Banner Corporation
2016
ANNUAL
REPORT
Listening, learning and
helping people achieve
their dreams since 1890.
CREATING TOMORROW,
TOGETHER.
Consumer and Small Business Banking
Helping clients and small businesses reach their goals, with a dedicated team
and a wide range of personal banking, home lending and small business
products, including robust digital solutions to deliver convenience and
information at your fingertips.
Commercial Banking
Going well beyond the basics of commercial, industrial and agricultural
lending, our highly experienced team provides clients with tailored solutions
to help their businesses thrive—including a broad range of international trade
finance, asset-based lending and treasury management services.
Real Estate Lending
Turning development ideas into reality with a robust mix of commercial real
estate, home builder and multifamily loan products and an experienced,
thoughtful team that helps clients find tailored solutions that work.
Fellow Shareholders,
On several occasions recently, I’ve been asked what impact the new
administration in Washington, D.C. will have on interest rates, the
economy and banking regulation. I’ve answered candidly. I don’t know.
Clearly, the stock market has an opinion, what with bank stocks, including
Banner, up sharply since the election. No doubt there’s some substance
to the current enthusiasm. And there’s probably a fair amount of pure
speculation as well.
What I do know is, at Banner, we have to stay focused on the things we
can control. It’s a recurring theme here. Yes, we have to be prepared for
rising interest rates, which we are, and from which we will benefit. But we
will also thrive if rates don’t rise. Yes, we would welcome a more robust
economy. But regardless of the economic environment, our job is to
acquire new clients and retain existing relationships through our super
community bank model of products and services. And, yes, regulatory
relief would be appreciated. But even if it happens, it’s not likely to be
soon. In the meantime, as we cross the $10 billion threshold, we have
to continue working diligently to meet existing regulatory expectations.
Those are things we can control.
Last year I suggested 2016 would be a transformational year for Banner.
It was. In banking, few events are more transformative than acquiring a
competitor that’s about your own size. How do you integrate cultures and
convert systems without altering your core personality and without losing
sight of your basic business goals? And when you think you’re reasonably
far along with conversions and integration, how can you tell if you’ve done
the job well?
In response to the first question, it takes extensive planning,
communication and hard work. I’m pleased to say my colleagues
throughout Banner — with remarkable dedication, focus and effort —
have successfully completed all (more than 100) systems conversions
associated with the AmericanWest Bank acquisition. Further, we
successfully implemented a new and improved electronic and mobile
banking platform for all of Banner’s clients. We’ve also completed the
transition to common branding, policies and procedures. And although
full cultural integration is a lengthier process, we’ve made positive strides
there as well.
In response to the second question, you need to look carefully. Year-to-
year financial comparisons lose some clarity when you double in size. Still,
there are key performance drivers that remain valid. We continued to add
new clients in legacy Banner markets. We retained more AmericanWest
clients than industry benchmarks suggested we would and added new
clients in these markets as well. We actually saw our net interest margin
increase. We held our own in terms of return on average assets. And we
realized most of the cost synergies we were anticipating.
Although we’re pleased with our progress, we want continuous
improvement. Crossing the $10 billion in assets threshold, which will
occur in 2017, brings with it a more intensive level of regulatory scrutiny
and some adverse revenue and expense effects from the Dodd-Frank Act.
Certainly, the opportunities of scale, density and new growth markets
afforded by the AmericanWest Bank acquisition more than offset any new
burdens. Nonetheless, Banner must be well prepared for its new status.
To that end, we took deliberate actions during 2016 to stay below the $10
billion threshold. This has given us more time to prepare for heightened
regulatory expectations and to delay the Durbin Amendment revenue
impact. For instance, the implementation of the Durbin Amendment cap
on interchange fees has been delayed until July 2018 and the requirement
to file our first Dodd Frank stress test has been delayed until June 2019.
At December 31, 2016, Banner Corporation had $9.8 billion in assets,
$7.4 billion in net loans and $8.1 billion in deposits. Our balance sheet
exhibits solid core deposit funding, excellent asset quality and a strong
capital base. As we now deploy the full strength of our integrated
super community bank business model across five western states, we
will benefit from our diversified geographic footprint and the growth
opportunities it offers. Following our successful systems conversions,
we are poised to capture the benefits of scale and provide even more
services to our expanding group of clients, communities, employees and
shareholders.
For the year ended December 31, 2016, Banner Corporation reported net
income of $85.4 million or $2.52 per diluted share, compared to $45.2
million or $1.89 per diluted share in 2015. Acquisition-related expenses
were $11.7 million or $0.22 per share net of tax benefit in 2016, compared
to $26.1 million or $0.76 per share net of tax benefit in 2015. Excluding
the impact of merger and acquisition expenses, gains and losses on the
sale of securities, and changes in fair value of financial instruments, our
earnings from core operations increased $29.9 million, or 47%, to $94.0
million in 2015 from $64.1 million in 2015.
Through a dedicated strategic planning process focusing on revenue
growth initiatives, our revenues from core operations increased 50% to
$460.3 million in 2016 compared to $305.9 million in 2015. During 2016
we improved our ability to consistently generate revenue through:
• Outstanding client acquisition and new account growth, with core
deposit accounts increasing $375 million, or 6%, raising core deposits
to 87% of total deposits,
• Loan growth of $129 million, or 2%, restrained in part by sales of one-
to four-family and multifamily loans,
• A strong net interest margin of 4.20% supported by growth of $521
million, or 20%, in non-interest-bearing deposits,
• Strong mortgage banking revenue which increased 44% over the prior
year, and
• 21% increase in deposit fees and other services-based revenues,
reflecting substantial growth in our client base.
These results already reflect the initial operating synergies achieved by the
2015 acquisitions; they also reflect our proven ability to attract new clients
and our Banner-way culture, underscoring the benefits of our super
community bank 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 this year, we are especially pleased
to have achieved a 0.96% return on average assets before acquisition
expenses, fair value adjustments and securities gains and to have delivered
our 23rd consecutive quarter of profitability.
Our credit risk profile remains moderate with a net recovery for the year
on loan losses and non-performing assets of just 0.35% of total assets.
Nonetheless, primarily because of loan growth and the renewal of
acquired loans out of the acquired discounted loan portfolio, we recorded
a $4 million provision for loan losses in 2016, ending the year with a very
strong 1.57% reserve to total loans when including the net loan discount
on acquired loans. Combined with a tangible common equity ratio of
10.83%, we have a very strong balance sheet, providing considerable
flexibility for strategic initiatives.
In addition to increasing annual cash dividends paid to shareholders from
$0.72 per share to $0.88 per share, we repurchased 1,145,250 shares of
common stock at an average price of $44.29 per share. The Company’s
tangible book value increased to $31.06 per share, compared to $29.64 a
year earlier.
It has been an exciting year at Banner. We are a richer and more diverse
Company with over 2,000 employees, 190 branch offices and a market
area encompassing Washington, Oregon, Idaho, California and Utah as
well as nine of the top 20 largest western metropolitan statistical areas
by population. We have embraced the change, building on our new
opportunities to do more in more places, to do it better, and to continue
building value for all our stakeholders.
We remain at our core a super community bank with a broad product
offering serving a middle market, small business and consumer client
base, making decisions as close to our clients as possible and investing
in our communities. Our people embody our motto: Connected,
Knowledgeable, Responsive.
In closing, I want to thank everyone at Banner for their extraordinary
commitment and hard work. I also want to extend my deepest
appreciation to Jess Foster, Mike Jones and Mike Gillfillan who are leaving
the board this year. Banner has benefited greatly from their expertise and
many years of guidance. And I welcome Merline Saintil, who has recently
joined our board.
Thank you for your continuing interest in and commitment to Banner.
Our performance in 2016 is evidence 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 2017.
Mark J. Grescovich
President and Chief Executive Officer
Banner Corporation & Banner Bank
Interior bulk pages
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, 2016
[ ]
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 X No _
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, 2016, was:
Common Stock – $1,434,750,706
(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, 2017:
Common Stock, $.01 par value – 33,108,767 shares
Non-voting Common Stock, $.01 par value – 84,788 shares
Documents Incorporated by Reference
Portions of Proxy Statement for Annual Meeting of Shareholders to be held April 25, 2017 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, 2016 and 2015
Comparison of Results of Operations
Years ended December 31, 2016 and 2015
Years ended December 31, 2015 and 2014
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 AmericanWest
Bank (AmericanWest) might not be realized within the expected time frames or at all, the credit risks of lending activities, including changes in
the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be
impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and non-performing assets, and
may result in our allowance for loan losses not being adequate to cover actual losses and require us to materially increase our reserves; changes
in economic conditions in general and in Washington, Idaho, Oregon, Utah and California in particular; changes in the levels of general interest
rates and the relative differences between short and long-term interest rates, loan and deposit interest rates, our net interest margin and funding
sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our
market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of safety and soundness and
compliance examinations of us by the Federal Reserve (the Federal Reserve) and of our bank subsidiaries by the Federal Deposit Insurance
Corporation (the FDIC), the Washington State Department of Financial Institutions, Division of Banks (the Washington DFI) or other regulatory
authorities, including the possibility that any such regulatory authority may, among other things, require restitution or institute an informal or
formal enforcement action against us or any of our bank subsidiaries which could require us to increase our reserve for loan losses, write-down
assets, change our regulatory capital position or affect our ability to borrow funds, or maintain or increase deposits, or impose additional
requirements and restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely
affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including
changes related to Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations;
our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the
use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant
changes in valuation; difficulties in reducing risk associated with the loans and securities on our balance sheet; staffing fluctuations in response
to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; the failure or security
breach of computer systems on which we depend; our ability to retain key members of our senior management team; costs and effects of litigation,
including settlements and judgments; our ability to implement our business strategies; future goodwill impairment due to changes in our business,
changes in market conditions, or other factors; our ability to manage loan delinquency rates; increased competitive pressures among financial
services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules,
or regulations or to respond to regulatory actions; our ability to pay dividends on our common stock and non-voting common stock, and interest
or principal payments on our junior subordinated debentures; adverse changes in the securities markets; inability of key third-party providers to
perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies
or the Financial Accounting Standards Board including additional guidance and interpretation on accounting issues and details of the
implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental,
regulatory, and technological factors affecting our operations, pricing, products and services; and other risks detailed from time to time in our
filings with the U.S. Securities and Exchange Commission (SEC), 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,
2016, its 187 branch offices and 11 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 Federal Reserve. Banner Bank and Islanders Bank (the Banks) are subject to regulation by the Washington DFI and
the FDIC. As of December 31, 2016, we had total consolidated assets of $9.79 billion, net loans of $7.37 billion, total deposits of $8.12 billion
and total shareholders’ equity of $1.31 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, 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, $3.00 billion in loans and $3.64 billion in deposits, 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), the holding company
for Siuslaw Bank, which closed on March 6, 2015, with ten branches and approximately $369.8 million in assets, $247.1 million in loans and
$316.4 million in deposits, added further market penetration in western Oregon, including the Eugene market. Both the Starbuck and Siuslaw
acquisitions 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, 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 recent periods; 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 continued strong 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 seven years we have substantially added to our client relationships and account base, while maintaining a moderate risk profile,
which has resulted in strong and sustainable revenues and low credit costs, and which we believe has positioned the Company well for continued
success.
For the year ended December 31, 2016, our net income increased to $85.4 million, or $2.52 earnings per diluted share, compared to $45.2 million,
or $1.89 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. The 2016 results reflect the first full year of earnings contribution from the operations acquired in the AmericanWest
and Siuslaw acquisitions. Acquisition-related expenses were $11.7 million, or $0.22 per diluted share net of tax benefit, in 2016 compared to
$26.1 million, or $0.76 per diluted share net of tax benefit, in 2015.
4
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, interest-bearing liabilities, and non-interest-
bearing funding sources including non-interest-bearing deposits. Our net interest income before provision for loan losses increased 55% to
$375.1 million for the year ended December 31, 2016, compared to $242.3 million for the year ended December 31, 2015.
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 2016 increased $154.0 million, or 51%,
to $458.5 million, compared to $304.6 million for 2015. 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 $83.5 million for the year ended
December 31, 2016, compared to $62.3 million for the year ended December 31, 2015.
Although our credit quality metrics continue to reflect our moderate risk profile, we recorded a $6.0 million provision for loan losses in the year
ended December 31, 2016, primarily due to the organic growth in the loan portfolio and the renewal of acquired loans out of the discounted loan
portfolios, compared to no provision recorded in 2015. Non-performing loans increased modestly to $22.6 million at December 31, 2016,
compared to $15.2 million a year earlier. Our allowance for loan losses at December 31, 2016 was $86.0 million, or 1.15% of total loans
outstanding and 381% 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 36% to $322.9 million for the year ended December 31, 2016, compared to $236.6 million for the year ended
December 31, 2015. 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 for a full year in 2016 and generally increased compensation, occupancy and payment and card processing services
reflecting increased transaction volume.
Reflecting our previously announced strategy to maintain assets below $10.0 billion through December 31, 2016, our total assets decreased
slightly in 2016 to $9.79 billion at December 31, 2016. Remaining below $10.0 billion through year end had the beneficial effect of delaying
the adverse impact on our future operating results from certain enhanced regulatory requirements and the Durbin Amendment cap on interchange
revenues when exceeding that asset size.
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.
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
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
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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, 2016, our net loan portfolio totaled $7.37 billion compared
to $7.24 billion at December 31, 2015.
Our lending activities are primarily directed toward the origination of real estate and commercial loans. Commercial real estate loans include
owner-occupied, investment properties and multifamily residential real estate. Although our level of activity and investment in commercial real
estate loans has been relatively stable for many years, we have experienced an increase in new originations in recent periods. We also originate
construction, land and land development loans, a significant component of which is our residential one- to four-family construction loans.
Originations of one- to four-family construction loans have increased for the past three years as builders have expanded production and experienced
strong sales in many of the markets we serve. Our origination of construction and development loans has been significant during this period
and balances in this portion of the portfolio have increased in recent periods but not at the same pace of originations 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
economy of the western United States, demand for these types of commercial business loans has strengthened and our production levels have
increased in recent periods. 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. 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, which resulted in meaningful growth from originations in 2016 and 2015, primarily related
to increased home equity lines of credit.
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, 2016 and 2015—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, 2016, $813.1 million, or 11% 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.
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. Our residential construction and land and land development
lending has been recently increasing in select markets 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
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region of Washington State and the Portland, Oregon market area. At December 31, 2016, construction, land and land development loans totaled
$823.1 million, or 11% 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, 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, 2016, our loan portfolio included $1.99 billion in non-owner-occupied commercial real estate loans, $1.35 billion
in owner-occupied commercial real estate loans and $248.2 million in multifamily loans which in aggregate comprised 48% 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 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, US Treasury 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, 2016, the average size of our commercial real estate
loans was $618,000 and the largest commercial real estate loan in our portfolio was approximately $17.7 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 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
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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, 2016, commercial business loans totaled $1.21 billion, or 16% of our total loans, including
$138.9 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, 2016, agricultural business loans, including collateral secured loans to purchase farm land and equipment, totaled $369.2 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.
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
8
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, 2016, we had $650.5 million, or 9% of our loan
portfolio, in consumer related loans, including $493.2 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
loan 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, 2016 and 2015, we originated loans, net of repayments, including our participation
in syndicated loans and loans held for sale of $1.11 billion and $741.7 million, respectively. The increase in originations net of repayments for
2016 compared with 2015 largely reflects increased production capacity, including a full year of production from the former AmericanWest and
Siuslaw Bank lending teams in 2016, with both periods being affected 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 $1.06 billion for the year
ended December 31, 2016 from $709.0 million during 2015, reflecting low interest rates, strong housing markets and our increased production
capacity. Originations of loan for sale included $367.6 million and $41.2 million of multifamily held for sale loan production for the years ended
December 31, 2016 and December 31, 2015, respectively. 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, 2016, we sold $880.9 million of loans held for sale compared to $677.2 million for the year ended December 31, 2015.
The held for sale loans sold in 2016 and 2015 included $198.1 million and $66.8 million, respectively, of multifamily loans held for sale. In
addition, we sold $160.3 million and $85.1 million of portfolio multifamily loans acquired through the merger with AmericanWest in 2016 and
2015, respectively. 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, 2016 and 2015, we purchased $314.3 million and
$323.5 million, respectively, of loans and loan participation interests, principally commercial real estate loans.
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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, 2016, we were servicing $2.55 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, 2016, our MSRs
were carried at a value of $15.2 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, 2016 and
2015—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 probable
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, 2016
and 2015—Provision and Allowance for Loan Losses,” and Tables 15 and 16 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
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, 2016 and 2015—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.
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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, 2016, our consolidated investment portfolio totaled $1.09 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. Security sales, paydowns and maturities during the year ended December 31, 2016 exceeded purchases as the Company deleveraged
the balance sheet primarily through reductions in our investment portfolio consistent with our asset management objectives to remain below
$10 billion in assets through December 31, 2016 to delay certain 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, 2016 and 2015—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, interest rate locks to borrowers, 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, 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 interest rate lock commitments with potential borrowers to originate loans that are intended to be sold and
for closed mortgage loans held for sale that are awaiting sale and delivery into the secondary market. The Company economically hedges the
risk of changing interest rates associated with these mortgage loan commitments by entering into forward sales contracts to sell residential
mortgage loans or mortgage-backed securities to broker/dealers as specific prices and dates.
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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,
2016 or 2015, 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 (non-interest-bearing
checking and interest-bearing transaction and savings accounts) is a fundamental element of our business strategy. Core deposits increased to
87% of total deposits at December 31, 2016 compared to 83% a year earlier and 80% two years ago.
Deposit Accounts: We generally attract deposits from within our primary market areas by offering a broad selection of deposit instruments,
including non-interest-bearing 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, 2016, we had $8.12 billion of deposits. 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, 2016 and
2015—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,
2016. In addition, see Note 8, Deposits of the Notes to the Consolidated Financial Statements.
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. 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, 2016, we had $54.2 million of borrowings from the FHLB. At that date, Banner
Bank was authorized by the FHLB to borrow up to $3.35 billion under a blanket floating lien security agreement, while Islanders Bank was
approved to borrow up to $98.1 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, 2016, based upon our available unencumbered collateral, Banner Bank was eligible to borrow $1.02
billion 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,
2016 and 2015—Borrowings,” and Table 10 contained therein, as well as Notes 9 and 10 of the Notes to the Consolidated Financial Statements.
At December 31, 2016, Banner Bank had an uncommitted federal funds line of credit agreement with another financial institution totaling $60.0
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, 2016. Availability of lines is subject to federal funds balances available
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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, 2016, we had issued retail repurchase agreements totaling
$100.7 million. We also may borrow funds through the use of secured wholesale repurchase agreements with securities brokers; at December 31,
2016, 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 $114.9 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, 2016. 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, 2016 the fair value of the junior subordinate debentures was $95.2 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, 2016, under guidance issued by
the Federal Reserve Board. 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, 2016, we had 1,942 full-time and 195 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 a reasonable time after the
corresponding additional tax payments are made or refunds are received.
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 on 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.
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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 and in other circumstances. The Federal Reserve 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. 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.
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 each 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. During 2016,
because the Federal Deposit Insurance Fund's reserve ratio surpassed 1.15%, the FDIC revised the range of initial assessment rates from five to
35 basis points to 3 to 30 basis points for all institutions. The FDIC also imposed a 4.5 basis point surcharge on assessment rates for all large
banks, defined as insured depository institutions with total consolidated assets of $10 billion or more. The surcharge will be in place until the
FDIC reserve ratio reaches 1.35%. When the reserve ratio reaches 1.38%, small banks will receive certain credits applicable to their assessments.
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If the FDIC reserve ratio does not reach 1.35% by December 31, 2018, the FDIC will impose a shortfall assessment on all large banks in the
first quarter of 2019.
Under the current rules, when the reserve ratio for the prior assessment period is equal to, or greater than 2.0% and less than 2.5%, initial base
assessment rates will range from two basis points to 28 basis points and when the reserve ratio for the prior assessment period is greater than
2.5%, initial base assessment rates will range from one basis point to 25 basis points (in each case subject to adjustments for unsecured debt
issued by the bank, unsecured debt issued by other FDIC-insured institutions, and brokered deposits held by the bank). 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. 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.
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. If an institution grows above
$15 billion as a result of an acquisition, the trust preferred securities will be excluded from Tier 1 capital and instead included in Tier 2 capital.
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
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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 risk-based capital 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 is required, which amount
will increase each year by 0.625% 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 considered “well capitalized,” a depository institution must have a Tier 1 risk-
based capital ratio of at least 8.0%, a total risk-based capital ratio of at least 10.0%, a CET1 capital ratio of at least 6.5% and a leverage ratio of
at least 5.0% 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, 2016, 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, 2016, 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 total regulatory capital;
or
• 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, 2016, Banner Bank's and Islanders Bank's
aggregate recorded loan balances for construction, land development and land loans were 81% and 30% of total regulatory capital, respectively. In
addition, at December 31, 2016, Banner Bank's and Islanders Bank's loans on commercial real estate were 312% and 233% 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
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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 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.
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,
2016, 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 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
require regulatory 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, and, effective in 2018, the beneficial owners of accounts. Bank regulators are
17
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 SEC.
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
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 SEC 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."
