Document

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

FORM 10-Q 
(Mark One)

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017
OR
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ to ______________
 Commission File Number 000-26584
BANNER CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
 
 
 
 
 
 
 
Washington
 
91-1691604
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
 
 
 
10 South First Avenue, Walla Walla, Washington 99362
 
 
(Address of principal executive offices and zip code)
 
 
 
 
 
 
 
Registrant's telephone number, including area code:  (509) 527-3636
 
 
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
 
 
 
 
 
 
 
Yes
[x]
 
No
[  ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Yes
[x]
 
No
[  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
 
 
 
Large accelerated filer  [x]
Accelerated filer    [ ]
Non-accelerated filer   [  ]
Smaller reporting company  [ ]
Emerging growth company [ ]
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
[  ]
 
No
[x]
 
APPLICABLE ONLY TO CORPORATE ISSUERS
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Title of class:
 
As of July 31, 2017
Common Stock, $.01 par value per share
 
33,180,402 shares
Non-voting Common Stock, $.01 par value per share
 
 
 
 
 
100,029 shares
 
 
 

1


BANNER CORPORATION AND SUBSIDIARIES

Table of Contents
PART I – FINANCIAL INFORMATION
 
 
 
Item 1 – Financial Statements.  The Unaudited Condensed Consolidated Financial Statements of Banner Corporation and Subsidiaries filed as a part of the report are as follows:
 
 
 
Consolidated Statements of Financial Condition as of June 30, 2017 and December 31, 2016
 
 
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016
 
 
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016
 
 
Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2017 and the Year Ended December 31, 2016
 
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016
 
 
Selected Notes to the Consolidated Financial Statements
 
 
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Executive Overview
 
 
Comparison of Financial Condition at June 30, 2017 and December 31, 2016
 
 
Comparison of Results of Operations for the Three and Six Months Ended June 30, 2017 and 2016
 
 
Asset Quality
 
 
Liquidity and Capital Resources
 
 
Capital Requirements
 
 
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Market Risk and Asset/Liability Management
 
 
Sensitivity Analysis
 
 
Item 4 – Controls and Procedures
 
 
PART II – OTHER INFORMATION
 
 
 
Item 1 – Legal Proceedings
 
 
Item 1A – Risk Factors
 
 
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 3 – Defaults upon Senior Securities
 
 
Item 4 – Mine Safety Disclosures
 
 
Item 5 – Other Information
 
 
Item 6 – Exhibits
 
 
SIGNATURES

2


Special Note Regarding Forward-Looking Statements

Certain matters in this Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements relate to our financial condition, liquidity, results of operations, plans, objectives, future performance or business.  Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.”  Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance and projections of financial items.  These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: 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 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; our ability to successfully integrate any assets, liabilities, customers, systems, and personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames or at all, and any goodwill charges related thereto and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, which might be greater than expected; 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-Q.  Any forward-looking statements are based upon management’s beliefs and assumptions at the time they are made.  We do not undertake and specifically disclaim any obligation to update any forward-looking statements included in this report or the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise.  These risks could cause our actual results to differ materially from those expressed in any forward-looking statements by, or on behalf of, us.  In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.

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


3


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) (In thousands, except shares)
June 30, 2017 and December 31, 2016
ASSETS
June 30
2017

 
December 31
2016

Cash and due from banks
$
196,178

 
$
177,083

Interest bearing deposits
77,370

 
70,636

Total cash and cash equivalents
273,548

 
247,719

Securities—trading, amortized cost $30,221 and $30,154, respectively
24,950

 
24,568

Securities—available-for-sale, amortized cost $1,290,189 and $806,336, respectively
1,290,159

 
800,917

Securities—held-to-maturity, fair value $272,089 and $270,528, respectively
268,050

 
267,873

Federal Home Loan Bank (FHLB) stock
12,334

 
12,506

Loans held for sale (includes $57,832 and $9,600, at fair value, respectively)
66,164

 
246,353

Loans receivable
7,551,563

 
7,451,148

Allowance for loan losses
(88,586
)
 
(85,997
)
Net loans
7,462,977

 
7,365,151

Accrued interest receivable
30,722

 
30,178

Real estate owned (REO), held for sale, net
2,427

 
11,081

Property and equipment, net
161,095

 
166,481

Goodwill
244,583

 
244,583

Other intangibles, net
26,813

 
30,162

Bank-owned life insurance (BOLI)
160,609

 
158,936

Deferred tax assets, net
121,131

 
127,694

Other assets
54,258

 
59,466

Total assets
$
10,199,820

 
$
9,793,668

LIABILITIES
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
3,254,581

 
$
3,140,451

Interest-bearing transaction and savings accounts
4,022,909

 
3,935,630

Interest-bearing certificates
1,206,241

 
1,045,333

Total deposits
8,483,731

 
8,121,414

Advances from FHLB at fair value
50,212

 
54,216

Other borrowings
116,455

 
105,685

Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)
96,852

 
95,200

Accrued expenses and other liabilities
102,511

 
71,369

Deferred compensation
40,208

 
40,074

Total liabilities
8,889,969

 
8,487,958

COMMITMENTS AND CONTINGENCIES (Note 12)

