84%
31.11%
31.11%
(footnotes follow)
72
Table 22: Interest Sensitivity Gap (continued)
Interest-earning assets: (1)
Construction loans
Fixed-rate mortgage loans
Adjustable-rate mortgage loans
Fixed-rate mortgage-backed securities
Adjustable-rate mortgage-backed securities
Fixed-rate commercial/agricultural loans
Adjustable-rate commercial/agricultural loans
Consumer and other loans
Investment securities and interest-earning deposits
Total rate sensitive assets
Interest-bearing liabilities: (2)
Interest-bearing checking accounts
Regular savings
Money market deposit accounts
Certificates of deposit
FHLB advances
Other borrowings
Trust preferred securities
Retail repurchase agreements
Total rate sensitive liabilities
Excess (deficiency) of interest-sensitive assets over interest-sensitive
liabilities
Cumulative excess of interest-sensitive assets
Within
6 Months
After 6
Months
Within 1 Year
After 1 Year
Within 3
Years
December 31, 2014
After 3 Years
Within 5
Years
After 5 Years
Within 10
Years
Over
10 Years
Total
$
$
$
220,128
132,836
502,365
62,779
638
53,010
588,831
199,946
120,766
1,881,299
135,172
78,540
244,473
327,611
32,000
—
123,716
77,185
1,018,697
$
10,904
102,120
152,182
48,554
1,703
37,997
9,093
25,792
14,244
402,589
135,172
63,695
146,684
231,987
—
—
—
—
577,538
$
$
16,196
259,532
450,989
147,033
—
98,897
30,071
64,915
40,483
1,108,116
315,400
148,622
97,789
168,773
—
—
—
—
730,584
2,308
159,540
283,728
31,593
—
34,143
20,717
22,935
70,982
625,946
315,400
148,622
—
37,355
—
—
—
—
501,377
$
156
193,387
22,467
11,918
—
15,173
2,284
15,331
51,470
312,186
—
—
4,752
—
—
—
—
4,752
$
$
2,811
101,966
132
14,862
—
1,973
—
1,219
40,703
163,666
—
—
38
—
—
—
—
38
252,503
949,381
1,411,863
316,739
2,341
241,193
650,996
330,138
338,648
4,493,802
901,144
439,479
488,946
770,516
32,000
—
123,716
77,185
2,832,986
862,602
$ (174,949)
$
377,532
$
124,569
$
307,434
$
163,628
$ 1,660,816
862,602
$
687,653
$ 1,065,185
$ 1,189,754
$ 1,497,188
$ 1,660,816
$ 1,660,816
Cumulative ratio of interest-earning assets to interest-bearing liabilities
184.68%
143.08 %
145.78%
142.07%
152.85%
158.62%
158.62%
Interest sensitivity gap to total assets
18.26%
(3.70)%
7.99%
2.64%
6.51%
3.46%
35.16%
Ratio of cumulative gap to total assets
18.26%
14.56 %
22.55%
25.19%
31.69%
35.16%
35.16%
(footnotes follow)
73
(1) Adjustable-rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which
they are due to mature, and fixed-rate assets are included in the period in which they are scheduled to be repaid based upon scheduled
amortization, in each case adjusted to take into account estimated prepayments. Mortgage loans and other loans are not reduced for
allowances for loan losses and non-performing loans. Mortgage loans, mortgage-backed securities, other loans and investment securities
are not adjusted for deferred fees and unamortized acquisition premiums and discounts.
(2) Adjustable-rate liabilities are included in the period in which interest rates are next scheduled to adjust rather than in the period they are
due to mature. Although regular savings, demand, interest-bearing checking, and money market deposit accounts are subject to immediate
withdrawal, based on historical experience management considers a substantial amount of such accounts to be core deposits having
significantly longer maturities. For the purpose of the gap analysis, these accounts have been assigned decay rates to reflect their longer
effective maturities. If all of these accounts had been assumed to be short-term, the one-year cumulative gap of interest-sensitive assets
would have been $(1.31) billion, or (13.37%) of total assets at December 31, 2015, and $(338.2) million, or (7.2%), at December 31,
2014. Interest-bearing liabilities for this table exclude certain non-interest-bearing deposits that are included in the average balance
calculations reflected in Table 17, Analysis of Net Interest Spread.
Liquidity and Capital Resources
Our primary sources of funds are deposits, borrowings, proceeds from loan principal and interest payments and sales of loans, and the maturity
of and interest income on mortgage-backed and investment securities. While maturities and scheduled amortization of loans and mortgage-
backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates,
economic conditions, competition and our pricing strategies.
Our primary investing activity is the origination and purchase of loans and, in certain periods, the purchase of securities. During the years ended
December 31, 2015, 2014 and 2013, our loan originations exceeded our loan repayments by $741.7 million, $506.0 million and $594.6 million,
respectively. During those periods we purchased loans of $323.5 million, $194.4 million and $48.7 million, respectively. This activity was
funded primarily by sales of loans and increased deposits. During the years ended December 31, 2015, 2014 and 2013, we sold $801.6 million,
$379.2 million, and $462.5 million, respectively, of loans. Securities purchased during the years ended December 31, 2015, 2014 and 2013
totaled $161.7 million, $100.1 million, and $256.5 million, respectively, and securities repayments, maturities and sales in those periods were
$373.0 million, $158.1 million, and $238.3 million, respectively.
Our primary financing activity is gathering deposits. Deposits increased by $4.16 billion during the year ended December 31, 2015, including
a $583.4 million increase in certificates of deposit. Deposits increased by $281.0 million during the year ended December 31, 2014. The
acquisitions of AmericanWest and Siuslaw Bank contributed $3.82 billion to the increase in deposits, including $1.09 billion in non-interest
bearing deposits, $2.11 billion in interest-bearing transaction and savings accounts, and $620.8 million in certificates of deposit as of December 31,
2015. The increase in certificate balances in 2015 includes an increase in brokered deposits by $158.1 million to $162.9 million at December 31,
2015. For the year ended December 31, 2014, the Branch purchase contributed $207.0 million to the increase in deposits. In each of the last
three years our core deposits have significantly increased as a result of our acquisitions, our increased marketing focus on retail deposits and
our pricing decisions designed to shift our deposit portfolio into lower cost checking, savings and money market accounts and allow higher rate
certificates of deposit to run-off. Certificates of deposits are generally more price sensitive than other retail deposits and our pricing of those
deposits varies significantly based upon our liquidity management strategies at any point in time. At December 31, 2015, certificates of deposit
amounted to $1.35 billion, or 17% of our total deposits, including $985.2 million which were scheduled to mature within one year. Certificates
of deposit declined from 20% of our total deposits at December 31, 2014, and 24% of total deposits at December 31, 2013, reflecting our efforts
to shift the portfolio mix into lower cost core deposits. While no assurance can be given as to future periods, historically, we have been able to
retain a significant amount of our deposits as they mature.
FHLB advances (excluding fair value adjustments) increased $100.6 million for the year ended December 31, 2015, after increasing $5.0 million
for the year ended December 31, 2014. During 2015 FHLB advances increased significantly primarily as a result of advances assumed in
connection with the AmericanWest acquisition. Other borrowings at December 31, 2015 increased $21.1 million to $98.3 million following a
decrease of $5.9 million in 2014. The increase in other borrowings in 2015 was due to an increase in retail repurchase agreements and a wholesale
repurchase agreement acquired in the AmericanWest acquisition.
We must maintain an adequate level of liquidity to ensure the availability of sufficient funds to accommodate deposit withdrawals, to support
loan growth, to satisfy financial commitments and to take advantage of investment opportunities. During the years ended December 31, 2015,
2014 and 2013, we used our sources of funds primarily to fund loan commitments, purchase securities and pay maturing savings certificates and
deposit withdrawals. At December 31, 2015, we had outstanding commitments to extend credit, originate loans and for letters of credit totaling
$2.26 billion. While representing potential growth in the loan portfolio and lending activities, this level of commitments is proportionally
consistent with our historical experience and does not represent a departure from normal operations.
We generally maintain sufficient cash and readily marketable securities to meet short-term liquidity needs; however, our primary liquidity
management practice to supplement deposits is to increase or decrease short-term borrowings, including FHLB advances and Federal Reserve
Bank of San Francisco (FRBSF) borrowings. We maintain credit facilities with the FHLB-Des Moines, which at December 31, 2015 provide
for advances that in the aggregate may equal the lesser of 35% of Banner Bank’s assets or adjusted qualifying collateral (subject to a sufficient
level of ownership of FHLB stock), up to a total possible credit line of $1.77 billion, and 35% of Islanders Bank’s assets or adjusted qualifying
collateral, up to a total possible credit line of $28.0 million. Advances under these credit facilities (excluding fair value adjustments) totaled
$132.8 million, or less than 1% of our assets at December 31, 2015. In addition, Banner Bank has been approved for participation in the FRBSF's
Borrower-In-Custody (BIC) program. Under this program Banner Bank had available lines of credit of approximately $735.0 million as of
74
December 31, 2015, subject to certain collateral requirements, namely the collateral type and risk rating of eligible pledged loans. We had $132.6
million funds borrowed from the FRBSF at December 31, 2015, an increase from no funds borrowed from the FRBSF in 2014. Management
believes it has adequate resources and funding potential to meet our foreseeable liquidity requirements.
Banner Corporation is a separate legal entity from the Banks and, on a stand-alone level, must provide for its own liquidity and pay its own
operating expenses and cash dividends. Banner's primary sources of funds consist of capital raised through dividends or capital distributions
from the Banks, although there are regulatory restrictions on the ability of the Banks to pay dividends. At December 31, 2015, Banner Corporation
(on an unconsolidated basis) had liquid assets of $58.2 million.
As noted below, Banner Corporation and its subsidiary banks continued to maintain capital levels significantly in excess of the requirements to
be categorized as “Well-Capitalized” under applicable regulatory standards. During the year ended December 31, 2015, total equity increased
$717.2 million, or 123%, to $1.30 billion which primarily reflects the 14.6 million common shares issued for the acquisitions of Starbuck and
Siuslaw and earnings from operations, that was partially offset by the payment of $19.9 million in accrued and declared cash dividends to common
shareholders . Total equity at December 31, 2015 is entirely attributable to common stock. At December 31, 2015, tangible common shareholders’
equity, which excludes other intangible assets, was $1.02 billion, or 10.68% of tangible assets. See the discussion and reconciliation of non-
GAAP financial information above in the Executive Overview section of this Management’s Discussion and Analysis of Financial Condition
and Results of Operation for more detailed information with respect to tangible common shareholders’ equity. Also, see the capital requirements
discussion and table below with respect to our regulatory capital positions.
Capital Requirements
Banner Corporation is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy
requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended (BHCA), and the regulations of the Federal
Reserve. Banner Bank and Islanders Bank, as state-chartered, federally insured commercial banks, are subject to the capital requirements
established by the FDIC.
The capital adequacy requirements are quantitative measures established by regulation that require Banner Corporation and the Banks to maintain
minimum amounts and ratios of capital. The Federal Reserve requires Banner Corporation to maintain capital adequacy that generally parallels
the FDIC requirements. The FDIC requires the Banks to maintain minimum ratios of Tier 1 total capital to risk-weighted assets, Tier 1 leverage
capital to average assets as well as Tier 1 Common equity to risk-weighted assets. At December 31, 2015, Banner Corporation and the Banks
each exceeded all current regulatory capital requirements.
The following table shows the regulatory capital ratios of Banner Corporation and its subsidiaries, Banner Bank and Islanders Bank, as of
December 31, 2015, and minimum regulatory requirements for the Banks to be categorized as “well-capitalized.”
Table 23: Regulatory Capital Ratios
Capital Ratios
Banner Corporation
Banner Bank
Islanders Bank
“Well-Capitalized”
Minimum Ratio (1)
Total capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Tier 1 capital to average leverage assets
Tier 1 Common equity to risk-weighted assets
13.63%
12.65
11.06
12.13
12.61%
11.64
10.23
11.64
20.31%
19.14
13.38
19.14
10.00%
8.00
5.00
n/a
(1) A bank holding company such as Banner Corporation does not have a “Well-capitalized” measurement. “Well-capitalized” only applies
to the Banks.
Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), Banner and the Banks became subject
to new capital requirements adopted by the Federal Reserve and the FDIC. The new capital requirements implement the “Basel III” regulatory
capital reforms and changes required by the Dodd-Frank Act. (See Item 1, “Business–Regulation,” and Note 16 of the Notes to the Consolidated
Financial Statements for additional information regarding Banner Corporation’s and Banner Bank’s regulatory capital requirements.)
Effect of Inflation and Changing Prices
The Consolidated Financial Statements and related financial data presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical
dollars, without considering the changes in relative purchasing power of money over time due to inflation. The primary effect of inflation on
our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates generally have a more significant effect on a financial institution’s performance
than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and
services.
75
Contractual Obligations
The following table shows the obligations of Banner Corporation and its subsidiaries as of December 31, 2015 by maturity (in thousands):
Table 24: Contractual Obligations
One Year or
Less
After One to
Three Years
After Three to
Five Years
After Five
Years
Total
Advances from Federal Home Loan Bank
$
107,600
$
25,000
$
— $
188
$
Junior subordinated debentures
Repurchase agreements
Operating lease obligations
Purchase obligation
—
93,325
14,323
14,767
—
5,000
23,566
22,218
—
—
14,395
13,836
140,212
—
23,010
5,945
132,788
140,212
98,325
75,294
56,766
Total
$
230,015
$
75,784
$
28,231
$
169,355
$
503,385
In addition, we have contracts with various vendors to provide services, including information processing, for periods generally ranging from
one to five years, for which our financial obligations are dependent upon acceptable performance by the vendor. For additional information
regarding future financial commitments, this discussion should be read in conjunction with our Consolidated Financial Statements and related
notes included elsewhere in this filing, including Note 23: “Commitments and Contingencies.”
ITEM 7A – Quantitative and Qualitative Disclosures About Market Risk
See pages 70–74 of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 8 – Financial Statements and Supplementary Data
For financial statements, see index on page 82.
ITEM 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
ITEM 9A – Controls and Procedures
The management of Banner Corporation is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934 (Exchange Act). A control procedure, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that its objectives are met. Also, because of the inherent limitations in all
control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the
Company have been detected. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls
and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future conditions. As a result of these inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Further, projections of any evaluation of effectiveness to future periods are subject
to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e)
of the Exchange Act) was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer
and several other members of our senior management as of the end of the period covered by this report. Based on their evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as of December 31, 2015, our disclosure controls and procedures were effective
in ensuring that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) accumulated and
communicated to our management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
(b) Changes in Internal Controls Over Financial Reporting: For the year ended December 31, 2015, there was no change in our internal control
over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting: Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we
included a report of management’s assessment of the effectiveness of its internal controls as part of this Annual Report on Form 10-K for the
year ended December 31, 2015.
76
ITEM 9B – Other Information
None.
77
ITEM 10 – Directors, Executive Officers and Corporate Governance
PART III
The information required by this item contained under the section captioned “Proposal 1– Election of Directors,” “Meetings and Committees
of the Board of Directors” and “Shareholder Proposals” in the Proxy Statement for the Annual Meeting of Shareholders, which will be filed with
the Securities and Exchange Commission no later than 120 days after the end of our fiscal year, is incorporated herein by reference.
Information regarding the executive officers of the Registrant is provided herein in Part I, Item 1 hereof.
The information regarding our Audit Committee and Financial Expert included under the sections captioned “Meetings and Committees of the
Board of Directors” and “Audit Committee Matters” in the Proxy Statement for the Annual Meeting of Shareholders, which will be filed with
the Securities and Exchange Commission no later than 120 days after the end of our fiscal year, is incorporated herein by reference.
Reference is made to the cover page of this Annual Report and the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance”
of the Proxy Statement for the Annual Meeting of the Shareholders, which will be filed with the Securities and Exchange Commission no later
than 120 days after the end of our fiscal year, regarding compliance with Section 16(a) of the Securities Exchange Act of 1934.
Code of Ethics
The Board of Directors adopted a Code of Business Conduct and Ethics for our officers (including its senior financial officers), directors, and
employees. The Code of Business Conduct and Ethics requires our officers, directors, and employees to maintain the highest standards of
professional conduct. A copy of the Code of Business Conduct and Ethics was filed as an exhibit to our Annual Report on Form 10-K for the
year ended December 31, 2004 and is available without charge, upon request to Investor Relations, Banner Corporation, P.O. Box 907, Walla
Walla, WA 99362.
Whistleblower Program and Protections
We subscribe to the Ethicspoint reporting system and encourage employees, customers, and vendors to call the Ethicspoint hotline at 1-866-
ETHICSP (384-4277) or visit its website at www.Ethicspoint.com to report any concerns regarding financial statement disclosures, accounting,
internal controls, or auditing matters. We will not retaliate against any of our officers or employees who raise legitimate concerns or questions
about an ethics matter or a suspected accounting, internal control, financial reporting, or auditing discrepancy or otherwise assists in investigations
regarding conduct that the employee reasonably believes to be a violation of Federal Securities Laws or any rule or regulation of the Securities
Exchange Commission, Federal Securities Laws relating to fraud against shareholders or violations of applicable banking laws. Non-retaliation
against employees is fundamental to our Code of Ethics and there are strong legal protections for those who, in good faith, raise an ethical
concern or a complaint about their employer.
ITEM 11 – Executive Compensation
Information required by this item regarding management compensation and employment contracts, director compensation, and Compensation
Committee interlocks and insider participation in compensation decisions is incorporated by reference to the sections captioned “Executive
Compensation,” “Directors’ Compensation,” and “Compensation Discussion and Analysis,” respectively, in the Proxy Statement for the Annual
Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal
year.
ITEM 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a) Security Ownership of Certain Beneficial Owners and Management
Information required by this item is incorporated herein by reference to the section captioned "Security Ownership of Certain Beneficial Owners
and Management" in the proxy statement for the Annual Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission no later than 120 days after the end of our fiscal year.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to the section captioned "Security Ownership of Certain Beneficial Owners
and Management" in the proxy statement for the Annual Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission no later than 120 days after the end of our fiscal year.
(c) Change in Control
Banner Corporation is not aware of any arrangements, including any pledge by any person of securities of Banner Corporation, the operation
of which may at a subsequent date result in a change in control of Banner Corporation.
78
(d) Equity Compensation Plan Information
The following table sets forth information about equity compensation plans that provide for the award of securities or the grant of options to
purchase securities to employees and directors of Banner and its subsidiaries that were in effect at December 31, 2015:
Plan category
Equity compensation plans approved by security holders
2001 Stock Option Plan
2012 Restricted Stock and Incentive Bonus Plan
2014 Omnibus Incentive Plan
Equity compensation plans not approved by security holders
Total
(A)
(B)
(C)
Number of securities
to be issued upon
exercise of
outstanding options
or vesting of
outstanding restricted
stock grants
Weighted average
exercise price of
outstanding options
and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans excluding
securities reflected in
column (A)
216.16
n/a
n/a
5,000
$
113,818
117,744
236,562
—
236,562
4,877
772,904
777,781
—
777,781
There were no shares tendered in connection with option exercises during the years ended December 31, 2015 and 2014, respectively. Restricted
shares canceled to pay withholding taxes totaled 18,498 and 14,492 during the years ended December 31, 2015 and 2014, respectively.
ITEM 13 – Certain Relationships and Related Transactions, and Director Independence
The information required by this item contained under the sections captioned “Related Party Transactions” and “Director Independence” in the
Proxy Statement for the Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than 120
days after the end of our fiscal year, is incorporated herein by reference.
ITEM 14 – Principal Accounting Fees and Services
The information required by this item contained under the section captioned “Proposal 3– Ratification of Selection of Independent Auditor” in
the Proxy Statement for the Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than
120 days after the end of our fiscal year, is incorporated herein by reference.
79
ITEM 15 – Exhibits and Financial Statement Schedules
PART IV
(a)
(1)
Financial Statements
See Index to Consolidated Financial Statements on page 82.
(2)
Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable or not required, or because the required information
is included in the Consolidated Financial Statements or the Notes thereto or in Part 1, Item 1.
(3)
Exhibits
See Index of Exhibits on page 145.
(b)
Exhibits
See Index of Exhibits on page 145.
80
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 29, 2016
Banner Corporation
/s/ Mark J. Grescovich
Mark J. Grescovich
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ Mark J. Grescovich
Mark J. Grescovich
President and Chief Executive Officer; Director
(Principal Executive Officer)
/s/ Lloyd W. Baker
Lloyd W. Baker
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: February 29, 2016
/s/ John R. Layman
John R. Layman
Director
Date: February 29, 2016
/s/ Connie R. Collingsworth
Connie R. Collingsworth
Director
Date: February 29, 2016
/s/ Gary Sirmon
Gary Sirmon
Chairman of the Board
Date: February 29, 2016
/s/ Brent A. Orrico
Brent A. Orrico
Director
Date: February 29, 2016
/s/ Michael M. Smith
Michael M. Smith
Director
Date: February 29, 2016
/s/ Constance H. Kravas
Constance H. Kravas
Director
Date: February 29, 2016
/s/ Spencer C. Fleischer
Spencer C. Fleischer
Director
Date: February 29, 2016
Date: February 29, 2016
/s/ Robert D. Adams
Robert D. Adams
Director
Date: February 29, 2016
/s/ Jesse G. Foster
Jesse G. Foster
Director
Date: February 29, 2016
/s/ D. Michael Jones
D. Michael Jones
Former President and Chief Executive Officer; Director
Date: February 29, 2016
/s/ Gordon E. Budke
Gordon E. Budke
Director
Date: February 29, 2016
/s/ David A. Klaue
David A. Klaue
Director
Date: February 29, 2016
/s/ Michael J. Gillfillan
Michael J. Gillfillan
Director
Date: February 29, 2016
81
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
BANNER CORPORATION AND SUBSIDIARIES
(Item 8 and Item 15(a)(1))
Report of Management
Management Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of December 31, 2014 and 2013
Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012
Notes to the Consolidated Financial Statements
Page
83
83
85
86
87
88
89
90
92
82
February 29, 2016
Report of Management
To the Shareholders:
The management of Banner Corporation (the Company) is responsible for the preparation, integrity, and fair presentation of its published financial
statements and all other information presented in this annual report. The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America and, as such, include amounts based on informed judgments and estimates made
by management. In the opinion of management, the financial statements and other information herein present fairly the financial condition and
operations of the Company at the dates indicated in conformity with accounting principles generally accepted in the United States of America.
Management is responsible for establishing and maintaining an effective system of internal control over financial reporting. The internal control
system is augmented by written policies and procedures and by audits performed by an internal audit staff (assisted in certain instances by
contracted external audit resources other than the independent registered public accounting firm), which reports to the Audit Committee of the
Board of Directors. Internal auditors monitor the operation of the internal and external control system and report findings to management and
the Audit Committee. When appropriate, corrective actions are taken to address identified control deficiencies and other opportunities for
improving the system. The Audit Committee provides oversight to the financial reporting process. There are inherent limitations in the
effectiveness of any system of internal control, including the possibility of human error and circumvention or overriding of controls. Accordingly,
even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because
of changes in conditions, the effectiveness of an internal control system may vary over time.