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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 regulations to implement the provisions of Section 619 of the Dodd-Frank Act, commonly referred to as the Volcker Rule, 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. 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 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
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, 2016, Banner Corporation repurchased
1,145,250 shares of its common stock at a average price of $44.29 per share under its previously announced trading plan.
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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,
2016:
Name
Age
Position with Banner Corporation
Position with Banner Bank
Mark J. Grescovich
Lloyd W. Baker
Richard B. Barton
Douglas M. Bennett
Peter J. Conner
Kayleen R. Kohler
Kenneth A. Larsen
Craig Miller
Cynthia D. Purcell
M. Kirk Quillin
James T. Reed, Jr.
Steven W. Rust
Judith A. Steiner
Gary W. Wagers
Keith A. Western
52
68
73
64
51
44
47
65
59
54
54
69
54
56
61
President, Chief Executive Officer,
Director
President, Chief Executive Officer, Director
Executive Vice President,
Chief Financial Officer
Executive Vice President
Executive Vice President,
Chief Credit Officer
Executive Vice President,
Real Estate Lending Operations
Executive Vice President,
Chief Financial Officer
Executive Vice President
Human Resources
Executive Vice President,
Mortgage Banking
Executive Vice President
General Counsel
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
Chief Risk 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.
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.
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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 and has included a variety of roles in financial management and reporting,
strategic planning, asset, liability and portfolio management, mortgage lending and secondary marketing.
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 40 years of experience in real estate
lending. He has served as a member of Banner Bank’s executive management committee since 2004.
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.
Kayleen R. Kohler joined Banner Bank in 2016 as Executive Vice President of Human Resources. Ms. Kohler’s focus is on driving organizational
design priorities at Banner Bank including: leadership development, talent acquisition, workforce planning, employee relations, compensation,
benefits, diversity initiatives, payroll, and safety. Prior to joining Banner, Ms. Kohler served 20 years in progressive human resource leadership
roles for Plum Creek Timber Company, now Weyerhaeuser. She holds bachelors’ degrees in Marketing as well as Business Management from
Northwest Missouri State University and a master’s in Organizational Management from the University of Phoenix. Through continuing
education, she maintains her SPHR and SHRM-SCP certifications.
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 25-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. Formerly he was the Chairman of the Washington Mortgage Bankers Association and currently serves as a commissioner
on the Washington State Housing Finance Commission. He was promoted to Executive Vice President in 2015.
Craig Miller is the Executive Vice President and General Counsel for Banner Bank. He joined Banner in 2016 and is responsible for overseeing
the company’s legal functions. Mr. Miller had previously served as senior litigation partner at Davis Wright Tremaine LLP in Seattle and served
with the firm, Rose Joneson Vargas, in American Samoa. His extensive experience in state and federal commercial trials, mediations and
arbitrations, cover a wide variety of litigation matters, with special concentration in representing creditors in distressed credit cases, including
collections, foreclosures, and bankruptcy adversary actions. Mr. Miller earned his Juris Doctor degree (JD) from the University of Southern
California Law School. His community involvement includes board service with the YMCA of Greater Seattle, Childhaven, King County Sexual
Assault Resource Center, and the Meany Center for the Performing Arts.
Cynthia D. Purcell is the Executive Vice President for Retail Banking and Administration. Ms. Purcell is responsible for leading the Retail
Banking business line including Branch Banking, Mortgage Banking, Business Banking and Digital delivery channels, as well as oversight of
administrative and support functions for the Bank. She was formerly the Chief Financial Officer of Inland Empire Bank (now Banner Bank),
which she joined in 1981. Over her banking career, Ms. Purcell has been deeply involved in advocating for the industry through leadership roles
on various Boards and committees including State Banking Associations and the American Bankers Association (ABA). She has also taught
banking courses throughout her career, including the ABA Graduate School of Bank Investments and Financial Management, the Northwest
Intermediate Banking School, and the Oregon Bankers Association Directors College.
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, Idaho and Utah. 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.
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, as well as Treasury Management and Specialty Banking Services. 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
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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 38 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.
Judith A. Steiner joined Banner Bank in 2016 as Executive Vice President and Chief Risk Officer. In this role, Ms. Steiner is responsible for
overseeing the company’s risk and compliance functions as well as the Bank’s interactions with industry regulators. Prior to joining Banner,
Ms. Steiner spent 25 years with FirstMerit Corporation in executive leadership positions including Executive Vice President & Chief Risk Officer,
Secretary, and General Counsel. Ms. Steiner earned her bachelor’s degree from the University of Akron and her Juris Doctor degree (JD) from
the Case Western Reserve University School of Law.
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 39 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 SEC.
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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. We provide
banking and financial services primarily 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 and it is not known how the recent withdrawal by the United States from the Trans-Pacific Partnership trade agreement may
also affect these businesses. 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.
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.
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 $6.64 billion outstanding in these types of higher risk loans at December 31, 2016 compared to $6.36 billion at December 31,
2015. These loans typically present different risks to us for a number of reasons, including those discussed below:
• Construction and Land Loans. At December 31, 2016, construction and land loans were $823.1 million or 11% 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
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
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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 $248.7 million or 43% in 2016. At December 31, 2016, construction and land loans that
were non-performing were $1.7 million, or 8% of our total non-performing loans.
• Commercial and Multifamily Real Estate Loans. At December 31, 2016, commercial and multifamily real estate loans were $3.59
billion, or 48% 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, 2016,
commercial and multifamily real estate loans that were non-performing were $9.1 million, or 40% of our total non-performing loans.
• Commercial Business Loans. At December 31, 2016, commercial business loans were $1.21 billion, or 16% 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, 2016, commercial business loans that were
non-performing were $3.1 million, or 14% of our total non-performing loans.
• Agricultural Loans. At December 31, 2016, agricultural loans were $369.2 million, or 5% of our total loan portfolio. Agricultural
lending involves a greater degree of risk and typically involves higher principal amounts than other types of loans. 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 adverse weather conditions that prevent the planting of a crops or limit crop yields (such as hail,
drought and floods), loss of livestock due to disease or other factors, declines in market prices for agricultural products (both domestically
and internationally) and the impact of government regulations (including changes in price supports, subsidies and environmental
regulations). In addition, many farms are dependent on a limited number of key individuals whose injury or death may significantly
affect the successful operation of the farm. If the cash flow from a farming operation is diminished, the borrower's ability to repay the
loan may impaired. Consequently, agricultural loans may involve a greater degree of risk than other types of loans, particularly in the
case of loans that are unsecured or secured by rapidly depreciating assets such as farm equipment (some of which is highly specialized
with a limited or no market for resale), or assets such as livestock or crops. In such cases, any repossessed collateral for a defaulted
agricultural operating loan my not provide an adequate source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation or because the assessed value of the collateral exceeds the eventual realization value. At
December 31, 2016, there were $3.2 million of agricultural loans that were non-performing or 14% of total non-performing loans.
• Consumer Loans. At December 31, 2016, consumer loans were $650.5 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, 2016, consumer loans that were non-performing were $1.9 million, or 9% 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.
The Financial Accounting Standards Board has adopted a new accounting standard that will be effective for our first fiscal year after December
15, 2019. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates
of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for credit losses. This will change the current
method of providing allowances for credit losses that are probable, which may require us to increase our allowance for loan losses, and may
greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for credit 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. 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 may be adversely affected by risks associated with completed and potential acquisitions.
As part of our general growth strategy, we have recently expanded our business through acquisitions. During 2015, we completed the acquisitions
of AmericanWest and Siuslaw. Although our business strategy emphasizes organic expansion, we continue, from time to time in the ordinary
course of business, to engage in preliminary discussions with potential acquisition targets. There can be no assurance that, in the future, we will
successfully identify suitable acquisition candidates, complete acquisitions and successfully integrate acquired operations into our existing
operations or expand into new markets. The consummation of any future acquisitions may dilute shareholder value or may have an adverse
effect upon our operating results while the operations of the acquired business are being integrated into our operations. In addition, once
integrated, acquired operations may not achieve levels of profitability comparable to those achieved by Banner’s existing operations, or otherwise
perform as expected. Further, transaction-related expenses may adversely affect our earnings. These adverse effects on our earnings and results
of operations may have a negative impact on the value of Banner’s stock. Acquiring banks, bank branches or businesses involves risks commonly
associated with acquisitions, including:
• 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;
• Higher than expected deposit attrition;
• Potential diversion of our management's time and attention;
• 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.
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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.
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, rating agency actions in respect of the securities,
defaults by the issuer or with respect to the underlying securities, 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.
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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-family 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. In an attempt to help the overall economy, the Federal Reserve Board has kept interest rates low through its targeted
Fed Funds rate. In December 2016, the Federal Reserve Board slightly increased the Fed Funds rate by 25 basis points and intends further
increases during 2017 subject to economic conditions. As the Federal Reserve Board increases the Fed Funds rate, overall interest rates will
likely rise, which may negatively impact both the housing markets by reducing refinancing activity and new home purchases and the U.S.
economic recovery.
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.
Changes in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current
loan obligations or by reducing our margins and profitability. Our net interest margin is the difference between the yield we earn on our assets
and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates—up or down—could adversely affect our
net interest margin and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the
same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or
contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a
result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract
until the yield catches up. Changes in the slope of the “yield curve”—or the spread between short-term and long-term interest rates—could also
reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because
our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our
net interest margin as our cost of funds increases relative to the yield we can earn on our assets. Also, interest rate decreases can lead to increased
prepayments of loans and mortgage-backed securities as borrowers refinance their loans to reduce borrowing costs. Under these circumstances,
we are subject to reinvestment risk as we may have to redeploy such repayment proceeds into lower yielding investments, which would likely
hurt our income.
A sustained increase in market interest rates could adversely affect our earnings. 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 and having a shorter
duration than our assets. We would incur a higher cost of funds to retain these deposits in a rising interest rate environment. 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.
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 71% of our loan portfolio was comprised of adjustable or floating-rate loans at
December 31, 2016, and approximately $2.6 billion, or 49%, of those loans contained interest rate floors, below which the loans’ contractual
interest rate may not adjust. At December 31, 2016, the weighted average floor interest rate of these loans was 4.60%. At that date, approximately
$1.40 billion, or 54%, of these loans were at their floor interest rate. The inability 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
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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.
Changes in interest rates also affect the value of our interest-earning assets and in particular our securities portfolio. Generally, the fair value
of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported
as a separate component of equity, net of tax. Decreases in the fair value of securities available for sale resulting from increases in interest rates
could have an adverse effect on stockholders’ equity.
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. For further discussion of how changes in interest rates could impact
us, see "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for additional information about our interest rate risk
management.
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.
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.
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 $9.79 billion and Banner Bank's total assets were $9.53 billion at December 31, 2016. 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.
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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.
Reductions in interchange income could negatively impact our earnings.
Interchange income is derived from fees paid by merchants to the interchange network in exchange for the use of the network's infrastructure
and payment facilitation. These fees are paid to card issuers to compensate them for the costs associated with issuance and operation. We earn
interchange fees on card transactions from its debit cards, including $19.5 million during the year ended December 31, 2016. Merchants have
attempted to negotiate lower interchange rates, and the Durbin Amendment to the Dodd-Frank Act, which we would become subject to once our
total assets exceed $10.0 billion, limits the amount of interchange fees that may be charged for certain debit card transactions. See “We may be
subject to additional regulatory scrutiny if and when Banner or Banner Bank’s total assets exceed $10.0 billion.” Merchants may also continue
to pursue alternative payment platforms, such as Apple Pay, to lower their processing costs. Any such new payment system may reduce our
interchange income. Our failure to comply with the operating regulations set forth by payment card networks, which may change, could subject
us to penalties, fees or the termination of our license to use the networks. Any of these scenarios could have a material impact on our business,
financial condition and results of operations.
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
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
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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.
The financial services market is undergoing rapid technological changes, and if we are unable to stay current with those
changes, we will not be able to effectively compete.
The financial services market, including banking services, is undergoing rapid changes with frequent introductions of new technology-driven
products and services. Our future success will depend, in part, on our ability to keep pace with the technological changes and to use technology
to satisfy and grow customer demand for our products and services and to create additional efficiencies in our operations. We expect that we
will need to make substantial investments in our technology and information systems to compete effectively and to stay current with technological
changes. Some of our competitors have substantially greater resources to invest in technological improvements and will be able to invest more
heavily in developing and adopting new technologies, which may put us at a competitive disadvantage. We may not be able to effectively
implement new technology-driven products and services or be successful in marketing these products and services to our customers. As a result,
our ability to effectively compete to retain or acquire new business may be impaired, and our business, financial condition or results of operations
may be adversely affected.
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
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,
30
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 framework for managing risks may not be effective in mitigating risk and loss to us.
We have established processes and procedures intended to identify, measure, monitor, report, analyze and control the types of risk to which we
are subject. These risks include liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and compliance risk, and reputational
risk, among others. We also maintain a compliance program to identify, measure, assess, and report on our adherence to applicable laws, policies
and procedures. While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk management or
compliance programs, along with other related controls, will effectively mitigate all risk and limit losses in our business. As with any risk
management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that
we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could suffer unexpected losses
which could have a material adverse effect on our financial condition and results of operations.
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. 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.
31
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.
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 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 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, 2016, we have 190 branch offices located in Washington, Oregon, California, Utah and Idaho. 187 branches are Banner Bank
branches and three of those 190 are Islanders Bank branches. 89 branches are located in Washington, 44 in Oregon, 36 in California, 14 in Idaho
and seven in Utah. Of these branch locations, approximately half are owned and the other half are leased facilities. In addition to the branch
locations, we also have eleven loan production offices nine of which are located in Washington and one each in Oregon and California. 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, 2016 totaled 1,705 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, 2016
High
Low
First quarter
Second quarter
Third quarter
Fourth quarter
First quarter
Second quarter
Third quarter
Fourth quarter
Year Ended December 31, 2015
$
$
$
$
45.92
45.01
44.69
56.50
46.26
50.50
50.16
53.55
High
Low
Cash Dividend
Declared
0.21
0.21
0.23
0.23
Cash Dividend
Declared
0.18
0.18
0.18
0.18
$
$
35.39
38.77
39.58
43.20
39.00
43.87
42.42
44.13
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 continued strong earnings, levels of capital, asset
quality and financial condition, we increased the dividend in the first and third quarters of 2016. 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, 2016, we were current on all interest payments.
33
Issuer Purchases of Equity Securities
The following table provides information about repurchases of common stock by the Company during the quarter ended December 31, 2016:
Period
Total Number of
Common Shares
Purchased
Average Price
Paid per
Common Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plan
Maximum Number of
Remaining Shares that May
be Purchased at Period End
under the Board
Authorization
October 1, 2016 - October 31, 2016
371,979 $
November 1, 2016 - November 30, 2016
December 1, 2016 - December 31, 2016
Total for quarter
293,700
—
665,679
44.29
45.66
—
44.90
367,200
293,700
—
660,900
859,990
566,290
566,290
566,290
On April 4, 2016, the Company announced that its Board of Directors had authorized the repurchase of up to 1,711,540 shares of the Company's
common stock, or 5% of the Company's outstanding shares. During the quarter ended September 30, 2016, the Company adopted a pre-arranged
stock trading plan, pursuant to the Board authorization, in accordance with guidelines specified under Rule 10b5-1 of the Securities Exchange
Act of 1934. Repurchases under the Company’s Rule 10b5-1 stock trading plan are administered through an independent broker. The stock
trading plan authorizes the repurchase of up to 1,300,000 shares of the 1,711,540 shares of Company stock authorized to be repurchased. The
stock trading plan will extend through March 12, 2017, unless completed sooner or otherwise extended or terminated. Repurchases are subject
to the requirements of the SEC, including Rule 10b-18, as well as certain price and other requirements specified in the plan. During the quarter
and year ended December 31, 2016, the Company repurchased 660,900 and 1,145,250 common shares, respectively, under the stock trading
plan leaving 566,290 shares available for future repurchase under the Board authorization.
In addition, 4,779 shares were surrendered by employees to satisfy tax withholding obligations upon the vesting of restricted stock grants in the
fourth quarter of 2016.
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 $5 Billion to $10 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 $5B-$10B
SNL Bank NASDAQ
Year Ended
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
100.00
100.00
100.00
100.00
179.52
117.45
117.63
119.19
265.81
164.57
181.48
171.31
259.69
188.84
186.94
177.42
281.12
201.98
212.96
191.53
347.46
219.89
305.09
265.56
*Assumes $100 invested in Banner Corporation common stock and each index at the close of business on December 31, 2011 and that all
dividends were reinvested. Information for the graph was provided by SNL Financial L.C. © 2017.
35
Item 6 – Selected Financial Data
The following condensed consolidated statements of financial condition and operations and selected performance ratios as of December 31,
2016, 2015, 2014, 2013, and 2012 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
Total shareholders’ equity
Shares outstanding
Shares outstanding excluding unearned, restricted
shares held in ESOP
OPERATING DATA:
(In thousands)
Interest income
Interest expense
2016
2015
$ 9,793,668
1,353,583
7,365,151
8,121,414
255,101
1,305,710
1,305,710
33,193
$ 9,796,298
1,655,290
7,236,496
8,055,068
324,186
1,300,059
1,300,059
34,242
December 31
2014
$ 4,723,163
708,609
3,755,127
3,898,950
187,436
582,888
582,888
19,572
2013
2012
$ 4,388,257
772,614
3,341,453
3,617,926
184,234
538,331
538,331
19,544
$ 4,265,264
811,902
3,146,303
3,557,804
160,000
506,919
506,919
19,455
33,193
34,242
19,572
19,509
19,421
2016
For the Year Ended December 31
2014
2013
2015
$
$
391,477
16,408
$
254,433
12,154
$
190,661
10,789
$
179,712
12,996
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)
375,069
6,030
369,039
49,156
25,552
—
(2,620)
11,382
83,470
175
322,694
322,869
129,640
44,255
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
Net income
$
85,385
$
45,222
$
54,070
$
46,214
$
64,857
(footnotes follow)
36
2012
187,162
19,514
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)
PER COMMON SHARE DATA:
Net income:
Basic
Diluted
Common shareholders’ equity per share (2)(9)
Common shareholders’ tangible equity per share (2)(9)
Cash dividends
2016
At or For the Years Ended December 31
2014
2015
2013
2012
$
$
2.52
2.52
39.34
31.06
0.88
$
1.90
1.89
37.97
29.64
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
Dividend payout ratio (basic)
Dividend payout ratio (diluted)
34.92%
34.92%
37.89%
38.10%
25.78%
25.84%
22.62%
22.67%
1.26%
1.27%
OTHER DATA:
Full time equivalent employees
Number of branches
2,078
190
2,063
202
1,150
93
1,084
88
1,074
88
2016
2015
As of December 31
2014
2013
2012
(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 recoveries (charge-offs) 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)
Consolidated Capital Ratios:
2016
At or For the Years Ended December 31
2014
2015
2013
2012
0.87%
6.41
13.54
4.19
4.20
0.85
3.28
70.41
105.84
1.15
0.03
0.35
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
380.87
512.47
453.56
299.81
223.20
10.83
10.68
12.29
12.23
11.80
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
13.40
12.41
11.83
11.19
13.63
12.65
11.06
12.13
16.80
15.54
13.41
na
16.99
15.73
13.64
na
16.96
15.70
12.74
na
Includes securities available-for-sale and held-to-maturity.
(1)
(2) Calculated using shares outstanding excluding unearned restricted shares held in ESOP.
(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 2016, as evidenced by our solid operating
results and profitability. 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 for the year included continued strong asset quality, outstanding client
acquisition and account growth and strong revenue generation from core operations. The year ended December 31, 2016 was also highlighted
by the completed integration of of Siuslaw Bank and AmericanWest Bank, which were acquired in 2015.
For the year ended December 31, 2016, our net income was $85.4 million, or $2.52 per diluted share, compared to net income of $45.2 million,
or $1.89 per diluted share for the year ended December 31, 2015 and $54.1 million, or $2.79 per diluted share for the year ended December 31,
2014. The 2016 results reflect the first full year of earnings contribution from the operations acquired in the AmericanWest and Siuslaw
acquisitions. Our results for the years ended December 31, 2016 and 2015 were significantly impacted by merger and acquisition activity and
the related expenses. Acquisition-related expenses were $11.7 million, or $0.22 per diluted share net of tax benefit, in 2016 compared to $26.1
million, or $0.76 per diluted share net of tax benefit, in 2015. Results for 2014 included a $9.1 million bargain purchase gain related to our June
2014 purchase of six branches in Oregon (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, 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
55% to $375.1 million for the year ended December 31, 2016, compared to $242.3 million for the year earlier. This increase in net interest
income reflects a full year contribution in 2016 of the operations acquired in the the AmericanWest and Siuslaw acquisitions and organic loan
and deposit growth from the legacy Banner Bank franchise. During the year ended December 31, 2016, our interest spread increased to 4.19%
from 4.09% for the prior year while our net interest margin increased to 4.20% compared to 4.10% for the prior year. Our net interest margin
was enhanced 16 basis points in 2016 and eight basis points in 2015 by acquisition accounting adjustments including the amortization of
acquisition accounting discounts on purchased loans received in the acquisitions, which are accreted into loan interest income, as well as net
premiums on non-market-rate certificate of deposit liabilities assumed in the acquisitions which are amortized as a reduction to deposit interest
expense. Setting aside acquisition accounting adjustments, our net interest margin increased two basis points despite continuing pressure on
asset yields in the very low interest rate environment as a result of changes to the mix of assets and liabilities.