 

SHAREHOLDERS’ EQUITY
 
 
 
Preferred stock - $0.01 par value per share, 500,000 shares authorized; no shares outstanding at June 30, 2017 and December 31, 2016

 

Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized; 33,178,914 shares issued and outstanding at June 30, 2017; 33,108,599 shares issued and outstanding at December 31, 2016
1,214,578

 
1,213,225

Common stock (non-voting) and paid in capital- $0.01 par value per share, 5,000,000 shares authorized; 99,117 shares issued and outstanding at June 30, 2017; 84,788 shares issued and outstanding at December 31, 2016
738

 
612

Retained earnings
94,541

 
95,328

Carrying value of shares held in trust for stock related compensation plans
(7,283
)
 
(7,283
)
Liability for common stock issued to deferred, stock related, compensation plans
7,283

 
7,283

Accumulated other comprehensive loss
(6
)
 
(3,455
)
Total shareholders' equity
1,309,851

 
1,305,710

Total liabilities & shareholders' equity
$
10,199,820

 
$
9,793,668

See Selected Notes to the Consolidated Financial Statements

4


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands, except shares and per share amounts)
For the Three and Six Months Ended June 30, 2017 and 2016
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017

 
2016

 
2017

 
2016

INTEREST INCOME:
 
 
 
 
 
 
 
Loans receivable
$
94,795

 
$
88,935

 
$
186,083

 
$
175,893

Mortgage-backed securities
6,239

 
5,274

 
10,886

 
10,664

Securities and cash equivalents
3,402

 
3,112

 
6,563

 
6,065

Total interest income
104,436

 
97,321

 
203,532

 
192,622

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
3,182

 
2,771

 
5,973

 
5,717

FHLB advances
301

 
339

 
574

 
618

Other borrowings
83

 
78

 
157

 
153

Junior subordinated debentures
1,164

 
985

 
2,268

 
1,944

Total interest expense
4,730

 
4,173

 
8,972

 
8,432

Net interest income
99,706

 
93,148

 
194,560

 
184,190

PROVISION FOR LOAN LOSSES
2,000

 
2,000

 
4,000

 
2,000

Net interest income after provision for loan losses
97,706

 
91,148

 
190,560

 
182,190

NON-INTEREST INCOME:
 
 
 
 
 
 
 
Deposit fees and other service charges
13,238

 
12,213

 
25,423

 
24,031

Mortgage banking operations
6,754

 
6,625

 
11,357

 
12,268

Bank-owned life insurance (BOLI)
1,461

 
1,128

 
2,556

 
2,313

Miscellaneous
1,720

 
1,328

 
5,356

 
2,592

 
23,173

 
21,294

 
44,692

 
41,204

Net loss on sale of securities
(54
)
 
(380
)
 
(41
)
 
(359
)
Net change in valuation of financial instruments carried at fair value
(650
)
 
(377
)
 
(1,338
)
 
(348
)
Total non-interest income
22,469

 
20,537

 
43,313

 
40,497

NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salary and employee benefits
49,019

 
45,175

 
95,083

 
91,738

Less capitalized loan origination costs
(4,598
)
 
(4,907
)
 
(8,914
)
 
(9,157
)
Occupancy and equipment
12,045

 
11,052

 
24,041

 
21,440

Information/computer data services
4,100

 
4,852

 
8,094

 
9,772

Payment and card processing expenses
5,792

 
5,501

 
10,812

 
10,286

Professional services
3,732

 
865

 
8,885

 
3,479

Advertising and marketing
1,766

 
2,474

 
3,095

 
4,207

Deposit insurance
1,071

 
1,311

 
2,337

 
2,649

State/municipal business and use taxes
279

 
770

 
1,078

 
1,608

REO operations
(363
)
 
137

 
(1,329
)
 
534

Amortization of core deposit intangibles
1,624

 
1,808

 
3,248

 
3,615

Miscellaneous
7,463

 
8,437

 
13,577

 
14,526

 
81,930

 
77,475

 
160,007

 
154,697

Acquisition-related costs

 
2,412

 

 
9,224

Total non-interest expense
81,930

 
79,887

 
160,007

 
163,921

Income before provision for income taxes
38,245

 
31,798

 
73,866

 
58,766

PROVISION FOR INCOME TAXES
12,791

 
10,841

 
24,619

 
20,035

NET INCOME
$
25,454

 
$
20,957

 
$
49,247

 
$
38,731

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.77

 
$
0.62

 
$
1.49

 
$
1.14

Diluted
$
0.77

 
$
0.61

 
$
1.49

 
$
1.14

Cumulative dividends declared per common share
$
1.25

 
$
0.21

 
$
1.50

 
$
0.42

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
32,982,126

 
34,069,234

 
32,957,920

 
34,053,105

Diluted
33,051,527

 
34,116,498

 
33,052,205

 
34,090,647

See Selected Notes to the Consolidated Financial Statements

5


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
For the Three and Six Months Ended June 30, 2017 and 2016