The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of the Company’s management. The
Audit Committee is responsible for the selection of the independent auditors. It meets periodically with management, the independent auditors
and the internal auditors to ensure that they are carrying out their responsibilities. The Committee is also responsible for performing an oversight
role by reviewing and monitoring the financial, accounting, and auditing procedures of the Company in addition to reviewing the Company’s
financial reports. The independent auditors and the internal auditors have full and free access to the Audit Committee, with or without the
presence of management, to discuss the adequacy of the internal control structure for financial reporting and any other matters which they believe
should be brought to the attention of the Committee.
Mark J. Grescovich, Chief Executive Officer
Lloyd W. Baker, Chief Financial Officer
Management Report on Internal Control over Financial Reporting
February 29, 2016
The management of Banner Corporation is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rule 13a-15(f).
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. All internal control systems,
no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding
controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial
statement preparation. Also, projection of any evaluation of effectiveness to future periods is subject to risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management with the participation of the Chief Executive Officer and Chief Financial Officer assessed the effectiveness of Banner Corporation’s
internal control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013).
Based on its assessment, Management concluded that Banner Corporation maintained effective internal control over financial reporting as of
December 31, 2015.
As of the close of business on October 1, 2015, the Company completed its acquisition of Starbuck Bancshares, Inc. ("Starbuck") and its subsidiary,
AmericanWest Bank. AmericanWest Bank was merged into Banner Bank, a wholly owned subsidiary of the Company, as of the close of business
on October 1, 2015. As of December 31, 2015, the majority of the acquired systems and operations of Starbuck and AmericanWest Bank,
including the branches, loans, deposits and core operating system, had not been converted to the Company’s systems or integrated into its
operations. As permitted by the Securities and Exchange Commission, management elected to exclude the non-integrated branches, systems,
operations and related loans and deposits of Starbuck, and AmericanWest Bank, from management's assessment of the effectiveness of the
Company's internal control over financial reporting as of December 31, 2015. The loans and deposits of Starbuck and AmericanWest Bank
83
represented $2.82 billion or 38% and $3.50 billion or 43%, respectively, of the Company’s total loans and deposits as reported in our consolidated
financial statements as of December 31, 2015. Our assessment of the internal control over financial reporting of the Company also excluded an
evaluation of the internal control over financial reporting of the non-integrated branches, systems, operations and related loans and deposits that
were formerly part of Starbuck and AmericanWest Bank.
The Company’s independent registered public accounting firm has audited the Company’s consolidated financial statements and the effectiveness
of our internal control over financial reporting as of and for the year ended December 31, 2015 that are included in this annual report and issued
their Report of Independent Registered Public Accounting Firm, appearing under Item 8. The attestation report expresses an unqualified opinion
on the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2015.
84
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Banner Corporation and Subsidiaries
Walla Walla, Washington
We have audited the accompanying consolidated statements of financial condition of Banner Corporation and subsidiaries, (the “Company”) as
of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity,
and cash flows for each of the three years in the period ended December 31, 2015. We also have audited the Company’s internal control over
financial reporting as of December 31, 2015, based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control - Integrated Framework (2013). As described in Management’s Report on Internal Control Over
Financial Reporting, the Company completed its acquisition of Starbuck Bancshares, Inc. ("Starbuck") and its subsidiary, AmericanWest Bank
as of the close of business on October 1, 2015, and management elected to exclude the non-integrated branches, systems, operations and related
loans and deposits of Starbuck and AmericanWest Bank from its assessment of the effectiveness of the Company's internal control over financial
reporting as of December 31, 2015. The loans and deposits of Starbuck and AmericanWest Bank represented $2.82 billion or 38% and $3.50
billion or 43%, respectively, of the Company’s total loans and deposits, as reported in the consolidated financial statements as of December 31,
2015. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial
reporting of the non-integrated branches, systems, operations and related loans and deposits that were formerly part of Starbuck and AmericanWest
Bank. The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial
statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated
financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that
our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position
of Banner Corporation and subsidiaries as of December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2015, in conformity with generally accepted accounting principles. Also in our
opinion, Banner Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2015, based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control - Integrated Framework (2013).
/s/ Moss Adams LLP
Portland, Oregon
February 29, 2016
85
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except shares)
December 31, 2015 and 2014
ASSETS
Cash and due from banks
Interest bearing deposits
Total cash and cash equivalents
Securities—trading, amortized cost $39,344 and $47,480, respectively
Securities—available-for-sale, amortized cost $1,139,740 and $411,424, respectively
Securities—held-to-maturity, fair value $226,627 and $137,608, respectively
Federal Home Loan Bank (FHLB) stock
Loans held for sale
Loans receivable
Allowance for loan losses
Net loans
Accrued interest receivable
Real estate owned (REO), held for sale, net
Property and equipment, net
Goodwill
Other intangible assets, net
Bank-owned life insurance (BOLI)
Deferred tax assets, net
Income tax receivable, net
Other assets
Total assets
LIABILITIES
Deposits:
Non-interest-bearing
Interest-bearing transaction and savings accounts
Interest-bearing certificates
Total deposits
Advances from FHLB at fair value
Other borrowings
Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)
Accrued expenses and other liabilities
Deferred compensation
Total liabilities
COMMITMENTS AND CONTINGENCIES (Note 23)
SHAREHOLDERS’ EQUITY
Preferred stock - $0.01 par value per share, 500,000 shares authorized; no shares issued and outstanding
at December 31, 2015 and December 31, 2014
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized,
32,817,789 shares issued and outstanding at December 31, 2015; 19,571,548 shares issued and
outstanding at December 31, 2014
Common stock (non-voting) and paid in capital - $0.01 par value per share, 5,000,000 shares
authorized; 1,424,466 shares issued and outstanding at December 31, 2015; no shares issued and
outstanding at December 31, 2014
Retained earnings
Accumulated other comprehensive loss
Carrying value of shares held in trust for stock related compensation plans
Liability for common stock issued to deferred, stock related, compensation plans
Total shareholders' equity
Total liabilities and shareholders' equity
See notes to consolidated financial statements
86
2015
2014
$
$
117,657
144,260
261,917
34,134
1,138,573
220,666
16,057
44,712
7,314,504
(78,008)
7,236,496
29,627
11,627
167,604
247,738
36,762
156,865
134,970
1,607
56,943
71,077
54,995
126,072
40,258
411,021
131,258
27,036
2,786
3,831,034
(75,907)
3,755,127
15,279
3,352
91,185
—
2,831
63,759
23,871
—
29,328
$
$
9,796,298
$
4,723,163
$
2,619,618
4,081,580
1,353,870
8,055,068
133,381
98,325
92,480
76,511
40,474
8,496,239
1,298,866
1,829,568
770,516
3,898,950
32,250
77,185
78,001
37,082
16,807
4,140,275
—
—
1,193,270
568,882
67,904
39,615
(730)
(6,928)
6,928
1,300,059
—
14,264
(258)
(6,669)
6,669
582,888
$
9,796,298
$
4,723,163
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for per share amounts)
For the Years Ended December 31, 2015, 2014 and 2013
2015
2014
2013
INTEREST INCOME:
Loans receivable
Mortgage-backed securities
Securities and cash equivalents
Total interest income
INTEREST EXPENSE:
Deposits
FHLB advances
Other borrowings
Junior subordinated debentures
Total interest expense
Net interest income before provision for loan losses
PROVISION FOR LOAN LOSSES
Net interest income
NON-INTEREST INCOME
Deposit fees and other service charges
Mortgage banking operations
BOLI
Miscellaneous
Net gain (loss) on sale of securities
Other-than-temporary impairment recovery
Net change in valuation of financial instruments carried at fair value
Acquisition termination fee
Acquisition bargain purchase gain
Total non-interest income
NON-INTEREST EXPENSE:
Salary and employee benefits
Less capitalized loan origination costs
Occupancy and equipment
Information/computer data services
Payment and card processing expenses
Professional services
Advertising and marketing
Deposit insurance
State/municipal business and use taxes
REO operations
Amortization of core deposit intangibles
Miscellaneous
Acquisition related costs
Total non-interest expense
Income before provision for income taxes
PROVISION FOR INCOME TAXES
NET INCOME
Earnings per common share
Basic
Diluted
Cumulative dividends declared per common share
Weighted average number of common shares outstanding:
Basic
Diluted
$
$
$
$
$
237,292
9,049
8,092
254,433
8,385
311
211
3,247
12,154
242,279
—
242,279
40,607
17,720
2,497
2,821
63,645
(540)
—
(813)
—
—
62,292
127,282
(14,379)
30,366
12,110
16,430
4,828
7,649
3,189
1,889
397
3,164
17,565
210,490
26,110
236,600
67,971
22,749
45,222
1.90
1.89
0.72
$
$
$
$
$
177,541
5,779
7,341
190,661
7,578
125
172
2,914
10,789
179,872
—
179,872
30,553
10,249
1,809
1,885
44,496
42
—
1,374
—
9,079
54,991
89,778
(11,730)
22,743
8,131
11,460
3,753
6,266
2,415
1,437
(446)
1,990
13,619
149,416
4,325
153,741
81,122
27,052
54,070
2.79
2.79
0.72
$
$
$
$
$
167,204
5,168
7,340
179,712
9,737
99
192
2,968
12,996
166,716
—
166,716
26,581
11,170
2,020
2,784
42,555
1,022
409
(2,278)
2,954
—
44,662
84,388
(11,227)
21,423
7,309
9,870
3,781
6,885
2,329
1,941
(689)
1,941
12,474
140,425
550
140,975
70,403
24,189
46,214
2.39
2.38
0.54
23,801,373
23,866,621
19,359,409
19,402,656
19,361,411
19,397,360
See notes to the consolidated financial statements
87
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
For the Years Ended December 31, 2015, 2014 and 2013
NET INCOME
$
45,222
$
54,070
$
46,214
2015
2014
2013
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:
Unrealized holding (loss) gain on securities—available-for-sale arising during the
period
Income tax benefit (expense) related to securities—available-for-sale unrealized
holding gains (losses)
Reclassification for net (gains) losses on securities—available-for-sale realized in
earnings
Income tax benefit (expense) related to securities—available-for-sale realized
(gains) losses
Other comprehensive income (loss)
(645)
249
(119)
43
(472)
4,319
(8,066)
(1,555)
2,896
(41)
15
2,738
116
(42)
(5,096)
COMPREHENSIVE INCOME
$
44,750
$
56,808
$
41,118
See notes to the consolidated financial statements
88
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands, except shares)
For the Years Ended December 31, 2015, 2014 and 2013
Common Stock
and Paid in Capital
Shares
Amount
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Unearned
Restricted
ESOP Shares
Shareholders'
Equity
Balance, January 1, 2013
19,454,965
$
567,907
$
Net income
Other comprehensive loss
Accrual of dividends on common stock ($0.54/share-cumulative)
Proceeds from issuance of common stock for shareholder reinvestment program
Amortization of stock-based compensation related to restricted stock grants, net
of shares surrendered
Balance, December 31, 2013
Balance, January 1, 2014
Net income
Other comprehensive income
Accrual of dividends on common stock ($0.72/share-cumulative)
Redemption of unallocated shares upon termination of ESOP
Repurchase of shares upon termination of ESOP
Proceeds from issuance of common stock for shareholder reinvestment program
Amortization of stock-based compensation related to restricted stock grants, net
of shares surrendered
Excess tax benefits on stock-based compensation
Balance, December 31, 2014
Balance, January 1, 2015
Net income
Other comprehensive loss
Accrual of dividends on common stock ($0.72/share-cumulative)
Proceeds from issuance of common stock for shareholder reinvestment program
Amortization of stock-based compensation related to restricted stock grants, net
of shares surrendered
Issuance of shares for acquisitions
Excess tax benefit on stock-based compensation
2,098
86,706
19,543,769
19,543,769
(34,340)
(13,550)
3,170
72,499
19,571,548
19,571,548
$
$
$
$
72
1,049
569,028
569,028
$
$
(1,987)
(555)
127
2,203
66
568,882
568,882
$
$
810
34
120,043
14,549,854
3,088
688,773
397
(61,402) $
46,214
(10,526)
2,101
$
(1,987) $
(5,097)
506,619
46,214
(5,097)
(10,526)
72
1,049
(25,714) $
(2,996) $
(1,987) $
538,331
(25,714) $
54,070
(14,092)
(2,996) $
(1,987) $
2,738
1,987
538,331
54,070
2,738
(14,092)
—
(555)
127
2,203
66
$
$
14,264
14,264
45,222
(19,871)
(258) $
— $
582,888
(258) $
— $
(472)
582,888
45,222
(472)
(19,871)
34
3,088
688,773
397
Balance, December 31, 2015
34,242,255
$
1,261,174
$
39,615
$
(730) $
— $
1,300,059
89
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31, 2015, 2014 and 2013
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided from operating activities:
$
45,222
$
54,070
$
46,214
2015
2014
2013
Depreciation
Deferred income and expense, net of amortization
Amortization of core deposit intangibles
Loss (gain) on sale of securities, net
Other-than-temporary impairment recovery
Net change in valuation of financial instruments carried at fair value
Purchases of securities—trading
Proceeds from sales of securities—trading
Principal repayments and maturities of securities—trading
Bargain purchase gain on acquisition
(Increase) decrease in deferred taxes
(Decrease) increase in current taxes payable
Equity-based compensation
Increase in cash surrender value of BOLI
Gain on sale of loans, net of capitalized servicing rights
Gain on disposal of real estate held for sale and property and equipment
Provision for real estate held for sale
Origination of loans held for sale
Proceeds from sales of loans held for sale
Net change in:
Other assets
Other liabilities
Net cash provided from operating activities
INVESTING ACTIVITIES:
Purchases of securities—available-for-sale
Principal repayments and maturities of securities—available-for-sale
Proceeds from sales of securities—available-for-sale
Purchases of securities—held-to-maturity
Principal repayments and maturities of securities—held-to-maturity
Loan originations, net
Purchases of loans and participating interest in loans
Proceeds from sales of other loans
Net cash received from acquisitions, net of branch divestitures
Purchases of property and equipment, net of sales
Proceeds from sale of real estate held for sale, net
Proceeds from FHLB stock repurchase program
Purchase of FHLB stock
Other
Net cash used by investing activities
FINANCING ACTIVITIES
Increase in deposits, net
Proceeds from FHLB advances
Payments for FHLB advances
Increase (decrease) in other borrowings, net
Cash dividends paid
Cash proceeds from issuance of shares for shareholder reinvestment plan
Net cash provided from financing activities
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
9,957
(1,534)
3,164
540
—
813
(6,338)
4,419
9,535
—
(3,906)
(1,519)
3,486
(2,481)
(10,716)
(391)
216
(709,035)
677,166
(7,319)
4,090
15,369
(141,989)
113,431
232,620
(13,357)
12,978
(32,675)
(323,533)
124,407
24,208
(12,072)
4,740
48,843
(23,634)
1,092
15,059
226,821
859,400
(979,808)
16,140
(17,170)
34
105,417
135,845
126,072
8,064
1,541
1,990
(42)
—
(1,374)
(2,387)
2,387
27,709
(9,079)
2,966
11,771
2,269
(1,788)
(6,080)
(1,076)
36
(361,859)
367,888
(2,310)
3,370
98,066
(58,705)
62,520
56,267
(38,961)
9,194
(144,152)
(194,381)
11,277
127,557
(5,935)
4,923
8,354
—
(2,025)
(164,067)
68,938
1,483,300
(1,478,308)
(5,871)
(13,462)
127
54,724
(11,277)
137,349
CASH AND CASH EQUIVALENTS, END OF YEAR
$
261,917
$
126,072
$
(Continued on next page)
90
7,457
3,200
1,941
(1,022)
(409)
2,278
(32,413)
34,308
6,509
—
7,869
(10,818)
1,049
(1,999)
(6,498)
(2,521)
785
(427,542)
443,225
19,426
4,327
95,366
(197,911)
84,424
103,274
(26,221)
9,788
(167,085)
(48,725)
19,305
6,809
(8,211)
16,944
1,315
—
(127)
(206,421)
51,417
1,020,705
(1,003,712)
6,423
(7,799)
72
67,106
(43,949)
181,298
137,349
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued) (in thousands)
For the Years Ended December 31, 2015, 2014 and 2013
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid in cash
Taxes paid in cash
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
2015
2014
2013
$
$
12,252
27,256
$
10,929
13,047
13,362
22,828
Loans, net of discounts, specific loss allowances and unearned income, transferred to
real estate owned and other repossessed assets
4,456
3,493
3,448
ACQUISITIONS (Note 3):
Assets acquired
Liabilities assumed
4,827,237
4,250,395
221,206
212,127
8,710
8,710
See notes to consolidated financial statements
91
BANNER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: Banner Corporation (Banner or the Company) is a bank holding company incorporated in the State of Washington. The
Company is primarily engaged in the business of planning, directing and coordinating the business activities of two wholly-owned subsidiaries,
Banner Bank and Islanders Bank. Banner Bank is a Washington-chartered commercial bank that conducts business from its headquarters in
Walla Walla, Washington and, as of December 31, 2015, its 199 branch offices and nine loan production offices located in Washington, Oregon,
California, Utah and Idaho. Islanders Bank is also a Washington-chartered commercial bank that conducts business from three locations in San
Juan County, Washington. Banner Corporation is subject to regulation by the Board of Governors of the Federal Reserve System. Banner Bank
and Islanders Bank (the Banks) are subject to regulation by the Washington State Department of Financial Institutions, Division of Banks (DFI)
and the Federal Deposit Insurance Corporation (the FDIC).
The Company’s operating results depend primarily on its net interest income, which is the difference between interest income on interest-earning
assets, consisting of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of customer deposits,
Federal Home Loan Bank of Des Moines (FHLB) advances, other borrowings and junior subordinated debentures. Net income also is affected
by the level of the Company’s non-interest income, including deposit fees and other service charges, gains and losses on the sale of securities,
results of mortgage banking operations, which includes loan origination and servicing fees and gains and losses on the sale of loans, as well as
non-interest expense, provisions for loan losses and income tax provisions. In addition, net income is affected by the net change in the value of
certain financial instruments carried at fair value.
Basis of Presentation and Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All material intercompany transactions, profits and balances have been eliminated. The consolidated financial
statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) and
under the rules and regulations of the U.S. Securities and Exchange Commission (the SEC).
Subsequent Events: The Company has evaluated events and transactions subsequent to December 31, 2015 for potential recognition or disclosure .
Cash and Cash Equivalents: Cash and cash equivalents include cash and due from banks and temporary investments which are federal funds
sold and interest bearing balances due from other banks. Cash and cash equivalents generally have maturities of three months or less at the date
of purchase.
Business Combinations: 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 are recorded at acquisition date fair values. The excess
purchase consideration 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 that acquisition. Expenses incurred
in connection with a business combination are expensed as incurred. Changes in deferred tax asset valuation allowances related to acquired tax
uncertainties are recognized in net income after the measurement period.
Use of 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 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 critical 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 and lease 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 core deposit intangibles and mortgage servicing rights, (v) the valuation of real estate held for sale and (vi) the
valuation of or recognition of deferred tax assets and liabilities (vii) the valuation of assets and liabilities acquired in business combinations. These
policies and judgments, estimates and assumptions are described in greater detail in subsequent Notes to the Consolidated Financial
Statements. Management believes that 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 the Company’s results of operations or
financial condition. Further, subsequent changes in economic or market conditions could have a material impact on these estimates and the
Company’s financial condition and operating results in future periods.
Securities: Securities are classified as held-to-maturity when the Company has the ability and positive intent to hold them to maturity. Securities
classified as available-for-sale are available for future liquidity requirements and may be sold prior to maturity. Securities classified as trading
are also available for future liquidity requirements and may be sold prior to maturity. Purchase premiums and discounts are recognized in interest
income using the interest method over the terms of the securities. Securities classified as held-to-maturity are carried at cost, adjusted for
amortization of premiums and accretion of discounts to maturity and, if appropriate, any other-than-temporary impairment losses. Securities
classified as available-for-sale are recorded at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are
excluded from earnings and are reported net of tax as accumulated other comprehensive income (loss), a component of shareholders’ equity,
92
until realized. Securities classified as trading are also recorded at fair value. Unrealized holding gains and losses on securities classified as
trading are included in earnings. (See Note 18 for a more complete discussion of accounting for the fair value of financial instruments.) Declines
in the fair value of securities below their cost that are deemed to be other-than-temporary are recognized in earnings as realized losses. Realized
gains and losses on sale are computed on the specific identification method and are included in earnings on the trade date sold.
The Company reviews investment securities on an ongoing basis for the presence of OTTI or permanent impairment, taking into consideration
current market conditions, fair value in relationship to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether
the Company intends to sell a security or if it is likely that it will be required to sell the security before recovery of the amortized cost basis of
the investment, which may be maturity, and other factors.
For debt securities, if the Company intends to sell the security or it is likely that the Company will be required to sell the security before recovering
its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If the Company does not intend to sell the security and
it is not likely that the Company will be required to sell the security but the Company does not expect to recover the entire amortized cost basis
of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security
is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash
flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential
OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected
and fair value, is recognized as a charge to other comprehensive income (OCI). Impairment losses related to all other factors are presented as
separate categories within OCI.
For investment securities transferred from held-to-maturity to available-for-sale, unrealized gains or losses from the time of transfer are accreted
or amortized over the remaining life of the debt security based on the amount and timing of future estimated cash flows. The accretion or
amortization of the amount recorded in OCI increases the carrying value of the investment and does not affect earnings.
Investment in FHLB Stock: At December 31, 2015, the Banks had $16.1 million in FHLB stock, compared to $27.0 million at December 31,
2014. The Banks' investments in FHLB stock are generally viewed as a long-term investment and are carried at par value ($100 per share), which
reasonably approximates its fair value. FHLB stock does not have a readily determinable fair value. Ownership of FHLB stock is restricted to
the FHLB and member institutions and can only be purchased and redeemed at par. As members of the FHLB system, the Banks are required
to maintain a minimum level of investment in FHLB stock based on specific percentages of their outstanding FHLB advances.
Management periodically evaluates FHLB stock for impairment. Management's determination of whether these investments are impaired is
based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of
whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of
the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the
FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB,
(3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position
of the FHLB. The Company has determined there is not any impairment on the FHLB stock investment as of December 31, 2015.
Loans Receivable: The Banks originate residential one- to four-family and multifamily mortgage loans for both portfolio investment and sale
in the secondary market. The Banks also originate construction and land development, commercial real estate, commercial business, agricultural
and consumer loans for portfolio investment. Loans receivable not designated as held for sale are recorded at the principal amount outstanding,
net of allowance for loan losses, deferred fees, discounts and premiums. Premiums, discounts and deferred loan fees are amortized to maturity
using the level-yield methodology.
Some of the Company’s loans are reported as troubled debt restructures (TDRs). Loans are appropriately reported as TDRs when the Banks
grant a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include
forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available
for a transaction of similar risk. As a result of these concessions, loans identified as TDRs are impaired as the Bank will not collect all amounts
due, both principal and interest, in accordance with the terms of the original loan agreement. TDRs are accounted for in accordance with the
Banks’ impaired loan accounting policies.
Loans Held for Sale. Residential one- to four-family and multifamily mortgage loans with the intent to be sold in the secondary market are
considered held for sale. These loans are carried at the lower of aggregate cost or estimated market value. 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 using recent sales data for comparable loans. Net unrealized losses on loans held for sale are recognized through
a valuation allowance by charges to income. Non-refundable fees and direct loan origination costs related to loans held for sale are recognized
as part of the cost basis of the loan at the time of sale. Gains and losses on sales of loans held for sale are determined using the specific identification
method and are recorded in the mortgage banking operations component of non-interest income.