Although our credit quality metrics continue to reflect our moderate risk profile, we recorded a $6.0 million provision for loan losses in the year
ended December 31, 2016, primarily due to the organic growth in the loan portfolio and the renewal of acquired loans out of the discounted loan
portfolios, compared to no provision for loan losses recorded in 2015 or 2014. Non-performing loans increased modestly to $22.6 million at
December 31, 2016, compared to $15.2 million a year earlier. Our allowance for loan losses at December 31, 2016 was $86.0 million, representing
381% 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 other service charges, results of mortgage
banking operations, which includes loan origination and servicing fees and gains and losses on the sale of loans, and 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. Our total non-interest income was $83.5 million for the year ended December 31,
2016, compared to $62.3 million for the year ended December 31, 2015. For the year ended December 31, 2016, we recorded a net loss of $2.6
million for fair value adjustments and $843,000 in net gains on the sale of securities. In comparison, for the year ended December 31, 2015, we
recorded a net loss of $813,000 for fair value adjustments and $540,000 in net losses on the sale of securities. Non-interest income excluding
the net gain on sale of securities, and changes in the value of financial instruments carried at fair value, which we believe is more indicative of
our core operations, increased 34% to $85.2 million for the year ended December 31, 2016 compared to $63.6 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, 2016
increased $154.0 million, or 51%, to $458.5 million, compared to $304.6 million for the same period a year earlier, largely as a result of the full
year of benefits from our 2015 acquisitions and organic growth. Our total revenues from core operations, which excludes net gains on sale of
securities and fair value adjustments, increased by $154.4 million, or 50%, to $460.3 million for the year ended December 31, 2016, compared
to $305.9 million for the same period a year earlier.
For the year ended December 31, 2016, non-interest expense increased 36% to $322.9 million, compared to $236.6 million for the year ended
December 31, 2015. The increase was largely attributable to the 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 for a full year in 2016 compared to
39
a period of less than a year in 2015, as well as generally increased compensation, occupancy and payment and card processing services reflecting
increased transaction volume.
Reflecting our previously announced strategy to maintain assets below $10.0 billion through December 31, 2016, our total assets decreased
slightly during 2016 to $9.79 billion at December 31, 2016. As part of this strategy total securities and interest-bearing cash balances decreased
as a result of repayments and sales of securities. Proceeds from these securities transactions were used to reduce FHLB advances and to repurchase
1,145,250 shares of common stock. Remaining below $10.0 billion through the year end had the beneficial effect of delaying the adverse impact
on our future operating results from certain enhanced regulatory requirements and the Durbin Amendment cap on interchange fees.
Non-GAAP financial measures: Non-interest income, revenues and other earnings information excluding fair value adjustments, net gains or
losses on sale of securities and, in certain periods, acquisition-related 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, 2016 and 2015” 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):
NON-INTEREST INCOME FROM CORE OPERATIONS:
2016
2015
2014
For the Years Ended December 31
Total non-interest income (GAAP)
Exclude net (gain) loss on sale of securities
Exclude change in valuation of financial instruments carried at fair value
Exclude acquisition bargain purchase gain
Total non-interest income from core operations (non-GAAP)
REVENUE FROM CORE OPERATIONS:
Net interest income before provision for loan losses
Total non-interest income
Total GAAP revenue
Exclude net (gain) loss on sale of securities
Exclude change in valuation of financial instruments carried at fair value
Exclude acquisition bargain purchase gain
Revenue from core operations (non-GAAP)
INCOME FROM CORE OPERATIONS:
Income before provision for taxes (GAAP)
Exclude net (gain) loss on sale of securities
Exclude change in valuation of financial instruments carried at fair value
Exclude acquisition bargain purchase gain
Exclude acquisition related costs
Income from core operations before provision for taxes (non-GAAP)
EARNINGS FROM CORE OPERATIONS:
Net income (GAAP)
Exclude net (gain) loss on sale of securities
Exclude change in valuation of financial instruments carried at fair value
Exclude acquisition bargain purchase gain
Exclude acquisition related costs
Exclude related tax (benefit) expense
Total earnings from core operations (non-GAAP)
Diluted earnings per share (GAAP)
Diluted core earnings per share (non-GAAP)
NET EFFECT OF ACQUISITION-RELATED COSTS ON EARNINGS:
Acquisition bargain purchase gain
Acquisition related costs
Related tax benefit (expense)
Total net effect of acquisitions on earnings
Diluted weighted shares outstanding
Total net effect of acquisitions on diluted earnings per share
$
$
$
$
$
$
$
$
$
$
$
$
$
$
83,470
(843)
2,620
—
$
62,292
540
813
—
54,991
(42)
(1,374)
(9,079)
85,247
$
63,645
$
44,496
$
375,069
83,470
458,539
(843)
2,620
—
$
242,279
62,292
304,571
540
813
—
179,872
54,991
234,863
(42)
(1,374)
(9,079)
460,316
$
305,924
$
224,368
$
129,640
(843)
2,620
—
11,733
$
67,971
540
813
—
26,110
81,122
(42)
(1,374)
(9,079)
4,325
143,150
$
95,434
$
74,952
85,385
(843)
2,620
—
11,733
(4,857)
94,038
2.52
2.78
$
$
$
$
45,222
540
813
—
26,110
(8,552)
64,133
1.89
2.69
$
$
$
$
— $
— $
(11,733)
4,217
(26,110)
8,065
54,070
(42)
(1,374)
(9,079)
4,325
3,166
51,066
2.79
2.63
9,079
(4,325)
(2,656)
(7,516) $
(18,045) $
2,098
33,853,511
23,866,621
19,402,656
(0.22) $
(0.76) $
0.11
41
RATIO OF ADJUSTED ALLOWANCE FOR LOAN LOSSES TO ADJUSTED
LOANS:
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
7,314,504
43,657
7,358,161
78,008
43,657
121,665
$
$
$
$
2014
3,831,034
148
3,831,182
75,907
148
76,055
$
$
$
$
2016
7,451,148
31,110
7,482,258
85,997
31,110
117,107
$
$
$
$
Allowance for loan losses/Total loans (GAAP)
Adjusted allowance for loan losses/Adjusted total loans (non-GAAP)
1.15%
1.57%
1.07%
1.65%
1.98%
1.99%
ACQUISITION ACCOUNTING IMPACT ON NET INTEREST MARGIN:
2016
2015
2014
Net interest income before provision for loan losses (GAAP)
$
375,069
$
242,279
$
179,872
Exclude discount accretion on purchased loans
Exclude premium amortization on acquired certificates of deposit
(10,984)
(1,552)
(3,566)
(748)
(223)
(139)
Net interest income before acquisition accounting impact (non-GAAP)
$
362,533
$
237,965
$
179,510
December 31
Average interest-earning assets (GAAP)
Exclude average net loan discount on acquired loans
$ 8,930,910
$ 5,902,143
$ 4,419,594
38,561
17,615
151
Average interest-earning assets before acquired loan discount (non-GAAP)
$ 8,969,471
$ 5,919,758
$ 4,419,745
Net interest margin (GAAP)
Exclude impact on net interest margin from discount accretion
Exclude impact on net interest margin from certificates of deposit premium
amortization
Exclude impact of net loan discount on average earning assets
Net margin before discount accretion (non-GAAP)
4.20 %
(0.12)%
(0.02)%
(0.02)%
4.04 %
4.10 %
(0.06)%
(0.01)%
(0.01)%
4.02 %
4.07 %
(0.01)%
— %
— %
4.06 %
December 31
NON-INTEREST EXPENSE FROM CORE OPERATIONS:
2016
2015
2014
Total non-interest expense (GAAP)
Exclude acquisition related costs
Non-interest expense from core operations (non-GAAP)
$
$
322,869
$
236,600
$
153,741
(11,733)
(26,110)
(4,325)
311,136
$
210,490
$
149,416
42
ADJUSTED EFFICIENCY RATIO:
Non-interest expense (GAAP)
Exclude acquisition-related costs
Exclude CDI amortization
Exclude state/municipal tax expense
Exclude REO gain (loss)
Adjusted non-interest expense (non-GAAP)
Net interest income before provision for loan losses (GAAP)
Non-interest income (GAAP)
Total revenue
Exclude net (gain) loss on sale of securities
Exclude net change in valuation of financial instruments carried at fair value
December 31
2016
2015
2014
$
322,869
$
236,600
$
153,741
$
$
(11,733)
(26,110)
$
$
(7,061)
(3,516)
(175)
300,384
375,069
83,470
458,539
(843)
2,620
$
$
(3,164)
(1,889)
(397)
205,040
242,279
62,292
304,571
540
813
(4,325)
(1,990)
(1,437)
446
146,435
179,872
54,991
234,863
(42)
(1,374)
Adjusted revenue (non-GAAP)
$
460,316
$
305,924
$
233,447
Efficiency ratio (GAAP)
Adjusted efficiency ratio (non-GAAP)
70.41%
65.26%
77.68%
67.02%
65.46%
62.73%
Common shareholders' tangible equity per share and the ratio of common shareholders' tangible equity to tangible assets referred to in footnote
(9) to Item 6, Selected Financial Data above are also non-GAAP financial measures. We calculate common shareholders' tangible equity by
excluding goodwill and other intangible assets from common shareholders' equity. We calculate tangible assets by excluding the balance of
goodwill and other intangible assets from total assets. We believe that this is consistent with the treatment by our bank regulatory agencies,
which exclude goodwill and other intangible assets from the calculation of risk-based capital ratios. Management believes that this non-GAAP
financial measure provides information to investors that is useful in understanding our capital position (dollars in thousands).
Shareholders’ equity (GAAP)
Exclude goodwill and other intangible assets, net
Common shareholders’ tangible equity (non-GAAP)
Total assets (GAAP)
Exclude goodwill and other intangible assets, net
December 31
2016
2015
2014
$
$
$
1,305,710
274,745
1,030,965
9,793,668
274,745
$
$
$
1,300,059
285,210
1,014,849
9,796,298
285,210
$
$
$
582,888
2,831
580,057
4,723,163
2,831
Total tangible assets (non-GAAP)
$
9,518,923
$
9,511,088
$
4,720,332
Common shareholders' equity to total assets (GAAP)
Common shareholders’ tangible equity to tangible assets (non-GAAP)
13.33%
10.83%
13.27%
10.67%
12.34%
12.29%
Common shares outstanding
33,193,387
34,242,255
19,571,548
Common shareholders' equity per share (GAAP)
Common shareholders' tangible equity per share (non-GAAP)
$
$
39.34
31.06
$
$
37.97
29.64
$
$
29.78
29.64
Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding our financial
condition and results of operations. The information contained in this section should be read in conjunction with the Consolidated Financial
Statements and accompanying Notes to the Consolidated Financial Statements contained in Item IV of this Form 10-K.
43
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
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 goodwill, core deposit intangibles, favorable
leasehold 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, 2015. 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.
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
44
upon our evaluation of various factors that are not directly measured in the determination of the formula and specific allowances. This
methodology may result in actual losses or recoveries differing significantly from the allowance for loan losses in the Consolidated Financial
Statements.
While we believe the estimates and assumptions used in our determination of the adequacy of the allowance for loan losses are reasonable, there
can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions
will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial
condition and results of operations. In addition, the determination of the amount of the Banks’ allowance for loan losses is subject to review by
bank regulators as part of the routine examination process, which may result in the adjustment of reserves based upon their judgment of information
available to them at the time of their examination.
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 required, 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.
Other intangibles also include favorable leasehold intangibles (LHI). LHI represents the value assigned to leases assumed in an acquisition in
which the lease terms are favorable compared to a market lease at the date of acquisition. LHI is amortized over the underlying lease term and
is reviewed at least annually for events or circumstances that could impair the value.
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.
45
Real Estate Owned Held for Sale: (Notes 1 and 6) Property acquired by foreclosure or deed in lieu of foreclosure is recorded at the estimated
fair value of the property, less expected selling costs. Development and improvement costs relating to the property may be capitalized, while
other holding costs are expensed. The carrying value of the property is periodically evaluated by management 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, California, Utah 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 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, 2016 and 2015
General. Total assets decreased slightly to $9.79 billion at December 31, 2016, compared to $9.80 billion at December 31, 2015. The modest
decrease in assets reflects our previously announced strategy to maintain total assets below $10.0 billion through December 31, 2016. The
decrease was largely the result of a decrease in total securities which was partially offset by increases in net loans and loans held for sale primarily
funded by an increase in deposits.
Net loans receivable (gross loans less deferred fees and discounts, and allowance for loan losses) increased $128.7 million, or 2%, to $7.37
billion at December 31, 2016, from $7.24 billion at December 31, 2015. The increase in net loans included increases of $246.2 million in
commercial real estate loans and $248.7 million in construction loans. The increase in these loan types was partially offset by decreases of
$224.8 million in multifamily real estate loans and $139.6 million in one- to four-family loans. The decreases in these loan types were driven
by the sale of $160.3 million of portfolio multifamily loans acquired in the the AmericanWest acquisition after December 31, 2015 and the
significant repayment by borrowers of one- to four-family real estate portfolio loans. 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. Loans held for sale increased significantly to $246.4 million at December 31, 2016, compared to $44.7
million at December 31, 2015, principally as a result of multifamily loan originations that outpaced loan sales. Loans held for sale at December
31, 2016, included $216.3 million of multifamily loans and $30.1 million of one- to four-family loans.
Securities decreased to $1.09 billion at December 31, 2016, from $1.39 billion at December 31, 2015, and the aggregate total of securities and
interest-bearing deposits decreased $373.6 million, or 24%, to $1.16 billion at December 31, 2016, compared to $1.54 billion a year earlier. The
decrease in securities balances reflects security sales, paydowns and maturities during the year exceeding purchases as the Company deleveraged
the balance sheet primarily through reductions in our investment portfolio consistent with our strategy to remain below $10 billion in assets
through December 31, 2016. The average effective duration of Banner's securities portfolio was approximately 3.8 years at December 31, 2016.
Primarily reflecting significant adjustments in prior years, the fair value of our trading securities was $5.6 million less than their amortized cost
at December 31, 2016. In addition, fair value adjustments for securities designated as available-for-sale reflected a decrease of $3.9 million for
the year ended December 31, 2016, which was included net of the associated tax benefit of $1.4 million 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 $47.2 million from the prior year-end balance. (See Notes 4
and 18 of the Notes to the Consolidated Financial Statements.)
Goodwill decreased $3.2 million to $244.6 million at December 31, 2016, compared to $247.7 million at December 31, 2015. The decrease
during the year represents post-closing fair value adjustments to the acquisition accounting for AmericanWest. Other intangibles decreased $7.3
million to $30.2 million at December 31, 2016, compared to $37.5 million at December 31, 2015, due to scheduled amortization of CDI and
leasehold intangibles.
Deposits increased $66.3 million, or 1%, to $8.12 billion at December 31, 2016, from $8.06 billion at December 31, 2015, largely as a result of
the organic growth in core deposits. Core deposits increased to 87% of total deposits at December 31, 2016, compared to 83% of total deposits
one year earlier. Non-interest-bearing deposits increased by $520.8 million, or 20%, to $3.14 billion from $2.62 billion, interest-bearing transaction
and savings accounts increased by $146.0 million, or 4%, to $3.94 billion at December 31, 2016 from $4.08 billion at December 31, 2015, and
certificates of deposit decreased $308.5 million, or 23%, to $1.05 billion at December 31, 2016 from $1.35 billion at December 31, 2015. In
connection with certain product changes during the first quarter of 2016, Banner converted approximately $421.8 million of former AmericanWest
interest-bearing deposits to non-interest-bearing deposits.
46
FHLB advances decreased $79.2 million, to $54.2 million at December 31, 2016 from $133.4 million at December 31, 2015, as increased deposits
were used to fund a larger portion of the balance sheet and the investment securities portfolio was reduced as part of the deleveraging initiative
to remain below $10 billion in assets at year end 2016. Other borrowings, consisting of retail and wholesale repurchase agreements primarily
related to customer cash management accounts, increased $7.4 million to $105.7 million at December 31, 2016, compared to $98.3 million at
December 31, 2015. Junior subordinated debentures, which are carried at fair value, increased $2.7 million to $95.2 million at December 31,
2016 from $92.5 million a year ago. For more information, see Notes 9, 10 and 11 of the Notes to the Consolidated Financial Statements.
Total shareholders’ equity increased $5.7 million, to $1.31 billion at December 31, 2016 compared to $1.30 billion at December 31, 2015. The
increase in equity primarily reflects net income of $85.4 million, reduced by the repurchase of $50.8 million of common stock and the payment
of $29.7 million of dividends to common shareholders. The increase in equity was partially offset by a $2.7 million reduction in accumulated
other comprehensive income representing unrealized losses, net of tax, on securities available-for-sale. In the year ended December 31, 2016,
we repurchased 1,145,250 shares of our common stock at an average price of $44.29 per share as part of our publicly announced repurchase
plan. Tangible common shareholders' equity, which excludes intangible assets, increased $16.1 million to $1.03 billion, or 10.83% of tangible
assets at December 31, 2016, compared to $1.01 billion, or 10.67% at December 31, 2015.
Investments. At December 31, 2016, our consolidated investment securities portfolio totaled $1.09 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, 2016, our aggregate investment in securities decreased $300.0 million, as the Company deleveraged the balance
sheet primarily through reductions in our investment portfolio consistent with our strategy to remain below $10 billion in assets through December
31, 2016. Holdings of mortgage-backed securities decreased $322.1 million, corporate bonds decreased $3.7 million and asset-backed securities
decreased $1.7 million. Partially offsetting these decreases, U.S. Government and agency obligations increased $26.7 million and municipal
bonds increased $739,000.
U.S. Government and Agency Obligations: Our portfolio of U.S. Government and agency obligations had a carrying value of $59.4 million
(also with an amortized cost of $59.6 million) at December 31, 2016, a weighted average contractual maturity of 9.1 years and a weighted average
coupon rate of 2.72%. Over 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, 2016, our mortgage-backed and mortgage-related securities had a carrying value of $662.3
million ($666.5 million at amortized cost, with a net fair value adjustment of $4.2 million). The weighted average coupon rate of these securities
was 3.61% and the weighted average contractual maturity was 17.3 years, although we receive principal payments on these securities each period
resulting in a much shorter expected average life. As of December 31, 2016, 95% of the mortgage-backed and mortgage-related securities pay
interest at a fixed rate and 5% pay at an adjustable interest rate.
Municipal Bonds: The carrying value of our tax-exempt bonds at December 31, 2016 was $223.2 million ($223.8 million at amortized cost,
with a net fair value adjustment of $593,000), 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, 2016
had a carrying value of $84.0 million (also $84.0 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 the majority within our geographic footprint. At December 31, 2016, our municipal
bond portfolio, including taxable and tax-exempt, had a weighted average maturity of approximately 11.9 years and a weighted average coupon
rate of 4.34%.
Corporate Bonds: Our corporate bond portfolio had a carrying value of $35.3 million ($41.1 million at amortized cost, with a net fair value
adjustment of $5.8 million) at December 31, 2016. Long-term adjustable-rate capital securities issued by financial institutions make up over
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 we had approximately $1.9 million 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, 2016, the portfolio had a weighted average maturity of 17.1 years and a weighted average coupon rate of 2.35%.
Asset-Backed Securities: At December 31, 2016, our asset-backed securities portfolio had a carrying value of $29.0 million (also with an
amortized cost of $29.3 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 2.01% and the weighted average
contractual maturity was 8.9 years. Approximately 66% 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, 2016, 2015 and 2014 (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
$
$
$
2016
December 31
2015
2014
Carrying
Value
Percent of
Total
Carrying
Value
Percent of
Total
Carrying
Value
Percent of
Total
1,326
335
21,143
1,641
123
5.4% $
1.4
86.0
6.7
0.5
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
24,568
100.0% $
34,134
100.0% $
40,258
100.0%
56,978
109,853
10,283
594,712
28,993
98
7.1% $
30,231
2.7% $
13.7
1.3
74.3
3.6
—
143,319
15,981
918,259
30,685
98
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
—
Total securities—available-for-sale
$
800,917
100.0% $ 1,138,573
100.0% $
411,021
100.0%
Held-to-Maturity
U.S. Government and agency obligations
$
1,065
0.4% $
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
196,989
3,876
65,943
73.5
1.5
24.6
162,778
4,273
52,509
73.8
1.9
23.8
119,951
1,800
7,361
91.4
1.4
5.6
267,873
100.0% $
220,666
100.0% $
131,258
100.0%
270,528
$
226,627
$
137,608
$
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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, 2016, our net loan portfolio totaled $7.37 billion compared to $7.24
billion at December 31, 2015. Our loan portfolio increased $136.6 million, or 2%, during the year ended December 31, 2016, compared to an
increase of $3.48 billion, or 91%, during the year ended December 31, 2015. The increase is the result of good originations and loan purchases
partially offset by the sale of $160.3 million of multifamily portfolio loans acquired in the AmericanWest acquisition sold after December 31,
2015 and the significant repayment of one- to four-family real estate portfolio loans. 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 2016 and 2015. Nonetheless,
looking forward, new loan originations and portfolio balances will continue to be significantly affected by the course of economic activity and
changes in interest rates. For the years ended December 31, 2016, 2015 and 2014, we originated loans, net of repayments and charge-offs, of
$1.11 billion, $741.7 million and $506.0 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, 2016,
2015 and 2014 totaled $1.11 billion, $801.6 million (including $151.9 million from the sale of multifamily loans acquired through the merger
with AmericanWest) and $379.2 million, respectively. See “Loan Servicing Portfolio” below. Loans held for sale increased $201.6 million to
$246.4 million at December 31, 2016, compared to $44.7 million at December 31, 2015. The increase in loans held for sale was primarily due
to an increase in multifamily loans held for sale.