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017

 
2016

 
2017

 
2016

NET INCOME
$
25,454

 
$
20,957

 
$
49,247

 
$
38,731

OTHER COMPREHENSIVE INCOME, NET OF INCOME TAXES:
 
 
 
 
 
 
 
Unrealized holding gain on available-for-sale securities arising during the period
2,900

 
5,230

 
5,348

 
18,702

Income tax expense related to available-for-sale securities unrealized holding gain
(1,045
)
 
(1,883
)
 
(1,925
)
 
(6,737
)
Reclassification for net losses on available-for-sale securities realized in earnings
54

 
380

 
41

 
359

Income tax benefit related to available-for-sale securities realized gains
(19
)
 
(137
)
 
(15
)
 
(129
)
Other comprehensive income
1,890

 
3,590

 
3,449

 
12,195

COMPREHENSIVE INCOME
$
27,344

 
$
24,547

 
$
52,696

 
$
50,926


See Selected Notes to the Consolidated Financial Statements

6


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited) (In thousands, except shares)
For the Six Months Ended June 30, 2017 and the Year Ended December 31, 2016

 
Common Stock
and Paid in Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive Loss
 
Shareholders’
Equity
 
Shares
 
Amount
 
 
 
Balance, January 1, 2016
34,242,255

 
$
1,261,174

 
$
39,615

 
$
(730
)
 
$
1,300,059

Net income
 
 
 
 
85,385

 
 
 
85,385

Other comprehensive loss, net of income tax
 
 
 
 
 
 
(2,725
)
 
(2,725
)
Accrual of dividends on common stock ($0.88/share cumulative)
 
 
 
 
(29,672
)
 
 
 
(29,672
)
Repurchase of common stock under the terms of the repurchase plan
(1,145,250
)
 
(50,772
)
 
 
 
 
 
(50,772
)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered
96,382

 
3,401

 
 
 
 
 
3,401

Excess tax benefit on stock-based compensation
 
 
34

 
 
 
 
 
34

Balance, December 31, 2016
33,193,387

 
$
1,213,837

 
$
95,328

 
$
(3,455
)
 
$
1,305,710


Balance, January 1, 2017
33,193,387

 
$
1,213,837

 
$
95,328

 
$
(3,455
)
 
$
1,305,710

Net income
 
 
 
 
49,247

 
 
 
49,247

Other comprehensive income, net of income tax
 
 
 
 
 
 
3,449

 
3,449

Accrual of dividends on common stock ($1.50/share cumulative)
 
 
 
 
(50,034
)
 
 
 
(50,034
)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered
84,644

 
1,479

 
 
 
 
 
1,479

Balance, June 30, 2017
33,278,031

 
$
1,215,316

 
$
94,541

 
$
(6
)
 
$
1,309,851



See Selected Notes to the Consolidated Financial Statements

7


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
For the Six Months Ended June 30, 2017 and 2016
 
Six Months Ended
June 30,
 
2017

 
2016

OPERATING ACTIVITIES:
 
 
 
Net income
$
49,247

 
$
38,731

Adjustments to reconcile net income to net cash provided from operating activities:
 
 
 
Depreciation
6,484

 
6,049

Deferred income and expense, net of amortization
(1,401
)
 
415

Amortization of core deposit intangibles
3,248

 
3,615

Loss on sale of securities
41

 
359

Net change in valuation of financial instruments carried at fair value
1,338

 
348

Purchases of securities—trading

 
(1,725
)
Principal repayments and maturities of securities—trading
17

 
2,252

Decrease in deferred taxes
6,564

 
11,759

Increase in current taxes payable
2,407

 
3,755

Equity-based compensation
1,479

 
1,910

Increase in cash surrender value of BOLI
(2,012
)
 
(2,296
)
Gain on sale of loans, net of capitalized servicing rights
(10,975
)
 
(8,501
)
Gain on disposal of real estate held for sale and property and equipment
(2,226
)
 
(440
)
Provision for loan losses
4,000

 
2,000

Provision for losses on real estate held for sale
256

 
636

Origination of loans held for sale
(394,585
)
 
(464,777
)
Proceeds from sales of loans held for sale
585,749

 
406,251

Net change in:
 
 
 
Other assets
(4,863
)
 
(20,367
)
Other liabilities
(3,338
)
 
7,362

Net cash provided from (used by) operating activities
241,430

 
(12,664
)
INVESTING ACTIVITIES:
 
 
 
Purchases of securities—available-for-sale
(580,321
)
 
(215,497
)
Principal repayments and maturities of securities—available-for-sale
80,149

 
90,177

Proceeds from sales of securities—available-for-sale
15,647

 
96,785

Purchases of securitiesheld-to-maturity
(4,605
)
 
(38,580
)
Principal repayments and maturities of securities—held-to-maturity
3,317

 
3,551

Loan originations, net of principal repayments
73,630

 
(16,219
)
Purchases of loans and participating interest in loans
(173,011
)
 
(149,214
)
Proceeds from sales of other loans
6,447

 
162,405

Purchases of property and equipment
(5,356
)
 