Acquired 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.
Purchased 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 excess of the cash flows expected to be collected over a PCI pool's carrying value
is considered to be the accretable yield and is recognized as interest income over the estimated life of the pool using the effective yield method.
93
The excess of the undiscounted contractual balances due over the cash flows expected to be collected is considered to be the nonaccretable
difference. The nonaccretable difference represents our estimate of the credit losses expected to occur and was considered in determining the
fair value of the loans as of the acquisition date. Subsequent to the acquisition date, any increases in expected cash flows over those expected
at purchase date in excess of fair value are adjusted through a change to the accretable yield on a prospective basis. Any subsequent decreases
in expected cash flows attributable to credit deterioration are recognized by recording a provision for loan losses.
For purchased non-credit-impaired 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. Any subsequent deterioration in credit quality is recognized by recording
a provision for loan losses.
Income Recognition on Nonaccrual and Impaired Loans and Securities: Interest on loans and securities is accrued as earned unless management
doubts the collectability of the asset or the unpaid interest. Interest accruals on loans are generally discontinued when loans become 90 days
past due for payment of interest or principal and the loans are then placed on nonaccrual status. 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. A loan may be put on
nonaccrual status sooner than this policy would dictate if, in management’s judgment, the interest may be uncollectable. While less common,
similar interest reversal and nonaccrual treatment is applied to investment securities if their ultimate collectability becomes questionable.
Provision and Allowance for Loan Losses: The provision for loan losses reflects the amount required to maintain the allowance for losses at
an appropriate level based upon management’s evaluation of the adequacy of general and specific loss reserves. The Company maintains an
allowance for loan losses consistent in all material respects with GAAP. The Company has established systematic methodologies for the
determination of the adequacy of the Company’s allowance for loan losses. The methodologies are set forth in a formal policy and take into
consideration the need for a general valuation allowance as well as specific allowances that are tied to individual problem loans. The Company
increases its allowance for loan losses by charging provisions for probable loan losses against its income and values impaired loans consistent
with accounting guidelines.
The allowance for loan losses is maintained at a level sufficient to provide for estimated losses based on evaluating known and inherent risks in
the loan portfolio and upon the Company’s continuing analysis of the factors underlying the quality of the loan portfolio. These factors include,
among others, changes in the size and composition of the loan portfolio, delinquency rates, actual loan loss experience, current economic
conditions, detailed analysis of individual loans for which full collectability may not be assured, and determination of the existence and realizable
value of the collateral and guarantees securing the loans. Realized losses related to specific assets are applied as a reduction of the carrying
value of the assets and charged immediately against the allowance for loan loss reserve. Recoveries on previously charged off loans are credited
to the allowance for loan losses. The reserve is based upon factors and trends identified by Banner at the time financial statements are
prepared. Although the Company uses the best information available, future adjustments to the allowance for loan losses may be necessary due
to economic, operating, regulatory and other conditions beyond the Company’s control. The adequacy of general and specific reserves is based
on a continuing evaluation of the pertinent factors underlying the quality of the loan portfolio as well as individual review of certain large balance
loans. Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. Loans that are collectively evaluated for
impairment include residential real estate and consumer loans and, as appropriate, smaller balance non-homogeneous loans. Larger balance
non-homogeneous residential construction and land, commercial real estate, commercial business loans and unsecured loans are individually
evaluated for impairment. Loans are considered impaired when, based on current information and events, the Company determines that it is
probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors involved in determining
impairment include, but are not limited to, the financial condition of the borrower and the value of the underlying collateral. Impaired loans are
measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at
the loan’s observable market price, or if the loan is collateral dependent, at the fair value of collateral less selling costs. Subsequent changes in
the value of impaired loans are included within the provision for loan losses in the same manner in which impairment initially was recognized
or as a reduction in the provision that would otherwise be reported.
The Company’s methodology for assessing the appropriateness of the allowance for loan losses consists of several key elements, which include
specific allowances, an allocated formula allowance and an unallocated allowance. Losses on specific loans are provided for when the losses
are probable and estimable. General loan loss reserves are established to provide for inherent loan portfolio risks not specifically provided
for. The level of general reserves is based on analysis of potential exposures existing in the loan portfolio including evaluation of historical
trends, current market conditions and other relevant factors identified by us at the time the financial statements are prepared. The formula
allowance is calculated by applying loss factors to outstanding loans, excluding those loans that are subject to individual analysis for specific
allowances. Loss factors are based on the Company’s historical loss experience adjusted for significant environmental considerations, including
the experience of other banking organizations, which in the judgment of management affects the collectability of the loan portfolio as of the
evaluation date. The unallocated allowance is based upon the Company’s evaluation of various factors that are not directly measured in the
determination of the formula and specific allowances.
While the Company believes the estimates and assumptions used in the determination of the adequacy of the allowance for loan losses are
reasonable, there can be no assurance that such estimates and assumptions will not be proved incorrect in the future, or that the actual amount
of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact
the financial condition and results of operations of the Company. In addition, the determination of the amount of the allowance for loan losses
is subject to review by bank regulators as part of the routine examination process, which may result in the adjustment of reserves based upon
their judgment of information available to them at the time of their examination.
94
Loan Origination and Commitment Fees: Loan origination fees, net of certain specifically defined direct loan origination costs, are deferred
and recognized as an adjustment of the loans’ interest yield using the level-yield method over the contractual term of each loan adjusted for
actual loan prepayment experience. Net deferred fees or costs related to loans held for sale are recognized in income at the time the loans are
sold. Loan commitment fees are deferred until the expiration of the commitment period unless management believes there is a remote likelihood
that the underlying commitment will be exercised, in which case the fees are amortized to fee income using the straight-line method over the
commitment period. If a loan commitment is exercised, the deferred commitment fee is accounted for in the same manner as a loan origination
fee. Deferred commitment fees associated with expired commitments are recognized as fee income.
Reserve for Unfunded Commitments: A reserve for unfunded commitments is maintained at a level that, in the opinion of management, is
adequate to absorb probable losses associated with the Banks' commitments to lend funds under existing agreements such as letters or lines of
credit. Management determines the adequacy of the reserve for unfunded commitments based upon reviews of individual credit facilities, current
economic conditions, the risk characteristics of the various categories of commitments and other relevant factors. The reserve is based on
estimates and ultimate losses may vary from the current estimates. These estimates are evaluated on a regular basis and, as adjustments become
necessary, they are reported in earnings in the periods in which they become known. Draws on unfunded commitments that are considered
uncollectible at the time funds are advanced are charged to the allowance for loan losses. Provisions for unfunded commitment losses are added
to the reserve for unfunded commitments, which is included in other liabilities.
Real Estate Held for Sale: Property acquired by foreclosure or deed in lieu of foreclosure is initially recorded at the estimated fair value of the
property, less expected selling costs. Development and improvement costs relating to the property are capitalized while direct holding costs are
expensed. The carrying value of the property is periodically evaluated by management and, if necessary, allowances are established to reduce
the carrying value to net realizable value. Gains or losses at the time the property is sold are charged or credited to operations in the period in
which they are realized. The amounts the Banks will ultimately recover from real estate held for sale may differ substantially from the carrying
value of the assets because of market factors beyond the Banks’ control or because of changes in the Banks’ strategies for recovering the
investment.
Property and Equipment: Property and equipment is carried at cost less accumulated depreciation. The provision for depreciation is based
upon the straight-line method applied to individual assets and groups of assets acquired in the same year over the lesser of their estimated useful
lives or the related lease terms of the assets:
Buildings and leased improvements
Furniture and equipment
10–30 years
3–10 years
Routine maintenance, repairs and replacement costs are expensed as incurred. Expenditures which significantly increase values or extend useful
lives are capitalized. The Company reviews buildings, leasehold improvements and equipment for impairment whenever events or changes in
circumstances indicate that the undiscounted cash flows for the property are less than its carrying value. If identified, an impairment loss is
recognized through a charge to earnings based on the fair value of the property.
Goodwill: Goodwill represents the excess of the purchase consideration 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. If the qualitative analysis concludes that further analysis is required, then a quantitative
impairment test would be completed. The quantitative goodwill impairment test is a two-step process. The first step compares the reporting
unit's estimated fair values, including goodwill, to its carrying amount. If the carrying amount exceeds its fair value, then goodwill impairment
may be indicated. The second step allocates the reporting units fair value to its assets and liabilities. If the unallocated fair value does not exceed
the carrying amount of goodwill then an impairment loss would be recognized as a charge to earnings.
Other Intangible Assets: Other intangible assets consist primarily of core deposit intangibles (CDI), which are amounts recorded in business
combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the customer relationships
associated with the deposits. Core deposit intangibles are being amortized on an accelerated basis over a weighted average estimated useful life
of three to ten years. 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: Servicing assets are recognized as separate assets when rights are acquired through purchase or sale of
loans. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage loans, the value of the servicing
right is estimated and capitalized. Fair values are estimated based on an independent dealer analysis of discounted cash flows. Capitalized
servicing rights 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.
Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined
by stratifying rights into tranches based on predominant risk characteristics for the underlying loans, such as interest rate, balance outstanding,
loan type, age and remaining term, and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the
extent that fair value is less than the capitalized amount for the tranche. If the Company later determines that all or a portion of the impairment
no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income.
95
Servicing fee income is recorded for fees earned for servicing loans and is reflected in mortgage banking operations on the Consolidated Statements
of Operations. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income
when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.
Bank-Owned Life Insurance (BOLI): The Banks have purchased, or acquired through mergers, life insurance policies in connection with the
implementation of certain executive supplemental income, salary continuation and deferred compensation retirement plans. These policies
provide protection against the adverse financial effects that could result from the death of a key employee and provide tax-exempt income to
offset expenses associated with the plans. It is the Banks’ intent to hold these policies as a long-term investment; however, there may be an
income tax impact if the Bank chooses to surrender certain policies. Although the lives of individual current or former management-level
employees are insured, the Banks are the respective owners and sole or partial beneficiaries.
Derivative Instruments: Derivatives include “off-balance-sheet” financial products, the value of which is dependent on the value of underlying
financial assets, such as stock, bonds, foreign currency, or a reference rate or index. Such derivatives include “forwards,” “futures,” “options”
or “swaps.” Banner Bank is a party to $12.0 million in notional amounts of interest rate swaps at December 31, 2015. Some of these swaps
serve as hedges to an equal amount of fixed rate loans which include market value prepayment penalties that mirror the provision of the specifically
matched interest rate swaps. In addition, Banner Bank uses an interest rate swap program for commercial loan customers that provides the client
with a variable rate loan and enters into an interest rate swap allowing them to effectively fix their loan interest rates. These customer swaps
are matched with third party swaps with qualified broker/dealer or banks to offset the risk. At December 31, 2015, Banner Bank had $282.0
million in notional amounts of these customer interest rate swaps outstanding, with an equal amount of offsetting third party swaps also in
place. The fair value adjustments for these swaps are reflected in other assets or other liabilities as appropriate.
Further, as a part of its mortgage banking activities, the Company issues “rate lock” commitments to borrowers and obtains offsetting “best
efforts” delivery commitments from purchasers of loans. The Company also uses forward contracts for the sale of mortgage-backed securities
and mandatory delivery commitments for the sale of loans to hedge "rate lock" commitments and loans held for sale. The commitments to
originate mortgage loans held for sale and the related delivery contracts are considered derivatives. The Company recognizes all derivatives as
either assets or liabilities in the balance sheet and requires measurement of those instruments at fair value through adjustments to current
earnings. None of these residential mortgage loan related derivatives are designated as hedging instruments for accounting purposes. Rather,
they are accounted for as free-standing derivatives, or economic hedges, and the Company reports changes in fair values of its derivatives in
current period net income. The fair value of the derivative loan commitments is estimated using the present value of expected future cash
flows. Assumptions used include rate assumptions based on historical information, current mortgage interest rates, the stage of completion of
the underlying application and underwriting process, the time remaining until the expiration of the derivative loan commitment, and the expected
net future cash flows related to the associated servicing of the loan (see Note 24 for a more complete discussion of derivatives and hedging).
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control
over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Banks, (2) the transferee obtains the right
(free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Banks do not
maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Advertising Expenses: Advertising costs are expensed as incurred. Costs related to production of advertising are considered incurred when the
advertising is first used.
Income 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 bases 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 provides 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 December 31, 2015, the Company had an insignificant amount of unrecognized tax benefits for uncertain tax positions, none of which
would materially affect the effective tax rate if recognized. The Company does not anticipate that the amount of unrecognized tax benefits will
significantly increase or decrease in the next twelve months. The Company’s policy is to recognize interest and penalties on unrecognized tax
benefits in income tax expense. The amount of interest and penalties accrued for the years ended December 31, 2015 and 2014 is immaterial.
The Company files consolidated income tax returns in Oregon, California, Utah and Idaho and for federal purposes. The Company has tax years
2011–2014 open for tax examination under the statute of limitation provisions of the Internal Revenue Code of 1986 (Code).
Stock-Based Compensation: The Company has adopted the fair value recognition method for recognizing stock-based compensation expense,
using the modified-prospective-transition method. Under that method, compensation costs are recognized based upon grant date fair value. This
96
method requires the cash flows resulting from the tax benefits of tax deductions in excess of the compensation cost recognized for those options
(excess tax benefits) to be classified as financing cash flows. The restricted stock grants value shares awarded at their fair value, which is their
intrinsic value on the date of the award grant. The expense of the award grants are accrued ratably over the vesting period from the date of each
award.
Stock Options: Stock option grant stock-based compensation costs under the Company's stock options plans are generally based on the fair value
calculated from the Black-Scholes option pricing on the date of the grant award. The Black-Scholes model assumes an expected stock price
volatility based on the historical volatility at the date of the grant and an expected term based on the remaining contractual life of the vesting
period. The Company bases the estimate of risk-free interest rate on the U.S. Treasury's Constant Maturities Indices in effect at the time of the
grant. The dividend yield is based on the current quarterly dividend in effect at the time of the grant.
The Company is required to estimate potential forfeitures of stock option grants and adjust compensation cost recorded accordingly. The estimate
of forfeitures is adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such
estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment in the period of change and also impact
the amount of stock compensation expense to be recognized in future periods.
Earnings Per Share: Earnings per common share is computed under the two-class method. Pursuant to the two-class method, nonvested stock-
based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and are included in the
computation of EPS pursuant. The two-class method is an earnings allocation formula that determines earnings per share for each class of
common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings.
Basic earnings per common share is computed by dividing net earnings allocated to common shareholders by the weighted-average number of
common shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per common share is
computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect
of stock compensation and warrants for common stock using the treasury stock method.
Comprehensive Income: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net
income. In addition, certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as
a separate component of the equity section of the Consolidated Statements of Financial Condition, and such items, along with net income, are
components of comprehensive income (loss) which is reported in the Consolidated Statements of Comprehensive Income.
Business Segments: The Company is managed by legal entity and not by lines of business. Each of the Banks is a community oriented commercial
bank chartered in the State of Washington. The Banks’ primary business is that of a traditional banking institution, gathering deposits and
originating loans for portfolio in its respective primary market areas. The Banks offer a wide variety of deposit products to their consumer and
commercial customers. Lending activities include the origination of real estate, commercial/agriculture business and consumer loans. Banner
Bank is also an active participant in the secondary market, originating residential loans for sale on both a servicing released and servicing retained
basis. In addition to interest income on loans and investment securities, the Banks receive other income from deposit service charges, loan
servicing fees and from the sale of loans and investments. The performance of the Banks is reviewed by the Company’s executive management
and Board of Directors on a monthly basis. All of the executive officers of the Company are members of Banner Bank’s management team.
Generally Accepted Accounting Principles establish standards to report information about operating segments in annual financial statements and
require reporting of selected information about operating segments in interim reports to shareholders. The Company has determined that its
current business and operations consist of a single business segment.
Reclassification: Certain reclassifications have been made to the prior years’ consolidated financial statements and/or schedules to conform to
the current year’s presentation. These reclassifications may have affected certain reported amounts and ratios for the prior periods. These
reclassifications had no effect on retained earnings or net income as previously presented and the effect of these reclassifications is considered
immaterial. For the impacts of the retrospective adoption of ASU No. 2014-01, Accounting for Investments in Qualified Affordable Housing
Projects, see Note 2.
Note 2: ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED
Investing in Qualified Affordable Housing Projects
In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-01, Accounting for
Investments in Qualified Affordable Housing Projects. The objective of this ASU is to provide guidance on accounting for investments by a
reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income
housing tax credit. The amendments in this ASU modify the conditions that a reporting entity must meet to be eligible to use a method other
than the equity or cost methods to account for qualified affordable housing project investments. If the modified conditions are met, the amendments
permit an entity to amortize the initial cost of the investment in proportion to the amount of tax credits and other tax benefits received and
recognize the net investment performance in the income statement as a component of income tax expense (benefit). Additionally, the amendments
introduce new recurring disclosures about all investments in qualified affordable housing projects irrespective of the method used to account
for the investments. The amendments in this ASU are applied retrospectively to all periods presented. ASU No. 2014-01 was effective beginning
after December 15, 2014 and was adopted by the Company, as of January 1, 2015. The new standard has been retrospectively applied resulting
in changes to other non-interest income, tax expense and net income, deferred tax asset, other assets and retained earnings in the prior periods
97
presented. The effect of this change on the revised annual Consolidated Statements of Operations was a decrease in net income of $95,000 and
$341,000 for the years ended December 31, 2014 and 2013, respectively. All prior periods have been reclassified to conform to the current
presentation.
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure
In January 2014, FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon
Foreclosure. The amendments in this ASU clarify that an in-substance repossession or foreclosure occurs, and a creditor is considered to have
received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining
legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real
estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.
Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by
the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process
of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for fiscal years and interim periods
beginning after December 15, 2014 and was adopted by the Company, as of January 1, 2015. At December 31, 2015, the Company had $3.4
million of foreclosed residential real estate properties held as other real estate owned. The recorded investment in one- to four-family residential
loans in the process of foreclosure was $2.8 million at both December 31, 2015.
Revenue from Contracts with Customers
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which creates Topic 606 and supersedes Topic 605,
Revenue Recognition. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In
general, the new guidance requires companies to use more judgment and make more estimates than under current guidance, including identifying
performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the
transaction price to each separate performance obligation. Under the terms of ASU 2015-14 the standard is effective for interim and annual
periods beginning after December 15, 2017. 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.
98
Customer's Accounting for Fees Paid in a Cloud Computing Arrangement
In April 2015, FASB issued ASU No. 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. The amendments in
this ASU provide guidance to customers in cloud computing arrangements about whether a cloud computing arrangement includes a software
license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the
arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license,
the customer should account for the arrangement as a service contract. The amendments are effective for annual periods, including interim
periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. This ASU is not expected to have a
material effect on the Company's Consolidated Financial Statements.
Push-down Accounting—Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115
In May 2015, FASB issued ASU No. 2015-08, Push-down Accounting—Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin
No. 115 (SEC Update). The amendments in the SEC Update conform the accounting guidance with the various SEC paragraphs pursuant to the
SEC Staff Accounting Bulletin No. 115. These amendments are effective immediately. This ASU does not have a material effect on the Company's
Consolidated Financial Statements.
Business Combinations—Simplifying the Accounting for Measurement-Period Adjustments
In September 2015, FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. The amendments in this
ASU require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting
period when the adjustment amounts are determined. The acquirer is required to record in the same period's financial statements the effect on
earnings from changes in depreciation, amortization, or other income effects resulting from the change to provisional amounts, calculated as if
the accounting had been completed at the acquisition date. The acquirer must present separately on the income statement, or disclose in the notes,
the amount recorded in current-period earnings that would have been recorded in previous reporting periods if the provisional amount had been
recognized at the acquisition date. The amendments in this ASU are effective for fiscal years beginning after December 15, 2015, including
interim periods within those fiscal years. This ASU may have a material effect on the Company's Consolidated Financial Statements depending
on the significance of future adjustments to provisional amounts, if any.
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. The amendments simplify the impairment assessment of equity investments without readily
determinable fair values. The amendments also eliminate 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 amendment 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.
99
Note 3: BUSINESS COMBINATIONS
Acquisition of Starbuck Bancshares, Inc.
Effective as of the close of business on October 1, 2015, the Company acquired Starbuck Bancshares, Inc. (Starbuck) 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
nonvoting 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 $226.0 million.
The acquired CDI has been determined to have a useful life of approximately ten years and will be amortized on an accelerated basis. Goodwill
is not amortized but will be evaluated for impairment on an annual basis or more often if circumstances dictate to determine if the carrying value
remains appropriate. Goodwill will not be deductible for income tax purposes as the acquisition is accounted for as a tax-free exchange for tax
purposes.
The following table presents a summary of the consideration paid and the estimated fair values as of the acquisition date for each major class
of assets acquired and liabilities assumed (in thousands):
Consideration to Starbuck equityholders:
Cash paid
Fair value of common shares issued
Total consideration
Fair value of assets acquired:
Cash and cash equivalents
Securities
Loans receivable (contractual amount of $3.04 billion)
REO, held for sale
Property and equipment
CDI
Deferred tax asset
Other assets
Total assets acquired
Fair value of liabilities assumed:
Deposits
FHLB advances
Junior subordinated debentures
Other liabilities
Total liabilities assumed
Net assets acquired
Goodwill
$
Starbuck
October 1, 2015
$
$
95,821
1,037,238
2,997,640
5,706
66,549
33,500
107,847
113,173
4,457,474
3,638,596
221,442
5,806
57,003
3,922,847
130,000
630,674
760,674
534,627
226,047
Acquired goodwill represents the premium the Company paid over the fair value of the net tangible and intangible assets acquired. The acquisition
complements 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 17, Goodwill, Other Intangible Assets and Mortgage Servicing Rights for the
accounting for goodwill and other intangible assets.
Amounts recorded are preliminary estimates of fair value. Additional adjustments to the acquisition accounting may be required and would
most likely involve loans, or property and equipment, or the deferred tax asset. 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.
100
The following table presents the acquired PCI loans as of the acquisition date (in thousands):
Acquired PCI loans:
Contractually required principal and interest payments
Nonaccretable difference
Cash flows expected to be collected
Accretable yield
Fair value of PCI loans
Starbuck
October 1, 2015
$
$
98,746
(26,162)
72,584
(11,071)
61,513
The following table presents certain unaudited pro forma information for illustrative purposes only, for the years ended December 31, 2015 and
2014 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):
Total revenues (net interest income plus non-interest income)
Net income
Earnings per share - basic
Earnings per share - diluted
Pro Forma
Years Ended December 31
2015
2014
$
$
$
$
455,427
86,255
2.56
2.55
$
$
$
$
430,984
87,031
2.67
2.67
The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities of Starbuck for the
period October 2, 2015 to December 31, 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 purchase of Siuslaw Financial Group, Inc. (Siuslaw), the
holding company of Siuslaw Bank, an Oregon state chartered commercial bank. Siuslaw merged with and into the Company and, immediately
thereafter, 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. The goodwill is not deductible for income tax purposes since the acquisition is accounted for as a tax-free exchange for
tax purposes.