At various times, we also purchase whole loans and participation interests in loans. During the years ended December 31, 2016, 2015 and 2014,
we purchased $314.3 million, $323.5 million and $194.4 million, respectively, of loans and loan participation interests. The loan purchases
primarily reflect participations in commercial real estate loans.
One- to Four-Family Residential Real Estate Lending: At December 31, 2016, $813.1 million, or 11% of our loan portfolio, consisted of
permanent loans on one- to four-family residences. 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. 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 $709.0
million for the year ended December 31, 2016, compared to $710.7 million and $410.0 million for the years ended December 31, 2015 and 2014,
respectively. 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 balance of loans for one- to four-family residences decreased by $139.6 million in
2016, largely as a result of the majority of our originations being sold and the repayment of portfolio loans.
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 an 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 $19.0 million in 2014, $58.6 million in 2015 and
$97.2 million in 2016, to total $375.7 million at December 31, 2016. In addition, during the year ended December 31, 2016, land development
loans (both residential and commercial) increased by $39.2 million to $199.2 million at December 31, 2016. Our construction and land
development loan originations including loans for residential and commercial properties totaled $1.29 billion for the year ended December 31,
2016, compared to $987.5 million for the year ended December 31, 2015, and $684.4 million for the year ended December 31, 2014. At
December 31, 2016, construction and land loans totaled $823.1 million (including $375.7 million of one- to four-family construction loans,
$170.0 million of residential land or land development loans, $248.2 million of commercial and multifamily real estate construction loans and
$29.2 million of commercial land or land development loans), or 11% of total loans, compared to $574.4 million, or 8%, at December 31, 2015.
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. 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. At December 31,
2016, our loan portfolio included $3.34 billion of commercial real estate loans, or 45% of the total loan portfolio. Our portfolio of multifamily
loans was much smaller, at $248.2 million, or 3% of total loans.
Commercial Business Lending: 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 addition to providing earning assets, this
type of lending has helped increase our deposit base. At December 31, 2016, commercial business loans totaled $1.21 billion, or 16% of total
loans, compared to $1.21 billion, or 17%, at December 31, 2015. In recent years our commercial lending has also included participation in
certain national syndicated loans, including share national credits, which totaled $138.9 million at December 31, 2016.
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
50
economic and weather conditions as well as market prices for agricultural products, which can be highly volatile at times. At December 31,
2016, agricultural loans totaled $369.2 million, or 5% of the loan portfolio, compared to $376.5 million, or 5%, at December 31, 2015.
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. At
December 31, 2016, our consumer loans increased $13.6 million to $650.5 million, or 9% of our loan portfolio, compared to $636.9 million, or
9%, at December 31, 2015. As of December 31, 2016, 76% of our consumer loans were secured by one- to four-family real estate, including
home equity lines of credit. Credit card balances totaled $33.4 million at December 31, 2016 compared to $28.0 million a year earlier.
Loan Servicing Portfolio: At December 31, 2016, we were servicing $2.55 billion of loans serviced for others and held $11.1 million in escrow
for our portfolio of loans serviced for others. The loan servicing portfolio at December 31, 2016 was composed of $1.04 billion of Freddie Mac
residential mortgage loans, $866.0 million of Fannie Mae residential mortgage loans, $372.0 million of Oregon Housing residential mortgage
loans and $265.0 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, 2016, we recognized $1.9 million of loan servicing fees in
our results of operations, which was net of $4.0 million of amortization for MSRs and included no impairment charges or reversals for a valuation
adjustment to MSRs.
Mortgage Servicing Rights: For the years ended December 31, 2016, 2015 and 2014, we capitalized $6.0 million, $5.3 million, and $3.0 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 2016 and 2014. Amortization of MSRs for the years ended December 31, 2016, 2015 and 2014 was $4.0 million, $3.2
million, and $2.1 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, 2016, our MSRs were carried at a value of $15.2 million, net of amortization, compared
to $13.3 million at December 31, 2015.
51
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The following table sets forth the Company’s loans by geographic concentration at December 31, 2016, 2015 and 2014 (dollars in thousands):
Table 4: Loans by Geographic Concentration
Washington
Oregon
California
Idaho
Utah
Other
Total
December 31, 2016
December 31, 2015
December 31, 2014
Amount
Percent
Amount
Percent
Amount
Percent
$
$
3,433,617
1,505,369
1,239,989
495,992
283,890
492,291
7,451,148
46.1% $
20.2
16.6
6.7
3.8
6.6
100.0% $
3,343,112
1,446,531
1,234,016
496,870
325,011
468,964
7,314,504
45.7% $
19.8
16.9
6.8
4.4
6.4
100.0% $
2,356,258
868,711
43,116
319,154
4,295
239,500
3,831,034
61.5%
22.7
1.1
8.3
0.1
6.3
100.0%
The following table sets forth certain information at December 31, 2016 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, and exclude loans held for sale and 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
$
78,466
133,429
12,878
61,441
48,256
348,798
91,043
13,939
467,784
145,716
13,166
5,940
37,468
$
102,095
145,109
6,709
32,451
71,650
24,556
74,631
11,280
244,164
48,874
20,402
5,120
14,656
$
115,310
150,785
14,871
6,981
2,802
316
862
662
210,906
41,813
7,349
5,327
14,378
$
776,482
957,221
108,225
20,341
1,418
739
3,468
2,095
209,970
114,545
49,953
20,195
29,003
280,646
599,792
105,467
2,854
—
1,295
—
1,208
75,055
18,208
722,207
456,629
61,749
Total
$ 1,352,999
1,986,336
248,150
124,068
124,126
375,704
170,004
29,184
1,207,879
369,156
813,077
493,211
157,254
Total loans
$ 1,458,324
$
801,697
$
572,362
$ 2,293,655
$ 2,325,110
$ 7,451,148
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, 2017 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
$
276,976
339,963
103,013
8,896
65,821
1,244
1,294
4,865
380,423
73,489
517,755
15,383
84,467
$
$
997,557
1,512,944
132,259
53,731
10,049
25,662
77,667
10,380
359,672
149,951
282,156
471,888
35,319
Total
1,274,533
1,852,907
235,272
62,627
75,870
26,906
78,961
15,245
740,095
223,440
799,911
487,271
119,786
Total loans maturing after one year
$
1,873,589
$
4,119,235
$
5,992,824
Deposits. 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 expansion and 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
which has contributed to us being 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.
We made further progress in 2016 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. Increasing core
deposits 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 $66.3 million, or 1%, to $8.12 billion at December 31,
2016 from $8.06 billion at December 31, 2015. In connection with certain product changes during the first quarter of 2016, Banner converted
approximately $421.8 million of former AmericanWest interest-bearing deposits to non-interest-bearing deposits. As a result of the product
changes, in addition to organic growth, non-interest-bearing deposits increased by $520.8 million, or 20%, to $3.14 billion at year end from
$2.62 billion at December 31, 2015. Also as a result of the product change, partially offset by organic account growth, interest-bearing transaction
and savings accounts decreased by $146.0 million, or 4%, to $3.94 billion at December 31, 2016 compared to $4.08 billion a year
earlier. Certificates of deposit decreased $308.5 million, or 23%, to $1.05 billion at December 31, 2016 from $1.35 billion at December 31,
2015. The decrease in certificate balances in 2016 includes a $128.9 million decrease in brokered deposits to $34.1 million at December 31,
2016, reflecting the deleveraging of the balance sheet.
54
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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, 2016 (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
$
$
167,085
77,141
136,606
135,130
515,962
The following table provides additional detail on geographic concentrations of our deposits at December 31, 2016 (in thousands):
Table 9: Geographic Concentration of Deposits
Washington
Oregon
California
Idaho
Utah
Total deposits
December 31, 2016
December 31, 2015
December 31, 2014
Amount
Percent
Amount
Percent
Amount
Percent
$
4,347,644
53.6% $
4,219,304
52.4% $
2,789,542
1,708,973
1,469,748
447,019
148,030
21.0
18.1
5.5
1.8
1,648,421
1,592,365
435,099
159,879
20.4
19.8
5.4
2.0
865,937
—
243,471
—
71.6%
22.2
—
6.2
—
$
8,121,414
100.0% $
8,055,068
100.0% $
3,898,950
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, 2016, we had $54.2 million of FHLB advances outstanding
(at fair value) at a weighted average rate of 0.83%, an decrease of $79.2 million compared to a year earlier. Also at December 31, 2016, we had
an investment of $12.5 million in FHLB capital stock. At that date, Banner Bank was authorized by the FHLB-Des Moines to borrow up to
$3.35 billion under a blanket floating lien security agreement, while Islanders Bank was approved to borrow up to $98.1 million under a similar
agreement.
The following table provides additional detail on our FHLB advances as of December 31, 2016 and 2015 (dollars in thousands):
Table 10: FHLB Advances Outstanding
December 31
2016
2015
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
$
54,000
—
—
179
54,179
37
54,216
0.81% $
—
—
5.94
0.83
$
107,600
25,000
—
188
132,788
593
133,381
0.55%
1.19
—
5.94
0.68
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,
2016, based upon our available unencumbered collateral, Banner Bank was eligible to borrow $1.02 billion from the Federal Reserve Bank;
however, at that date we had no funds borrowed under this arrangement.
56
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, 2016, retail and wholesale repurchase agreements totaling $105.7 million, with a weighted
average rate of 0.28%, 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 $7.4 million, or 8%, from the 2015 year-end
balance. We had $5.0 million of borrowings under wholesale repurchase agreements at both December 31, 2016 and December 31, 2015.
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 the TPS qualifies as Tier 1 capital for regulatory capital
purposes. The junior subordinated debentures are carried at fair value on our Consolidated Statements of Financial Condition and had an estimated
fair value of $95.2 million at December 31, 2016. At December 31, 2016, the TPS had a weighted average rate of 3.03%. 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. 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. 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 slightly to $33.8 million, or 0.35% of total assets, at December 31, 2016, from $27.1 million, or 0.28% of total
assets, at December 31, 2015, and from $20.2 million, or 0.43% of total assets, at December 31, 2014. At December 31, 2016, our allowance
for loan losses was $86.0 million, or 381% of non-performing loans, compared to $78.0 million, or 512% of non-performing loans at December 31,
2015. 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, 2016, we had $18.9 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 $32.3 million at December 31, 2016, compared to $58.6 million at December 31, 2015 and none in the years prior to 2015.
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
REO assets held for sale, net (2)
Other repossessed assets held for sale, net
2016
2015
2014
2013
2012
December 31
$
8,237
—
1,748
2,263
3,074
3,229
1,875
20,426
1,233
—
—
72
2,153
22,579
11,081
166
$
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
16,736
3,352
76
$
6,287
—
1,193
12,532
723
—
1,173
21,908
2,611
—
105
144
2,860
24,768
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
Total non-performing assets
$
33,826
$
27,117
$
20,164
$
28,927
$
50,243
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
0.30%
0.23%
0.35%
0.21%
0.16%
0.28%
0.44%
0.35%
0.43%
0.72%
0.56%
0.66%
1.06%
0.81%
1.18%
$
$
18,907
11,571
$
$
21,777
18,834
$
$
29,154
8,387
$
$
47,428
8,784
$
$
57,462
11,685
(1)
Includes $1.0 million of nonaccrual restructured loans. For the year ended December 31, 2016, $1.3 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 were 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, 2016, we had other classified
loans with an aggregate outstanding balance of $58.9 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.
58
The following table presents the REO activity for the years ended December 31, 2016, 2015 and 2014 (in thousands):
Table 12: REO
For the years ended December 31,
2016
2015
2014
Balance, beginning of the period
$
11,627
$
3,352
$
Additions from loan foreclosures
Additions from acquisitions
Additions from capitalized costs
Proceeds from dispositions of REO
Gain on sale of REO
Valuation adjustments in period
8,909
400
—
(10,812)
1,833
(876)
4,351
8,231
298
(4,740)
351
(216)
4,044
3,264
—
30
(4,923)
973
(36)
Balance, end of period
$
11,081
$
11,627
$
3,352
REO decreased $546,000, to $11.1 million at December 31, 2016 compared to $11.6 million at December 31, 2015 and $3.4 million at
December 31, 2014. The slight decrease during 2016 reflects sales of REO properties exceeding additions. The increase during the year ended
December 31, 2015 largely reflects REO acquired from the two bank acquisitions in 2015.
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.
Comparison of Results of Operations for the Years Ended December 31, 2016 and 2015
For the year ended December 31, 2016, we had net income of $85.4 million, or $2.52 per diluted share. This compares to net income of $45.2
million, or $1.89 per diluted share, for the year ended December 31, 2015. The 2016 results reflect the first full year of earnings contribution
from the operations acquired in the AmericanWest and Siuslaw acquisitions and lower acquisition-related expenses. Acquisition-related expenses
were $11.7 million, or $0.22 per diluted share net of tax benefit, in 2016 compared to $26.1 million, or $0.76 per diluted share net of tax benefit,
in 2015.
Our operating results depend largely on our net interest income which, as explained below, increased by $132.8 million to $375.1 million,
primarily reflecting a full year contribution in 2016 of the operations acquired in the the AmericanWest and Siuslaw acquisitions and organic
loan and deposit growth from the legacy Banner Bank franchise. Our operating results for the year ended December 31, 2016 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. Excluding fair value adjustments and
net gains on sale of securities, our non-interest income from core operations increased by $21.6 million to $85.2 million for the year ended
December 31, 2016 compared to $63.6 million the preceding year, primarily as a result of a $8.5 million increase in deposit fees and other service
charges and a $7.8 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 $154.4 million, or 50%, in revenue from core operations to $460.3 million for the
year ended December 31, 2016 compared to $305.9 million for the year ended December 31, 2015. Non-interest expense increased to $322.9
million for the year ended December 31, 2016 compared with $236.6 million for the year ended December 31, 2015 largely as a result of a full
year's expense associated with operating the branches acquired in the AmericanWest acquisition on October 1, 2015 and the Siuslaw Bank
branches acquired in March 2015 as well as 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 $132.8 million, or 55%, to $375.1 million for the year
ended December 31, 2016, compared to $242.3 million one year earlier largely reflecting the full year contribution of the 2015 acquisitions, as
well as continued new client acquisition. Net interest margin was enhanced by the amortization of acquisition accounting discounts on purchased
loans received in the bank acquisitions, which are 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 4.20% for the year ended
December 31, 2016 was ten basis points higher than the prior year reflecting sixteen basis points from acquisition accounting adjustments,
compared to just eight basis points from acquisition accounting adjustments in 2015. The average yield on interest-earning assets of 4.38% for
the year ended December 31, 2016 increased seven basis points compared to the prior year as favorable purchase accounting adjustments and
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 three basis points to 0.19% as compared to the prior year. As a result, the net interest spread
increased to 4.19% for the year ended December 31, 2016 compared to 4.09% for the prior year.
59
Interest Income. Interest income for the year ended December 31, 2016 was $391.5 million, compared to $254.4 million for the prior year, an
increase of $137.0 million, or 54%. 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 $8.93 billion for the year ended December 31, 2016, an increase of
$3.03 billion, or 51%, compared to $5.90 billion one year earlier. The yield on average interest-earning assets was 4.38% for the year ended
December 31, 2016, compared to 4.31% for the year ended December 31, 2015. The increased yield on earning assets reflects a larger positive
impact from purchase accounting loan discount accretion, as well as improvement in securities yields and changes in the asset mix, partially
offset by the continuing erosion of yields as loans mature or prepay and are replaced by lower yielding assets in the current low interest rate
environment. Loan yields increased six basis points to 4.84% for the year ended December 31, 2016 compared to 4.78% in the preceding year,
reflecting a 17 basis point positive impact from loan discount accretion in 2016 compared to a nine basis point positive impact in 2015 partially
offset by the continuing reduction in contractual loan yields in the current low interest rate environment. Average loans receivable for the year
ended December 31, 2016 increased $2.47 billion, or 50%, to $7.43 billion, compared to $4.96 billion for the prior year. Interest income on
loans increased by $122.3 million, or 52%, to $359.6 million for the year ended December 31, 2016, from $237.3 million for the prior year,
reflecting the impact of the $2.47 billion increase in average loan balances and the six basis point increase in the average yield on total loans.
The combined average balance of mortgage-backed securities, other investment securities, daily interest-bearing deposits and FHLB stock
increased to $1.50 billion for the year ended December 31, 2016 (excluding the effect of fair value adjustments), compared to $941.0 million
for the year ended December 31, 2015, accounting for most of the $14.7 million increase in interest and dividend income compared to the prior
year. The average yield on the combined portfolio increased to 2.13% for the year ended December 31, 2016, from 1.82% for the prior year.
Portfolio yields improved primarily as a result of the full year impact of higher interest rates on the securities acquired in the AmericanWest
acquisition. For the year ended December 31, 2016, the average yield on mortgage-backed securities increased 23 basis points to 2.08% compared
to the prior year, while the yield on other securities increased fifteen basis points to 2.60% compared to the prior year.
Interest Expense. Interest expense for the year ended December 31, 2016 was $16.4 million, compared to $12.2 million for the prior year, an
increase of $4.3 million, or 35%. The increase in interest expense occurred as a result of a $2.95 billion, or 54%, increase in average funding
liabilities, partially offset by a three basis point decrease in the average cost of all funding liabilities to 0.19% for the year ended December 31,
2016, from 0.22% for the year ended December 31, 2015. This increase in average funding liabilities reflects increases in core deposits, including
non-interest-bearing deposits, interest-bearing transaction and savings accounts, as the result of the 2015 bank acquisitions 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 $2.72 million, or 32%, to $11.1 million for the year ended December 31, 2016 compared to $8.4 million for
the prior year as a result of a $2.84 billion, or 54%, increase in the average balance of deposits, partially offset by a two basis point decrease in
the average cost of deposits. Average deposit balances increased to $8.05 billion for the year ended December 31, 2016, from $5.21 billion for
the year ended December 31, 2015, while the average rate paid on deposit balances decreased to 0.14% in the current year from 0.16% for the
prior year. The cost of interest-bearing deposits decreased by two basis points to 0.22% for the year ended December 31, 2016 compared to
0.24% in the prior year. Also contributing to the decrease in total deposit costs was a $1.27 billion increase in the average balances of non-
interest-bearing accounts during 2016. In addition, amortization of acquisition accounting net premiums on certificates of deposit reduced the
cost of deposits by eight basis points in 2016, compared to six basis points in 2015. 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. 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 total borrowings increased to $390.5 million for the year end December 31, 2016, compared to $276.6 million for the prior year. The
increase in average total borrowings was largely due to a $92.1 million increase in average FHLB advances. The increase in the average balance
of total borrowings was primarily responsible for the $1.5 million increase in the related interest expense to $5.3 million for the year ended
December 31, 2016, from $3.8 million in the prior year. The average rate on total borrowings remained unchanged from the prior year despite
higher interest rates, particularly for our junior subordinated debentures which reprice every three months based on changes in the three-month
LIBOR index, as lower costing FHLB advances and other borrowings comprised a higher percentage of our total borrowing mix, stabilizing the
average rate paid on total borrowings between the two years.
Table 13, 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
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(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 14: 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, 2016
Compared to Year Ended
December 31, 2015
Increase (Decrease) in
Income/Expense Due to
Year Ended December 31, 2015
Compared to Year Ended
December 31, 2014
Increase (Decrease) in
Income/Expense Due to
Rate
Volume
Net
Rate
Volume
Net
$
(683) $
3,743
121
3,181
99,843
18,609
687
119,139
$
99,160
22,352
808
122,320
$
$
(2,725) $
977
(123)
(1,871)
52,408
8,284
928
61,620
1,245
471
149
229
2,094
9,034
3,697
(88)
(13)
12,630
10,279
4,168
61
216
14,724
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
Total net change in interest income on interest-earning
assets
5,275
131,769
137,044
(940)
64,710
63,770
Interest-bearing liabilities:
Deposits (2)
FHLB advances
Other borrowings
Junior subordinated debentures
Total borrowings
(839)
3,559
25
64
599
688
617
35
194
846
2,720
642
99
793
1,534
(608)
1,413
145
17
119
281
41
22
214
277
805
186
39
333
558
Total net change in interest expense on interest-bearing
liabilities
(151)
4,405
4,254
(327)
1,690
1,363
Net change in net interest income
$
5,426
$ 127,364
$ 132,790
$
(613) $
63,020
$
62,407
(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. Although our credit quality metrics continue to reflect our moderate risk profile, we recorded a
$6.0 million provision for loan losses in the year ended December 31, 2016, primarily due to the organic growth in the loan portfolio and the
maturity and subsequent renewal and migration of acquired loans out of the discounted loan portfolios, compared to no provision for loan losses
recorded in 2015. 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. We
continue to maintain a strong allowance for loan losses at December 31, 2016.