(6,096
)
Proceeds from sale of real estate held for sale and sale of other property, net
14,912

 
6,322

Proceeds from FHLB stock repurchase program
53,156

 
37,396

Purchase of FHLB stock
(52,984
)
 
(44,685
)
Other
298

 
1,319

Net cash used by investing activities
(568,721
)
 
(72,336
)
FINANCING ACTIVITIES:
 
 
 
Increase (decrease) in deposits, net
362,317

 
(135,293
)
Repayment of long term FHLB advances
(4
)
 
(70,004
)
(Repayments of) proceeds from overnight and short term FHLB advances, net
(4,000
)
 
262,400

Increase in other borrowings, net
10,770

 
13,983

Cash dividends paid
(15,963
)
 
(13,347
)
Net cash provided from financing activities
353,120

 
57,739

NET CHANGE IN CASH AND CASH EQUIVALENTS
25,829

 
(27,261
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
247,719

 
261,917

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
273,548

 
$
234,656


(Continued on next page)

8


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Six Months Ended June 30, 2017 and 2016
 
Six Months Ended
June 30,
 
2017

 
2016

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Interest paid in cash
$
8,464

 
$
8,569

Taxes paid, net of refunds received in cash
17,106

 
11,025

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
10

 
592

    Dividends accrued but not paid until after period end
41,733

 
7,303


See Selected Notes to the Consolidated Financial Statements

9


BANNER CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1:  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

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

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (SEC). In preparing these financial statements, the Company has evaluated events and transactions subsequent to June 30, 2017 for potential recognition or disclosure. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC and the accounting standards for interim financial statements. Certain reclassifications have been made to the 2016 Consolidated Financial Statements and/or schedules to conform to the 2017 presentation. These reclassifications may have affected certain ratios for the prior periods. The effect of these reclassifications is considered immaterial. All significant intercompany transactions and balances have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are significant to an understanding of Banner’s financial statements. These policies relate to (i) the methodology for the recognition of interest income, (ii) determination of the provision and allowance for loan losses, (iii) the valuation of financial assets and liabilities recorded at fair value, including other-than-temporary impairment (OTTI) losses, (iv) the valuation of intangibles, such as goodwill, core deposit intangibles (CDI) and mortgage servicing rights, (v) the valuation of real estate held for sale, (vi) the valuation of assets and liabilities acquired in business combinations and subsequent recognition of related income and expense, and (vii) the valuation or recognition of deferred tax assets and liabilities. These policies and judgments, estimates and assumptions are described in greater detail in subsequent notes to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations (Critical Accounting Policies) in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC.  There have been no significant changes in our application of accounting policies during the first six months of 2017.

The information included in this Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the SEC (2016 Form 10-K).  Interim results are not necessarily indicative of results for a full year or any other interim period.

Note 2:  ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which creates 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. 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. Management intends to adopt the new guidance on January 1, 2018.  Management is in the process of completing the following analysis that includes (1) identification of all revenue streams included in the financial statements (excluding interest income, which is outside of the scope of the pronouncement); (2) identify revenue streams within the scope of the pronouncement; (3) determination of size, timing, and amount of revenue recognition for streams of income within the scope of the pronouncement; (4) determination of the sample size of contracts for further analysis; and (5) completion of analysis on sample of contracts to evaluate the impact of the new guidance. Based on this analysis the Company is developing processes and procedures during 2017 to address the requirements of 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.


10


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.

Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU require equity securities to be measured at fair value with changes in the fair value recognized through net income. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value under certain circumstances and require enhanced disclosures about those investments. This ASU simplifies the impairment assessment of equity investments without readily determinable fair values. This ASU also eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The amendments in this ASU require separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This ASU excludes from net income gains or losses that the entity may not realize because those financial liabilities are not usually transferred or settled at their fair values before maturity. The amendments in this ASU require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or in the accompanying notes to the financial statements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. At June 30, 2017, Banner held $5.5 million of available-for-sale equity investment securities. The provisions of ASU No. 2016-01 require changes in the value of equity securities to be recognized in the income statement which could result in additional volatility in income.

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 124 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, upon the adoption of this ASU the Company expects to report increased assets and increased liabilities on its Consolidated Statements of Financial Condition as a result of recognizing right-of-use assets and lease liabilities related to these leases and certain equipment under non-cancelable operating lease agreements, which currently are not reflected in its Consolidated Statements of Financial Condition.

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 June 30, 2017, Banner had three swap relationships using hedge accounting with a total market value of $580,000. This ASU has not had a material impact on the Company’s Consolidated Financial Statements.