101
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):
Consideration to Siuslaw shareholders:
Cash paid
Fair value of common shares issued
Total consideration
Fair value of assets acquired:
Cash and cash equivalents
Securities—available-for-sale
Loans receivable (contractual amount of $252.2 million)
REO, held for sale
Property and equipment
CDI
Other assets
Total assets acquired
Fair value of liabilities assumed:
Deposits
Junior subordinated debentures
Other liabilities
Total liabilities assumed
Net assets acquired
Goodwill
$
Siuslaw
March 6, 2015
$
$
84,405
12,865
247,098
2,525
8,127
3,895
10,848
369,763
316,406
5,959
5,183
327,548
5,806
58,100
63,906
42,215
21,691
Acquired goodwill represents the premium the Company paid over the fair value of the net tangible and intangible assets acquired. The acquisition
complements 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 17, Goodwill, Other Intangible Assets and Mortgage Servicing Rights for the accounting for goodwill
and other intangible assets.
Amounts recorded are estimates of fair value. Additional adjustments to the purchase price allocation may be required and would most likely
involve loans or property and equipment. 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 PCI loans as of the acquisition date (in thousands):
Acquired PCI loans:
Contractually required principal and interest payments
Nonaccretable difference
Cash flows expected to be collected
Accretable yield
Fair value of PCI loans
Siuslaw
March 6, 2015
$
$
11,134
(3,238)
7,896
(2,239)
5,657
The following table presents certain unaudited pro forma information for illustrative purposes only, for the years ended December 31, 2015 and
2014 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 other business synergies,
102
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):
Total revenues (net interest income plus non-interest income)
Net income
Earnings per share - basic
Earnings per share - diluted
Pro Forma
Years Ended December 31
2015
2014
$
$
$
$
308,153
44,484
1.85
1.85
$
$
$
$
254,212
58,703
2.84
2.83
The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities of Siuslaw for the
period March 7, 2015 to December 31, 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.
Purchase of Six Oregon Branches
Effective as of the close of business on June 20, 2014, Banner Bank completed the purchase of six branches from Umpqua Bank, successor to
Sterling Savings Bank (the Branch purchase). Five of the six branches are located in Coos County, Oregon and the sixth branch is located in
Douglas County, Oregon. The purchase provided $212.1 million in deposit accounts, $87.9 million in loans, and $3.1 million in branch properties.
Banner Bank received $127.6 million in cash from the transaction.
The application of the acquisition method of accounting resulted in recognition of a CDI of $2.4 million and an acquisition bargain purchase
gain of $9.1 million. The bargain purchase gain consisted primarily of a $7.0 million discount on the assets acquired in this required branch
divestiture combined with a $2.4 million core deposit intangible, net of approximately $300,000 in other fair value adjustments. The acquired
CDI was determined to have a useful life of approximately eight years and is being amortized on an accelerated basis.
The following table displays the fair value as of the acquisition date for each major class of assets acquired and liabilities assumed (in thousands):
Total consideration
Fair value of assets acquired:
Cash and cash equivalents
Loans receivable (contractual amount of $88.3 million)
Property and equipment
CDI
Other assets
Total assets acquired
Fair value of liabilities assumed:
Deposits
Other liabilities
Total liabilities assumed
Net assets acquired
Acquisition bargain purchase gain
Branch Purchase
June 20, 2014
$
—
$
127,557
87,923
3,079
2,372
275
221,206
212,085
42
212,127
9,079
(9,079)
$
The primary reason for the Branch purchase was to continue the Company's growth strategy, including expanding its geographic footprint in
markets throughout the Northwest. As of June 20, 2014, the transaction had no remaining contingencies. The operating results of the Company
include the operating results produced by the Branch purchase from June 21, 2014 to December 31, 2015. Pro forma results of operations for
the years ended December 31, 2015 and 2014, as if the Branch purchase had occurred on January 1, 2014, have not been presented because
historical financial information was not available. There were no PCI loans acquired in connection with the Branch purchase.
103
Acquisition-Related Costs
The following tables present the key components of acquisition-related costs in connection with the Branch purchase, the acquisition of Siuslaw
and the acquisition of Starbuck, including AmericanWest, for the years ended December 31, 2015, 2014 and 2013 (in thousands):
Acquisition-related costs recognized in non-interest expense:
Personnel severance/retention fees
Non-capitalized equipment and repairs
Client communications
Information/computer data services
Payment and processing expenses
Professional services
Miscellaneous
The Branch purchase
Siuslaw
Starbuck
Note 4: SECURITIES
Years Ended December 31
2015
2014
2013
$
$
$
$
$
6,577
1,031
527
2,875
28
11,169
3,903
— $
105
327
334
185
2,953
421
26,110
$
4,325
$
— $
2,000
24,110
$
1,784
748
1,793
26,110
$
4,325
$
—
—
—
—
—
550
—
550
550
—
—
550
The amortized cost, gross unrealized losses and gains and estimated fair value of securities at December 31, 2015 and 2014 are summarized as
follows (in thousands):
Trading:
U.S. Government and agency obligations
Municipal bonds
Corporate bonds
Mortgage-backed or related securities
Equity securities
Available-for-Sale:
U.S. Government and agency obligations
Municipal bonds
Corporate bonds
Mortgage-backed or related securities
Asset-backed securities
Equity securities
Held-to-Maturity:
U.S. Government and agency obligations
Municipal bonds:
Corporate bonds
Mortgage-backed or related securities
$
$
$
December 31, 2015
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
1,230
332
25,063
12,705
14
39,344
Fair Value
$
1,368
341
18,699
13,663
63
$
34,134
$
30,211
142,898
15,937
919,318
31,288
88
$
213
853
56
4,056
—
10
(193) $
(432)
(12)
(5,115)
(603)
—
30,231
143,319
15,981
918,259
30,685
98
$ 1,139,740
$
5,188
$
(6,355) $ 1,138,573
$
$
1,106
162,778
4,273
52,509
5
6,219
—
253
$
— $
(191)
—
(325)
1,111
168,806
4,273
52,437
$
220,666
$
6,477
$
(516) $
226,627
104
Trading:
U.S. Government and agency obligations
Municipal bonds
Corporate bonds
Mortgage-backed or related securities
Equity securities
Available-for-Sale:
U.S. Government and agency obligations
Municipal bonds
Corporate bonds
Mortgage-backed or related securities
Asset-backed securities
Held-to-Maturity:
U.S. Government and agency obligations
Municipal bonds:
Corporate bonds
Mortgage-backed or related securities
December 31, 2014
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
Fair Value
$
$
$
$
$
1,340
1,405
27,995
16,726
14
47,480
29,973
49,959
5,000
300,979
25,513
411,424
2,146
119,951
1,800
7,361
$
$
$
$
$
$
$
$
1,505
1,440
19,118
18,136
59
40,258
29,770
50,028
5,018
300,810
25,395
411,021
2,127
126,222
1,800
7,459
$
8
190
18
1,429
167
(211)
(121)
—
(1,598)
(285)
1,812
$
(2,215)
— $
6,319
—
105
(19)
(48)
—
(7)
$
131,258
$
6,424
$
(74)
$
137,608
At December 31, 2015 and 2014, 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):
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
Municipal bonds
Corporate bonds
Mortgage-backed or related securities
Asset-backed securities
$
8,707
69,848
5,153
533,143
20,893
$
(97) $
(426)
(12)
(4,380)
(355)
$
10,489
905
—
68,562
9,792
$
(96) $
(6)
—
(735)
(248)
19,196
70,753
5,153
601,705
30,685
(193)
(432)
(12)
(5,115)
(603)
$
637,744
$
(5,270) $
89,748
$
(1,085) $
727,492
$
(6,355)
Held-to-Maturity:
Municipal bonds
Corporate bonds
Mortgage-backed or related securities
$
$
28,545
—
34,493
(188) $
—
(323)
$
254
—
255
(3) $
—
(2)
$
28,799
—
34,748
$
63,038
$
(511) $
509
$
(5) $
63,547
$
(191)
—
(325)
(516)
105
December 31, 2014
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
Municipal bonds
Mortgage-backed or related securities
Asset-backed securities
$
$
15,983
16,322
91,046
—
$
(58) $
(61)
(236)
—
9,847
7,129
107,266
9,765
$
(153) $
(60)
(1,362)
(285)
25,830
23,451
198,312
9,765
(211)
(121)
(1,598)
(285)
$
123,351
$
(355) $
134,007
$
(1,860) $
257,358
$
(2,215)
Held-to-Maturity:
U.S. Government and agency obligations
Municipal bonds
Mortgage-backed or related securities
$
— $
9,821
1,018
— $
(44)
(7)
$
1,127
592
—
(19) $
(4)
—
$
1,127
10,413
1,018
$
10,839
$
(51) $
1,719
$
(23) $
12,558
$
(19)
(48)
(7)
(74)
At December 31, 2015, there were 242 securities—available-for-sale with unrealized losses, compared to 94 at December 31, 2014 and 114 at
December 31, 2013. At December 31, 2015, there were 32 securities—held-to-maturity with unrealized losses, compared to 25 at December 31,
2014 and 36 at December 31, 2013. Management does not believe that any individual unrealized loss as of December 31, 2015, 2014 or 2013
represented 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 $4.4 million with a resulting net loss of $690,000 for the year ended December 31, 2015 and totaled $2.4
million with a resulting net gain of $1,000 for the year ended December 31, 2014. Sales of securities—trading for the year ended December 31,
2013 totaled $34.3 million with a resulting net gain of $1.5 million, including $1.0 million which represented recoveries on certain collateralized
debt obligations that had previously been written off. In addition to the $1.5 million net gain, the Company also recognized a $409,000 OTTI
recovery on sales of securities—trading for the year ended December 31, 2013, which was related to the sale of certain equity securities issued
by government-sponsored entities. The Company did not recognize any OTTI charges or recoveries on securities—trading during the years
ended December 31, 2015 or 2014. There were no securities—trading in a nonaccrual status at December 31, 2015 and 2014. Net unrealized
holding gains of $2.0 million were recognized in 2015.
Sales of securities—available-for-sale totaled $232.6 million with a resulting net gain of $126,000 for the year ended December 31, 2015. Sales
of securities—available-for-sale totaled $56.3 million with a resulting net gain of $41,000 for the year ended December 31, 2014. Sales of
securities—available-for-sale totaled $103.3 million with a resulting net loss of $116,000 for the year ended December 31, 2013. There were
no securities—available-for-sale in a nonaccrual status at December 31, 2015 and 2014.
There were no sales of securities—held-to-maturity during the years ended December 31, 2015, 2014 or 2013. There were no securities—held-
to-maturity in a nonaccrual status at December 31, 2015 and 2014.
The amortized cost and estimated fair value of securities at December 31, 2015, 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.
December 31, 2015
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
$
— $
— $
12,522
$
12,477
$
4,986
$
Maturing after one year through five years
Maturing after five years through ten years
Maturing after ten years through twenty years
Maturing after twenty years
8,790
3,480
1,997
25,063
39,330
9,361
3,823
2,188
18,699
34,071
278,205
185,919
338,069
324,937
277,056
184,948
338,362
325,632
13,707
83,478
99,614
18,881
1,139,652
1,138,475
220,666
5,035
13,810
84,158
104,460
19,164
226,627
Equity securities
14
63
88
98
$
39,344
$
34,134
$ 1,139,740
$ 1,138,573
$
220,666
$
226,627
106
The following table presents, as of December 31, 2015, investment securities which were pledged to secure borrowings, public deposits or other
obligations as permitted or required by law (in thousands):
Purpose or beneficiary:
State and local governments public deposits
$
204,894
$
201,149
$
210,422
Carrying
Value
Amortized
Cost
Fair Value
Interest rate swap counterparties
Repurchase transaction accounts
Other
Total pledged securities
13,687
110,140
1,970
13,284
109,956
1,895
13,687
110,146
1,970
$
330,691
$
326,284
$
336,225
Note 5: LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES
Loans receivable at December 31, 2015 and 2014 are summarized as follows (dollars in thousands):
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
Commercial construction
Multifamily construction
One- to four-family construction
Land and land development:
Residential
Commercial
Commercial business
Agricultural business, including secured by farmland
One- to four-family residential
Consumer:
Consumer secured by one- to four-family
Consumer—other
Total loans outstanding
Less allowance for loan losses
December 31, 2015
December 31, 2014
Amount
Percent of Total
Amount
Percent of Total
$
1,327,807
1,765,353
472,976
72,103
63,846
278,469
126,773
33,179
1,207,944
376,531
952,633
478,420
158,470
18.2% $
24.1
6.5
1.0
0.9
3.8
1.7
0.5
16.5
5.1
13.0
6.5
2.2
546,783
856,942
167,524
17,337
60,193
219,889
102,435
11,152
723,964
238,499
537,108
222,205
127,003
14.3%
22.3
4.4
0.4
1.6
5.7
2.7
0.3
18.9
6.2
14.1
5.8
3.3
7,314,504
100.0%
3,831,034
100.0%
(78,008)
(75,907)
Net loans
$
7,236,496
$
3,755,127
Loan amounts are net of unearned loan fees in excess of unamortized costs of $5.5 million at December 31, 2015 and $5.8 million at December 31,
2014. Net loans include net discounts on acquired loans of $43.7 million and $148,000 as of December 31, 2015 and 2014, respectively.
The Company’s loans to directors, executive officers and related entities are on substantially the same terms and underwriting as those prevailing
at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectability. Such loans had balances
of $7.9 million and $8.6 million for the years ended December 31, 2015 and 2014, respectively.
107
Purchased credit-impaired loans: The outstanding contractual unpaid principal balance of PCI loans, excluding acquisition accounting
adjustments, was $83.4 million at December 31, 2015. The carrying balance of PCI loans was $58.6 million at December 31, 2015. There were
no PCI loans at December 31, 2014.
The following table presents the changes in the accretable yield for PCI loans for the years ended December 31, 2015 and 2014 (in thousands):
Balance, beginning of period
Additions
Accretion to interest income
Disposals and other
Reclassifications from non-accretable difference
Balance, end of period
Years Ended December 31
2015
2014
$
$
— $
13,310
(2,202)
(1,238)
505
10,375
$
—
—
—
—
—
—
As of December 31, 2015, the non-accretable difference between the contractually required payments and cash flows expected to be collected
was $29.5 million.
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,
TDRs, and loans that are 90 days or more past due, but are still on accrual. Purchase credit-impaired loans are consider performing within the
scope of the PCI accounting guidance and are not included in the impaired loan tables.
108
The following tables provide additional information on impaired loans, excluding purchased credit impaired loans, with and without specific
allowance reserves at December 31, 2015 and 2014. Recorded investment includes the unpaid principal balance or the carrying amount of loans
less charge-offs and net deferred loan fees (in thousands):
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
Commercial construction
One- to four-family construction
Land and land development:
Residential
Commercial
Commercial business
Agricultural business/farmland
One- to four-family residential
Consumer:
Consumer secured by one- to four-family
Consumer—other
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
One- to four-family construction
Land and land development:
Residential
Commercial business
Agricultural business/farmland
One- to four-family residential
Consumer:
Consumer secured by one- to four-family
Consumer—other
December 31, 2015
Recorded Investment
Without
Allowance (1)
With
Allowance (2)
Related
Allowance
Unpaid
Principal
Balance
$
1,465
8,740
359
1,141
1,741
3,540
1,628
2,266
1,309
17,897
776
433
$
— $
2,503
—
1,069
—
750
1,027
538
544
2,206
—
—
$
1,416
5,846
357
—
1,741
1,634
1,184
697
14,418
716
351
70
602
71
—
161
444
—
150
43
736
23
7
$
41,295
$
8,637
$
28,360
$
2,307
December 31, 2014
Recorded Investment
Without
Allowance (1)
With
Allowance (2)
Related
Allowance
Unpaid
Principal
Balance
$
1,598
6,458
786
3,923
3,710
1,502
1,597
27,855
1,256
634
$
$
966
30
—
—
1,275
—
744
1,865
73
138
$
582
6,023
786
3,923
1,280
1,276
854
24,529
1,077
470
24
729
86
640
346
128
26
1,032
75
6
$
49,319
$
5,091
$
40,800
$
3,092
(1) Loans without an allowance reserve have been individually evaluated for impairment and that evaluation concluded that no reserve
(2)
was needed.
Includes general reserves for loans evaluated in pools of homogeneous loans and loans with a specific reserve allowance. Loans with
a specific allowance reserve have been individually evaluated for impairment using either a discounted cash flow analysis or, for
collateral dependent loans, current appraisals less costs to sell to establish realizable value.
109
The following tables summarize our average recorded investment and interest income recognized on impaired loans by loan class for the years
ended December 31, 2015, 2014 and 2013 (in thousands):
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
One- to four-family construction
Land and land development:
Residential
Commercial
Commercial business
Agricultural business/farmland
One- to four-family residential
Consumer:
Consumer secured by one- to four-
family
Consumer—other
Year Ended December
31, 2015
Year Ended December 31,
2014
Year Ended December 31,
2013
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$
$
1,467
8,003
362
1,463
2,406
931
1,667
1,143
17,770
736
392
$
9
303
18
114
49
—
35
19
630
11
18
$
1,841
6,145
795
2,655
2,872
—
1,328
1,866
26,093
1,248
597
$
12
315
45
118
89
—
41
—
870
19
19
$
2,761
8,977
5,705
5,870
6,053
—
2,236
110
40,557
1,403
677
12
241
298
239
221
—
59
8
1,063
25
29
$
36,340
$
1,206
$
45,440
$
1,528
$
74,349
$
2,195
The following tables present TDRs at December 31, 2015 and 2014 (in thousands):
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
One- to four-family construction
Land and land development:
Residential
Commercial business
Agricultural business/farmland
One- to four-family residential
Consumer:
Consumer secured by one- to four-
family
Consumer—other
December 31, 2015
December 31, 2014
Accrual
Status
Nonaccrual
Status
Total
TDRs
Accrual
Status
Nonaccrual
Status
Total
TDRs
$
$
181
5,834
357
1,741
1,151
624
545
11,025
147
172
$
104
13
—
—
483
—
277
1,428
14
—
$
285
5,847
357
1,741
1,634
624
822
12,453
161
172
$
183
6,021
786
3,923
1,279
739
—
15,793
233
197
$
109
32
—
—
525
87
—
1,363
117
116
292
6,053
786
3,923
1,804
826
—
17,156
350
313
$
21,777
$
2,319
$
24,096
$
29,154
$
2,349
$
31,503
As of December 31, 2015 and 2014, the Company had commitments to advance funds up to an additional amount of $237,000 and $2.1 million,
respectively, related to TDRs.
110
The following table presents new TDRs that occurred during the years ended December 31, 2015 and 2014 (dollars in thousands):
Recorded Investment (1) (2)
Commercial real estate:
Owner-occupied
One- to four-family construction
Land and land development:
Residential
Commercial business
Agricultural business/farmland
One- to four-family residential
Consumer:
Consumer - other
Year Ended December 31, 2015
Year Ended December 31, 2014
Pre-
modification
Outstanding
Recorded
Investment
Post-
modification
Outstanding
Recorded
Investment
Number of
Contracts
Pre-
modification
Outstanding
Recorded
Investment
Post-
modification
Outstanding
Recorded
Investment
Number of
Contracts
— $
—
— $
—
2
—
3
2
—
1,302
—
822
431
—
—
—
483
—
822
431
—
1
10
—
1
—
4
1
$
$
203
2,153
203
2,153
—
100
—
905
9
—
100
—
862
9
7
$
2,555
$
1,736
17
$
3,370
$
3,327
(1) Since most loans were already considered classified and/or on non-accrual status prior to restructuring, the modifications did not have
a material effect on the Company’s determination of the allowance for loan losses.
(2) The majority of these modifications do not fit into one separate type, such as rate, term, amount, interest-only or payment, but instead
are a combination of multiple types of modifications; therefore, they are disclosed in aggregate.
The following table presents TDRs which incurred a payment default within the years ended December 31, 2015 and 2014, for which the payment
default occurred within twelve months of the restructure date. A default on a restructured loan results in a transfer to nonaccrual status, a charge-
off or a combination of both (in thousands):
Agricultural business/farmland
One- to four-family residential
Total
Years Ended December 31
2015
2014
Number of
Loans
Amount
Number of
Loans
Amount
2
1
3
$
$
277
387
664
— $
—
— $
—
—
—
Credit Quality Indicators: To appropriately and effectively manage the ongoing credit quality of the Company’s loan portfolio, management
has implemented a risk-rating or loan grading system for its loans. The system is a tool to evaluate portfolio asset quality throughout each
applicable loan’s life as an asset of the Company. Generally, loans and leases are risk rated on an aggregate borrower/relationship basis with
individual loans sharing similar ratings. There are some instances when specific situations relating to individual loans will provide the basis for
different risk ratings within the aggregate relationship. Loans are graded on a scale of 1 to 9. A description of the general characteristics of
these categories is shown below:
Overall Risk Rating Definitions: Risk-ratings contain both qualitative and quantitative measurements and take into account the financial strength
of a borrower and the structure of the loan or lease. Consequently, the definitions are to be applied in the context of each lending transaction
and judgment must also be used to determine the appropriate risk rating, as it is not unusual for a loan or lease to exhibit characteristics of more
than one risk-rating category. Consideration for the final rating is centered in the borrower’s ability to repay, in a timely fashion, both principal
and interest. There were no material changes in the risk-rating or loan grading system in 2015.
Risk Rating 1: Exceptional
A credit supported by exceptional financial strength, stability, and liquidity. The risk rating of 1 is reserved for the Company’s top quality loans,
generally reserved for investment grade credits underwritten to the standards of institutional credit providers.
Risk Rating 2: Excellent
A credit supported by excellent financial strength, stability and liquidity. The risk rating of 2 is reserved for very strong and highly stable
customers with ready access to alternative financing sources.
111
Risk Rating 3: Strong
A credit supported by good overall financial strength and stability. Collateral margins are strong, cash flow is stable although susceptible to
cyclical market changes.
Risk Rating 4: Acceptable
A credit supported by the borrower’s adequate financial strength and stability. Assets and cash flow are reasonably sound and provide for orderly
debt reduction. Access to alternative financing sources will be more difficult to obtain.
Risk Rating 5: Watch
A credit with the characteristics of an acceptable credit but one which requires more than the normal level of supervision and warrants formal
quarterly management reporting. Credits in this category are not yet criticized or classified, but due to adverse events or aspects of underwriting
require closer than normal supervision. Generally, credits should be watch credits in most cases for six months or less as the impact of stress
factors are analyzed.
Risk Rating 6: Special Mention
A credit with potential weaknesses that deserves management’s close attention is risk rated a 6. If left uncorrected, these potential weaknesses
will result in deterioration in the capacity to repay debt. A key distinction between Special Mention and Substandard is that in a Special Mention
credit, there are identified weaknesses that pose potential risk(s) to the repayment sources, versus well defined weaknesses that pose risk(s) to
the repayment sources. Assets in this category are expected to be in this category no more than 9-12 months as the potential weaknesses in the
credit are resolved.
Risk Rating 7: Substandard
A credit with well defined weaknesses that jeopardize the ability to repay in full is risk rated a 7. These credits are inadequately protected by
either the sound net worth and payment capacity of the borrower or the value of pledged collateral. These are credits with a distinct possibility
of loss. Loans headed for foreclosure and/or legal action due to deterioration are rated 7 or worse.
Risk Rating 8: Doubtful
A credit with an extremely high probability of loss is risk rated 8. These credits have all the same critical weaknesses that are found in a
substandard loan; however, the weaknesses are elevated to the point that based upon current information, collection or liquidation in full is
improbable. While some loss on doubtful credits is expected, pending events may strengthen a credit making the amount and timing of any loss
indeterminate. In these situations taking the loss is inappropriate until it is clear that the pending event has failed to strengthen the credit and
improve the capacity to repay debt.