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 $2.0 million for the year ended December 31, 2016, compared to net recoveries of $2.1 million for the prior year,
while non-performing loans increased by $7.4 million during the year to $22.6 million at December 31, 2016, compared to $15.2 million at
December 31, 2015. A comparison of the allowance for loan losses at December 31, 2016 and 2015 reflects an increase of $8.0 million, or 10%,
to $86.0 million at December 31, 2016, from $78.0 million at December 31, 2015. Included in our allowance at December 31, 2016 was an
unallocated portion of $3.6 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) increased to 1.15% at December 31, 2016, compared to 1.07% at December 31, 2015. 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 1.57%
as of December 31, 2016, compared to 1.65% at 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,
2016. 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 15: Changes in Allowance for Loan Losses
Balance, beginning of period
$
78,008
$
75,907
$
74,258
$
76,759
$
82,180
Provision
6,030
—
—
—
13,000
Years Ended December 31
2016
2015
2014
2013
2012
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
582
—
2,171
1,993
59
1,283
610
6,698
(746)
—
(616)
(948)
(567)
(375)
(1,487)
(4,739)
1,959
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)
1,649
(2,501)
(18,421)
Balance, end of period
$
85,997
$
78,008
$
75,907
$
74,258
$
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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
1.15%
0.03%
381%
1.07%
0.04%
512%
1.98%
0.04%
454%
2.17 %
2.37 %
(0.08)%
(0.57)%
300 %
223 %
Net loan discount on acquired loans
$
31,110
$
43,657
$
— $
— $
—
Adjusted allowance for loan losses/Adjusted loans (non-
GAAP)(1)
1.57%
1.65%
1.98%
2.17 %
2.37 %
(1) 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 Operations for more detailed information with respect to the adjusted allowance
for loan losses/adjusted loans.
64
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Non-interest Income. The following table presents the key components of non-interest income for the years ended December 31, 2016, 2015,
2014 (dollars in thousands):
Table 17: Non-interest Income
2016 compared to 2015
2015 compared to 2014
2016
2015
Change
Amount
Change
Percent
2015
2014
Change
Amount
Change
Percent
Deposit fees and other service
charges
$ 49,156
$ 40,607
$
8,549
21.1 % $ 40,607
$ 30,553
$
10,054
Mortgage banking operations
25,552
17,720
Bank owned life insurance
Miscellaneous
4,538
6,001
2,497
2,821
7,832
2,041
3,180
44.2 %
81.7 %
112.7 %
17,720
10,249
7,471
2,497
2,821
1,809
1,885
688
936
32.9 %
72.9 %
38.0 %
49.7 %
Net gain (loss) on sale of
securities
Net change in valuation of
financial instruments carried at
fair value
Acquisition bargain purchase
gain
85,247
63,645
21,602
33.9 %
63,645
44,496
19,149
43.0 %
843
(540)
1,383
(256.1)%
(540)
42
(582)
(1,385.7)%
(2,620)
(813)
(1,807)
222.3 %
(813)
1,374
(2,187)
(159.2)%
—
—
—
— %
—
9,079
(9,079)
100.0 %
Total non-interest income
$ 83,470
$ 62,292
$ 21,178
34.0 % $ 62,292
$ 54,991
$
7,301
13.3 %
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 $21.2 million, or 34%, to $83.5
million for the year ended December 31, 2016, compared to $62.3 million for the year ended December 31, 2015. This increase was primarily
due to the strong growth in deposit fees and other service charges and mortgage banking operations. Excluding fair value adjustments, net gains
on the sale of securities, non-interest income from core operations increased $21.6 million to $85.2 million for the year ended December 31,
2016 compared to $63.6 million at December 31, 2015. Reflecting a full year of transaction activity from the deposit accounts acquired in the
2015 bank acquisitions as well as organic growth, income from deposit fees and other service charges increased by $8.5 million, or 21%, to
$49.2 million for the year ended December 31, 2016, compared to $40.6 million for the prior year. Mortgage banking revenues increased by
$7.8 million to $25.6 million for the year ended December 31, 2016, compared to $17.7 million in the prior year. Sales of one-to-four family
loans held for sale for the year ended December 31, 2016 totaled $682.8 million compared to $610.4 million for the year ended December 31,
2015, reflecting increased refinancing activity, as well as a strong home purchase market and our increased market presence. In addition, for
the year ended December 31, 2016, mortgage banking revenues included $3.3 million of gains on the sale of multifamily loans which were
originated by our multifamily production unit that was acquired in the AmericanWest acquisition. The $3.2 million increase in miscellaneous
income and the $2.0 million increase in bank owned life insurance income also contributed to the overall increase in non-interest income. The
increase in miscellaneous income was primarily driven by increased retail investment commissions and gains on SBA loan sales, while the
increase in bank owned life insurance income reflects a full year's contribution from the bank owned life insurance acquired in the AmericanWest
acquisition, as well as $332,000 of death benefit income.
For the year ended December 31, 2016, we recorded a net loss of $2.6 million for changes in the valuation of financial instruments carried at
fair value, compared to a net loss of $813,000 for the year ended December 31, 2015. The adjustments in 2016 primarily reflect changes in the
valuation of certain investment securities, which resulted in $376,000 in net losses, as well as changes in the valuation of the junior subordinated
debentures we have issued, which resulted in $2.7 million in charges, in each case largely as a result of increased market interest rates. The net
fair value losses in 2015 primarily reflected changes in the valuation of certain investment securities resulting in $2.0 million in net gains and
changes in the valuation of the junior subordinated debentures, which resulted in $2.7 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, 2016, 2015,
2014 (dollars in thousands).
Table 18: Non-interest Expense
2016 compared to 2015
2015 compared to 2014
2016
2015
Change
Amount
Change
Percent
2015
2014
Change
Amount
Change
Percent
Salaries and employee benefits
$ 180,883
$ 127,282
$ 53,601
42.1 % $ 127,282
$ 89,778
$
37,504
41.8%
Less capitalized loan origination
costs
(18,895)
(14,379)
(4,516)
Occupancy and equipment
45,000
30,366
14,634
31.4 %
48.2 %
(14,379)
(11,730)
30,366
22,743
(2,649)
7,623
22.6%
33.5%
Information/computer data
services
Payment and card processing
expenses
19,281
12,110
7,171
59.2 %
12,110
8,131
3,979
48.9%
21,604
16,430
5,174
31.5 %
16,430
11,460
4,970
43.4%
Professional services
8,120
4,828
3,292
68.2 %
4,828
3,753
1,075
28.6%
Advertising and marketing
9,709
7,649
2,060
26.9 %
7,649
6,266
1,383
22.1%
Deposit insurance
4,551
3,189
1,362
42.7 %
3,189
2,415
State/Municipal business and use
taxes
REO operations
Amortization of core deposit
intangibles
Miscellaneous
3,516
175
7,061
30,131
1,889
397
3,164
17,565
1,627
(222)
86.1 %
55.9 %
3,897
123.2 %
12,566
71.5 %
1,889
397
3,164
17,565
1,437
(446)
1,990
13,619
$ 311,136
$ 210,490
$ 100,646
47.8 % $ 210,490
$ 149,416
Acquisition-related costs
$ 11,733
$ 26,110
$ (14,377)
(55.1)% $
26,110
$
4,325
Total non-interest expense
$ 322,869
$ 236,600
$ 86,269
36.5 % $ 236,600
$ 153,741
774
452
843
1,174
3,946
61,074
21,785
82,859
$
$
$
32.0%
31.5%
189.0%
59.0%
29.0%
40.9%
503.7%
53.9%
Non-interest expense for the year ended December 31, 2016 was $322.9 million, an increase of $86.3 million, or 36%, as compared to the same
period in 2015. The increase was largely as a result of the costs associated with operating the branches acquired from AmericanWest, as well
as generally increased salary and employee benefit costs, payment and card processing expenses, and occupancy and equipment expenses, which
were partially offset by an increase in the credit for capitalized loan origination costs. Acquisition-related costs added $11.7 million to non-
interest expense in the current year compared to $26.1 million in the year ended December 31, 2015. Salaries and employee benefits expenses
increased $53.6 million to $180.9 million for the year ended December 31, 2016 from $127.3 million for the year ended December 31, 2015,
primarily reflecting additional staffing as a result of our bank acquisitions in 2015 and to a lesser extent normal salary and wage adjustments,
partially offset by a $4.5 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 $5.2 million, reflecting the significant growth in core deposits and account
activity from the 2015 bank acquisitions and organic growth. Occupancy and equipment expenses increased $14.6 million, or 48%, to $45.0
million in 2016, compared to $30.4 million in 2015 largely as a result of the branches and support facilities acquired. Information and computer
data services expense increased $7.2 million, or 59%, to $19.3 million in the current year, compared to $12.1 million in the prior year, reflecting
additional costs required for expanding systems and operations associated with the bank acquisitions in 2015. REO operations for the year ended
December 31, 2016 resulted in expense of $175,000, compared to an expense of $397,000 in the prior year, and included $876,000 of valuation
adjustments and $1.8 million of net gains on the sale of properties in addition to the carrying costs related to repossessed properties. Miscellaneous
expense increased $12.6 million to $30.1 million for the year ended December 31, 2016 from $17.6 million, reflecting higher general expenses
associated with the increased scale of the Company.
Income Taxes. For the year ended December 31, 2016, we recognized $44.3 million in income tax expense for an effective rate of 34.1%, 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 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, 2015, we recognized $22.7 million in income tax expense for an effective tax rate of
33.5% with proportionately less of our income subject to state income taxes compared to 2016. For more information on income taxes and
deferred taxes, see Note 12 of the Notes to the Consolidated Financial Statements.
67
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 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 bargain purchase gain related to the Branch purchase. Excluding fair value 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 matured or prepayed and
were replaced by lower yielding assets in the 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 reflected increases in core deposits,
including 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 significantly
contributed to our reduced funding costs in 2015.
68
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 year ended December 31, 2015 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 31, 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 one basis point for the year ended December 31, 2015. 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 during 2015 from changes in short-term market rates on our cost of deposits. 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 deposit 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 2015 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.
Non-interest Income. 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 reflected 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.
Non-interest Expense. 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 operating on multiple systems prior to system conversion, 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. Salaries and employee
benefit expenses 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,
69
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 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%.
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, 2016, our loans with interest rate floors totaled approximately $2.59 billion and had a
weighted average floor rate of 4.60% compared to a current average note rate of 4.78%.
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, 2016, 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 19: 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, 2016
Estimated Increase (Decrease) in
+400
+300
+200
+100
0
-25
$ 26,672
7.1% $ 78,089
10.4% $ (268,695)
(13.0)%
21,189
14,917
7,587
—
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4.0
2.0
—
62,445
44,699
23,536
—
8.3
5.9
3.1
—
(172,626)
(86,628)
(26,590)
—
(6,453)
(1.7)
(16,029)
(2.1)
(2,824)
(8.3)
(4.2)
(1.3)
—
(0.1)
(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 0.50% and 0.75%.
The December 31, 2016 simulation scenarios show increased net interest income sensitivity and declines in economic value of equity as a result
of changes in interest rates compared to the prior year. These changes were influenced by updates to Banner’s key simulation assumptions and
the implementation of a new asset liability management system completed in the third quarter of 2016. These updates were the result of
management’s evaluation of its interest rate risk systems and methodologies in light of the Company’s recent acquisitions and organic growth
along with its current asset size and complexity. Differences in assumptions from prior period simulations in key assumptions such as deposit
betas, time lags, decay rates, loan prepayment speeds, investment cash flow projections, and discount rates were the main drivers of simulation
profile changes versus prior periods.
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 20, Interest Sensitivity Gap, presents our interest sensitivity gap between interest-earning assets and interest-bearing liabilities at
December 31, 2016 and 2015. 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, 2016, total interest-
earning assets maturing or repricing within one year exceeded total interest-bearing liabilities maturing or repricing in the same time period by
$2.63 billion, representing a one-year cumulative gap to total assets ratio of 26.88%. The updates discussed above to Banner’s key simulation
assumptions and the implementation of a new asset liability management system completed in the third quarter of 2016 affect the comparability
of the interest sensitivity gap analysis as of December 31, 2016 compared to periods prior to September 30, 2016.
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, 2016 and 2015 are within our internal policy guidelines and management
considers that our current level of interest rate risk is reasonable.
71
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(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 $(479.3) million, or (4.89%) of total assets at December 31, 2016. 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, 2016, 2015 and 2014, our loan originations exceeded our loan repayments by $1.11 billion, $741.7 million and $506.0 million,
respectively. During those periods we purchased loans of $314.3 million, $323.5 million and $194.4 million, respectively. This activity was
funded primarily by sales of loans, sales of securities and increased deposits. During the years ended December 31, 2016, 2015 and 2014, we
sold $1.11 billion, $801.6 million, and $379.2 million, respectively, of loans. Securities purchased during the years ended December 31, 2016,
2015 and 2014 totaled $305.2 million, $161.7 million, and $100.1 million, respectively, and securities repayments, maturities and sales in those
periods were $583.9 million, $373.0 million, and $158.1 million, respectively.
Our primary financing activity is gathering deposits. Largely as a result of the increase in non-interest-bearing transaction accounts partially
offset by a planned decrease in certificates of deposit, deposits increased by $66.3 million during the year ended December 31, 2016. Deposits
increased by $4.16 billion during the year ended December 31, 2015. 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, 2016, certificates of deposit amounted to $1.05 billion, or 13% of our total deposits,
including $765.4 million which were scheduled to mature within one year. Certificates of deposit declined from 17% of our total deposits at
December 31, 2015, and 20% of total deposits at December 31, 2014, 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) decreased $78.6 million for the year ended December 31, 2016, after increasing $100.6
million for the year ended December 31, 2015 due to the bank acquisitions. Other borrowings at December 31, 2016 increased $7.4 million to
$105.7 million following an increase of $21.1 million in 2015. FHLB advances decreased during 2016 as increased deposits were used to fund
a larger portion of the balance sheet and the investment securities portfolio was reduced as part of the deleveraging initiative to remain below
$10 billion in assets through December 31, 2016.
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, 2016,
2015 and 2014, we used our sources of funds primarily to fund loan commitments, purchase securities and pay maturing savings certificates and
deposit withdrawals. At December 31, 2016, we had outstanding commitments to extend credit, originate loans and for letters of credit totaling
$2.37 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, 2016 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 $3.35 billion, and 35% of Islanders Bank’s assets or adjusted qualifying
collateral, up to a total possible credit line of $98.1 million. Advances under these credit facilities (excluding fair value adjustments) totaled
$54.2 million, or less than 1% of our assets at December 31, 2016. 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 $1.02 billion as of
December 31, 2016, subject to certain collateral requirements, namely the collateral type and risk rating of eligible pledged loans. We had no
funds borrowed from the FRBSF at December 31, 2016 or 2015. Management believes it has adequate resources and funding potential to meet
our foreseeable liquidity requirements.
73
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, 2016, Banner Corporation
(on an unconsolidated basis) had liquid assets of $86.3 million.
As noted below, Banner Corporation and its subsidiary banks continued to maintain capital levels in excess of the requirements to be categorized
as “Well-Capitalized” under applicable regulatory standards. During the year ended December 31, 2016, total equity increased $5.7 million to
$1.31 billion. Total equity at December 31, 2016 is entirely attributable to voting and non-voting common stock and retained earnings. At
December 31, 2016, tangible common shareholders’ equity, which excludes other intangible assets, was $1.03 billion, or 10.83% 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 Total Capital, Tier 1 Capital, and Common Equity Tier 1
Capital to risk-weighted assets as well as Tier 1 leverage capital to average assets. In addition to the minimum capital ratios, the Banks now
have to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital 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 began to be phased in starting in
January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented to an amount equal to 2.5% of risk-weighted
assets in January 2019. At December 31, 2016, 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, 2016.
Table 21: Regulatory Capital Ratios
Capital Ratios
Banner Corporation
Banner Bank
Islanders Bank
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
13.40%
12.41
11.83
11.19
11.76%
10.78
10.34
10.78
18.43%
17.33
12.72
17.33
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.
74
Contractual Obligations
The following table shows the obligations of Banner Corporation and its subsidiaries as of December 31, 2016 by maturity (in thousands):
Table 22: Contractual Obligations
One Year or
Less
After One to
Three Years
After Three to
Five Years
After Five
Years
Advances from Federal Home Loan Bank
$
54,000
$
Junior subordinated debentures
Repurchase agreements
Certificates of Deposit
Operating lease obligations
Purchase obligation
—
100,685
765,406
14,583
13,850
— $
—
— $
—
5,000
220,368
22,819
14,138
—
56,150
16,037
6,837
179
$
140,212
—
3,409
16,126
3,008
Total
54,179
140,212
105,685
1,045,333
69,565
37,833
Total
$
948,524
$
262,325
$
79,024
$
162,934
$
1,452,807
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, 2016, 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, 2016, 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, 2016.
75
ITEM 9B – Other Information
None.
76
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 SEC 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 SEC 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 SEC 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 SEC, 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 SEC 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.
77
(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, 2016:
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 and unit 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
$
89,819
200,900
295,719
—
295,719
2,843
634,758
637,601
—
637,601
There were no shares tendered in connection with option exercises during the years ended December 31, 2016 and 2015, respectively. Restricted
shares canceled to pay withholding taxes totaled 25,628 and 18,498 during the years ended December 31, 2016 and 2015, 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 SEC 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 SEC no later than 120 days after the end of our fiscal
year, is incorporated herein by reference.
78
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 146.
(b)
Exhibits
See Index of Exhibits on page 146.
79
Item 16 - Form 10-K Summary.
None.
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 27, 2017
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 27, 2017
/s/ John R. Layman
John R. Layman
Director
Date: February 27, 2017
/s/ Connie R. Collingsworth
Connie R. Collingsworth
Director
Date: February 27, 2017
/s/ Gary Sirmon
Gary Sirmon
Chairman of the Board
Date: February 27, 2017
/s/ Brent A. Orrico
Brent A. Orrico
Director
Date: February 27, 2017
/s/ Michael M. Smith
Michael M. Smith
Director
Date: February 27, 2017
/s/ Roberto R. Herencia
Roberto R. Herencia
Director
Date: February 27, 2017
/s/ David I. Matson
David I. Matson
Director
Date: February 27, 2017
Date: February 27, 2017
/s/ Robert D. Adams
Robert D. Adams
Director
Date: February 27, 2017
/s/ Jesse G. Foster
Jesse G. Foster
Director
Date: February 27, 2017
/s/ D. Michael Jones
D. Michael Jones
Former President and Chief Executive Officer; Director
Date: February 27, 2017
/s/ Gordon E. Budke
Gordon E. Budke
Director
Date: February 27, 2017
/s/ David A. Klaue
David A. Klaue
Director
Date: February 27, 2017
/s/ Michael J. Gillfillan
Michael J. Gillfillan
Director
Date: February 27, 2017
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, 2016 and 2015
Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014
Notes to the Consolidated Financial Statements
Page
83
83
84
85
86
87
88
90
92
82
February 27, 2017
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 27, 2017
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, 2016. 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, 2016.
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, 2016 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, 2016.