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

11


related. Diversity in practice has developed because the existing four-step decision sequence in ASC 815 focuses only on whether the payoff was indexed to something other than an interest rate or credit risk. As a result, entities have been uncertain whether they should (1) determine whether the embedded features are clearly and closely related to the debt host solely on the basis of the four-step decision sequence or (2) first apply the four-step decision sequence and then also evaluate whether the event triggering the exercisability of the contingent put or call option is indexed only to an interest rate or credit risk. This ASU clarifies that in assessing whether an embedded contingent put or call option is clearly and closely related to the debt host, an entity is required to perform only the four-step decision sequence in ASC 815 as amended by this ASU. The entity does not have to separately assess whether the event that triggers its ability to exercise the contingent option is itself indexed only to interest rates or credit risk. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. This ASU has not had 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 amendment affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial asset not excluded from the scope that have the contractual right to receive cash. 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. The Company has formed an internal committee to oversee the project and is currently soliciting proposals from third party vendors to assist with the project. Upon adoption, the Company expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. The new guidance may result in an increase in the allowance for loan losses which will also reflect the new requirement to include the nonaccretable principal differences on purchased credit impaired loans; however, the Company is still in the process of determining the magnitude of the increase and its impact on the Consolidated Financial Statements. In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities available for sale will be replaced with an allowance approach. The Company has begun developing and implementing processes to address the amendments of this ASU.

Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20)

In March 2017, FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities. The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. Under current GAAP, premiums and discounts on callable debt securities generally are amortized to the maturity date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to the maturity date. The amendments in this ASU more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is still evaluating the effects this ASU will have on the Company’s Consolidated Financial Statements.

Compensation - Stock Compensation (Topic 718)
In May 2017, FASB issued ASU 2017-09, Scope of Modification Accounting. The amendments in this ASU are intended to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following are met: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification, (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have

12


not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The Company's early adoption of the amendments in this ASU in the quarter ended June 30, 2017 did not have a material impact on the Company’s Consolidated Financial Statements.

Note 3:  SECURITIES

The amortized cost, gross unrealized gains and losses and estimated fair value of securities at June 30, 2017 and December 31, 2016 are summarized as follows (in thousands):
 
June 30, 2017
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair
Value
Trading:
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
1,230

 
 
 
 
 
$
1,315

Municipal bonds
331

 
 
 
 
 
333

Corporate bonds
27,045

 
 
 
 
 
21,568

Mortgage-backed or related securities
1,601

 
 
 
 
 
1,599

Equity securities
14

 
 
 
 
 
135

 
$
30,221

 
 
 
 
 
$
24,950

Available-for-Sale:
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
89,925

 
$
310

 
$
(241
)
 
$
89,994

Municipal bonds
112,809

 
1,131

 
(423
)
 
113,517

Corporate bonds
10,401

 
91

 
(45
)
 
10,447

Mortgage-backed or related securities
1,042,756

 
4,060

 
(4,870
)
 
1,041,946

Asset-backed securities
28,642

 
118

 
(54
)
 
28,706

Equity securities
5,656

 
10

 
(117
)
 
5,549

 
$
1,290,189

 
$
5,720

 
$
(5,750
)
 
$
1,290,159

Held-to-Maturity:
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
1,045

 
$

 
$
(4
)
 
$
1,041

Municipal bonds:
196,494

 
4,900

 
(1,201
)
 
200,193

Corporate bonds
3,802

 

 

 
3,802

Mortgage-backed or related securities
66,709

 
550

 
(206
)
 
67,053

 
$
268,050

 
$
5,450

 
$
(1,411
)
 
$
272,089


13




 
December 31, 2016
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair
Value
Trading:
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
1,230

 
 
 
 
 
$
1,326

Municipal bonds
331

 
 
 
 
 
335

Corporate bonds
26,959

 
 
 
 
 
21,143

Mortgage-backed or related securities
1,620

 
 
 
 
 
1,641

Equity securities
14

 
 
 
 
 
123

 
$
30,154

 
 
 
 
 
$
24,568

Available-for-Sale:
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
57,288

 
$
146

 
$
(456
)
 
$
56,978

Municipal bonds
110,487

 
455

 
(1,089
)
 
109,853

Corporate bonds
10,255

 
77

 
(49
)
 
10,283

Mortgage-backed or related securities
598,899

 
2,064

 
(6,251
)
 
594,712

Asset-backed securities
29,319

 

 
(326
)
 
28,993

Equity securities
88

 
10

 

 
98

 
$
806,336

 
$
2,752

 
$
(8,171
)
 
$
800,917

Held-to-Maturity:
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
1,065

 
$

 
$
(18
)
 
$
1,047

Municipal bonds:
196,989

 
4,173

 
(1,272
)
 
199,890

Corporate bonds
3,876

 

 

 
3,876

Mortgage-backed or related securities
65,943

 
309

 
(537
)
 
65,715

 
$
267,873

 
$
4,482

 
$
(1,827
)
 
$
270,528



14


At June 30, 2017 and December 31, 2016, 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):
 
June 30, 2017
 
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
$
39,614

 
$
(235
)
 
$
795

 
$
(6
)
 
$
40,409

 
$
(241
)
Municipal bonds
50,381

 
(392
)
 
1,200

 
(31
)
 
51,581

 
(423
)
Corporate bonds

 

 
4,946

 
(45
)
 
4,946

 
(45
)
Mortgage-backed or related securities
527,095

 
(4,189
)
 
50,232

 
(681
)
 
577,327

 
(4,870
)
Asset-backed securities
10,461

 
(54
)
 

 