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 are
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.
112
The following tables show Banner’s portfolio of risk-rated loans and non-risk-rated loans by grade or other characteristic as of December 31, 2015 and 2014 (in thousands):
Commercial
Real Estate
Multifamily
Real Estate
Construction
and Land
Commercial
Business
Agricultural
Business
One- to Four-
Family
Residential
Consumer
Total Loans
December 31, 2015
Risk-rated loans:
Pass (Risk Ratings 1-5) (1)
Special mention
Substandard
Doubtful
Loss
Total loans
Performing loans
Purchased credit-impaired loans
Non-performing loans (2)
Total loans
Risk-rated loans:
Pass (Risk Ratings 1-5) (1)
Special mention
Substandard
Doubtful
Loss
Total loans
Performing loans
Non-performing loans (2)
Total loans
$
$
$
$
$
$
$
$
$
$
$
3,022,281
30,928
39,951
—
—
3,093,160
3,048,424
40,985
3,751
$
$
$
468,467
138
4,371
—
—
472,976
470,982
1,994
—
$
$
$
558,425
2,386
13,559
—
—
574,370
566,460
5,650
2,260
$
$
$
1,167,933
25,286
14,725
—
—
1,207,944
1,198,475
7,302
2,167
$
$
$
354,760
17,526
4,245
—
—
376,531
374,305
1,529
697
$
$
$
943,098
1,346
8,189
—
—
952,633
945,968
1,066
5,599
$
$
$
633,734
22
3,124
10
—
636,890
636,068
74
748
7,148,698
77,632
88,164
10
—
7,314,504
7,240,682
58,600
15,222
3,093,160
$
472,976
$
574,370
$
1,207,944
$
376,531
$
952,633
$
636,890
$
7,314,504
Commercial
Real Estate
Multifamily
Real Estate
Construction
and Land
Commercial
Business
Agricultural
Business
One- to Four-
Family
Residential
Consumer
Total Loans
December 31, 2014
$
1,375,885
3,717
24,123
—
—
$
166,712
—
812
—
—
$
395,356
—
15,650
—
—
$
691,143
27,453
5,368
—
—
$
234,101
1,055
3,343
—
—
$
524,598
63
12,447
—
—
$
346,456
140
2,601
11
—
3,734,251
32,428
64,344
11
—
1,403,725
$
167,524
$
411,006
$
723,964
$
238,499
$
537,108
$
349,208
$
3,831,034
1,402,328
$
167,524
$
409,731
$
723,427
$
236,902
$
526,506
$
347,880
$
3,814,298
1,397
—
1,275
537
1,597
10,602
1,328
16,736
1,403,725
$
167,524
$
411,006
$
723,964
$
238,499
$
537,108
$
349,208
$
3,831,034
(1) The Pass category includes some performing loans that are part of homogenous pools which are not individually risk-rated. This includes all consumer loans, all one- to four-family residential
loans and, as of December 31, 2015 and 2014, in the commercial business category, $150 million and $115 million, respectively, of credit-scored small business loans. As loans in these pools
become non-performing, they are individually risk-rated.
(2) Non-performing loans include non-accrual loans and loans past due greater than 90 days but still on accrual status.
113
The following tables provide additional detail on the age analysis of Banner’s past due loans as of December 31, 2015 and 2014 (in thousands):
30–59
Days Past
Due
60–89
Days Past
Due
90 Days
or More
Past Due
Total Past
Due
Purchased
Credit-
Impaired
Current
Total Loans
Loans 90 Days
or More Past
Due and
Accruing
Non-accrual
December 31, 2015
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
Commercial construction
Multifamily construction
One- to four-family construction
Land and land development:
Residential
Commercial
Commercial business
Agricultural business/farmland
One- to four-family residential (1)
Consumer:
$
$
3,981
1,763
4
—
771
2,466
—
—
1,844
323
620
$
139
132
—
—
13
220
—
96
174
729
873
Consumer secured by one- to four-family
Consumer—other
Total
465
488
12,725
$
$
60
155
2,591
$
885
2,503
—
—
—
—
747
—
1,024
278
3,811
38
131
9,417
$
$
5,005
4,398
4
—
784
2,686
747
96
3,042
1,330
5,304
24,261
16,724
1,994
—
—
905
77
4,668
7,302
1,529
1,066
$
$ 1,298,541
1,744,231
470,978
72,103
63,062
274,878
$ 1,327,807
1,765,353
472,976
72,103
63,846
278,469
— $
—
—
—
—
—
125,949
28,415
1,197,600
373,672
946,263
126,773
33,179
1,207,944
376,531
952,633
1,235
2,516
—
—
—
1,233
1,027
—
2,159
697
4,700
—
—
8
—
899
4
41
952
565
138
14,270
$
563
774
24,733
$
$
40
34
58,600
477,817
157,662
$ 7,231,171
478,420
158,470
$ 7,314,504
$
114
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
Commercial construction
Multifamily construction
One- to four-family construction
Land and land development:
Residential
Commercial
Commercial business
Agricultural business/farmland
One- to four-family residential (1)
Consumer:
30–59
Days Past
Due
60–89
Days Past
Due
90 Days
or More
Past Due
Total Past
Due
Purchased
Credit-
Impaired
Current
Total Loans
Loans 90 Days
or More Past
Due and
Accruing
Non-accrual
December 31, 2014
$
— $
639
—
—
—
840
759
—
775
597
877
$
1,984
—
—
—
—
—
—
—
35
466
1,623
— $
—
—
—
—
—
750
—
100
744
7,526
$
1,984
639
—
—
—
840
1,509
—
910
1,807
10,026
$
— $
—
—
—
—
—
—
—
—
—
—
$
544,799
856,303
167,524
17,337
60,193
219,049
100,926
11,152
723,054
236,692
527,082
546,783
856,942
167,524
17,337
60,193
219,889
102,435
11,152
723,964
238,499
537,108
— $
—
—
—
—
—
—
—
—
—
2,095
1,100
32
—
1,275
—
—
—
—
537
1,597
8,834
Consumer secured by one- to four-family
Consumer—other
1,187
—
14,562
$
(1) One- to four-family loans are not considered past due until they exceed 30 days and are not reflected herein. One- to four-family loans exactly 30 days past due at December 31, 2015
221,947
—
—
126,131
— $ 3,812,189
222,205
127,003
$ 3,831,034
258
872
18,845
80
—
2,175
60
88
4,256
59
491
5,037
139
293
9,552
$
$
$
$
$
$
Total
and 2014 were $4 million and $8 million, respectively.
115
The following tables provide additional information on the allowance for loan losses and loan balances individually and collectively evaluated for impairment at or for the year ended December 31,
2015 (in thousands):
Commercial
Real Estate
Multifamily
Real Estate
Construction
and Land
Commercial
Business
Agricultural
Business
One- to Four-
Family
Residential
Consumer
Unallocated
Total
For the Year Ended December 31, 2015
Allowance for loan losses:
Beginning balance
$
Provision for loan losses
Recoveries
Charge-offs
$
18,784
1,177
819
(64)
$
4,562
(480)
113
—
$
25,545
666
1,811
(891)
$
12,043
1,611
948
(746)
$
3,821
(878)
1,927
(1,225)
$
5,447
(1,068)
772
(419)
$
483
1,363
570
(1,514)
$
5,222
(2,391)
—
—
75,907
—
6,960
(4,859)
Ending balance
$
20,716
$
4,195
$
27,131
$
13,856
$
3,645
$
4,732
$
902
$
2,831
$
78,008
Commercial
Real Estate
Multifamily
Real Estate
Construction
and Land
Commercial
Business
Agricultural
Business
One- to Four-
Family
Residential
Consumer
Unallocated
Total
December 31, 2015
$
605
$
71
$
418
$
69
$
— $
728
$
29
$
— $
1,920
20,111
4,124
26,713
13,732
3,645
4,004
—
—
—
55
—
—
873
—
2,831
76,033
—
55
Allowance individually evaluated
for impairment
Allowance collectively evaluated
for impairment
Allowance for purchased credit-
impaired loans
Total allowance for loan losses
$
20,716
$
4,195
$
27,131
$
13,856
$
3,645
$
4,732
$
902
$
2,831
$
78,008
Commercial
Real Estate
Multifamily
Real Estate
Construction
and Land
Commercial
Business
Agricultural
Business
One- to Four-
Family
Residential
Consumer
Unallocated
Total
December 31, 2015
$
8,519
$
357
$
4,669
$
2,223
$
544
$
12,185
$
319
$
— $
28,816
3,043,656
470,625
564,051
1,198,419
374,458
939,382
636,497
Loan balances:
Loans individually evaluated for
impairment
Loans collectively evaluated for
impairment
Purchased credit-impaired loans
40,985
1,994
5,650
7,302
1,529
1,066
74
—
—
7,227,088
58,600
Total loans
$
3,093,160
$
472,976
$
574,370
$
1,207,944
$
376,531
$
952,633
$
636,890
$
— $
7,314,504
116
The following tables provide additional information on the allowance for loan losses and loan balances individually and collectively evaluated for impairment at or for the year ended December 31,
2014 (in thousands):
Commercial
Real Estate
Multifamily
Real Estate
Construction
and Land
Commercial
Business
Agricultural
Business
One- to Four-
Family
Residential
Consumer
Unallocated
Total
For the Year Ended December 31, 2014
Allowance for loan losses:
Beginning balance
$
Provision for loan losses
Recoveries
Charge-offs
$
16,759
1,757
1,507
(1,239)
$
5,306
(724)
—
(20)
$
17,640
6,336
1,776
(207)
$
11,773
626
988
(1,344)
$
2,841
(417)
1,576
(179)
$
11,486
(5,772)
618
(885)
$
1,335
90
528
(1,470)
$
7,118
(1,896)
—
—
74,258
—
6,993
(5,344)
Ending balance
$
18,784
$
4,562
$
25,545
$
12,043
$
3,821
$
5,447
$
483
$
5,222
$
75,907
Commercial
Real Estate
Multifamily
Real Estate
Construction
and Land
Commercial
Business
Agricultural
Business
One- to Four-
Family
Residential
Consumer
Unallocated
Total
December 31, 2014
Allowance individually evaluated
for impairment
Allowance collectively evaluated
for impairment
$
728
$
86
$
986
$
82
$
— $
1,014
$
70
$
— $
2,966
18,056
4,476
24,559
11,961
3,821
4,433
413
5,222
72,941
Total allowance for loan losses
$
18,784
$
4,562
$
25,545
$
12,043
$
3,821
$
5,447
$
483
$
5,222
$
75,907
Commercial
Real Estate
Multifamily
Real Estate
Construction
and Land
Commercial
Business
Agricultural
Business
One- to Four-
Family
Residential
Consumer
Unallocated
Total
December 31, 2014
Loan balances:
Loans individually evaluated for
impairment
Loans collectively evaluated
for impairment
$
7,171
$
786
$
6,477
$
739
$
744
$
17,848
$
681
$
— $
34,446
1,396,554
166,738
404,529
723,225
237,755
519,260
348,527
—
3,796,588
Total loans
$
1,403,725
$
167,524
$
411,006
$
723,964
$
238,499
$
537,108
$
349,208
$
— $
3,831,034
117
Note 6: REAL ESTATE OWNED, HELD FOR SALE, NET
The following table presents the changes in REO, net of valuation allowance, for the years ended December 31, 2015, 2014 and 2013 (in
thousands):
Balance, beginning of period
$
3,352
$
4,044
$
15,778
Years Ended December 31
2015
2014
2013
Additions from loan foreclosures
Additions from capitalized costs
Additions from acquisitions
Proceeds from dispositions of REO
Gain on sale of REO
Valuation adjustments in the period
4,351
298
8,231
(4,740)
351
(216)
3,264
30
—
(4,923)
973
(36)
3,166
348
—
(16,944)
2,481
(785)
Balance, end of period
$
11,627
$
3,352
$
4,044
Note 7: PROPERTY AND EQUIPMENT, NET
Land, buildings and equipment owned by the Company and its subsidiaries at December 31, 2015 and 2014 are summarized as follows (in
thousands):
Land
Buildings and leasehold improvements
Furniture and equipment
Less accumulated depreciation
Property and equipment, net
December 31
2015
2014
$
$
38,992
160,075
79,018
278,085
21,969
98,901
72,152
193,022
(110,481)
(101,837)
$
167,604
$
91,185
The Company’s depreciation expense related to property and equipment was $10.0 million, $8.1 million, and $7.5 million for the years ended
December 31, 2015, 2014 and 2013, respectively. The Company’s rental expense was $10.2 million, $7.6 million, and $7.3 million for the years
ended December 31, 2015, 2014 and 2013, respectively.
The Company’s obligations under long-term property leases are as follows:
Year
2016
2017
2018
2019
2020
Thereafter
Amount
$ 14.3 million
12.9 million
10.7 million
7.8 million
6.6 million
23.0 million
Total
$ 75.3 million
118
Note 8: DEPOSITS
Deposits consist of the following at December 31, 2015 and 2014 (in thousands):
Non-interest-bearing checking
Interest-bearing checking
Regular savings accounts
Money market accounts
Total transaction and savings accounts
Certificates of deposit:
Certificates of deposit less than or equal to the FDIC insured limit of $250,000
Certificates of deposit greater than the FDIC insured limit of $250,000
Total certificates of deposit
Total deposits
Included in total deposits:
Public fund transaction accounts
Public fund interest-bearing certificates
Total public deposits
Total brokered deposits
December 31
2015
2014
$
2,619,618
1,159,846
1,284,642
1,637,092
6,701,198
1,168,495
185,375
1,353,870
1,298,866
439,480
901,142
488,946
3,128,434
633,345
137,171
770,516
8,055,068
$
3,898,950
209,430
31,281
$
102,854
35,346
240,711
$
138,200
162,936
$
4,799
$
$
$
$
$
Deposits at December 31, 2015 and 2014 included deposits from the Company’s directors, executive officers and related entities totaling $6.6
million and $6.2 million, respectively.
Scheduled maturities and weighted average interest rates of certificate accounts at December 31, 2015 are as follows (dollars in thousands):
Maturing in one year or less
Maturing after one year through two years
Maturing after two years through three years
Maturing after three years through four years
Maturing after four years through five years
Maturing after five years
Total certificates of deposit
December 31, 2015
Amount
Weighted
Average Rate
$
985,193
226,381
88,184
24,981
25,917
3,214
$
1,353,870
0.48%
0.88
1.05
1.17
1.26
1.10
0.61%
119
Note 9: ADVANCES FROM FEDERAL HOME LOAN BANK OF DES MOINES
Utilizing a blanket pledge, qualifying loans receivable at December 31, 2015 and 2014, were pledged as security for FHLB borrowings and there
were no securities pledged as collateral as of December 31, 2015 or 2014. At December 31, 2015 and 2014, FHLB advances were scheduled
to mature as follows (dollars in thousands):
Maturing in one year or less
Maturing after one year through three years
Maturing after three years through five years
Maturing after five years
Total FHLB advances, at par
Fair value adjustment
December 31
2015
2014
$
$
107,600
25,000
—
188
132,788
593
32,000
—
—
196
32,196
54
Total FHLB advances, carried at fair value
$
133,381
$
32,250
The maximum amount outstanding from the FHLB advances at month end for the years ended December 31, 2015 and 2014 was $221.6
million and $105.5 million. The average FHLB advances balance outstanding for the years ended December 31, 2015 and 2014 was $45.0
million and $39.1 million, respectively. The average contractual interest rate on the FHLB advances for the years ended December 31, 2015
and 2014 was 0.69% and 0.32%, respectively. As of December 31, 2015, Banner Bank has established a borrowing line with the FHLB to
borrow up to 35% of its total assets, contingent on having sufficient qualifying collateral and ownership of FHLB stock. Islanders Bank
similarly may borrow up to 35% of its total assets, also contingent on collateral and FHLB stock. At December 31, 2015, the maximum total
FHLB credit line was $1.77 billion and $28.0 million for Banner Bank and Islanders Bank, respectively.
Note 10: OTHER BORROWINGS
Other borrowings consist of retail and wholesale repurchase agreements, other term borrowings and Federal Reserve Bank borrowings.
Repurchase Agreements: At December 31, 2015, retail repurchase agreements carry interest rates ranging from 0.15% to 0.40%. In addition
to the retail repurchase agreements, Banner Bank had one wholesale repurchase agreement with an interest rate of 2.15%. These repurchase
agreements are secured by the pledge of certain mortgage-backed and agency securities with a carrying value of $110.1 million. Banner Bank
has the right to pledge or sell these securities, but it must replace them with substantially the same securities.
Federal Reserve Bank of San Francisco and Other Borrowings: Banner Bank periodically borrows funds on an overnight basis from the Federal
Reserve Bank through the Borrower-In-Custody (BIC) program. Such borrowings are secured by a pledge of eligible loans. At December 31,
2015, based upon available unencumbered collateral, Banner Bank was eligible to borrow $735.0 million from the Federal Reserve Bank,
although, at that date, as well as at December 31, 2014, the Bank had no funds borrowed under this or other borrowing arrangements.
At December 31, 2015, Banner Bank had an uncommitted federal funds line of credit agreement with another financial institution totaling $25.0
million, while Islanders Bank had an uncommitted federal funds line of credit agreement with another financial institution totaling $5.0 million.
No balances were outstanding under these agreements as of December 31, 2015 and 2014. Availability of lines is subject to federal funds balances
available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs and the agreements may
restrict consecutive day usage.
120
A summary of all other borrowings at December 31, 2015 and 2014 by the period remaining to maturity is as follows (dollars in thousands):
Repurchase agreements:
Maturing in one year or less
Maturing after one year through two years
Maturing after two years
Total year-end outstanding
Average outstanding
Maximum outstanding at any month-end
At or for the Years Ended December 31
2015
2014
Amount
Weighted
Average Rate
Amount
Weighted
Average Rate
$
$
$
93,325
—
5,000
98,325
94,182
102,474
0.19% $
—
2.15
0.29
0.22
n/a
$
$
77,185
—
—
77,185
83,965
89,921
0.20%
—
—
0.20
0.20
n/a
121
NOTE 11: JUNIOR SUBORDINATED DEBENTURES AND MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES
At December 31, 2015, the Company had nine wholly-owned subsidiary grantor trusts (the Trusts), which had issued $136.0 million of trust preferred securities to third parties, as well as $4.2
million of common capital securities, carried among other assets, which were issued to the Company. Trust preferred securities and common capital securities accrue and pay distributions
periodically at specified annual rates as provided in the indentures. The Trusts used the proceeds from the offerings to purchase a like amount of junior subordinated debentures (the Debentures)
of the Company. The Debentures are the sole assets of the Trusts. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional
guarantee by the Company of the obligations of the Trusts. The trust preferred securities (TPS) are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as
provided in the indentures. The Company has the right to redeem the Debentures in whole on or after specific dates, at a redemption price specified in the indentures plus any accrued but unpaid
interest to the redemption date. All of the trust preferred securities issued by the Trusts qualified as Tier 1 capital as of December 31, 2015. At December 31, 2015, the Trusts comprised $88.3
million, or 14.0% of the Company’s total risk-based capital.
The following table is a summary of trust preferred securities at December 31, 2015 (dollars in thousands):
Name of Trust
Aggregate
Liquidation
Amount of
Trust Preferred
Securities
Aggregate
Liquidation
Amount of
Common Capital
Securities
Aggregate
Principal Amount
of Junior
Subordinated
Debentures
Stated
Maturity (1)
Current
Interest
Rate
Reset
Period
Interest Rate Spread
Banner Capital Trust II
$
15,000
$
464
$
15,464
2033
3.96% Quarterly
Three-month LIBOR + 3.35%
Banner Capital Trust III
Banner Capital Trust IV
Banner Capital Trust V
Banner Capital Trust VI
Banner Capital Trust VII
Siuslaw Statutory Trust I
Greater Sacramento Bancorp Statutory Trust I
Greater Sacramento Bancorp Statutory Trust II
15,000
15,000
25,000
25,000
25,000
8,000
4,000
4,000
465
465
774
774
774
248
124
124
15,465
2033
3.51
Quarterly
Three-month LIBOR + 2.90%
15,465
2034
3.46
Quarterly
Three-month LIBOR + 2.85%
25,774
2035
2.18
Quarterly
Three-month LIBOR + 1.57%
25,774
2037
2.23
Quarterly
Three-month LIBOR + 1.62%
25,774
2037
1.99
Quarterly
Three-month LIBOR + 1.38%
8,248
2034
3.31
Quarterly
Three-month LIBOR + 2.70%
4,124
2033
3.96
Quarterly
Three-month LIBOR + 3.35%
4,124
2035
2.29
Quarterly
Three-month LIBOR + 1.68%
Total TPS liability at par
$
136,000
$
4,212
140,212
2.76%
Fair value adjustment
Total TPS liability at fair value
(47,732)
$
92,480
(1) All of the Company's trust preferred securities are eligible for redemption.
122
Note 12: INCOME TAXES
The following table presents the components of the provision for income taxes included in the Consolidated Statements of Operations for the
years ended December 31, 2015, 2014 and 2013 (in thousands):
Current
Federal
State
Total Current
Deferred
Federal
State
Total Deferred
Years Ended December 31
2015
2014
2013
$
24,683
$
23,411
$
1,399
26,082
1,444
24,855
(3,310)
(23)
(3,333)
2,764
(567)
2,197
11,829
292
12,121
10,936
1,132
12,068
Increase (decrease) in valuation allowance
—
—
—
Provision for income taxes
$
22,749
$
27,052
$
24,189
The following tables present the reconciliation of the federal statutory rate to the actual effective rate for the years ended December 31, 2015,
2014 and 2013 (dollars in thousands):
Federal income tax statutory rate
Increase (decrease) in tax rate due to:
Tax-exempt interest
Investment in life insurance
State income taxes, net of federal tax offset
Tax credits
Merger and acquisition costs
Other
Effective income tax rate
Years Ended December 31
2015
35.0%
(3.9)
(1.3)
1.1
(1.6)
1.9
2.3
2014
35.0%
(2.6)
(0.8)
1.1
(0.8)
0.7
0.7
2013
35.0%
(2.4)
(1.0)
1.2
(0.9)
—
2.5
33.5%
33.3%
34.4%
123
The following table reflects the effect of temporary differences that gave rise to the components of the net deferred tax asset as of December 31,
2015 and 2014 (in thousands):
Deferred tax assets:
Loan loss and REO
Deferred compensation
Net operating loss carryforward
Federal and state tax credits
State net operating losses
Loan discount
Other
Total deferred tax assets
Deferred tax liabilities:
FHLB stock dividends
Depreciation
Deferred loan fees, servicing rights and loan origination costs
Intangibles
Financial instruments accounted for under fair value accounting
Unrealized (gain) loss on securities - available-for-sale
Total deferred tax liabilities
Deferred income tax asset
Valuation allowance
Deferred tax asset, net
$
December 31
2015
2014
$
33,312
19,253
91,893
7,877
8,692
13,412
5,620
180,059
—
(1,103)
(9,884)
(13,320)
(17,112)
(1,475)
(42,894)
137,165
(2,195)
26,536
9,223
17,577
3,676
1,009
(1,190)
1,344
58,175
(4,805)
(4,479)
(7,843)
(975)
(15,611)
145
(33,568)
24,607
—
$
134,970
$
24,607
At December 31, 2015, the Company has federal net operating loss carryforwards of approximately $262.5 million. The Company has $23.0
million state net operating loss carryforwards, which the Company has established a $2.2 million valuation reserve against. The federal and
state net operating losses will expire, if unused, by the end of 2034. The Company has federal general business credit carryforwards of $3.3
million, which will expire, if unused, by the end of 2031. The Company also has federal alternative minimum tax credit carryforwards of $4.2
million, which are available to reduce future federal regular income taxes, if any, over an indefinite period. Additionally, at December 31, 2015,
the Company has state alternative minimum tax credit and other state credit carryovers of $353,000. At December 31, 2014, the Company had
federal and state net operating loss carryforwards of approximately $50.2 million and $21.2 million, respectively, and federal general business
credits carryforwards of $2.7 million. At that same date, the Company also had alternative minimum tax credit carryforwards of approximately
$900,000.