83
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, 2016 and 2015, 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, 2016. We also have audited the Company’s internal control over
financial reporting as of December 31, 2016, based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control - Integrated Framework (2013). 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, 2016 and 2015, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the Unites
States of America. Also in our opinion, Banner Corporation and Subsidiaries maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ Moss Adams LLP
Portland, Oregon
February 27, 2017
84
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except shares)
December 31, 2016 and 2015
ASSETS
Cash and due from banks
Interest bearing deposits
Total cash and cash equivalents
Securities—trading, amortized cost $30,154 and $39,344, respectively
Securities—available-for-sale, amortized cost $806,336 and $1,139,740, respectively
Securities—held-to-maturity, fair value $270,528 and $226,627, respectively
Federal Home Loan Bank (FHLB) stock
Loans held for sale (includes $9.6 million and none, respectively, at fair value)
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
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, 2016 and December 31, 2015
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized,
33,108,599 shares issued and outstanding at December 31, 2016; 32,817,789 shares issued and
outstanding at December 31, 2015
Common stock (non-voting) and paid in capital - $0.01 par value per share, 5,000,000 shares
authorized; 84,788 shares issued and outstanding at December 31, 2016; 1,424,466 shares issued
and outstanding at December 31, 2015
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
85
$
$
$
2016
2015
$
177,083
70,636
247,719
24,568
800,917
267,873
12,506
246,353
7,451,148
(85,997)
7,365,151
30,178
11,081
166,481
244,583
30,162
158,936
127,694
59,466
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
37,472
156,865
134,970
57,840
9,793,668
$
9,796,298
$
3,140,451
3,935,630
1,045,333
8,121,414
54,216
105,685
95,200
71,369
40,074
8,487,958
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
—
—
1,213,225
1,195,755
612
95,328
(3,455)
(7,283)
7,283
1,305,710
65,419
39,615
(730)
(6,928)
6,928
1,300,059
$
9,793,668
$
9,796,298
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for per share amounts)
For the Years Ended December 31, 2016, 2015 and 2014
2016
2015
2014
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
Net change in valuation of financial instruments carried at fair value
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
$
$
$
$
$
359,612
19,328
12,537
391,477
11,105
953
310
4,040
16,408
375,069
6,030
369,039
49,156
25,552
4,538
6,001
85,247
843
(2,620)
—
83,470
180,883
(18,895)
45,000
19,281
21,604
8,120
9,709
4,551
3,516
175
7,061
30,131
311,136
11,733
322,869
129,640
44,255
85,385
2.52
2.52
0.88
$
$
$
$
$
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
33,820,148
33,853,511
23,801,373
23,866,621
19,359,409
19,402,656
See notes to the consolidated financial statements
86
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
For the Years Ended December 31, 2016, 2015 and 2014
NET INCOME
$
85,385
$
45,222
$
54,070
2016
2015
2014
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 on securities—available-for-sale realized in earnings
Income tax benefit related to securities—available-for-sale realized gains
Other comprehensive income (loss)
(3,940)
1,414
(311)
112
(2,725)
(645)
249
(119)
43
(472)
4,319
(1,555)
(41)
15
2,738
COMPREHENSIVE INCOME
$
82,660
$
44,750
$
56,808
See notes to the consolidated financial statements
87
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B
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31, 2016, 2015 and 2014
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided from operating activities:
2016
2015
2014
$
85,385
$
45,222
$
54,070
Depreciation
Deferred income and expense, net of amortization
Amortization of core deposit intangibles
Loss (gain) on sale of securities, net
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 loan loss
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 (used by) provided from operating activities
INVESTING ACTIVITIES:
13,464
(1,323)
7,061
(843)
2,620
(1,725)
7,839
3,746
—
7,883
(2,184)
3,435
(4,507)
(17,713)
(1,389)
6,030
876
(1,063,328)
880,890
3,759
(6,664)
(76,688)
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
Purchases of securities—available-for-sale
(243,115)
(141,989)
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 of repayments
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
Proceeds from sale of real estate held for sale and sale of other property
Proceeds from FHLB stock repurchase program
Purchase of FHLB stock
Other
Net cash provided from (used by) investing activities
(Continued on next page)
90
191,534
369,755
(60,344)
11,009
(46,042)
(314,301)
233,419
—
(16,239)
14,513
80,681
(77,130)
2,707
146,447
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
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)
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued) (in thousands)
For the Years Ended December 31, 2016, 2015 and 2014
2016
2015
2014
FINANCING ACTIVITIES:
Increase in deposits, net
Repayment of long term FHLB borrowing
Advances, net of (repayments) of overnight and short-term FHLB borrowings
Increase (decrease) in other borrowings, net
Cash dividends paid
Cash proceeds from issuance of shares for shareholder reinvestment plan
Cash paid for repurchase of common stock
Net cash (used by) provided from financing activities
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
66,346
(95,009)
16,400
7,360
(28,282)
—
(50,772)
(83,957)
(14,198)
261,917
226,821
(8)
(120,400)
16,140
(17,170)
34
—
105,417
135,845
126,072
CASH AND CASH EQUIVALENTS, END OF YEAR
$
247,719
$
261,917
$
68,938
(8)
5,000
(5,871)
(13,462)
127
—
54,724
(11,277)
137,349
126,072
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid in cash
Taxes paid in cash
$
16,722
$
12,252
$
36,153
27,256
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Loans, net of discounts, specific loss allowances and unearned income, transferred to
real estate owned and other repossessed assets
Dividends accrued but not paid until after period end
9,146
7,662
4,456
6,271
10,929
13,047
3,493
3,570
2016
2015
2014
ACQUISITIONS (Note 3):
Assets acquired
Liabilities assumed
—
—
4,829,748
4,249,751
221,206
212,127
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, 2016, its 187 branch offices and 11 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 (Federal
Reserve Board). Banner Bank and Islanders Bank (the Banks) are subject to regulation by the Washington State Department of Financial
Institutions, Division of Banks (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,
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, 2016 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 goodwill, core deposit intangibles (CDI) and mortgage servicing rights, (v) the valuation of real estate held for
sale, (vi) the valuation or recognition of deferred tax assets and liabilities and (vii) the valuation of assets and liabilities acquired in business
combinations and subsequent recognition of related income and expense. 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 (OCI), a component of shareholders’ equity,
until realized. Securities classified as trading are also recorded at fair value. Unrealized holding gains and losses on securities classified as
92
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 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, 2016, the Banks had $12.5 million in FHLB of Des Moines stock (FHLB stock), compared to
$16.1 million at December 31, 2015. 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 no impairment on the FHLB stock investment as of December 31, 2016.
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. Residential one- to four-family loans under best effort delivery commitments and multifamily mortgage loans are
carried at the lower of aggregate cost or estimated market value. Residential one- to four-family loans under mandatory delivery commitments
are carried at fair value in order to match changes in the value of the loans with the value of the economic hedges on the loans. Fair values for
residential mortgage loans held for sale are determined by comparing actual loan rates to current secondary market prices for similar loans. 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. 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
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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.
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 the Company's 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.
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Loan Origination and Commitment Fees: Loan origination fees, net of certain specifically defined direct loan origination costs, are deferred
and recognized as an adjustment of the loans’ interest yield using the level-yield method over the contractual term of each loan adjusted for
actual loan prepayment experience. Net deferred fees or costs related to loans held for sale are recognized as part of the cost basis of the
loan. Loan commitment fees are deferred until the expiration of the commitment period unless management believes there is a remote likelihood
that the underlying commitment will be exercised, in which case the fees are amortized to fee income using the straight-line method over the
commitment period. If a loan commitment is exercised, the deferred commitment fee is accounted for in the same manner as a loan origination
fee. Deferred commitment fees associated with expired commitments are recognized as fee income.
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
recognized in non-interest expense and added to the reserve for unfunded commitments, which is included in other liabilities.
Real Estate Owned: 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
10–39 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.
Held for sale property is recorded at the lower of the estimated fair value of the property, less expected selling costs, or the book value at the
date the property is transferred to held for sale. Depreciation is not recorded on held for sale 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. CDI is 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.
Other intangibles also include favorable leasehold intangibles (LHI). LHI represents the value assigned to leases assumed in an acquisition in
which the lease terms are favorable compared to a market lease at the date of acquisition. LHI is amortized over the underlying lease term and
is reviewed at least annually for events or circumstances that could impair the value.
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
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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.
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 $8.7 million in notional amounts of interest rate swaps at December 31, 2016. 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, 2016, Banner Bank had $307.1
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 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. 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 basis of
existing assets and liabilities are expected to be reported in the Company’s income tax returns. The effect on deferred taxes of a change in tax
rates is recognized in income in the period of change. A valuation allowance is recognized as a reduction to deferred tax assets when management
determines it is more likely than not that deferred tax assets will not be available to offset future income tax liabilities.
Accounting standards for income taxes prescribe a recognition threshold and measurement process for financial statement recognition and
measurement of uncertain tax positions taken or expected to be taken in a tax return, and also 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.
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As of December 31, 2016, the Company had an insignificant amount of unrecognized tax benefits for uncertain tax positions, none of which if
recognized 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, 2016 and
2015 is immaterial. The Company files consolidated income tax returns in Oregon, California, Utah and Idaho and for federal purposes. The
Company has tax years 2013–2015 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
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. 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. Application of
the two-class method resulted in the equivalent earnings per share to the treasury method.
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.
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Note 2: ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from
Contracts with Customers, which creates 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. As a financial institution, the Company's largest component of revenue, interest income, is excluded from the scope this ASU. The
Company is currently evaluating which if any of its sources of non-interest income will be impacted by this ASU.
In April 2016, FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing. The amendments in this ASU do not change
the core principle of the guidance in Topic 606. Rather, the amendments in this ASU clarify the following two aspects of Topic 606: identifying
performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The amendments in
this ASU affect the guidance in ASU 2014-09, discussed above, which is not yet effective. The effective date and transition requirements for
the amendments in this ASU are the same as the effective date and transition requirements in Topic 606 (Revenues from Contracts with Customers).
The Company is evaluating the provisions of this ASU in conjunction with ASU No. 2014-09 to determine the potential impact Topic 606 and
its amendments will have on the Company’s Consolidated Financial Statements.
In May 2016, FASB issued ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients, amending ASC Topic 606 (Revenue from
Contracts with Customers). The amendments in this ASU do not change the core principle of the guidance in Topic 606. Rather, the amendments
in this ASU affect only several narrow aspects of Topic 606. The amendments in this ASU affect the guidance in ASU 2014-09, discussed above,
which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and
transition requirements in Topic 606 (Revenues from Contracts with Customers). The Company is evaluating the provisions of this ASU in
conjunction with ASU No. 2014-09 to determine the potential impact Topic 606 and its amendments will have on the Company’s Consolidated
Financial Statements.
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 were effective for annual periods, including interim
periods within those annual periods, beginning after December 15, 2015 and were adopted by the Company as of January 1, 2016. This ASU
did 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 were effective for fiscal years beginning after December 15, 2015 and were
adopted by the Company as of January 1, 2016. As a result of this ASU, the adjustments recorded during 2016 to the provisional amounts
recorded as of December 31, 2015 related to the acquisition of Starbuck Bancshares, Inc. (Starbuck) were recorded in the current period.
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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. The Company leases 108 buildings and offices under non-cancelable operating
leases, the majority of which will be subject to this ASU. While the Company has not quantified the impact to its balance sheet, it does expect
the adoption of this ASU will result in a gross-up in its balance sheet as a result of recording a right-of-use asset and lease liability for these
leases.
Derivatives and Hedging (Topic 815)
In March 2016, FASB issued ASU No. 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The
amendments in this ASU clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument
under Topic 815 (Derivatives and Hedging) does not, in and of itself, require dedesignation of that hedging relationship provided that all other
hedge accounting criteria continue to be met. The amendments in this ASU are effective for financial statements issued for fiscal years beginning
after December 15, 2016, and interim periods within those fiscal years. An entity has an option to apply the amendments in this ASU on either
a prospective basis or a modified retrospective basis. Early adoption is permitted, including adoption in an interim period. At December 31,
2016, Banner had four swap relationships using hedge accounting with a total market value of $660,000. This ASU became effective for the
Company on January 1, 2017 and is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In March 2016, FASB issued ASU No. 2016-06, Contingent Put and Call Options in Debt Instruments. The amendments in this ASU clarify
the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly
and closely related to their debt hosts. To determine how to account for debt instruments with embedded features, including contingent put and
call options, an entity is required to assess whether the embedded derivatives must be bifurcated from the host contract and accounted for
separately. Part of this assessment consists of evaluating whether the embedded derivative features are clearly and closely related to the debt
host. Under existing guidance, for contingently exercisable options to be considered clearly and closely related to a debt host, they must be
indexed only to interest rates or credit risk. ASU 2016-06 addresses inconsistent interpretations of whether an event that triggers an entity’s
ability to exercise the embedded contingent option must be indexed to interest rates or credit risk for that option to qualify as clearly and closely
related. Diversity in practice has developed because the existing four-step decision sequence in ASC 815 focuses only on whether the payoff
was indexed to something other than an interest rate or credit risk. As a result, entities have been uncertain whether they should (1) determine
whether the embedded features are clearly and closely related to the debt host solely on the basis of the four-step decision sequence or (2) first
apply the four-step decision sequence and then also evaluate whether the event triggering the exercisability of the contingent put or call option
is indexed only to an interest rate or credit risk. This ASU clarifies that in assessing whether an embedded contingent put or call option is clearly
and closely related to the debt host, an entity is required to perform only the four-step decision sequence in ASC 815 as amended by this ASU.
The entity does not have to separately assess whether the event that triggers its ability to exercise the contingent option is itself indexed only to
interest rates or credit risk. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December
99
15, 2016, and interim periods within those fiscal years. This ASU became effective for the Company on January 1, 2017 and is not expected to
have a material impact on the Company’s Consolidated Financial Statements.
Compensation—Stock Compensation (Topic 718)
In March 2016, FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. FASB issued this ASU as part
of its Simplification Initiative. The areas for simplification in this ASU involve several aspects of the accounting for share-based payment
transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement
of cash flows. Amendments in this ASU relate to the timing of when excess tax benefits are recognized, minimum statutory withholding
requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect
adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee
taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should
be applied retrospectively. Amendments in this ASU require recognition of excess tax benefits and tax deficiencies in the income statement and
the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments in this ASU
related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective
transition method. The amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within
those annual periods. This ASU became effective for the Company on January 1, 2017 and is not expected to have a material impact on the
Company’s Consolidated Financial Statements.
Financial Instruments—Credit Losses (Topic 326)
In June 2016, FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. Current GAAP requires an “incurred
loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The main objective of this
ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and
other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this ASU replace the incurred loss
impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range
of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU require a financial asset (or group of
financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is
a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected
to be collected on the financial asset. The measurement of expected credit losses will be based on relevant information about past events,
including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.
The amendments in this ASU broaden the information that an entity must consider in developing its expected credit loss estimate for assets
measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected
credit loss, which will be more decision useful to users of the financial statements. The amendments in this ASU will be effective for fiscal
years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is still evaluating the effects this
ASU will have on the Company’s Consolidated Financial Statements. While the Company has not quantified the impact of this ASU, it does
expect changing from the current incurred loss model to an expected loss model will result in an earlier recognition of losses.
Statement of Cash Flows (Topic 230)
In August 2016, FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. There is diversity in practice in
how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230 and other Topics. This
ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. Those eight issues are (1) debt
prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates
that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business
combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies,
including bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization
transactions, and (8) separately identifiable cash flows and application of the predominance principle. Current GAAP either is unclear or does
not include specific guidance on these eight cash flow classification issues. These amendments provide guidance for each of the eight issues,
thereby reducing current and potential future diversity in practice. The amendments in this ASU are effective for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The
Company elected to early adopt in the fourth quarter of 2016. This ASU did not have a material impact on the Company's Consolidated Financial
Statements.
Intangibles—Goodwill and Other (Topic 350)
In January 2017, FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The amendments in this ASU are intended to
reduce the cost and complexity of the goodwill impairment test by eliminating Step 2 from the that impairment test. The amendments modify
the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition
that exists when the carrying amount of a reporting unit exceeds its fair value. Under the amendments in this ASU, an entity will perform its
annual, or interim, goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount. An impairment charge
should be recognized for the amount which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not
exceed the total amount of goodwill allocated to that reporting unit. The amendments in this ASU are effective for the Company's annual or
any interim goodwill impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual
100
goodwill impairment tests performed on testing dates after January 1, 2017. The Company is early adopting these amendments in 2017 and
does not expect a material impact on the Company's Consolidated Financial Statements.
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 $222.9 million.
The acquired CDI has been determined to have a useful life of approximately ten years and will be amortized on an accelerated basis. Goodwill
is not amortized but will be evaluated for impairment on an annual basis or more often if circumstances dictate to determine if the carrying value
remains appropriate. Goodwill will not be deductible for income tax purposes as the acquisition is accounted for as a tax-free exchange for tax
purposes.
The following table presents a summary of the consideration paid and the estimated fair values as of the acquisition date for each major class
of assets acquired and liabilities assumed (in thousands):
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
2,999,130
6,105
66,728
33,500
108,454
113,009
4,459,985
3,638,596
221,442
5,806
56,359
3,922,203
130,000
630,674
760,674
537,782
222,892
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.
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
101
expected to be collected on these loans was estimated to be $44.1 million. This discount is being accreted into income over the life of the loans
on an effective yield basis.
The following table presents the acquired 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 year ended December 31, 2015 as if
Starbuck had been acquired on January 1, 2014. This unaudited estimated pro forma financial information combines the historical results of
Starbuck with the Company’s consolidated historical results. Pro forma adjustments include accretion of loan discount, accretion of investment
premiums, amortization of deposit premium, amortization of CDI, reversal of acquisition expense, and reversal of historical recorded amounts
for similar items, with all adjustments tax effected. The pro forma information is not indicative of what would have occurred had the acquisition
actually occurred on January 1, 2014. In particular, no adjustments have been made to eliminate the impact of other-than-temporary impairment
losses and losses recognized on the sale of securities that may not have been necessary had the investment securities been recorded at fair value
as of January 1, 2014. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from
recording loan assets at fair value. Additionally, Banner expects to achieve further operating cost savings and other business synergies, including
revenue growth, as a result of the acquisition which are not reflected in the pro forma amounts that follow. As a result, actual amounts would
have differed from the unaudited pro forma information presented (in thousands except per share amounts):
Total revenues (net interest income plus non-interest income)
Net income
Earnings per share - basic
Earnings per share - diluted
Pro Forma
Year Ended December 31
2015
$
$
$
$
455,427
86,255
2.56
2.55
The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities of Starbuck since
October 2, 2015. Disclosure of the amount of Starbuck's revenue and net income (excluding integration costs) included in the Company’s
Consolidated Statements of Operations is impracticable due to the integration of the operations, systems and accounting for this acquisition
occurring in different stages.
Acquisition of Siuslaw Financial Group, Inc.
Effective as of the close of business on March 6, 2015, the Company completed the 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.
102
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.
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 year ended December 31, 2015 as if
Siuslaw had been acquired on January 1, 2014. This unaudited estimated pro forma financial information combines the historical results of
Siuslaw with the Company’s consolidated historical results. Pro forma adjustments include, accretion of loan discount, accretion of investment
premiums, amortization of deposit premium, amortization of CDI, reversal of acquisition expense, and reversal of historical recorded amounts
for similar items, with all adjustments tax effected. The pro forma information is not indicative of what would have occurred had the acquisition
actually occurred on January 1, 2014. In particular, no adjustments have been made to eliminate the impact of other-than-temporary impairment
losses and losses recognized on the sale of securities that may not have been necessary had the investment securities been recorded at fair value
as of January 1, 2014. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from
recording loan assets at fair value. Additionally, Banner expects to achieve further operating cost savings and 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):
103
Total revenues (net interest income plus non-interest income)
Net income
Earnings per share - basic
Earnings per share - diluted
Pro Forma
Year Ended December 31
2015
$
$
$
$
308,153
44,484
1.85
1.85
The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities of Siuslaw for the
period since March 7, 2015. Disclosure of the amount of Siuslaw’s revenue and net income (excluding integration costs) included in the
Company’s Consolidated Statements of Operations is impracticable due to the integration of the operations and accounting for this acquisition.
Acquisition-Related Costs
The following tables present the key components of acquisition-related costs in connection with the purchase of six Oregon branches in 2014
(the Branch purchase), the acquisition of Siuslaw and the acquisition of Starbuck, including AmericanWest, for the years ended December 31,
2016, 2015 and 2014 (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
Years Ended December 31
2016
2015
2014
$
$
$
$
$
1,384
2,590
1,158
2,490
197
2,230
1,684
$
6,577
1,031
527
2,875
28
11,169
3,903
11,733
$
26,110
$
— $
95
11,638
— $
2,000
24,110
11,733
$
26,110
$
—
105
327
334
185
2,953
421
4,325
1,784
748
1,793
4,325
104
Note 4: SECURITIES
The amortized cost, gross unrealized losses and gains and estimated fair value of securities at December 31, 2016 and 2015 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, 2016
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
1,230
331
26,959
1,620
14
30,154
Fair Value
$
1,326
335
21,143
1,641
123
$
24,568
$
57,288
110,487
10,255
598,899
29,319
88
146
455
77
2,064
—
10
$
(456) $
(1,089)
(49)
(6,251)
(326)
—
56,978
109,853
10,283
594,712
28,993
98
806,336
$
2,752
$
(8,171) $
800,917
1,065
196,989
3,876
65,943
$
— $
(18) $
4,173
—
309
(1,272)
—
(537)
1,047
199,890
3,876
65,715
$
$
$
$
$
$
267,873
$
4,482
$
(1,827) $
270,528
105
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
Fair Value
$
$
$
1,230
332
25,063
12,705
14
39,344
30,211
142,898
15,937
919,318
31,288
88
$ 1,139,740
$
1,106
162,778
4,273
52,509
$
$
$
$
$
$
1,368
341
18,699
13,663
63
34,134
30,231
143,319
15,981
918,259
30,685
98
(193)
(432)
(12)
(5,115)
(603)
—
(6,355)
$ 1,138,573
— $
(191)
—
(325)
1,111
168,806
4,273
52,437
$
$
$
213
853
56
4,056
—
10
5,188
5
6,219
—
253
$
220,666
$
6,477
$
(516)
$
226,627
At December 31, 2016 and 2015, the gross unrealized losses and the fair value for securities available-for-sale and held-to-maturity aggregated
by the length of time that individual securities have been in a continuous unrealized loss position was as follows (in thousands):
December 31, 2016
Less Than 12 Months
12 Months or More
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Available-for-Sale:
U.S. Government and agency obligations
Municipal bonds
Corporate bonds
Mortgage-backed or related securities
Asset-backed securities
$
39,043
60,765
5,206
403,431
9,928
$
(442) $
(1,087)
(49)
(5,604)
(101)
$
1,012
556
—
47,467
19,064
$
(14) $
(2)
—
(647)
(225)
40,055
61,321
5,206
450,898
28,992
(456)
(1,089)
(49)
(6,251)
(326)
$
518,373
$
(7,283) $
68,099
$
(888) $
586,472
$
(8,171)
Held-to-Maturity:
U.S. Government and agency obligations
Municipal bonds
Mortgage-backed or related securities
$
$
$
$
1,047
64,802
42,245
(18) $
(1,267) $
(537)
— $
204
$
—
— $
(5) $
—
$
$
1,047
65,006
42,245
(18)
(1,272)
(537)
$
108,094
$
(1,822) $
204
$
(5) $
108,298
$
(1,827)
106
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
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)
At December 31, 2016, there were 243 securities—available-for-sale with unrealized losses, compared to 242 at December 31, 2015 and 94 at
December 31, 2014. At December 31, 2016, there were 73 securities—held-to-maturity with unrealized losses, compared to 32 at December 31,
2015 and 25 at December 31, 2014. Management does not believe that any individual unrealized loss as of December 31, 2016, 2015 or 2014
represented OTTI. The decline in fair market value of these securities was generally due to changes in interest rates.