 
10,461

 
(54
)
Equity securities
5,451

 
(117
)
 

 

 
5,451

 
(117
)
 
$
633,002

 
$
(4,987
)
 
$
57,173

 
$
(763
)
 
$
690,175

 
$
(5,750
)
Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
1,041

 
$
(4
)
 
$

 
$

 
$
1,041

 
$
(4
)
Municipal bonds
43,634

 
(1,198
)
 
203

 
(3
)
 
43,837

 
(1,201
)
Mortgage-backed or related securities
17,939

 
(206
)
 

 

 
17,939

 
(206
)
 
$
62,614

 
$
(1,408
)
 
$
203

 
$
(3
)
 
$
62,817

 
$
(1,411
)
 
 
 
 
 
 
 
 
 
 
 
 
 
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
$
39,043

 
$
(442
)
 
$
1,012

 
$
(14
)
 
$
40,055

 
$
(456
)
Municipal bonds
60,765

 
(1,087
)
 
556

 
(2
)
 
61,321

 
(1,089
)
Corporate bonds
5,206

 
(49
)
 

 

 
5,206

 
(49
)
Mortgage-backed or related securities
403,431

 
(5,604
)
 
47,467

 
(647
)
 
450,898

 
(6,251
)
Asset-backed securities
9,928

 
(101
)
 
19,064

 
(225
)
 
28,992

 
(326
)
 
$
518,373

 
$
(7,283
)
 
$
68,099

 
$
(888
)
 
$
586,472

 
$
(8,171
)
Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
1,047

 
$
(18
)
 
$

 
$

 
$
1,047

 
$
(18
)
Municipal bonds
64,802

 
(1,267
)
 
204

 
(5
)
 
65,006

 
(1,272
)
Mortgage-backed or related securities
42,245

 
(537
)
 

 

 
42,245

 
(537
)
 
$
108,094

 
$
(1,822
)
 
$
204

 
$
(5
)
 
$
108,298

 
$
(1,827
)

At June 30, 2017, there were 221 securities—available-for-sale with unrealized losses, compared to 243 at December 31, 2016.  At June 30, 2017, there were 29 securities—held-to-maturity with unrealized losses, compared to 73 at December 31, 2016.  Management does not believe that any individual unrealized loss as of June 30, 2017 or December 31, 2016 represented other-than-temporary impairment (OTTI).  The decline in fair market value of these securities was generally due to changes in interest rates and changes in market-desired spreads subsequent to their purchase.

There were no sales of securities—trading during the six months ended June 30, 2017 or June 30, 2016. The Company did not recognize any OTTI charges or recoveries on securities—trading during the six months ended June 30, 2017 or the six months ended June 30, 2016. There were no securities—trading in a nonaccrual status at June 30, 2017 or December 31, 2016.  Net unrealized holding gains of $315,000 were recognized during the six months ended June 30, 2017.

Sales of securities—available-for-sale totaled $15.6 million with a resulting net loss of $41,000 for the six months ended June 30, 2017.  Sales of securities—available-for-sale totaled $96.8 million with a resulting net loss of $359,000 for the six months ended June 30, 2016. There were no securities—available-for-sale in a nonaccrual status at June 30, 2017 or December 31, 2016.

15



There were no sales of securities—held-to-maturity during the six months ended June 30, 2017 or June 30, 2016. There were no securities—held-to-maturity in a nonaccrual status at June 30, 2017 or December 31, 2016.

The amortized cost and estimated fair value of securities at June 30, 2017, 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.
 
June 30, 2017
 
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
$
1,732

 
$
1,732

 
$
30,084

 
$
30,039

 
$
2,016

 
$
2,017

Maturing after one year through five years
230

 
230

 
109,023

 
109,253

 
20,143

 
20,331

Maturing after five years through ten years
1,200

 
1,285

 
256,093

 
255,194

 
112,167

 
113,755

Maturing after ten years through twenty years
12,705

 
11,170

 
280,181

 
281,226

 
90,554

 
93,658

Maturing after twenty years
14,340

 
10,398

 
609,152

 
608,898

 
43,170

 
42,328

 
30,207

 
24,815

 
1,284,533

 
1,284,610

 
268,050

 
272,089

Equity securities
14

 
135

 
5,656

 
5,549

 

 

 
$
30,221

 
$
24,950

 
$
1,290,189

 
$
1,290,159

 
$
268,050

 
$
272,089


The following table presents, as of June 30, 2017, investment securities which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law (in thousands):
 
June 30, 2017
 
Carrying Value
 
Amortized Cost
 
Fair
Value
Purpose or beneficiary:
 
 
 
 
 
State and local governments public deposits
$
147,524

 
$
147,272

 
$
150,325

Interest rate swap counterparties
24,125

 
24,150

 
24,242

Repurchase agreements
133,210

 
133,434

 
133,396

Other
3,972

 
3,972

 
3,921

Total pledged securities
$
308,831

 
$
308,828

 
$
311,884



16


Note 4: LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES

Loans receivable at June 30, 2017 and December 31, 2016 are summarized as follows (dollars in thousands):
 