As a consequence of our acquisition of Starbuck Bancshares, Inc., the Company experienced a change in control within the meaning of Section
382 of the Code. In addition, the underlying Section 382 limitations at Starbuck Bancshares, Inc. level continue to apply to the Company. Section
382 limits the ability of a corporate taxpayer to use net operating loss carryforwards, general business credits, and recognized built-in-losses,
on an annual basis, incurred prior to the change in control against income earned after the change in control. As a result of the Section 382
limitation, the Company is limited to utilizing $21.5 million (after the application of the Section 382 limitations carried over from Starbuck
Bancshares, Inc.) of federal net operating loss carryforwards, general business credits, and recognized built-in losses. The Company has provided
a $2.2 million valuation reserve against the portion of its various state net operating loss carryforwards and tax credits that it believes it is more
likely than not that it will not realize the benefit because the application of the Section 382 limitations at the state level is based on future
apportionment rates.
In addition, as a consequence of Banner's capital raise in June 2010, the Company experienced a change in control within the meaning of Section
382 of the Code. As a result of the Section 382 limitation, the Company is limited to utilizing $6.9 million of net operating loss carryforwards
which existed prior to the acquisition of Starbuck Bancshares, Inc., on an annual basis. Based on its analysis, the Company believes it is more
likely than not that the June 2010 change in control will not impact its ability to utilize all of the related available net operating loss carryforwards,
general business credits, and recognized built-in-losses.
Retained earnings at December 31, 2015 and 2014 included approximately $5.4 million in tax basis bad debt reserves for which no income tax
liability has been booked. In the future, if this tax bad debt reserve is used for purposes other than to absorb bad debts or the Company no longer
qualifies as a bank or is completely liquidated, the Company will incur a federal tax liability at the then-prevailing corporate tax rate, established
as $1.9 million at December 31, 2015.
As of December 31, 2014, the Company had reduced its previous year's tax receivable by $9.8 million as a result of the approval of a closing
agreement with the Internal Revenue Service (IRS) related to amended 2006, 2008 and 2009 federal income tax returns. Review of the amended
124
federal returns was completed by the IRS in 2013 and the Company signed a closing agreement with the IRS related to refund claims of $9.8
million, which was received in 2014.
Note 13: EMPLOYEE BENEFIT PLANS
Employee Retirement Plans: Substantially all of the Company’s and the Banks' employees are eligible to participate in its 401(k)/Profit Sharing
Plan, a defined contribution and profit sharing plan sponsored by the Company. Employees may elect to have a portion of their salary contributed
to the plan in conformity with Section 401(k) of the Internal Revenue Code. At the discretion of the Company’s Board of Directors, the Company
may elect to make matching and/or profit sharing contributions for the employees’ benefit. For the years ended December 31, 2015, 2014 and
2013, $2.8 million, $1.4 million and $1.0 million, respectively, was expensed for 401(k) contributions. The Board of Directors has elected to
make a 4% of eligible compensation matching contribution for 2016.
Supplemental Retirement and Salary Continuation Plans: Through the Banks, the Company is obligated under various non-qualified deferred
compensation plans to help supplement the retirement income of certain executives, including certain retired executives, selected by resolution
of the Banks’ Boards of Directors or in certain cases by the former directors of acquired banks. These plans are unfunded, include both defined
benefit and defined contribution plans, and provide for payments after the executive’s retirement. In the event of a participant employee’s death
prior to or during retirement, the Company is obligated to pay to the designated beneficiary the benefits set forth under the plan. For the years
ended December 31, 2015, 2014 and 2013, expense recorded for supplemental retirement and salary continuation plan benefits totaled $1.3
million, $1.2 million, and $1.5 million, respectively. At December 31, 2015 and 2014, liabilities recorded for the various supplemental retirement
and salary continuation plan benefits totaled $39.0 million and $14.2 million, respectively, and are recorded in a deferred compensation liability
account.
Deferred Compensation Plans and Rabbi Trusts: The Company and the Banks also offer non-qualified deferred compensation plans to members
of their Boards of Directors and certain employees. The plans permit each participant to defer a portion of director fees, non-qualified retirement
contributions, salary or bonuses for future receipt. Compensation is charged to expense in the period earned. In connection with its acquisitions,
the Company also assumed liability for certain deferred compensation plans for key employees, retired employees and directors.
In order to fund the plans’ future obligations, the Company has purchased life insurance policies or other investments, including Banner
Corporation common stock, which in certain instances are held in irrevocable trusts commonly referred to as “Rabbi Trusts.” As the Company
is the owner of the investments and the beneficiary of the insurance policies, and in order to reflect the Company’s policy to pay benefits equal
to the accumulations, the assets and liabilities are reflected in the Consolidated Statements of Financial Condition. Banner Corporation common
stock held for such plans is reported as a contra-equity account and was recorded at an original cost of $6.9 million at December 31, 2015 and
$6.7 million at December 31, 2014. At December 31, 2015 and 2014, liabilities recorded in connection with deferred compensation plan benefits
totaled $8.4 million ($6.9 million in contra-equity) and $8.2 million ($6.7 million in contra-equity), respectively, and are recorded in deferred
compensation or equity as appropriate.
The Banks have purchased, or acquired through mergers, life insurance policies in connection with the implementation of certain executive
supplemental retirement, salary continuation and deferred compensation retirement plans, as well as additional policies not related to any specific
plan. These policies provide protection against the adverse financial effects that could result from the death of a key employee and provide tax-
exempt income to offset expenses associated with the plans. It is the Banks’ intent to hold these policies as a long-term investment. However,
there will be an income tax impact if the Banks choose to surrender certain policies. Although the lives of individual current or former management-
level employees are insured, the Banks are the owners and sole or partial beneficiaries. At December 31, 2015 and 2014, the cash surrender
value of these policies was $156.9 million and $63.8 million, respectively. The Banks are exposed to credit risk to the extent an insurance
company is unable to fulfill its financial obligations under a policy. In order to mitigate this risk, the Banks use a variety of insurance companies
and regularly monitor their financial condition.
Note 14: STOCK-BASED COMPENSATION PLANS
The Company operates the following stock-based compensation plans as approved by its shareholders:
•
•
•
•
2001 Stock Option Plan (the SOP).
2006 Long Term Incentive Plan.
2012 Restricted Stock and Incentive Bonus Plan.
2014 Omnibus Incentive 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, restricted stock unit grants,
and stock options.
Stock Options
Under the SOP, Banner reserved 68,571 shares for issuance pursuant to the exercise of stock options to be granted to directors and
employees. Authority to grant additional options under the 2001 Stock Option Plan terminated on April 20, 2011. The exercise price of the
stock options is set at 100% of the fair market value of the stock price on the date of grant. Options granted vest at a rate of 20% per year from
125
the date of grant and any unexercised incentive stock options will expire ten years after date of grant or 90 days after employment or service
ends.
During the years ended December 31, 2015, 2014 and 2013, the Company did not grant any stock options. Additionally, there were no significant
modifications made to any stock option grants during the period. The fair values of stock options granted are amortized as compensation expense
on a straight-line basis over the vesting period of the grant. For the years ended December 31, 2015, 2014 and 2013 there were no stock option
compensation expenses recorded.
A summary of the Company’s stock option award activity for the years ended December 31, 2013, 2014 and 2015 follows:
Outstanding at December 31, 2012
42,521
$
173.98
1.75
n/a
Weighted
Average
Exercise Price
Shares
Weighted
Average
Remaining
Contractual
Term, In Years
Aggregate
Intrinsic Value
Granted
Exercised
Forfeited
Outstanding at December 31, 2013
Granted
Exercised
Forfeited
Outstanding at December 31, 2014
Granted
Exercised
Forfeited
Outstanding at December 31, 2015
Outstanding at December 31, 2015, net of expected forfeitures
Exercisable at December 31, 2015
—
—
(16,157)
26,364
—
—
(15,700)
10,664
—
—
(5,664)
5,000
—
5,000
—
—
121.29
206.27
—
—
206.44
206.03
—
—
197.11
216.16
—
216.16
1.58
n/a
1.90
n/a
n/a
n/a
1.58
n/a
n/a
—
The intrinsic value of stock options is calculated as the amount by which the market price of Banner's common stock exceeds the exercise price
at the time of exercise or the end of the period as applicable.
At December 31, 2015, financial data pertaining to outstanding stock options was as follows:
Exercise Price
Weighted Average
Exercise Price of
Option Shares
Granted
Number of Option
Shares Granted
Weighted Average
Option Shares
Vested and
Exercisable
Weighted Average
Exercise Price of
Option Shares
Exercisable
Remaining
Contractual Life
$
216.16
$
216.16
5,000
5,000
$
216.16
1.6 years
During the year ended December 31, 2015, there were no exercises of stock options. Cash was not used to settle any equity instruments previously
granted. The Company issues shares from authorized but unissued shares upon the exercise of stock options. The Company does not currently
expect to repurchase shares from any source to satisfy such obligations under the SOP.
2006 Long-Term Incentive Plan
In June 2006, the Board of Directors adopted the Banner Corporation 2006 Long-Term Incentive Plan effective July 1, 2006. The plan is an
account-based type of benefit, the value of which is directly related to changes in the value of Company common stock, dividends declared on
Company common stock and changes in Banner Bank’s average earnings rate, and is considered a stock appreciation right (SAR). Each SAR
entitles the holder to receive cash upon vesting, equal to the excess of the fair market value of a share of the Company’s common stock on the
date of maturity of the SAR over the fair market value of such share on the date granted. The primary objective of the plan was to create a
retention incentive by allowing officers who remain with the Company or the Banks for a sufficient period of time to share in the increases in
the value of Banner common stock.
126
The Company re-measures the fair value of SARs each reporting period until the award is settled and recognizes changes in fair value and vesting
in compensation expense. The Company recognized a net reversal of compensation expense of $103,000 for the year ended December 31, 2015
compared to compensation expense of $89,000 for the year ended December 31, 2014. The reversal of compensation expense in 2015 was due
to changes in the market value of Banner common stock.
As of December 31, 2015, all SAR awards have been settled and there was no remaining liability for SARs.
2012 Restricted Stock and Incentive Bonus Plan
Under the 2012 Restricted Stock and Incentive Bonus Plan (2012 Restricted Stock Plan), which was initially approved on April 24, 2012, the
Company is authorized to issue up to 300,000 shares of its common stock to provide a means for attracting and retaining highly skilled officers
of Banner Corporation and its affiliates. Shares granted under the 2012 Restricted Stock Plan have a minimum vesting period of three years.
The 2012 Restricted Stock Plan will continue in effect for a term of ten years, after which no further awards may be granted.
The 2012 Restricted Stock Plan was amended on April 23, 2013 to provide for the ability to grant (1) cash-denominated incentive-based awards
payable in cash or common stock, including those that are eligible to qualify as qualified performance-based compensation for the purposes of
Section 162(m) of the Code and (2) restricted stock awards that qualify as qualified performance-based compensation for the purposes of Section
162(m) of the Code. Vesting requirements may include time-based conditions, performance-based conditions, or market-based conditions.
As of December 31, 2015, the Company had granted 295,123 shares of restricted stock from the 2012 Restricted Stock Plan (as amended and
restated), of which 181,305 shares had vested and 113,818 shares remain unvested.
2014 Omnibus Incentive Plan
The 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 has reserved 900,000 shares of its common stock for issuance under the 2014 Plan in connection
with the exercise of awards. As of December 31, 2015, 119,765 restricted stock shares and 7,331 restricted stock units have been granted under
the 2014 Plan of which 9,352 restricted stock shares have vested.
The expense associated with all restricted stock grants was $3.5 million, $2.7 million and $1.5 million respectively, for the years ended
December 31, 2015, 2014 and 2013. Unrecognized compensation expense for these awards as of December 31, 2015 was $6.9 million and will
be amortized over the next 35 months.
A summary of the Company's Restricted Stock/Unit award activity during the years ended December 31, 2013, 2014 and 2015 follows:
Unvested at December 31, 2012
Granted
Vested
Forfeited
Unvested at December 31, 2013
Granted
Vested
Forfeited
Unvested at December 31, 2014
Granted
Vested
Forfeited
Unvested at December 31, 2015
127
Weighted
Average
Grant-Date
Fair Value
20.59
30.81
19.85
—
26.94
40.07
24.81
31.00
32.83
45.59
30.28
39.07
42.33
Shares/Units
107,851
$
98,891
(42,250)
—
164,492
90,181
(56,307)
(3,260)
195,106
155,183
(109,416)
(9,311)
231,562
Note 15: PREFERRED STOCK AND RELATED WARRANT
On November 21, 2008, as part of the Capital Purchase Program, the Company entered into a Purchase Agreement with U.S. Treasury pursuant
to which the Company issued and sold 124,000 shares of Series A Preferred Stock, having a liquidation preference of $1,000 per share ($124
million liquidation preference in the aggregate) and a ten-year warrant to purchase up to 243,998 shares (post reverse-split) of the Company’s
common stock, par value $0.01 per share, at an initial exercise price of $76.23 per share (post reverse-split), for an aggregate purchase price of
$18.6 million in cash.
During the year ended December 31, 2012, the Company repurchased or redeemed its Series A Preferred Stock. The related warrants to purchase
up to $18.6 million in Banner common stock (243,998 shares) were sold by the U.S. Treasury at public auction in June 2013. That sale did not
change the Company's capital position and did not have any impact on the financial accounting and reporting for these securities.
Note 16: REGULATORY CAPITAL REQUIREMENTS
Banner Corporation is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy
requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended (BHCA), and the regulations of the Federal
Reserve. Banner Bank and Islanders Bank, as state-chartered federally insured commercial banks, are subject to the capital requirements
established by the FDIC. The Federal Reserve requires Banner to maintain capital adequacy that generally parallels the FDIC requirements.
The following table shows the regulatory capital ratios of the Company and the Banks and the minimum regulatory requirements (dollars in
thousands):
Actual
Minimum for Capital
Adequacy Purposes
Minimum to be
Categorized as “Well-
Capitalized” Under
Prompt Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2015:
The Company—consolidated:
Total capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Tier 1 common equity to risk-weighted assets
Tier 1 capital to average leverage assets
$ 1,139,554
1,057,597
1,013,971
1,057,597
13.63% $
12.65
12.13
11.06
Banner Bank:
Total capital to risk- weighted assets
Tier 1 capital to risk- weighted assets
Tier 1 common equity to risk-weighted assets
Tier 1 capital to average leverage assets
1,030,601
950,865
950,865
950,865
Islanders Bank:
Total capital to risk- weighted assets
Tier 1 capital to risk- weighted assets
Tier 1 common equity to risk-weighted assets
Tier 1 capital to average leverage assets
38,448
36,227
36,227
36,227
12.61
11.64
11.64
10.23
20.31
19.14
19.14
13.38
668,941
501,706
376,279
382,617
653,606
490,205
367,653
371,807
15,146
11,359
8,520
10,826
8.00%
6.00
4.50
4.00
8.00
6.00
4.50
4.00
8.00
6.00
4.50
4.00
n/a
n/a
n/a
n/a
$
817,008
653,606
531,055
464,759
18,932
15,146
12,306
13,533
n/a
n/a
n/a
n/a
10.00
8.00
6.50
5.00
10.00
8.00
6.50
5.00
December 31, 2014:
The Company—consolidated:
Total capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Tier 1 capital to average leverage assets
$
684,583
633,317
633,317
16.80% $
15.54
13.41
326,071
163,036
188,885
8.00%
4.00
4.00
n/a
n/a
n/a
n/a
n/a
n/a
Banner Bank:
Total capital to risk- weighted assets
Tier 1 capital to risk- weighted assets
Tier 1 capital to average leverage assets
Islanders Bank:
Total capital to risk- weighted assets
Tier 1 capital to risk- weighted assets
Tier 1 capital to average leverage assets
605,997
556,897
556,897
36,590
34,332
34,332
15.53
14.27
12.42
19.92
18.69
13.68
128
312,220
156,110
179,304
14,693
7,347
10,040
8.00
4.00
4.00
8.00
4.00
4.00
$
390,274
234,165
224,130
10.00%
6.00
5.00
18,367
11,020
12,550
10.00
6.00
5.00
At December 31, 2015, Banner Corporation and the Banks each exceeded all regulatory capital adequacy requirements. There have been no
conditions or events since December 31, 2015 that have materially adversely changed the Tier 1 or Tier 2 capital of the Company or the
Banks. However, events beyond the control of the Banks, such as weak or depressed economic conditions in areas where the Banks have most
of their loans, could adversely affect future earnings and, consequently, the ability of the Banks to meet their respective capital requirements. The
Company may not declare or pay cash dividends on, or repurchase, any of its shares of common stock if the effect thereof would cause equity
to be reduced below applicable regulatory capital maintenance requirements or if such declaration and payment would otherwise violate regulatory
requirements.
On July 2, 2013, the Federal Reserve approved a final rule (Final Rule) to establish a new comprehensive regulatory capital framework for all
U.S. financial institutions and their holding companies. On July 9, 2013, the Final Rule was approved as an interim final rule by the FDIC. The
Final Rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. The final rule includes new risk-
based capital and leverage ratios, which are effective January 1, 2015 and revise the definition of what constitutes “capital” for purposes of
calculating those ratios.
Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), Banner and the Banks became subject
to the new capital requirements adopted by the Federal Reserve and the FDIC. These new requirements create a new required ratio for common
equity Tier 1 (CET1) capital, increase the leverage and Tier 1 capital ratios, change the risk-weights of certain assets for purposes of the risk-
based capital ratios, create an additional capital conservation buffer over the required capital ratios and change what qualifies as capital for
purposes of meeting these various capital requirements. Beginning in 2016, failure to maintain the required capital conservation buffer will
limit Banner's ability and the ability of the Banks to pay dividends, repurchase shares or pay discretionary bonuses. Under the new capital
regulations, the minimum capital ratios applicable to Banner and the Banks are: (i) a CETI capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%
(increased from 4%); (iii) a total capital ratio of 8% (unchanged from prior rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. CET1
generally consists of common stock; retained earnings; accumulated other comprehensive income (AOCI), unless an election is made to exclude
AOCI from regulatory capital, as discussed below; and certain minority interests; all subject to applicable regulatory adjustments and deductions.
There are a number of changes in what constitutes regulatory capital, some of which are subject to transition periods. These changes include
the phasing-out of certain instruments as qualifying capital. Banner and the Banks do not have any of these instruments. Under the new
requirements for total capital, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing
rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of CET1 will be deducted from
capital. In the first quarter of 2015, we elected to permanently opt-out of the inclusion of AOCI in our capital calculations, to reduce the impact
of market volatility on our regulatory capital levels.
The new requirements also include changes in the risk-weights of certain assets to better reflect credit risk and other risk exposures. These
include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans
and for non-residential mortgage loans that are 90 days past due or otherwise in non-accrual status; a 20% (up from 0%) credit conversion factor
for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (up from 0%); a
250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital; and increased risk-weights
(0% to 600%) for equity exposures.
In addition to the minimum CET1, Tier 1, total capital and leverage ratios, Banner and each of the Banks will have to maintain a capital
conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order
to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible
retained income that could be utilized for such actions. This new capital conservation buffer requirement will be phased in beginning in January
2016 at 0.625% of risk-weighted assets and increasing each year by that amount until fully implemented in January 2019.
Note 17: GOODWILL, OTHER INTANGIBLE ASSETS AND MORTGAGE SERVICING RIGHTS
Goodwill and Other Intangible Assets: At December 31, 2015, intangible assets are comprised of goodwill and CDI acquired in business
combinations. Goodwill represents the excess of the total purchase price paid over the fair value of the assets acquired, net of the fair values of
liabilities assumed, and is not amortized but is reviewed annually for impairment. At December 31, 2015, the Company completed it's qualitative
assessment of goodwill and concluded that it is more likely than not that the fair value of Banner, the reporting unit, exceeds the carrying value.
Additions to goodwill during 2015 relate to the AmericanWest and Siuslaw acquisitions. Banner has identified a single reporting unit for the
purposes of its goodwill impairment evaluation. See Note 3, Business Combinations, for additional information on the acquisition and purchase
price allocation.
The Company amortizes CDI over their estimated useful lives and reviews them at least annually for events or circumstances that could impair
their value. The CDI assets shown in the table below represent the value ascribed to the long-term deposit relationships acquired in various
bank acquisitions. The additions in the table below relate to the Branch purchase in 2014 and the acquisition of Siuslaw and AmericanWest in
2015. These intangible assets are being amortized using an accelerated method over estimated useful lives of three to ten years. The CDI assets
are not estimated to have a significant residual value.
129
The following table summarizes the changes in the Company’s goodwill and CDI for the years ended December 31, 2013, 2014 and 2015 (in
thousands):
Goodwill
CDI
Total
Balance, December 31, 2012
$
— $
4,230
$
Additions through acquisition
Amortization
Balance, December 31, 2013
Additions through acquisition
Amortization
Balance, December 31, 2014
Additions through acquisition
Amortization
Other changes (1)
—
—
—
—
—
—
247,738
—
—
160
(1,941)
2,449
2,372
(1,990)
2,831
37,395
(3,164)
(300)
4,230
160
(1,941)
2,449
2,372
(1,990)
2,831
285,133
(3,164)
(300)
Balance, December 31, 2015
$
247,738
$
36,762
$
284,500
(1) Acquired CDI from AmericanWest was adjusted for a branch that was subsequently sold.
Estimated amortization expense in future years with respect to existing intangibles as of December 31, 2015 (in thousands):
Year ended:
2016
2017
2018
2019
Thereafter
Net carrying amount
CDI
7,061
6,332
5,610
4,889
12,870
36,762
$
$
Mortgage servicing rights are reported in other assets. Mortgage servicing rights are initially recognized 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 to servicing fee
income. However, if the fair value is greater than the amortized cost, the amount above the amortized cost is not recognized in the carrying
value. In 2015 and 2014, the Company did not record any impairment charges or recoveries against mortgage servicing rights. In 2013, the
Company recorded a recovery of $1.3 million in previously recognized impairment charges against mortgage servicing rights. Unpaid principal
balance of loans for which mortgage servicing rights have been recognized totaled $1.86 billion and $1.28 billion at December 31, 2015 and
2014, respectively. Custodial accounts maintained in connection with this servicing totaled $8.7 million and $6.5 million at December 31, 2015
and 2014, respectively.