Sales of securities—trading totaled $7.8 million with a resulting net gain of $530,000 for the year ended December 31, 2016 and totaled $4.4
million with a resulting net loss of $690,000 for the year ended December 31, 2015. Sales of securities—trading for the year ended December 31,
2014 totaled $2.4 million with a resulting net gain of $1,000. The Company did not recognize any OTTI charges or recoveries on securities—
trading during the years ended December 31, 2016, 2015 or 2014. There were no securities—trading in a nonaccrual status at December 31,
2016 and 2015. Net unrealized holding losses of $376,000 were recognized in 2016 and $2.0 million in 2015.
Sales of securities—available-for-sale totaled $369.8 million with a resulting net gain of $311,000 for the year ended December 31, 2016. 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. There were no
securities—available-for-sale in a nonaccrual status at December 31, 2016 and 2015.
There were no sales of securities—held-to-maturity during the years ended December 31, 2016, 2015 or 2014. There were no securities—held-
to-maturity in a nonaccrual status at December 31, 2016 and 2015.
The amortized cost and estimated fair value of securities at December 31, 2016, by contractual maturity, are shown below (in thousands). Expected
maturities will differ from contractual maturities because some securities may be called or prepaid with or without call or prepayment penalties.
December 31, 2016
Trading
Available-for-Sale
Held-to-Maturity
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Maturing in one year or less
$
1,751
$
1,775
$
13,077
$
13,063
$
1,962
$
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
230
1,200
—
26,959
30,140
231
1,296
—
21,143
24,445
120,405
176,010
188,557
308,199
806,248
120,126
173,720
187,940
305,970
800,819
18,988
113,587
88,546
44,790
267,873
270,528
1,975
19,000
114,336
91,098
44,119
Equity securities
14
123
88
98
—
—
$
30,154
$
24,568
$
806,336
$
800,917
$
267,873
$
270,528
107
The following table presents, as of December 31, 2016, 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
$
203,510
$
203,474
$
207,013
Carrying
Value
Amortized
Cost
Fair Value
Interest rate swap counterparties
Repurchase transaction accounts
Other
Total pledged securities
24,393
114,949
1,778
24,447
115,650
1,782
24,287
114,864
1,778
$
344,630
$
345,353
$
347,942
Note 5: LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES
Loans receivable at December 31, 2016 and 2015 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, 2016
December 31, 2015
Amount
Percent of Total
Amount
Percent of Total
$
1,352,999
1,986,336
248,150
124,068
124,126
375,704
170,004
29,184
1,207,879
369,156
813,077
493,211
157,254
18.1% $
26.7
3.3
1.7
1.7
5.0
2.3
0.4
16.2
5.0
10.9
6.6
2.1
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
7,451,148
100.0%
7,314,504
100.0%
(85,997)
(78,008)
Net loans
$
7,365,151
$
7,236,496
Loan amounts are net of unearned loan fees in excess of unamortized costs of $5.8 million at December 31, 2016 and $5.5 million at December 31,
2015. Net loans include net discounts on acquired loans of $31.1 million and $43.7 million as of December 31, 2016 and 2015, 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 $4.3 million and $7.9 million for the years ended December 31, 2016 and 2015, respectively.
108
Purchased credit-impaired loans: The outstanding contractual unpaid principal balance of PCI loans, excluding acquisition accounting
adjustments, were $48.4 million at December 31, 2016 and $83.4 million at December 31, 2015. The carrying balance of PCI loans were $32.3
million at December 31, 2016 and $58.6 million at December 31, 2015.
The following table presents the changes in the accretable yield for PCI loans for the years ended December 31, 2016 and 2015 (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
2016
10,375
$
—
(9,333)
(1,018)
8,693
8,717
$
2015
—
13,310
(2,202)
(1,238)
505
10,375
$
$
As of December 31, 2016 and December 31, 2015, the non-accretable difference between the contractually required payments and cash flows
expected to be collected was $15.7 million and $29.5 million, respectively.
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. Purchased credit-impaired loans are considered performing within
the scope of the PCI accounting guidance and are not included in the impaired loan tables.
109
The following tables provide additional information on impaired loans, excluding PCI loans, with and without specific allowance reserves at
December 31, 2016 and 2015. 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
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
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
December 31, 2016
Recorded Investment
Without
Allowance (1)
With
Allowance (2)
Related
Allowance
Unpaid
Principal
Balance
$
$
3,786
9,916
508
1,180
3,012
1,608
3,753
6,438
11,439
1,904
391
$
1,778
4,015
—
—
750
998
2,294
5,886
90
—
4
$
1,798
5,854
496
1,180
1,106
—
1,431
468
11,085
1,865
388
175
580
81
156
219
—
154
35
655
179
29
$
43,935
$
15,815
$
25,671
$
2,263
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
(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.
110
The following table summarizes our average recorded investment and interest income recognized on impaired loans by loan class for the years
ended December 31, 2016, 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
Commercial business
Agricultural business/farmland
One- to four-family residential
Consumer:
Consumer secured by one- to four-family
Consumer—other
Year Ended December 31,
2016
Year Ended December 31,
2015
Year Ended December 31,
2014
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$
$
2,721
18,529
513
1,158
1,948
1,003
4,290
5,004
11,976
1,778
615
$
2
242
21
75
85
—
37
119
441
17
17
$
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
$
49,535
$
1,056
$
36,340
$
1,206
$
45,440
$
1,528
The following table presents TDRs by accrual and nonaccrual status at December 31, 2016 and 2015 (in thousands):
December 31, 2016
December 31, 2015
Accrual
Status
Nonaccrual
Status
Total
TDRs
Accrual
Status
Nonaccrual
Status
Total
TDRs
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
$
$
203
4,304
349
1,180
1,106
653
3,125
7,678
143
166
$
96
—
—
—
—
—
79
843
6
—
$
299
4,304
349
1,180
1,106
653
3,204
8,521
149
166
$
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
$
18,907
$
1,024
$
19,931
$
21,777
$
2,319
$
24,096
As of December 31, 2016 and 2015, the Company had commitments to advance funds up to an additional amount of $127,000 and $237,000,
respectively, related to TDRs.
111
The following table presents new TDRs that occurred during the years ended December 31, 2016 and 2015 (dollars in thousands):
Year Ended December 31, 2016
Year Ended December 31, 2015
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
Recorded Investment (1) (2)
Commercial real estate:
Owner-occupied
Land and land development:
Residential
Agricultural business/farmland
One- to four-family residential
1
$
194
$
194
— $
— $
—
—
1
—
—
78
—
—
78
2
$
272
$
272
2
3
2
7
1,302
822
431
$
2,555
$
1,736
—
483
822
431
(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 year ended December 31, 2015 for which the payment default
occurred within twelve months of the restructure date. There were no TDRs that incurred a payment default in the year ended December 31,
2016. A default on a restructured loan results in a transfer to nonaccrual status, a charge-off or a combination of both (dollars in thousands):
Agricultural business/farmland
One- to four-family residential
Total
December 31, 2015
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 2016.
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.
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.
112
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.
113
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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, 2016, 2015 and 2014 (in
thousands):
Balance, beginning of period
$
11,627
$
3,352
$
4,044
Years Ended December 31
2016
2015
2014
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
8,909
—
400
(10,812)
1,833
(876)
4,351
298
8,231
(4,740)
351
(216)
3,264
30
—
(4,923)
973
(36)
Balance, end of period
$
11,081
$
11,627
$
3,352
At December 31, 2016, and 2015, the Company had $917,000 and $3.4 million, respectively, of foreclosed residential real estate properties held
as REO. The recorded investment in one- to four-family residential loans in the process of foreclosure was $715,000 at December 31, 2016 and
$2.8 million at December 31, 2015.
Note 7: PROPERTY AND EQUIPMENT, NET
Land, buildings and equipment owned by the Company and its subsidiaries at December 31, 2016 and 2015 are summarized as follows (in
thousands):
Land(1)
Buildings and leasehold improvements(1)
Furniture and equipment
Less accumulated depreciation
December 31
2016
2015
$
$
35,463
162,342
91,706
289,511
38,992
160,075
79,018
278,085
(123,030)
(110,481)
167,604
Property and equipment, net
(1) The Company had $8.5 million and $1.9 million of properties held for sale that were included in land and buildings at December 31, 2016
and 2015, respectively.
166,481
$
$
The Company’s depreciation expense related to property and equipment was $13.5 million, $10.0 million, and $8.1 million for the years ended
December 31, 2016, 2015 and 2014, respectively. The Company’s rental expense was $16.7 million, $10.2 million, and $7.6 million for the
years ended December 31, 2016, 2015 and 2014, respectively.
The Company’s obligations under long-term property leases are as follows:
Year
2017
2018
2019
2020
2021
Thereafter
Amount
$ 14.6 million
12.7 million
10.1 million
8.8 million
7.2 million
16.1 million
Total
$ 69.5 million
120
Note 8: DEPOSITS
Deposits consist of the following at December 31, 2016 and 2015 (in thousands):
Non-interest-bearing checking
Interest-bearing checking
Regular savings accounts
Money market accounts
Total interest-bearing transaction and savings accounts
Certificates of deposit:
Certificates of deposit less than or equal to $250,000
Certificates of deposit greater than $250,000
Total certificates of deposit(1)
Total deposits
Included in total deposits:
Public fund transaction accounts
Public fund interest-bearing certificates
Total public deposits
Total brokered deposits
December 31
2016
2015
$
3,140,451
$
2,619,618
914,484
1,523,391
1,497,755
3,935,630
884,403
160,930
1,045,333
1,159,846
1,284,642
1,637,092
4,081,580
1,168,495
185,375
1,353,870
8,121,414
$
8,055,068
221,765
25,650
$
209,430
31,281
247,415
$
240,711
34,074
$
162,936
$
$
$
$
(1)Certificates of deposit includes $426,000 and $2.0 million of acquisition premiums at December 31, 2016 and 2015, respectively.
Deposits at December 31, 2016 and 2015 included deposits from the Company’s directors, executive officers and related entities totaling $7.2
million and $6.6 million, respectively. At December 31, 2016 and 2015, the Company had certificates of deposit of $165.4 million and $192.3
million, respectively, that were equal to or greater than $250,000.
Scheduled maturities and weighted average interest rates of certificate accounts at December 31, 2016 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, 2016
Amount
Weighted
Average Rate
$
765,406
159,436
60,932
26,238
29,912
3,409
$
1,045,333
0.45%
0.76
0.88
1.19
1.06
1.26
0.56%
121
Note 9: ADVANCES FROM FEDERAL HOME LOAN BANK OF DES MOINES
Utilizing a blanket pledge, qualifying loans receivable at December 31, 2016 and 2015, were pledged as security for FHLB borrowings and there
were no securities pledged as collateral as of December 31, 2016 or 2015. At December 31, 2016 and 2015, FHLB advances were scheduled
to mature as follows (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
2016
2015
$
$
54,000
—
—
179
54,179
37
107,600
25,000
—
188
132,788
593
Total FHLB advances, carried at fair value
$
54,216
$
133,381
The maximum amount outstanding from the FHLB advances at month end for the years ended December 31, 2016 and 2015 was $300.2 million
and $221.6 million, respectively. The average FHLB advances balance outstanding for the years ended December 31, 2016 and 2015 was $141.9
million and $45.0 million, respectively. The average contractual interest rate on the FHLB advances for the years ended December 31, 2016
and 2015 was 0.67% and 0.69%, respectively. As of December 31, 2016, 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, 2016, the maximum total FHLB credit line
was $3.35 billion and $98.1 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, 2016, 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 $114.9 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,
2016, based upon available unencumbered collateral, Banner Bank was eligible to borrow $1.02 billion from the Federal Reserve Bank, although,
at that date, as well as at December 31, 2015, the Bank had no funds borrowed under this or other borrowing arrangements.
At December 31, 2016, Banner Bank had an uncommitted federal funds line of credit agreement with another financial institution totaling $60.0
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, 2016 and 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.
A summary of all other borrowings at December 31, 2016 and 2015 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
2016
2015
Amount
Weighted
Average Rate
Amount
Weighted
Average Rate
100,685
5,000
—
105,685
108,427
112,309
$
$
$
122
0.19% $
2.15
—
$
$
0.28
0.29
n/a
93,325
—
5,000
98,325
94,182
102,474
0.19%
—
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0.29
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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, 2016, 2015 and 2014 (in thousands):
Current
Federal
State
Total Current
Deferred
Federal
State
Total Deferred
Years Ended December 31
2016
2015
2014
$
29,787
$
24,683
$
2,477
32,264
9,908
2,083
11,991
1,399
26,082
(3,310)
(23)
(3,333)
23,411
1,444
24,855
2,764
(567)
2,197
Provision for income taxes
$
44,255
$
22,749
$
27,052
The following table presents the reconciliation of the federal statutory rate to the actual effective rate for the years ended December 31, 2016,
2015 and 2014:
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
2016
35.0%
(2.6)
(1.2)
2.2
(0.8)
—
1.5
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
34.1%
33.5%
33.3%
124
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,
2016 and 2015 (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:
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
2016
2015
$
36,719
23,189
82,714
7,711
7,396
9,696
6,217
173,642
(2,218)
(13,291)
(11,178)
(16,186)
(880)
(43,753)
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)
129,889
137,165
(2,195)
(2,195)
$
127,694
$
134,970
At December 31, 2016, the Company has federal net operating loss carryforwards of approximately $236.3 million. The Company also has
$145.8 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 at
December 31, 2016 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, 2016, the Company has state credit carryovers of $193,000. At December 31, 2015, the Company had federal
and state net operating loss carryforwards of approximately $262.5 million and $167.6 million, respectively, and federal general business credits
carryforwards of $3.3 million. At that same date, the Company also had federal alternative minimum tax credit carryforwards of approximately
$4.2 million. The 2015 state net operating loss carryovers obtained from acquisitions were previously reported on a partially tax effected basis
as $23.0 million.
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 Internal Revenue Code of 1986 (Code). In addition, the underlying Section 382 limitations at Starbuck Bancshares, Inc. prior to the
Company's acquisition 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 limitations, 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 on an annual basis. The applicable state Section 382 limitations range from $525,000 to $21.5 million. 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 limitations, 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, 2016 and 2015 included approximately $5.4 million in tax basis bad debt reserves for which no income tax
liability has been recorded. 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, 2016.
125
Tax credit investments: The Company invests in low income housing tax credit funds that are designed to generate a return primarily through
the realization of federal tax credits. The Company accounts for these investments by amortizing the cost of tax credit investments over the life
of the investment using a proportional amortization method and tax credit investment amortization expense is a component of the provision for
income taxes.
The following table presents the balances of the Company's tax credit investments and related unfunded commitments at December 31, 2016
and 2015 (in thousands):
Tax credit investments
Unfunded commitments—tax credit investments
December 31, 2016
December 31, 2015
$
4,654
$
665
5,326
1,398
The following table presents other information related to the Company's tax credit investments for the years ended December 31, 2016 and 2015
(in thousands):
Tax credits and other tax benefits recognized
Tax credit amortization expense included in provision for income taxes
Note 13: EMPLOYEE BENEFIT PLANS
For the year ended
December 31,
2016
$
1,136
$
672
2015
1,273
1,000
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, 2016, 2015 and
2014, $4.6 million, $2.8 million and $1.4 million, respectively, was expensed for 401(k) contributions. The Board of Directors has elected to
make a 4% of eligible compensation matching contribution for 2017.
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, 2016, 2015 and 2014, expense recorded for supplemental retirement and salary continuation plan benefits totaled $2.7
million, $1.3 million, and $1.2 million, respectively. At December 31, 2016 and 2015, liabilities recorded for the various supplemental retirement
and salary continuation plan benefits totaled $38.3 million and $39.0 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 $7.3 million at December 31, 2016 and
$6.9 million at December 31, 2015. At December 31, 2016 and 2015, liabilities recorded in connection with deferred compensation plan benefits
totaled $9.0 million ($7.3 million in contra-equity) and $8.4 million ($6.9 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-
126
level employees are insured, the Banks are the owners and sole or partial beneficiaries. At December 31, 2016 and 2015, the cash surrender
value of these policies was $158.9 million and $156.9 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).
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
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, 2016, 2015 and 2014, the Company did not grant any stock options and there were no stock options
forfeited. 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, 2016, 2015 and 2014 there were no stock option compensation expenses recorded.
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, 2016, 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
7 months
During the year ended December 31, 2016, 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.
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, and/or market-based conditions.
As of December 31, 2016, the Company had granted 297,157 shares of restricted stock from the 2012 Restricted Stock Plan (as amended and
restated), of which 207,338 shares had vested and 89,819 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,
127
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, 2016, 239,088 restricted stock shares and 26,154 restricted stock units have been granted under
the 2014 Plan of which 46,011 restricted stock shares and 18,331 restricted stock units have vested.
The expense associated with all restricted stock grants was $4.5 million, $3.5 million and $2.7 million respectively, for the years ended
December 31, 2016, 2015 and 2014. Unrecognized compensation expense for these awards as of December 31, 2016 was $6.8 million and will
be amortized over the next 36 months.
A summary of the Company's Restricted Stock/Unit award activity during the years ended December 31, 2014, 2015 and 2016 follows:
Unvested at December 31, 2013
Granted
Vested
Forfeited
Unvested at December 31, 2014
Granted
Vested
Forfeited
Unvested at December 31, 2015
Granted
Vested
Forfeited
Unvested at December 31, 2016
Weighted
Average
Grant-Date
Fair Value
26.94
40.07
24.81
31.00
32.83
45.59
30.28
39.07
42.33
41.74
41.47
42.54
42.26
Shares/Units
164,492
$
90,181
(56,307)
(3,260)
195,106
155,183
(109,416)
(9,311)
231,562
177,775
(104,297)
(14,321)
290,719
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 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.
128
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, 2016:
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
$ 1,214,913
1,125,267
1,014,994
1,125,267
13.40% $
12.41
11.19
11.83
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
1,043,837
956,298
956,298
956,298
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
35,207
33,099
33,099
33,099
11.76
10.78
10.78
10.34
18.43
17.33
17.33
12.72
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
725,566
544,174
408,131
380,519
709,882
532,411
399,308
369,936
15,281
11,461
8,598
10,405
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
8.00% $
6.00
4.50
4.00
8.00
6.00
4.50
4.00
8.00
6.00
4.50
4.00
906,957
544,174
n/a
n/a
887,352
709,882
576,779
462,420
19,101
15,281
12,416
13,006
836,530
501,918
n/a
n/a
817,008
653,606
531,055
464,759
18,932
15,146
12,306
13,533
10.00%
6.00
n/a
n/a
10.00
8.00
6.50
5.00
10.00
8.00
6.50
5.00
10.00%
6.00
n/a
n/a
10.00%
8.00
6.50
5.00
10.00
8.00
6.50
5.00
At December 31, 2016, Banner Corporation and the Banks each exceeded all regulatory capital adequacy requirements. There have been no
conditions or events since December 31, 2016 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.
129
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 were effective January 1, 2015 and revised 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 created a new required ratio for common
equity Tier 1 (CET1) capital, increased the leverage and Tier 1 capital ratios, changed the risk-weights of certain assets for purposes of the risk-
based capital ratios, created an additional capital conservation buffer over the required capital ratios and changed 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 included changes in the risk-weights of certain assets to better reflect credit risk and other risk exposures. These
included 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 now have to maintain a capital
conservation buffer consisting of additional CET1 capital 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 began to be phased in starting in January 2016 at 0.625% of risk-weighted assets and
will increase each year until fully implemented to an amount equal to 2.5% of risk-weighted assets in January 2019.
Note 17: GOODWILL, OTHER INTANGIBLE ASSETS AND MORTGAGE SERVICING RIGHTS
Goodwill and Other Intangible Assets: At December 31, 2016, intangible assets are comprised of goodwill, CDI, and LHI 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. Banner has identified one reporting unit for purposes of
evaluating goodwill for impairment. At December 31, 2016, the Company completed a 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 the year
ended December 31, 2015 relate to the Starbuck and Siuslaw acquisitions. The adjustments to goodwill in 2016 related to changes in the
preliminary goodwill recorded for the Starbuck acquisition including adjustments to loan discount, deferred taxes and REO valuations. See
Note 3, Business Combinations, for additional information on the acquisition and purchase price allocation.
CDI represents the value of transaction-related deposits and the value of the customer relationships associated with the deposits. LHI represents
the value ascribed to leases assumed in an acquisition in which the lease terms are favorable compared to a market lease at the date of acquisition.
The Company amortizes CDI and LHI 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 acquisition of Siuslaw and Starbuck in 2015. These intangible assets
are being amortized using an accelerated method over estimated useful lives of three to ten years. The CDI and LHI assets are not estimated to
have a significant residual value.