June 30, 2017
 
December 31, 2016
 
Amount
 
Percent of Total
 
Amount
 
Percent of Total
Commercial real estate:
 
 
 
 
 
 
 
Owner-occupied
$
1,358,094

 
18.0
%
 
$
1,352,999

 
18.1
%
Investment properties
1,975,075

 
26.2

 
1,986,336

 
26.7

Multifamily real estate
288,442

 
3.8

 
248,150

 
3.3

Commercial construction
144,092

 
1.9

 
124,068

 
1.7

Multifamily construction
111,562

 
1.5

 
124,126

 
1.7

One- to four-family construction
380,782

 
5.0

 
375,704

 
5.0

Land and land development:
 

 
 
 
 

 
 
Residential
147,149

 
1.9

 
170,004

 
2.3

Commercial
27,917

 
0.4

 
29,184

 
0.4

Commercial business
1,286,204

 
17.0

 
1,207,879

 
16.2

Agricultural business, including secured by farmland
344,412

 
4.6

 
369,156

 
5.0

One- to four-family residential
800,008

 
10.6

 
813,077

 
10.9

Consumer:
 
 
 
 
 
 
 
Consumer secured by one- to four-family
527,623

 
7.0

 
493,211

 
6.6

Consumer—other
160,203

 
2.1

 
157,254

 
2.1

Total loans
7,551,563

 
100.0
%
 
7,451,148

 
100.0
%
Less allowance for loan losses
(88,586
)
 
 

 
(85,997
)
 
 

Net loans
$
7,462,977

 
 

 
$
7,365,151

 
 


Loan amounts are net of unearned loan fees in excess of unamortized costs of $3.3 million as of June 30, 2017 and $5.8 million as of December 31, 2016. Net loans include net discounts on acquired loans of $25.8 million and $31.1 million as of June 30, 2017 and December 31, 2016, respectively.

Purchased credit-impaired loans and purchased non-credit-impaired loans. Purchased loans, including loans acquired in business combinations, are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan and lease losses is not recorded at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased credit-impaired (PCI) or purchased non-credit-impaired. PCI loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments. The outstanding contractual unpaid principal balance of PCI loans, excluding acquisition accounting adjustments, was $39.6 million at June 30, 2017 and $48.4 million at December 31, 2016. The carrying balance of PCI loans was $26.3 million at June 30, 2017 and $32.3 million at December 31, 2016.
The following table presents the changes in the accretable yield for PCI loans for the three and six months ended June 30, 2017 and 2016 (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Balance, beginning of period
$
8,670

 
$
10,717

 
$
8,717

 
$
10,375

Accretion to interest income
(2,170
)
 
(2,607
)
 
(3,490
)
 
(4,538
)
Disposals
(497
)
 
(101
)
 
(497
)
 
(119
)
Reclassifications from non-accretable difference
1,663

 
3,026

 
2,936

 
5,317

Balance, end of period
$
7,666

 
$
11,035

 
$
7,666

 
$
11,035


As of June 30, 2017 and December 31, 2016, the non-accretable difference between the contractually required payments and cash flows expected to be collected were $13.0 million and $15.7 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

17


the borrower, the value of the underlying collateral and the current status of the economy. Impaired loans are comprised of loans on nonaccrual, troubled debt restructures (TDRs) that are performing under their restructured terms, and loans that are 90 days or more past due, but are still on accrual. PCI loans are considered performing within the scope of the purchased credit-impaired accounting guidance and are not included in the impaired loan tables.

The following tables provide information on impaired loans, excluding PCI loans, with and without allowance reserves at June 30, 2017 and December 31, 2016. Recorded investment includes the unpaid principal balance or the carrying amount of loans less charge-offs and net deferred loan fees (in thousands):
 
June 30, 2017
 
Unpaid Principal Balance
 
Recorded Investment
 
Related Allowance
 
 
Without Allowance (1)
 
With Allowance (2)
 
Commercial real estate:
 
 
 
 
 
 
 
Owner-occupied
$
5,099

 
$
4,670

 
$
201

 
$
19

Investment properties
4,827

 
1,597

 
3,228

 
251

Multifamily real estate
346

 

 
345

 
61

Land and land development:
 
 
 
 
 
 
 
Residential
1,737

 
1,078

 
323

 
116

Commercial
1,538

 
928

 

 

Commercial business
8,305

 
7,114

 
603

 
59

Agricultural business/farmland
4,682

 
4,186

 
373

 
238

One- to four-family residential
9,005

 
2,982

 
5,956

 
324

Consumer:
 
 
 
 
 
 
 
Consumer secured by one- to four-family
1,732

 
1,524

 
142

 
8

Consumer—other
155

 
78

 
77

 
4

 
$
37,426

 
$
24,157

 
$
11,248

 
$
1,080

 
 
 
 
 
 
 
 
 
December 31, 2016
 
Unpaid Principal Balance
 
Recorded Investment
 
Related Allowance
 
 
Without Allowance (1)
 
With Allowance (2)
 
Commercial real estate:
 
 
 
 
 
 
 