An analysis of the mortgage servicing rights for the years ended December 31, 2015, 2014 and 2013 is presented below (in thousands):
Balance, beginning of the year
Amounts capitalized
Additions through acquisition
Amortization (1)
Valuation adjustments in the period
Balance, end of the year (2)
Years Ended December 31
2015
2014
2013
$
$
9,030
$
8,086
$
5,313
2,172
(3,220)
—
3,023
—
(2,079)
—
13,295
$
9,030
$
6,244
2,913
—
(2,371)
1,300
8,086
(1) Amortization of mortgage servicing rights is recorded as a reduction of loan servicing income and any unamortized balance is fully
written off if the loan repays in full.
(2) There was no valuation allowance as of December 31, 2015, 2014 and 2013.
130
Note 18: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents estimated fair values of the Company’s financial instruments as of December 31, 2015 and 2014, whether or not
recognized or recorded in the Consolidated Statements of Financial Condition (in thousands):
Assets:
Cash and due from banks
Securities—trading
Securities—available-for-sale
Securities—held-to-maturity
Loans receivable held for sale
Loans receivable
FHLB stock
BOLI
Mortgage servicing rights
Derivatives:
Interest rate swaps
Interest rate lock commitments
Liabilities:
Demand, interest-bearing checking and money
market
Regular savings
Certificates of deposit
Advances from FHLB at fair value
Junior subordinated debentures at fair value
Other borrowings
Derivatives:
Interest rate swaps
Interest rate forward sales commitments
December 31, 2015
December 31, 2014
Level
Carrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
1
2,3
2
3
2
3
3
1
3
2
2
2
2
2
2
3
2
2
2
$ 261,917
34,134
1,138,573
220,666
44,712
7,314,504
16,057
156,865
13,295
$ 261,917
34,134
1,138,573
226,627
45,600
7,084,631
16,057
156,865
17,370
$ 126,072
40,258
411,021
131,258
2,786
3,831,034
27,036
63,759
9,030
$ 126,072
40,258
411,021
137,608
2,807
3,722,179
27,036
63,759
12,987
11,984
471
11,984
471
6,290
317
6,290
317
5,416,556
1,284,642
1,353,870
133,381
92,480
98,325
5,416,556
1,284,642
1,332,825
133,381
92,480
98,325
2,227,292
901,142
770,516
32,250
78,001
77,185
2,227,292
901,142
770,516
32,250
78,001
77,185
11,984
50
11,984
50
6,290
198
6,290
198
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 standard requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s
estimates for market assumptions. These two types of inputs create the following fair value hierarchy:
• Level 1 – Quoted prices in active markets for identical instruments. An active market is a market in which transactions occur with
sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the
most reliable evidence of fair value and shall be used to measure fair value whenever available.
• Level 2 – Observable inputs other than Level 1 including quoted prices in active markets for similar instruments, quoted prices in less
active markets for identical or similar instruments, or other observable inputs that can be corroborated by observable market data.
• Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing
models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value
requires significant management judgment or estimation; also includes observable inputs from non-binding single dealer quotes not
corroborated by observable market data. 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
131
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 December 31, 2015 and 2014 (in thousands):
December 31, 2015
Level 1
Level 2
Level 3
Total
Assets:
Securities—trading
U.S. Government and agency
Municipal bonds
TPS and TRUP CDOs (1)
Mortgage-backed securities
Equity securities
Securities—available-for-sale
U.S. Government and agency
Municipal bonds
Corporate bonds
Mortgage-backed securities
Asset-backed securities
Equity securities
Derivatives
Interest rate swaps
Interest rate lock commitments
Liabilities
Advances from FHLB at fair value
Junior subordinated debentures at fair value
Derivatives
Interest rate swaps
Interest rate forward sales commitments
$
$
$
$
— $
—
—
—
—
—
$
1,368
341
—
13,663
63
15,435
— $
—
18,699
—
—
18,699
—
—
—
—
—
—
—
—
—
30,231
143,319
15,981
918,259
30,685
98
1,138,573
11,984
471
—
—
—
—
—
—
—
—
—
1,368
341
18,699
13,663
63
34,134
30,231
143,319
15,981
918,259
30,685
98
1,138,573
11,984
471
— $
1,166,463
$
18,699
$
1,185,162
— $
133,381
$
— $
—
—
—
—
92,480
11,984
50
—
—
133,381
92,480
11,984
50
— $
145,415
$
92,480
$
237,895
(1) Pooled trust preferred collateralized debt obligation securities (TRUP CDOs)
132
Assets:
Securities—available-for-sale
U.S. Government and agency
Municipal bonds
Corporate bonds
Mortgage-backed securities
Asset-backed securities
Securities—trading
U.S. Government and agency
Municipal bonds
TPS and TRUP CDOs
Mortgage-backed securities
Equity securities
Derivatives
Interest rate lock commitments
Interest rate swaps
Liabilities
Advances from FHLB at fair value
Junior subordinated debentures at fair value
Derivatives
Interest rate forward sales commitments
Interest rate swaps
December 31, 2014
Level 1
Level 2
Level 3
Total
$
$
$
$
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
$
29,770
50,028
5,018
300,810
25,395
411,021
1,505
1,440
—
18,136
59
21,140
—
6,290
— $
—
—
—
—
—
—
—
19,118
—
—
19,118
317
—
29,770
50,028
5,018
300,810
25,395
411,021
1,505
1,440
19,118
18,136
59
40,258
317
6,290
— $
438,451
$
19,435
$
457,886
— $
32,250
$
— $
—
—
—
—
78,001
198
6,290
—
—
32,250
78,001
198
6,290
— $
38,738
$
78,001
$
116,739
The following methods were used to estimate the fair value of each class of financial instruments:
Cash and Cash Equivalents: The carrying amount of these items is a reasonable estimate of their fair value.
Securities: The estimated fair values of investment securities and mortgaged-backed securities are priced using current active market quotes, if
available, which are considered Level 1 measurements. For most of the portfolio, matrix pricing based on the securities’ relationship to other
benchmark quoted prices is used to establish the fair value. These measurements are considered Level 2. Due to the continued limited activity
in the trust preferred markets that have limited the observability of market spreads for some of the Company’s TPS and TRUP CDOs, 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 using recent sales data for comparable loans.
Loans Receivable: Fair values are estimated first by stratifying the portfolios of loans with similar financial characteristics. Loans are segregated
by type such as multifamily real estate, residential mortgage, nonresidential mortgage, commercial/agricultural, consumer and other. Each loan
category is further segmented into fixed- and adjustable-rate interest terms. A preliminary estimate of fair value is then calculated based on
discounted cash flows using as a discount rate the current rate offered on similar products, plus an adjustment for liquidity to reflect the non-
homogeneous nature of the loans. The preliminary estimate is then further reduced by the amount of the allowance for loan losses to arrive at
a final estimate of fair value. Fair value for impaired loans is also based on recent appraisals or estimated cash flows discounted using rates
commensurate with risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are
judgmentally determined using available market information and specific borrower information.
FHLB Stock: The fair value is based upon the redemption value of the stock which equates to its carrying value.
Bank-Owned Life Insurance: The fair value of BOLI policies owned is based on the various insurance contracts' cash surrender value.
133
Mortgage Servicing Rights: Fair values are estimated based on an independent dealer analysis of discounted cash flows. The evaluation utilizes
assumptions market participants would use in determining fair value including prepayment speeds, delinquency and foreclosure rates, the discount
rate, servicing costs, and the timing of cash flows. The mortgage servicing portfolio is stratified by loan type and fair value estimates are adjusted
up or down based on the serviced loan interest rates versus current rates on new loan originations since the most recent independent analysis.
Deposits: The carrying amount of deposits with no stated maturity, such as savings and checking accounts, is a reasonable estimate of their fair
value. The market value of certificates of deposit is based upon the discounted value of contractual cash flows. The discount rate is determined
using the rates currently offered on comparable instruments.
FHLB Advances: Fair valuations for Banner’s FHLB advances are estimated using fair market values provided by the lender, the FHLB of Des
Moines. The FHLB of Des Moines prices advances by discounting the future contractual cash flows for individual advances, using its current
cost of funds curve to provide the discount rate.
Junior Subordinated Debentures: The fair value of junior subordinated debentures is estimated using 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 credit concerns
in the capital markets and inactivity in the trust preferred markets that have limited the observability of market spreads, management has classified
this as a Level 3 fair value measure.
Other Borrowings: Other borrowings include securities sold under agreements to repurchase and occasionally federal funds purchased and their
carrying amount is considered a reasonable approximation of their fair value.
Derivatives: Derivatives include interest rate swap agreements, interest rate lock commitments to originate loans held for sale and forward sales
contracts to sell loans and securities related to mortgage banking activities. Fair values for these instruments, which generally change as a result
of changes in the level of market interest rates, are estimated based on dealer quotes and secondary market sources.
Off-Balance Sheet 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 December 31, 2015
and 2014. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have
not been comprehensively revalued for purposes of these financial statements since that date and, 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 the Company's assets and liabilities classified as Level 3 and measured at fair value on a recurring and nonrecurring basis at December 31,
2015 and 2014:
Financial Instruments
Valuation Technique
Unobservable Inputs
December 31
2015
2014
Weighted
Average Rate
Weighted
Average Rate
5.61%
n/a
5.61
5.26%
3.96
5.26
Discounted cash flows
Discount rate
Discounted cash flows
Discount rate
Discounted cash flows
Discount rate
Discounted cash flows
Discount rate
Various
Various
Collateral Valuations
Market values
Appraisals
Market values
n/a
n/a
n/a
n/a
TPS securities
TRUP CDOs
Junior subordinated debentures
Impaired loans
REO
TPS Securities and TRUP CDOs: Management believes that the credit risk-adjusted spread used to develop the discount rate utilized in the fair
value measurement of TPS and TRUP CDOs is indicative of the risk premium a willing market participant would require under current market
conditions for instruments with similar contractual rates, 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 and TRUP CDOs 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
134
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 December 31, 2015, or the passage of time, will result in negative fair value
adjustments. At December 31, 2015, the discount rate utilized was based on a credit spread of 500 basis points and three month LIBOR of 62
basis points.
The following table provides a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3)
on a recurring basis during the year ended December 31, 2015 and 2014 (in thousands):
Beginning balance at December 31, 2014
Total gains or losses recognized
Assets gains
Liabilities losses
Purchases, issuances and settlements, net
Paydowns and maturities
Transfers in and/or out of Level 3
Ending balance at December 31, 2015
Beginning balance at December 31, 2013
Total gains or losses recognized
Assets gains
Liabilities losses
Purchases, issuances and settlements
Paydowns and maturities
Transfers in and/or out of Level 3
Ending balance at December 31, 2014
Year Ended December 31, 2015
Level 3 Fair Value Inputs
TPS and TRUP
CDOs
Borrowings—
Junior Subordinated
Debentures
19,119
$
537
—
5,697
(6,654)
—
18,699
$
78,001
—
2,714
11,765
—
—
92,480
Year Ended December 31, 2014
Level 3 Fair Value Inputs
TPS and TRUP
CDOs
Borrowings—
Junior Subordinated
Debentures
35,140
$
73,928
5,481
—
—
(21,502)
—
—
4,073
—
—
—
19,119
$
78,001
$
$
$
$
The Company has elected to continue to recognize the interest income and dividends from the securities reclassified to fair value as a component
of interest income as was done in prior years when they were classified as available-for-sale. Interest expense related to the FHLB advances
and junior subordinated debentures continues to be measured based on contractual interest rates and reported in interest expense. The change
in fair value of these financial instruments has been recorded as a component of non-interest income.
Items Measured at Fair Value on a Non-recurring Basis
The following tables present financial assets and liabilities 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 at December 31, 2015 and 2014 (in thousands):
Impaired loans
REO
Impaired loans
REO
$
$
At or For the Year Ended December 31, 2015
Level 1
Level 2
Level 3
Total
— $
—
— $
—
$
2,372
11,627
2,372
11,627
At or For the Year Ended December 31, 2014
Level 1
Level 2
Level 3
Total
— $
—
— $
—
$
4,725
3,352
4,725
3,352
135
The following table presents the losses resulting from non-recurring fair value adjustments for the years ended December 31, 2015 and 2014 (in
thousands):
Impaired loans
REO
Total loss from nonrecurring measurements
For the twelve months ended December 31,
2015
2014
$
$
(110) $
(231)
(341) $
(512)
(453)
(965)
Impaired loans: Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price or the fair value of collateral if the loan is collateral dependent. If this
practical expedient is used, the impaired loans are considered to be held at fair value. Subsequent changes in the value of impaired loans are
included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision
that would otherwise be reported. Impaired loans are periodically evaluated to determine if valuation adjustments, or partial write-downs, should
be recorded. The need for valuation adjustments arises when observable market prices or current appraised values of collateral indicate a shortfall
in collateral value compared to current carrying values of the related loan. If the Company determines that the value of the impaired loan is less
than the carrying value of the loan, the Company either establishes an impairment reserve as a specific component of the allowance for loan
losses or charges off the impaired amount. These valuation adjustments are considered non-recurring fair value adjustments. The remaining
impaired loans are evaluated for reserve needs in homogenous pools within the Company’s methodology for assessing the adequacy of the
allowance for loan losses.
REO: The Company records REO (acquired through a lending relationship) at fair value on a non-recurring basis. Fair value adjustments on
REO are based on updated real estate appraisals which are based on current market conditions. All REO properties are recorded at the estimated
fair value of the real estate, less expected selling costs. 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.
136
Note 19: BANNER CORPORATION (PARENT COMPANY ONLY)
Summary financial information is as follows (in thousands):
Statements of Financial Condition
ASSETS
Cash
Investment in trust equities
Investment in subsidiaries
Other assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Miscellaneous liabilities
Deferred tax liability
Junior subordinated debentures at fair value
Shareholders’ equity
December 31
2015
2014
$
58,232
4,212
1,319,348
21,134
52,124
3,716
610,732
8,279
1,402,926
$
674,851
$
7,846
2,541
92,480
1,300,059
2,446
11,516
78,001
582,888
1,402,926
$
674,851
$
$
$
$
Statements of Operations
INTEREST INCOME:
Interest-bearing deposits
OTHER INCOME (EXPENSE):
Dividend income from subsidiaries
Equity in undistributed (distributions in excess of) income of subsidiaries
Other income
Net change in valuation of financial instruments carried at fair value
Interest on other borrowings
Other expenses
Net income before taxes
BENEFIT FROM INCOME TAXES
NET INCOME
Years Ended December 31
2015
2014
2013
$
122
$
96
$
82
170,260
(116,120)
69
(2,714)
(3,247)
(7,175)
41,195
(4,027)
26,027
33,612
67
(4,073)
(2,914)
(2,519)
50,296
(3,774)
$
45,222
$
54,070
$
24,725
23,653
3,016
(865)
(2,968)
(2,794)
44,849
(1,365)
46,214
137
Statements of Cash Flows
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Distributions in excess of (Equity in undistributed) income of subsidiaries
Increase (decrease) in deferred taxes
Net change in valuation of financial instruments carried at fair value
Increase in other assets
Increase (decrease) in other liabilities
Net cash provided from operating activities
INVESTING ACTIVITIES:
Funds transferred to deferred compensation trust
Acquisitions
Net cash used by investing activities
FINANCING ACTIVITIES:
Issuance of stock for shareholder reinvestment program
Cash dividends paid
Net cash used by financing activities
NET CHANGE IN CASH
CASH, BEGINNING OF PERIOD
CASH, END OF PERIOD
Note 20: STOCK REPURCHASES
Years Ended December 31
2015
2014
2013
$
45,222
$
54,070
$
46,214
116,120
(1,398)
2,714
(10,655)
3,919
155,922
(26)
(132,652)
(132,678)
34
(17,170)
(17,136)
6,108
52,124
(33,612)
(1,444)
4,073
(3,822)
222
19,487
(26)
—
(26)
127
(13,462)
(13,335)
6,126
45,998
$
58,232
$
52,124
$
(23,653)
17
865
(4,655)
(1,921)
16,867
(27)
—
(27)
72
(7,798)
(7,726)
9,114
36,884
45,998
On March 26, 2014, the Company announced that its Board of Directors had authorized the repurchase of up to 978,826 shares of the Company's
common stock, or 5% of the Company's outstanding shares. Under the plan, shares may be repurchased by the Company in open market
purchases. The extent to which the Company repurchases its shares and timing of such repurchases will depend upon market conditions and
other corporate considerations.
The Company did not repurchase any shares of its common stock during the years ended December 31, 2015, 2014 or 2013 except for shares
surrendered by employees to satisfy tax withholding obligations upon the vesting of restricted stock grants and shares redeemed relating to the
termination of the ESOP. The ESOP terminated during the year ended December 31, 2014.
Note 21: CALCULATION OF EARNINGS PER COMMON SHARE
The following tables show the calculation of earnings per common share (in thousands, except per share data):
Years Ended December 31
2015
2014
2013
Net income
$
45,222
$
54,070
$
46,214
Weighted average number of common shares outstanding
Basic
Diluted
Earnings per common share
Basic
Diluted
23,801,373
23,866,621
19,359,409
19,402,656
19,361,411
19,397,360
$
$
1.90
1.89
$
$
2.79
2.79
$
$
2.39
2.38
At December 31, 2015, there were 231,562 issued but unvested restricted stock shares and units that were included in the computation of diluted
earnings per share.
Options to purchase an additional 5,000 shares of common stock and a warrant to purchase up to 243,998 shares of common stock were not
included in the computation of diluted earnings per share because their exercise price resulted in them being anti-dilutive.
138
Note 22: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Results of operations on a quarterly basis for the years ended December 31, 2015, 2014 and 2013 were as follows (dollars in thousands except
for per share data):
Interest income
Interest expense
Net interest income before provision for loan losses
Provision for loan losses
Net interest income
Non-interest income
Non-interest expense
Income before provision for income taxes
Provision for income taxes
Net income
Basic earnings per share
Diluted earnings per share
Dividends declared
Interest income
Interest expense
Net interest income before provision for loan losses
Provision for loan losses
Net interest income
Non-interest income
Non-interest expense
Income before provision for income taxes
Provision for income taxes
Net income
Basic earnings per share
Diluted earnings per share
Dividends declared
Year Ended December 31, 2015
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
$
$
$
$
$
$
$
$
$
$
49,069
2,533
46,536
—
46,536
13,696
41,914
18,318
6,184
12,134
0.61
0.61
0.18
First
Quarter
45,106
2,767
42,339
—
42,339
9,032
35,581
15,790
5,241
10,549
0.55
0.54
0.18
$
$
$
54,076
2,619
51,457
—
51,457
16,141
47,734
19,864
6,615
13,249
0.64
0.64
0.18
54,793
2,605
52,188
—
52,188
14,098
46,697
19,589
6,642
12,947
0.62
0.62
0.18
Year Ended December 31, 2014
Second
Quarter
Third
Quarter
$
$
$
46,540
2,732
43,808
—
43,808
20,310
38,435
25,683
8,696
16,987
0.88
0.88
0.18
49,764
2,700
47,064
—
47,064
13,536
38,495
22,105
7,284
14,821
0.76
0.76
0.18
$
$
$
$
$
$
96,495
4,396
92,099
—
92,099
18,356
100,254
10,201
3,308
6,893
0.20
0.20
0.18
Fourth
Quarter
49,251
2,590
46,661
—
46,661
12,113
41,230
17,544
5,831
11,713
0.60
0.60
0.18
139
Interest income
Interest expense
Net interest income before provision for loan losses
Provision for loan losses
Net interest income
Non-interest income
Non-interest expense
Income (loss) before provision for income taxes
Provision (benefit) for income taxes
Net income
Basic earnings per share
Diluted earnings per share
Dividends declared
Note 23: COMMITMENTS AND CONTINGENCIES
Year Ended December 31, 2013
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
$
$
$
$
44,508
3,540
40,968
—
40,968
10,088
34,099
16,957
5,373
11,584
0.60
0.60
0.12
$
$
$
45,571
3,323
42,248
—
42,248
10,953
35,457
17,744
6,076
11,668
0.60
0.60
0.12
$
$
$
45,037
3,144
41,893
—
41,893
10,592
34,490
17,995
6,459
11,536
0.60
0.59
0.15
44,596
2,989
41,607
—
41,607
13,029
36,929
17,707
6,281
11,426
0.59
0.59
0.15
The Company has financial instruments with off-balance-sheet risk generated in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to extend credit, commitments related to standby letters of credit, commitments
to originate loans, commitments to sell loans, and commitments to buy or 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
December 31, 2015
December 31, 2014
Commitments to extend credit
Standby letters of credit and financial guarantees
Commitments to originate loans
$
$
2,132,996
22,315
32,908
Derivatives also included in Note 24:
Commitments to originate loans held for sale
Commitments to sell loans secured by one- to four-family residential properties
Commitments to sell securities related to mortgage banking activities
76,146
37,545
41,500
1,166,165
9,934
20,988
29,851
8,714
25,000
Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Many of the
commitments may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash
requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary
upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable,
inventory, property, plant and equipment, and income producing commercial properties. The Company's reserve for unfunded loan commitments
was $3.9 million and $732,000, at December 31, 2015 and 2014, respectively.
Standby letters of credit are conditional commitments issued to guarantee a customer’s performance or payment to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Interest rates on residential one- to four-family mortgage loan applications are typically rate locked (committed) to customers during the application
stage for periods ranging from 30 to 60 days, the most typical period being 45 days. Traditionally, these loan applications with rate lock
commitments had the pricing for the sale of these loans locked with various qualified investors under a best-efforts delivery program at or near
the time the interest rate is locked with the customer. The Bank then attempts to deliver these loans before their rate locks expired. This
140
arrangement generally required delivery of the loans prior to the expiration of the rate lock. Delays in funding the loans required a lock extension.
The cost of a lock extension at times was borne by the customer and at times by the Bank. These lock extension costs have not had a material
impact to our operations. The Company enters into forward commitments at specific prices and settlement dates to deliver either: (1) residential
mortgage loans for purchase by secondary market investors (i.e., Freddie Mac or Fannie Mae), or (2) mortgage-backed securities to broker/
dealers. The purpose of these forward commitments is to offset the movement in interest rates between the execution of its residential mortgage
rate lock commitments with borrowers and the sale of those loans to the secondary market investor. There were no counterparty default losses
on forward contracts during 2015 or 2014. Market risk with respect to forward contracts arises principally from changes in the value of contractual
positions due to changes in interest rates. The Company limits its exposure to market risk by monitoring differences between commitments to
customers and forward contracts with market investors and securities broker/dealers. In the event the Company has forward delivery contract
commitments in excess of available mortgage loans, the transaction is completed by either paying or receiving a fee to or from the investor or
broker/dealer equal to the increase or decrease in the market value of the forward contract. Changes in the value of rate lock commitments are
recorded as assets and liabilities as explained in Note 1: “Derivative Instruments.”
In the normal course of business, the Company and/or its subsidiaries have various legal proceedings and other contingent matters
outstanding. These proceedings and the associated legal claims are often contested and the outcome of individual matters is not always
predictable. These claims and counter-claims typically arise during the course of collection efforts on problem loans or with respect to action
to enforce liens on properties in which the Banks hold a security interest. Based upon the information known to management at this time, the
Company and the Banks are not a party to any legal proceedings that management believes would have a material adverse effect on the results
of operations or consolidated financial position at December 31, 2015.
In connection with certain asset sales, the Banks typically make representations and warranties about the underlying assets conforming to specified
guidelines. If the underlying assets do not conform to the specifications, the Bank may have an obligation to repurchase the assets or indemnify
the purchaser against any loss. The Banks believe that the potential for material loss under these arrangements is remote. Accordingly, the fair
value of such obligations is not material.