130
The following table summarizes the changes in the Company’s goodwill, CDI and LHI for the years ended December 31, 2014, 2015 and 2016
(in thousands):
Balance, December 31, 2013
$
— $
2,449
$
— $
2,449
Goodwill
CDI
LHI
Total
Additions through acquisition
Amortization
Balance, December 31, 2014
Additions through acquisition
Amortization
Other Changes (1)
Balance, December 31, 2015
Amortization
Adjustments to goodwill
—
—
—
247,738
—
—
247,738
—
(3,155)
2,372
(1,990)
2,831
37,395
(3,164)
(300)
36,762
(7,061)
—
—
—
—
776
(66)
—
710
(249)
—
2,372
(1,990)
2,831
285,909
(3,230)
(300)
285,210
(7,310)
(3,155)
Balance, December 31, 2016
$
244,583
$
29,701
$
461
$
274,745
(1) Acquired CDI from Starbuck was adjusted for a branch that was subsequently sold.
Estimated amortization expense in future years with respect to CDI as of December 31, 2016 (in thousands):
Year ended:
2017
2018
2019
2020
Thereafter
Net carrying amount
Estimated
Amortization
$
$
6,332
5,609
4,889
4,169
8,702
29,701
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 2016 and 2015, the Company did not record any impairment charges or recoveries against mortgage servicing rights. Unpaid principal
balance of loans for which mortgage servicing rights have been recognized totaled $2.05 billion and $1.86 billion at December 31, 2016 and
2015, respectively. Custodial accounts maintained in connection with this servicing totaled $10.3 million and $8.7 million at December 31,
2016 and 2015, respectively.
An analysis of the mortgage servicing rights for the years ended December 31, 2016, 2015 and 2014 is presented below (in thousands):
Balance, beginning of the year
Amounts capitalized
Additions through acquisition
Amortization (1)
Balance, end of the year (2)
Years Ended December 31
2016
2015
2014
$
$
13,295
$
9,030
$
5,965
—
(4,011)
5,313
2,172
(3,220)
15,249
$
13,295
$
8,086
3,023
—
(2,079)
9,030
(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, 2016, 2015 and 2014.
131
Note 18: FAIR VALUE
The following table presents estimated fair values of the Company’s financial instruments as of December 31, 2016 and 2015, 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 and forward sales
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 lock and forward sales
commitments
December 31, 2016
December 31, 2015
Level
Carrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
1
2,3
2
2,3
2
3
3
1
3
2
2
2
2
2
2
3
2
2
2
$ 247,719
24,568
800,917
267,873
246,353
7,451,148
12,506
158,936
15,249
$ 247,719
24,568
800,917
270,528
246,815
7,337,608
12,506
158,936
16,740
$ 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
8,330
8,330
11,984
11,984
482
482
471
471
5,552,690
1,523,391
1,045,333
54,216
95,200
105,685
5,552,690
1,523,391
1,028,866
54,216
95,200
105,685
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
8,330
8,330
11,984
11,984
289
289
50
50
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,
132
reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous
estimates that must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation
methodologies also introduces a greater degree of subjectivity to these estimated fair values. Transfers between levels of the fair value hierarchy
are deemed to occur at the end of the reporting period.
Items Measured at Fair Value on a Recurring Basis:
The following tables present financial assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy
of the fair value measurements for those assets and liabilities as of December 31, 2016 and 2015 (in thousands):
December 31, 2016
Level 1
Level 2
Level 3
Total
Assets:
Securities—trading
U.S. Government and agency
Municipal bonds
Corporate Bonds (TPS securities)
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
Loans held for sale
Derivatives
Interest rate lock and forward sales commitments
Interest rate swaps
Liabilities
Advances from FHLB at fair value
Junior subordinated debentures at fair value
Derivatives
Interest rate lock and forward sales commitments
Interest rate swaps
— $
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
$
$
1,326
335
—
1,641
123
3,425
56,978
109,853
10,283
594,712
28,993
98
800,917
9,600
482
8,330
— $
—
21,143
—
—
21,143
— $
—
—
—
—
—
—
—
—
—
1,326
335
21,143
1,641
123
24,568
56,978
109,853
10,283
594,712
28,993
98
800,917
9,600
482
8,330
— $
822,754
$
21,143
$
843,897
— $
54,216
$
— $
—
—
—
—
95,200
289
8,330
—
—
54,216
95,200
289
8,330
— $
62,835
$
95,200
$
158,035
$
$
$
$
$
133
Assets:
Securities—trading
U.S. Government and agency
Municipal bonds
Corporate Bonds (TPS securities)
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 lock and forward sales commitments
Interest rate swaps
Liabilities
Advances from FHLB at fair value
Junior subordinated debentures at fair value
Derivatives
Interest rate lock and forward sales commitments
Interest rate swaps
December 31, 2015
Level 1
Level 2
Level 3
Total
$
$
$
$
$
— $
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
$
$
1,368
341
—
13,663
63
15,435
30,231
143,319
15,981
918,259
30,685
98
1,138,573
471
11,984
— $
—
18,699
—
—
18,699
— $
—
—
—
—
—
—
—
—
1,368
341
18,699
13,663
63
34,134
30,231
143,319
15,981
918,259
30,685
98
1,138,573
471
11,984
— $
1,166,463
$
18,699
$
1,185,162
— $
133,381
$
— $
—
—
—
—
92,480
50
11,984
—
—
133,381
92,480
50
11,984
— $
145,415
$
92,480
$
237,895
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 securities, management has
classified these securities as a Level 3 fair value measure. Management periodically reviews the pricing information received from third-party
pricing services and tests those prices against other sources to validate the reported fair values.
Loans Held for Sale: Fair values for residential mortgage loans held for sale are determined by comparing actual loan rates to current secondary
market prices for similar loans. Fair values for multifamily loans held for sale are calculated 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.
134
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, 2016
and 2015. The factors used in the fair value estimates are subject to change subsequent to the dates the fair value estimates are completed,
therefore, current estimates of fair value may differ significantly from the amounts presented herein.
Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)
The following table provides a description of the valuation technique, unobservable inputs, and qualitative information about the unobservable
inputs for the Company's assets and liabilities classified as Level 3 and measured at fair value on a recurring and nonrecurring basis at December 31,
2016:
Financial Instruments
Valuation Technique
Unobservable Inputs
Corporate Bonds (TPS securities)
Junior subordinated debentures
REO
Discounted cash flows
Discount rate
Discounted cash flows
Discount rate
Appraisals
Discount to appraised
value
0% to 45%
December 31
2016
Weighted
Average Rate
6.00%
6.00%
TPS Securities: Management believes that the credit risk-adjusted spread used to develop the discount rate utilized in the fair value measurement
of TPS securities is indicative of the risk premium a willing market participant would require under current market conditions for instruments
with similar contractual rates, terms and conditions and issuers with similar credit risk profiles and with similar expected probability of default.
Management attributes the change in fair value of these instruments, compared to their par value, primarily to perceived general market adjustments
to the risk premiums for these types of assets subsequent to their issuance.
Junior subordinated debentures: Similar to the TPS securities discussed above, management believes that the credit risk-adjusted spread utilized
in the fair value measurement of the junior subordinated debentures is indicative of the risk premium a willing market participant would require
under current market conditions for an issuer with Banner's credit risk profile. Management attributes the change in fair value of the junior
subordinated debentures, compared to their par value, primarily to perceived general market adjustments to the risk premiums for these types of
liabilities subsequent to their issuance. Future contractions in the risk adjusted spread relative to the spread currently utilized to measure the
Company's junior subordinated debentures at fair value as of December 31, 2016, or the passage of time, will result in negative fair value
135
adjustments. At December 31, 2016, the discount rate utilized was based on a credit spread of 500 basis points and three month LIBOR of 100
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, 2016 and 2015 (in thousands):
Beginning balance at December 31, 2015
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, 2016
Beginning balance at December 31, 2014
Total gains or losses recognized
Assets gains
Liabilities losses
Purchases, issuances and settlements
Paydowns and maturities
Ending balance at December 31, 2015
Year Ended December 31, 2016
Level 3 Fair Value Inputs
TPS Securities
Borrowings—
Junior Subordinated
Debentures
18,699
$
92,480
719
—
1,725
—
—
—
2,720
—
—
—
21,143
$
95,200
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
$
$
$
$
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 table presents 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, 2016 and 2015 (in thousands):
REO
Impaired loans
REO
December 31, 2016
Level 1
Level 2
Level 3
Total
— $
— $
11,081
$
11,081
Level 1
Level 2
Level 3
Total
December 31, 2015
— $
—
— $
—
$
2,372
11,627
2,372
11,627
$
$
136
The following table presents the losses resulting from non-recurring fair value adjustments for the years ended December 31, 2016 and 2015 (in
thousands):
Impaired loans
REO
Total loss from nonrecurring measurements
For the year ended December 31,
2016
2015
$
$
(182) $
(671)
(853) $
(110)
(231)
(341)
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.
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.
137
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
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Miscellaneous liabilities
Deferred tax liability
Junior subordinated debentures at fair value
Shareholders’ equity
Total liabilities and shareholders' equity
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
December 31
2016
2015
$
86,268
4,212
1,307,475
13,784
58,232
4,212
1,319,348
21,134
1,411,739
$
1,402,926
$
8,990
1,839
95,200
1,305,710
7,846
2,541
92,480
1,300,059
1,411,739
$
1,402,926
$
$
$
$
Years Ended December 31
2016
2015
2014
$
127
$
122
$
96
50,971
40,852
60
(2,720)
(4,040)
(3,450)
81,800
(3,585)
170,260
(116,120)
69
(2,714)
(3,247)
(7,175)
41,195
(4,027)
$
85,385
$
45,222
$
26,027
33,612
67
(4,073)
(2,914)
(2,519)
50,296
(3,774)
54,070
138
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
Decrease in deferred taxes
Net change in valuation of financial instruments carried at fair value
Decrease (increase) in other assets
Increase in other liabilities
Net cash provided from operating activities
INVESTING ACTIVITIES:
Funds transferred to deferred compensation trust
Reduction in investment in subsidiaries
Acquisitions
Net cash provided from (used by) investing activities
FINANCING ACTIVITIES:
Issuance of stock for shareholder reinvestment program
Repurchase of common stock
Cash dividends paid
Net cash used by financing activities
NET CHANGE IN CASH
CASH, BEGINNING OF PERIOD
CASH, END OF PERIOD
Years Ended December 31
2016
2015
2014
$
85,385
$
45,222
$
54,070
(40,852)
(702)
2,720
7,332
3,233
57,116
(26)
50,000
—
49,974
—
(50,772)
(28,282)
(79,054)
28,036
58,232
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
$
86,268
$
58,232
$
(33,612)
(1,444)
4,073
(3,822)
222
19,487
(26)
—
—
(26)
127
—
(13,462)
(13,335)
6,126
45,998
52,124
Note 20: STOCK REPURCHASES AND RECHARACTERIZATION
On April 4, 2016, the Company announced that its Board of Directors had authorized the repurchase of up to 1,711,540 shares of the Company's
common stock, or 5% of the Company's outstanding shares. During the year ended December 31, 2016, the Company adopted a pre-arranged
stock trading plan, pursuant to the Board authorization, in accordance with guidelines specified under Rule 10b5-1 of the Securities Exchange
Act of 1934. Repurchases under the Company’s 10b5-1 stock trading plan are administered through an independent broker. The stock trading
plan will cover the repurchase of up to 1,300,000 shares of the Company’s stock. The stock trading plan will extend through March 12, 2017,
unless completed sooner or otherwise extended or terminated. Repurchases are subject to the requirements of the Securities and Exchange
Commission, including Rule 10b-18, as well as certain price and other requirements specified in the plan. During the year ended December 31,
2016, the Company repurchased 1,145,250 common shares under the stock trading plan leaving 566,290 shares available for future repurchase
under the Board authorization. In addition to the shares repurchased under the plan there were 25,628 shares surrendered by employees to satisfy
tax withholding obligations upon vesting of restricted stock grants.
The Company did not repurchase any shares of its common stock during the years ended December 31, 2015 or 2014 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 was terminated during the year ended December 31, 2014.
During the year ended December 31, 2016, the 1.3 million shares of non-voting common stock issued in connection with the acquisition of
Starbuck. and its subsidiary, AmericanWest were sold by the original holder of the shares. These shares contained a provision where they
would automatically convert from non-voting to voting upon a permitted transfer of the shares. Therefore, these shares are included in
Banner's voting common stock outstanding as of December 31, 2016.
139
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
2016
2015
2014
Net income
$
85,385
$
45,222
$
54,070
Weighted average number of common shares outstanding
Basic
Diluted
Earnings per common share
Basic
Diluted
33,820,148
33,853,511
23,801,373
23,866,621
19,359,409
19,402,656
$
$
2.52
2.52
$
$
1.90
1.89
$
$
2.79
2.79
At December 31, 2016, 2015 and 2014 there were 290,719, 231,562, and 195,106, respectively, issued but unvested restricted stock shares and
units that were included in the computation of diluted earnings per share.
At December 31, 2016 and 2015 there were options to purchase an additional 5,000 shares of common stock and at December 31, 2014 there
were options to purchase an additional 10,664 shares of common stock that were not included in the computation of diluted earnings per share
because their exercise price resulted in them being anti-dilutive. At December 31, 2016, 2015 and 2014 there was a warrant to purchase up to
243,998 shares of common stock and they were not included in the computation of diluted earnings per share because their exercise price resulted
in them being anti-dilutive.
Note 22: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Results of operations on a quarterly basis for the years ended December 31, 2016, 2015 and 2014 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
Year Ended December 31, 2016
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
$
$
$
$
95,301
4,258
91,043
—
91,043
19,959
84,034
26,968
9,194
17,774
0.52
0.52
0.21
$
$
$
97,321
4,173
93,148
2,000
91,148
20,537
79,887
31,798
10,841
20,957
0.62
0.61
0.21
$
$
$
97,849
4,141
93,708
2,000
91,708
23,512
79,092
36,128
12,277
23,851
0.70
0.70
0.23
101,007
3,836
97,171
2,030
95,141
19,463
79,857
34,747
11,943
22,804
0.69
0.69
0.23
140
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
Note 23: COMMITMENTS AND CONTINGENCIES
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
Lease Commitments—The Company leases 108 buildings and offices under non-cancelable operating leases. The leases contain various
provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule.
Substantially all of the leases provide the Company with the option to extend the lease term one or more times following expiration of the initial
term.
Financial Instruments with Off-Balance Sheet Risk—The Company has financial instruments with off-balance-sheet risk generated in the normal
course of business to meet the financing needs of 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.
141
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, 2016
December 31, 2015
Commitments to extend credit
Standby letters of credit and financial guarantees
Commitments to originate loans
Risk participation agreement
$
$
2,204,795
17,694
69,833
7,488
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
69,487
36,907
44,000
2,132,996
22,315
32,908
7,672
76,146
37,545
41,500
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 $3.6 million and $3.9 million, at December 31, 2016 and 2015, respectively.
Standby letters of credit are conditional commitments issued to guarantee a customer’s performance or payment to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Through the acquisition of
Starbuck, 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.
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
arrangement generally required delivery of the loans prior to the expiration of the rate lock. Delays in funding the loans would require a lock
extension. The cost of a lock extension at times was borne by the customer and at times by the Bank. These lock extension costs have not had
a material impact to our operations. For mandatory delivery commitments the Company enters into forward commitments at specific prices and
settlement dates to deliver either: (1) residential mortgage loans for purchase by secondary market investors (i.e., Freddie Mac or Fannie Mae),
or (2) mortgage-backed securities to broker/dealers. The purpose of these forward commitments is to offset the movement in interest rates
between the execution of its residential mortgage rate lock commitments with borrowers and the sale of those loans to the secondary market
investor. There were no counterparty default losses on forward contracts during 2016 or 2015. 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, 2016.
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
142
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.
As of December 31, 2016 and December 31, 2015, 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, 2016
December 31, 2015
December 31, 2016
December 31, 2015
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
$
5,855
$
660
$
6,734
$
938
$
5,855
$
660
$
6,734
$
938
(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.
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 interest rate lock commitments with potential borrowers to originate loans that are intended to be sold and
for closed mortgage loans held for sale that are awaiting sale and delivery into the secondary market. The Company economically hedges the
risk of changing interest rates associated with these mortgage loan commitments by entering into forward sales contracts to sell residential
mortgage loans or mortgage-backed securities to broker/dealers as specific prices and dates.
143
As of December 31, 2016 and December 31, 2015, 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, 2016
December 31, 2015
December 31, 2016
December 31, 2015
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
$
309,936
$
7,670
$
293,937
$
11,046
$
309,936
$
7,670
$
293,937
$
11,046
Mortgage loan
commitments
Forward sales
contracts
42,296
71,192
30
452
76,146
41,500
428
43
27,191
9,715
174
115
—
32,763
—
50
$
423,424
$
8,152
$
411,583
$
11,517
$
346,842
$
7,959
$
326,700
$
11,096
(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 $822,000 at December 31, 2016 and $327,000 at
December 31, 2015), 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, 2016 and 2015 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,
2016
(348) $
296
(52) $
2015
100
141
241
$
$
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, 2016 or December 31, 2015, it could have been required to settle its obligations under the agreements at the termination value.
As of December 31, 2016 and 2015, the termination value of derivatives in a net liability position related to these agreements was $7.6 million
and $12.0 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 $29.3 million
and $20.8 million as of December 31, 2016 and 2015, 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.
144
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, 2016 and December 31, 2015 (in thousands):
December 31, 2016
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
$
$
$
$
8,330
8,330
8,330
8,330
$
$
$
$
— $
— $
— $
— $
8,330
8,330
8,330
8,330
$
$
$
$
(362) $
(362) $
— $
— $
7,968
7,968
(362) $
(7,557) $
(362) $
(7,557) $
411
411
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) $
—
—
Derivative assets
Interest rate swaps
Derivative liabilities
Interest rate swaps
Derivative assets
Interest rate swaps
Derivative liabilities
Interest rate swaps
145
BANNER CORPORATION
Exhibit
2.1{a}
2.1{b}
2.1{c}
2.1{d}
3{a}
3{b}
3{c}
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}
10{m}
10{n}
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 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].
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)].
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)].
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)].
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)].
146
10{o}
10{p}
10{q}
10{r}
10{s}
10{t}
10{u}
14
21
23.1
31.1
31.2
32
101
2014 Omnibus Incentive Plan [incorporated by reference as Appendix C to the Registrant's Definitive Proxy Statement on Schedule
14A filed on March 24, 2014 (File No. 000-26584)] and amendments [incorporated by reference to the Form 8-K filed on March
25, 2015 (File No. 000-26534)].
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)].
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, 2016, 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.
147
SUBSIDIARIES OF THE REGISTRANT
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)
Nickerson Street Associates, LLC (2)
Greater Sacramento Bancorp Statutory Trust I (1)
Greater Sacramento Bancorp Statutory Trust II (1)
(1) Wholly-owned by Banner Corporation.
(2) Wholly-owned by Banner Bank.
Percentage of
Ownership
Jurisdiction of State of
Incorporation
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Washington
Washington
Washington
Washington
Oregon
Washington
Washington
Connecticut
Washington
Delaware
Delaware
148
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 No. 333-211332 on Form S-3 of our report dated February 27, 2017, with respect to the consolidated statements of
financial condition of Banner Corporation and Subsidiaries as of December 31, 2016 and 2015, 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,
2016, and the effectiveness of internal control over financial reporting as of December 31, 2016, which reports appear in this Annual Report on
Form 10-K of Banner Corporation for the year ended December 31, 2016.
/s/ Moss Adams LLP
Portland, Oregon
February 27, 2017
149
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 27, 2017
/s/Mark J. Grescovich
Mark J. Grescovich
Chief Executive Officer
150
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 27, 2017
/s/ Lloyd W. Baker
Lloyd W. Baker
Chief Financial Officer
151
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 27, 2017
February 27, 2017
/s/ Mark J. Grescovich
Mark J. Grescovich
Chief Executive Officer
/s/ Lloyd W. Baker
Lloyd W. Baker
Chief Financial Officer
152
Interior bulk pages
Washington
89
Idaho
14
Oregon
44
Utah
7
190
California
36
Branch banking
locations
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 11 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
PO 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 – islandersbank.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 97205
Special Counsel
Breyer & Associates PC
8180 Greensboro Drive, Suite 785
McLean, VA 22102
Annual Meeting of Shareholders
10 a.m., Tuesday, April 25, 2017
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
Gordon E. Budke
Connie R. Collingsworth
Jesse G. Foster
Michael J. Gillfillan
Mark J. Grescovich
Roberto R. Herencia
D. Michael Jones
David A. Klaue
John R. Layman
David I. Matson
Brent A. Orrico
Merline Saintil
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 Credit Officer
Douglas M. Bennett
EVP, Real Estate Lending Division
Peter J. Conner
EVP, Chief Financial Officer, Banner Bank
Kayleen R. Kohler
EVP, Human Resources
Kenneth A. Larsen
EVP, Mortgage Banking
Craig Miller
EVP, General Counsel
Cynthia D. Purcell
EVP, Retail Banking and Administration
M. Kirk Quillin
EVP, East Region Commercial Banking
James T. Reed, Jr.
EVP, West Region Commercial Banking
Steven W. Rust
EVP and Chief Information Officer
Judith Steiner
EVP, Chief Risk Officer
Gary W. Wagers
EVP, Retail Products and Services
Keith A. Western
EVP, California and S. Oregon Commercial
Banking
ANNUAL
REPORT
Banner Corporation
2016
Corporate Headquarters
10 South First Avenue
PO Box 907
Walla Walla, WA 99362-0265
509-527-3636
800-272-9933
bannerbank@bannerbank.com
bannerbank.com