Owner-occupied
$
3,786

 
$
3,373

 
$
203

 
$
20

Investment properties
9,916

 
5,565

 
4,304

 
408

Multifamily real estate
508

 
147

 
349

 
64

One- to four-family construction
1,180

 

 
1,180

 
156

Land and land development:
 
 
 
 
 
 
 
Residential
3,012

 
750

 
1,106

 
219

Commercial
1,608

 
998

 

 

Commercial business
3,753

 
3,074

 
651

 
69

Agricultural business/farmland
6,438

 
6,354

 

 

One- to four-family residential
11,439

 
3,149

 
8,026

 
479

Consumer:
 
 
 
 
 
 
 
Consumer secured by one- to four-family
1,904

 
1,721

 
144

 
1

Consumer—other
391

 
226

 
166

 
4

 
$
43,935

 
$
25,357

 
$
16,129

 
$
1,420


(1) 
Includes loans without an allowance reserve that have been individually evaluated for impairment and that evaluation concluded that no reserve was needed and $8.6 million and $10.0 million of homogenous and small balance loans as of June 30, 2017 and December 31, 2016, respectively, that are collectively evaluated for impairment for which a general reserve has been established.
(2) 
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.

18



The following tables summarize our average recorded investment and interest income recognized on impaired loans by loan class for the three and six months ended June 30, 2017 and 2016 (in thousands):
 
Three Months Ended
June 30, 2017
 
Three Months Ended
June 30, 2016
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Commercial real estate:
 
 
 
 
 
 
 
Owner-occupied
$
2,662

 
$
2

 
$
1,764

 
$
2

Investment properties
7,438

 
38

 
16,000

 
75

Multifamily real estate
395

 
5

 
386

 
5

One- to four-family construction
393

 
7

 
1,621

 
25

Land and land development:
 
 
 
 
 
 
 
Residential
1,727

 
19

 
1,961

 
22

Commercial
944

 

 
994

 

Commercial business
4,857

 
50

 
1,910

 
6

Agricultural business/farmland
4,339

 
30

 
5,038

 
8

One- to four-family residential
9,503

 
84

 
12,990

 
113

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

 
2

 
1,333

 
3

Consumer—other
175

 
1

 
523

 
3

 
$
34,024

 
$
238

 
$
44,520

 
$
262

 
 
 
 
 
 
 
 
 
Six Months Ended
June 30, 2017
 
Six Months Ended
June 30, 2016
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Commercial real estate:
 
 
 
 
 
 
 
Owner-occupied
$
2,789

 
$
4

 
$
1,719

 
$
6

Investment properties
8,165

 
87

 
16,001

 
150

Multifamily real estate
445

 
9

 
388

 
9

One- to four-family construction
787

 
27

 
1,616

 
53

Land and land development:
 
 
 
 
 
 
 
Residential
1,813

 
36

 
1,966

 
43

Commercial
961

 

 
1,010

 

Commercial business
4,692

 
57

 
1,980

 
12

Agricultural business/farmland
5,310

 
62

 
4,428

 
13

One- to four-family residential
9,953

 
167

 
12,986

 
227

Consumer:
 
 
 
 
 
 
 
Consumer secured by one- to four-family
1,666

 
5

 
1,255

 
8

Consumer—other
222

 
4

 
547

 
7

 
$
36,803

 
$
458

 
$
43,896

 
$
528


Troubled Debt Restructures. Some of the Company’s loans are reported as TDRs.  Loans are reported as TDRs when the bank grants one or more concessions to a borrower experiencing financial difficulties that it would not otherwise consider.  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.  Our TDRs have generally not involved forgiveness of amounts due, but almost always include a modification of multiple factors; the most common combination includes interest rate, payment amount and maturity date. As a result of these concessions, restructured loans are impaired as the Company will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement.  Loans identified as TDRs are accounted for in accordance with the Company's impaired loan accounting policies.


19


The following table presents TDRs by accrual and nonaccrual status at June 30, 2017 and December 31, 2016 (in thousands):
 
June 30, 2017
 
December 31, 2016
 
Accrual
Status
 
Nonaccrual
Status
 
Total
TDRs
 
Accrual
Status
 
Nonaccrual
Status
 
Total
TDRs
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Owner-occupied
$
201

 
$
92

 
$
293

 
$
203

 
$
96

 
$
299

Investment properties
3,228

 

 
3,228

 
4,304

 

 
4,304

Multifamily real estate
345

 

 
345

 
349

 

 
349

One- to four-family construction

 

 

 
1,180

 

 
1,180

Land and land development:
 
 
 
 
 
 
 
 
 
 
 
Residential
603

 

 
603

 
1,106

 

 
1,106

Commercial business
603

 

 
603

 
653

 

 
653

Agricultural business, including secured by farmland
3,104

 
79

 
3,183

 
3,125

 
79

 
3,204

One- to four-family residential
5,228

 
820

 
6,048

 
7,678

 
843

 
8,521

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Consumer secured by one- to four-family
142

 
3

 
145

 
143

 
6

 
149

Consumer—other
77

 

 
77

 
166

 

 
166