NOTE 24: DERIVATIVES AND HEDGING
The Company, through its Banner Bank subsidiary, is party to various derivative instruments that are used for asset and liability management
and customer financing needs. Derivative instruments are contracts between two or more parties that have a notional amount and an underlying
variable, require no net investment and allow for the net settlement of positions. The notional amount serves as the basis for the payment
provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents a specified interest rate, index,
or other component. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged
between the parties and influences the market value of the derivative contract. The Company obtains dealer quotations to value its derivative
contracts.
The Company's predominant derivative and hedging activities involve interest rate swaps related to certain term loans and forward sales contracts
associated with mortgage banking activities. Generally, these instruments help the Company manage exposure to market risk and meet customer
financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in
external factors such as market-driven interest rates and prices or other economic factors.
Derivatives Designated in Hedge Relationships
The Company's fixed rate 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, customers received fixed interest rate commercial loans and the 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 customers 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. The Bank discontinued originating interest rate swaps under this program in 2008.
141
As of December 31, 2015 and December 31, 2014, the notional values or contractual amounts and fair values of the Company's derivatives
designated in hedge relationships were as follows (in thousands):
Asset Derivatives
Liability Derivatives
December 31, 2015
December 31, 2014
December 31, 2015
December 31, 2014
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
$
6,734
$
938
$
7,089
$
1,165
$
6,734
$
938
$
7,089
$
1,165
(1)
(2)
Included in Loans Receivable on the Consolidated Statements of Financial Condition.
Included in Other Liabilities on the Consolidated Statements of Financial Condition.
Derivatives Not Designated in Hedge Relationships
Interest Rate Swaps: Banner Bank uses an interest rate swap program for commercial loan customers, that provides the client with a variable
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. Through the acquisition
of AmericanWest, Banner Bank assumed a risk participation agreement. Under the risk participation agreement, Banner Bank guarantees the
financial performance of a borrower on the participated portion of a interest rate swap on a loan.
Mortgage Banking: In the normal course of business, the Company sells originated 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 rate lock commitments with potential borrowers to originate loans that are intended to be sold and for closed
loans that are awaiting sale and delivery into the secondary market.
Written loan commitments that relate to the origination of mortgage loans that will be held for resale are considered free-standing derivatives
and do not qualify for hedge accounting. Written loan commitments generally have a term of up to 60 days before the closing of the loan. The
loan commitment does not bind the potential borrower to enter into the loan, nor does it guarantee that the Company will approve the potential
borrower for the loan. Therefore, when determining fair value, the Company makes estimates of expected “fallout” (loan commitments not
expected to close), using models which consider cumulative historical fallout rates, current market interest rates and other factors.
Written loan commitments in which the borrower has locked in an interest rate results in market risk to the Company to the extent market interest
rates change from the rate quoted to the borrower. The Company economically hedges the risk of changing interest rates associated with its
interest rate lock commitments by entering into forward sales contracts.
Mortgage loans which are held for sale are subject to changes in fair value due to fluctuations in interest rates from the loan's closing date through
the date of sale of the loans into the secondary market. Typically, the fair value of these loans declines when interest rates increase and rises
when interest rates decrease. To mitigate this risk, the Company enters into forward sales contracts on a significant portion of these loans to
provide an economic hedge against those changes in fair value. Mortgage loans held for sale and the forward sales contracts are recorded at fair
value with ineffective changes in value recorded in current earnings as loan sales and servicing income.
142
As of December 31, 2015 and December 31, 2014, the notional values or contractual amounts and fair values of the Company's derivatives not
designated in hedge relationships were as follows (in thousands):
Asset Derivatives
Liability Derivatives
December 31, 2015
December 31, 2014
December 31, 2015
December 31, 2014
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
$
293,937
$
11,046
$
134,512
$
5,125
$
293,937
$
11,046
$
134,512
$
5,125
Risk participation
agreement
Mortgage loan
commitments
Forward sales
contracts
—
76,146
41,500
—
428
43
—
29,311
—
—
317
—
7,672
—
32,763
36
—
50
—
—
33,174
—
—
198
$
411,583
$
11,517
$
163,823
$
5,442
$
334,372
$
11,132
$
167,686
$
5,323
(1)
(2)
Included in Other Assets on the Consolidated Statements of Financial Condition, with the exception of those interest rate swaps from
prior to 2009 that were not designated in hedge relationships (with a fair value of $327,000 at December 31, 2015 and $558,000 at
December 31, 2014), which are included in Loans Receivable.
Included in Other Liabilities on the Consolidated Statements of Financial Condition.
Gains (losses) recognized in income on non-designated hedging instruments for the years ended December 31, 2015 and 2014 were as follows
(in thousands):
Mortgage loan commitments
Forward sales contracts
Mortgage banking operations
Mortgage banking operations
Location on Income Statement
For the Year Ended December 31
2015
$
100
141
241
$
2014
221
(188)
33
$
$
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
December 31, 2015 or December 31, 2014, it could have been required to settle its obligations under the agreements at the termination value.
As of December 31, 2015 and 2014, the termination value of derivatives in a net liability position related to these agreements was $12.0 million
and $6.3 million, respectively. The Company generally posts collateral against derivative liabilities in the form of government agency-issued
bonds, mortgage-backed securities, or commercial mortgage-backed securities. Collateral posted against derivative liabilities was $20.8 million
and $11.1 million as of December 31, 2015 and 2014, respectively.
Derivative assets and liabilities are recorded at fair value on the balance sheet and do not take into account the effects of master netting agreements.
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.
143
The following table illustrates the potential effect of the Company's derivative master netting arrangements, by type of financial instrument, on
the Company's Consolidated Statements of Financial Condition as of December 31, 2015 and December 31, 2014 (in thousands):
December 31, 2015
Gross Amounts of Financial
Instruments Not Offset in the
Statement of Financial Condition
Gross
Amounts
Recognized
Amounts
offset in the
Statement
of Financial
Condition
Net Amounts
in the
Statement
of Financial
Condition
Netting
Adjustment Per
Applicable
Master Netting
Agreements
Fair Value
of Financial
Collateral
in the Statement
of Financial
Condition
Net Amount
$
$
$
$
11,984
11,984
11,984
11,984
$
$
$
$
— $
11,984
— $
11,984
— $
11,984
— $
11,984
$
$
$
$
— $
— $
— $
— $
— $
11,984
— $
11,984
(11,984) $
(11,984) $
—
—
December 31, 2014
Gross Amounts of Financial
Instruments Not Offset in the
Statement of Financial Condition
Gross
Amounts
Recognized
Amounts
offset in the
Statement
of Financial
Condition
Net Amounts
in the
Statement
of Financial
Condition
Netting
Adjustment Per
Applicable
Master Netting
Agreements
Fair Value
of Financial
Collateral
in the Statement
of Financial
Condition
Net Amount
$
$
$
$
6,290
6,290
6,290
6,290
$
$
$
$
— $
— $
— $
— $
6,290
6,290
6,290
6,290
$
$
$
$
(6) $
(6) $
(6) $
(6) $
— $
— $
6,284
6,284
(6,279) $
(6,279) $
5
5
Derivative assets
Interest rate swaps
Derivative liabilities
Interest rate swaps
Derivative assets
Interest rate swaps
Derivative liabilities
Interest rate swaps
144
BANNER CORPORATION
Exhibit
2.1{a}
2.1{b}
2.1{c}
2.1{d}
3{a}
3{b}
3{c}
3{d}
4{a}
10{a}
10{b}
10{c}
10{d}
10{e}
10{f}
10{g}
10{h}
10{i}
10{j}
10{k}
10{l}
Index of Exhibits
Agreement and Plan of Merger, dated as of November 5, 2014, by and among the Registrant, SKBHC Holdings LLC and Starbuck
Bancshares, Inc. [incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on November
12, 2014 (File No. 000-26584)].
Amendment, dated as of May 18, 2015, to the Agreement and Plan of Merger, dated as of November 5, 2014, by and among Banner
Corporation, SKBHC Holdings, LLC and Starbuck Bancshares, Inc. (incorporated herein by reference to Exhibit 2.1 to the Current
Report on Form 8-K filed on May 19, 2015 (File No. 000-26584)).
Amendment No. 2, dated July 13, 2015, to the Agreement and Plan of Merger, dated as of November 5, 2014, by and among Banner
Corporation, SKBHC Holdings LLC, Starbuck Bancshares, Inc., Banner Corporation, and Elements Merger Sub, LLC (incorporated
herein by reference to Exhibit 2.1(c) to the Quarterly Report on Form 10-Q filed on November 6, 2015 (File No. 000-26584)).
Agreement and Plan of Merger dated as of August 7, 2014 by and between Banner Corporation and Siuslaw Financial Group, Inc.
[incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on August 8, 2014 (File No.
000-26584)].
Amended and Restated Articles of Incorporation of Registrant [incorporated by reference to the Registrant's Current Report on
Form 8-K filed on April 28, 2010 (File No. 000-26584)], as amended on May 26, 2011 [incorporated by reference to the Current
Report on Form 8-K filed on June 1, 2011 (File No. 000-26584)].
Articles of Amendment to Amended and Restated Articles of Incorporation of Banner Corporation (incorporated herein by reference
to Exhibit 3.1 to the Current Report on Form 8-K filed on June 1, 2011 (File No. 00026584)).
Articles of Amendment to Amended and Restated Articles of Incorporation of Banner Corporation for nonvoting common stock
(incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on March 18, 2015 (File No. 00026584)).
Bylaws of Registrant [incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on April 1, 2011 (File No.
000-26584)].
Warrant to purchase shares of Company's common stock dated November 21, 2008 [incorporated by reference to the Registrant's
Current Report on Form 8-K filed on November 24, 2008 (File No. 000-26584)]
Executive Salary Continuation Agreement with Gary L. Sirmon [incorporated by reference to exhibits filed with the Annual Report
on Form 10-K for the year ended March 31, 1996 (File No. 000-26584)].
Amended and Restated Employment Agreement, with Mark J. Grescovich [incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed on June 4, 2013 (File No. 000-26584].
1996 Stock Option Plan [incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 dated August 26,
1996 (File No. 333-10819)].
Supplemental Retirement Plan as Amended with Jesse G. Foster [incorporated by reference to exhibits filed with the Annual Report
on Form 10-K for the year ended March 31, 1997 (File No. 000-26584)].
Supplemental Executive Retirement Program Agreement with D. Michael Jones [incorporated by reference to exhibits filed with
the Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 000-26584)].
Form of Supplemental Executive Retirement Program Agreement with Gary Sirmon, Michael K. Larsen, Lloyd W. Baker, Cynthia
D. Purcell and Richard B. Barton [incorporated by reference to exhibits filed with the Annual Report on Form 10-K for the year
ended December 31, 2001 and the exhibits filed with the Form 8-K on May 6, 2008 (File No. 000-26584)].
1998 Stock Option Plan [incorporated by reference to exhibits filed with the Registration Statement on Form S-8 dated February
2, 1999 (File No. 333-71625)].
2001 Stock Option Plan [incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 dated August 8, 2001
(File No. 333-67168)].
Form of Employment Contract entered into with Lloyd W. Baker, Cynthia D. Purcell, Richard B. Barton and Douglas M. Bennett
[incorporated by reference to exhibits filed with the Form 8-K on June 25, 2014 (File No. 000-26584)].
2004 Executive Officer and Director Stock Account Deferred Compensation Plan [incorporated by reference to exhibits filed with
the Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 000-26584)].
2004 Executive Officer and Director Investment Account Deferred Compensation Plan [incorporated by reference to exhibits filed
with the Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 000-26584)].
Long-Term Incentive Plan and Form of Repricing Agreement [incorporated by reference to the exhibits filed with the Form 8-K
on May 6, 2008 (File No. 000-26584)].
10{m}
2005 Executive Officer and Director Stock Account Deferred Compensation Plan [incorporated by reference to exhibits filed with
the Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 000-26584)].
145
10{n}
10{o}
10{p}
10{q}
10{r}
10{s}
10{t}
10{u}
10{v}
10{w}
10{x}
10{y}
14
21
23.1
31.1
31.2
32
101
Entry into an Indemnification Agreement with each of the Registrant's Directors [incorporated by reference to exhibits filed with
the Form 8-K on January 29, 2010 (File No. 000-26584)].
2012 Restricted Stock and Incentive Bonus Plan [incorporated by reference to Appendix B to the Registrant's Definitive Proxy
Statement on Schedule 14A filed on March 19, 2013 (File No. 000-26584)].
Form of Performance-Based Restricted Stock Award Agreement [incorporated by reference to Exhibit 10.1 included in the
Registrant's Current Report on Form 8-K filed on June 4, 2013 (File No. 000-26584)].
Form of Time-Based Restricted Stock Award Agreement [incorporated by reference to Exhibit 10.1 included in the Registrant's
Current Report on Form 8-K filed on June 4, 2013 (File No. 000-26584)].
2014 Omnibus Incentive Plan [incorporated by reference as Appendix C to the Registrant's Definitive Proxy Statement on Schedule
14A filed on March 24, 2014 (File No. 000-26584)].
Forms of Equity-Based Award Agreements: Incentive Stock Option Award Agreement, Non-Qualified Stock Option Award
Agreement, Restricted Stock Award Agreement, Restricted Stock Unit Award Agreement, Stock Appreciation Right Award
Agreement, and Performance Unit Award Agreement [incorporated by reference to Exhibits 10.2 - 10.7 included in the Registration
Statement on Form S-8 dated May 9, 2014 (File No. 333-195835)].
Employment agreement entered into with Johan Mehlum [incorporated by reference to Exhibit 10.1 included in the Registration
Statement on Form S-4 dated October 8, 2014 (File No. 333-199211)].
Employment agreement entered into with Lonnie Iholts [incorporated by reference to Exhibit 10.2 included in the Registration
Statement on Form S-4 dated October 8, 2014 (File No. 333-199211)].
Investor Letter Agreement dated as of November 5, 2014 by and between Banner Corporation, and Oaktree Principal Fund V
(Delaware), L.P. and certain of its affiliates (incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on
Form 8-K filed on November 12, 2014 (File No. 000-26584)].
Investor Letter Agreement dated as of November 5, 2014 by and between Banner Corporation, and Friedman Fleischer and Lowe
Capital Partners III, L.P. and certain of its affiliates (incorporated herein by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed on November 12, 2014 (File No. 000-26584)].
Investor Letter Agreement dated as of November 5, 2014 by and between Banner Corporation, and GS Capital Partners VI Fund
L.P. and certain of its affiliates (incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K
filed on November 12, 2014 (File No. 000-26584)]
Amendment to Investor Letter Agreement dated as of May 18, 2015 by and between Banner Corporation, and GS Capital partners
VI Fund, L.P. and certain of its affiliates (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed
on May 19, 2015 (File No. 000-26584)).
Code of Ethics [incorporated by reference to exhibits filed with the Annual Report on Form 10-K for the year ended December 31,
2004 (File No. 000-26584)].
Subsidiaries of the Registrant.
Consent of Registered Independent Public Accounting Firm – Moss Adams LLP.
Certification of Chief Executive Officer pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following materials from Banner Corporation’s Annual Report on Form 10-K for the year ended December 31, 2015, formatted
in Extensible Business Reporting Language (XBRL): (a) Consolidated Statements of Financial Condition; (b) Consolidated
Statements of Operations; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Shareholders'
Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements.
146
EXHIBIT 21
Parent
Banner Corporation
Subsidiaries
Banner Bank (1)
Islanders Bank (1)
Banner Capital Trusts II, III, IV, V, VI, and VII (1)
Springer Development LLC (2)
Community Financial Corporation (2)
Northwest Financial Corporation (2)
Banner Investment Advisors, LLC (2)
Siuslaw Statutory Trust I (1)
Elements Merger Sub, LLC (1) (3)
Nickerson Street Associates, LLC (2)
Blue Star Properties, Inc. (2)
Greater Sacramento Bancorp Statutory Trust I (1)
Greater Sacramento Bancorp Statutory Trust II (1)
SUBSIDIARIES OF THE REGISTRANT
Percentage of
Ownership
Jurisdiction of State of
Incorporation
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Washington
Washington
Washington
Washington
Oregon
Washington
Washington
Connecticut
Washington
Washington
Oregon
Delaware
Delaware
(1) Wholly-owned by Banner Corporation.
(2) Wholly-owned by Banner Bank.
(3) Subsequent to December 31, 2015, Elements Merger Sub, LLC was merged into Banner Corporation.
147
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.1
We consent to the incorporation by reference in Registration Statement Nos. 333-67168, 333-187256 and 333-195835 on Form S-8 and
Registration Statement 333-180925 on Form S-3 of our reports dated February 29, 2016, with respect to the consolidated statements of financial
condition of Banner Corporation and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations,
comprehensive income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2015, and
the effectiveness of internal control over financial reporting as of December 31, 2015, which reports appear in this Annual Report on Form 10-
K of Banner Corporation for the year ended December 31, 2015.
/s/ Moss Adams LLP
Portland, Oregon
February 29, 2016
148
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF BANNER CORPORATION
PURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES ACT OF 1934
I, Mark J. Grescovich, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Banner Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent
functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
February 29, 2016
/s/Mark J. Grescovich
Mark J. Grescovich
Chief Executive Officer
149
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER OF BANNER CORPORATION
PURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES ACT OF 1934
I, Lloyd W. Baker, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Banner Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent
functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
February 29, 2016
/s/ Lloyd W. Baker
Lloyd W. Baker
Chief Financial Officer
150
EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF BANNER CORPORATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify in his capacity as an officer of Banner Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Annual Report on Form 10-K, that:
•
•
the report fully complies with the requirements of Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, and
the information contained in the report fairly presents, in all material respects, the Company’s financial condition and results of
operations as of the dates and for the periods presented in the financial statements included in such report.
February 29, 2016
February 29, 2016
/s/ Mark J. Grescovich
Mark J. Grescovich
Chief Executive Officer
/s/ Lloyd W. Baker
Lloyd W. Baker
Chief Financial Officer
151
89
B R A N C H E S
BRANCHES
44
36
BRANCHES
B R A N C H E S
14
7BRANCHES
LOCATIONS As we grow, we keep working hard to help our clients
and communities dream big and achieve more.
WE’RE CREATING TOMORROW, TOGETHER.WE’RE CREATING TOMORROW, TOGETHER. Retail Banking
Helping people reach their goals, with a dedicated team and
a wide range of personal banking products and solutions.
Commercial Banking
Building communities one business at a time, with tailored
solutions and personalized client care that goes above and beyond.
Real Estate Lending
Turning dreams into reality with a robust mix of loan products and an
experienced, thoughtful team that helps clients find solutions that work.
WE’RE CREATING TOMORROW, TOGETHER.WE’RE CREATING TOMORROW, TOGETHER. Banner Corporation is a dynamic banking organization that is developing a
significant and expanding regional franchise throughout the Pacific Northwest.
Formed originally in 1995, Banner Corporation is the holding company for
Banner Bank, a Washington-chartered commercial bank headquartered in
Walla Walla, Washington, with roots that date back to 1890.
Banner Bank strives to deliver a high level of individual service as a community
bank while offering advantages available from being a larger financial institution.
Serving a growing and prosperous region with a full range of deposit services
and business, commercial real estate, construction, residential, agricultural and
consumer loans, the Company provides community banking services through
a combined total of 190 full-service branches and nine loan offices located in
58 counties in Washington, Oregon, Idaho, California and Utah.
Banner Bank is a member of the Federal Home Loan Bank System and its
deposits are insured by the Federal Deposit Insurance Corporation.
Banner Bank is a wholly-owned subsidiary of Banner Corporation.
Banner Corporation common stock is traded over-the-counter on the
NASDAQ Global Market® under the symbol “BANR.”
CORPORATE PROFILE Corporate Headquarters
10 South First Avenue
P.O. Box 907
Walla Walla, WA 99362-0264
509-527-3636
800-272-9933
Website: bannerbank.com
Email: bannerbank@bannerbank.com
Subsidiaries
Banner Bank – bannerbank.com
Islanders Bank – islanderbank.com
Community Financial Corporation
Transfer Agent and Registrar
Computershare Trust Company, N.A.
PO Box 30170
College Station, TX 77842-3170
Independent Public
Accountants and Auditors
Moss Adams LLP
805 SW Broadway Suite 1200
Portland, OR 87205
Special Counsel
Breyer & Associates PC
8180 Greensboro Drive, Suite 785
McLean, VA 22102
Annual Meeting of Shareholders
10 a.m., Tuesday, April 26, 2016
Marcus Whitman Hotel
6 W Rose Street
Walla Walla, WA 99362
Dividend Payments Sent Quarterly
Dividend payments are reviewed quarterly by the Board of
Directors and, if appropriate and authorized, have historically
been paid during the months of January, April, July and
October. To avoid delay or lost mail, and to reduce costs,
we encourage you to request direct deposit of dividend
payments to your bank account. To enroll in the Direct
Deposit Plan, telephone the Company’s Investor Services
Department at 800-272-9933.
Dividend Reinvestment and Stock Purchase Plan
Banner Corporation offers a dividend reinvestment program
whereby shareholders may reinvest all or a portion of their
dividends in additional shares of the Company’s common
stock. Information concerning this optional program is
available from the Investor Services Department or from
Computershare Investor Services at 800-697-8924.
Investor Information
Shareholders and others will find the Company’s
financial information, press releases and other
information on the Company’s website at
www.bannerbank.com. There is a direct link from the
website to the Securities and Exchange Commission
(SEC) filings via the EDGAR database, including
Forms 10-K, 10-Q and 8-K.
Shareholders May Contact:
Investor Relations, Banner Corporation
PO Box 907
Walla Walla, WA 99362
Or call 800-272-9933 to obtain a hard copy
of these reports without charge.
Directors
Robert. D. Adams
Doyle L. Arnold
Gordon E. Budke
Connie R. Collingsworth
Spencer C. Fleischer
Jesse G. Foster
Michael J. Gillfillan
Mark J. Grescovich
Roberto R. Herencia
D. Michael Jones
David A. Klaue
Constance H. Kravas
John R. Layman
David I. Matson
Brent A. Orrico
Gary Sirmon
Michael M. Smith
Executive
Officers
Mark J. Grescovich
President and Chief Executive Officer
Lloyd W. Baker
EVP and Chief Financial Officer
Richard B. Barton
EVP, Chief Lending Officer
Douglas M. Bennett
EVP, Real Estate Lending Division
Tyrone J. Bliss
EVP, Risk Management and Compliance Officer
James R. Claffee
EVP, Chief Integration Officer
Peter J. Conner
EVP, Chief Financial Officer, Banner Bank
Kenneth A. Larsen
EVP, Mortgage Banking
Cynthia D. Purcell
EVP, Retail Banking and Administration
M. Kirk Quillin
SVP, East Region Commercial Banking
James T. Reed, Jr.
SVP, West Region Commercial Banking
Steven W. Rust
EVP and Chief Information Officer
Gary W. Wagers
EVP, Retail Products and Services
Keith A. Western
EVP, California and S. Oregon Commercial Banking
WE LISTEN, LEARN AND HELP PEOPLE DREAM BIG.WE LISTEN, LEARN AND HELP PEOPLE DREAM BIG. ANNUAL2015
REPORT
Let’s create tomorrow, together.
Corporate Headquarters
10 South First Avenue
P.O. Box 907
Walla Walla, WA 99362-0265
509-527-3636
800-272-9933
bannerbank@bannerbank.com
bannerbank.com