Edgar Filing: BANNER CORP

10-Q

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 MARCH 31, 2016.


[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ to ______________

Commission File Number 0-26584

BANNER CORPORATION

(Exact name of registrant as specified in its charter)





Washington		91-1691604
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

	10 South First Avenue, Walla Walla, Washington 99362
	(Address of principal executive offices and zip code)

	Registrant's telephone number, including area code: (509) 527-3636

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

[x]

[ ]

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]

[ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [x]

Accelerated filer [ ]

Non-accelerated filer [ ]

Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

[ ]

[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 April 30, 2016

Common Stock, $.01 par value per share

32,927,921 shares

Nonvoting Common Stock, $.01 par value per share

1,427,663 shares

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 March 31, 2016 and December 31, 2015	4

Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015	5

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and 2015	6

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2016 and the Year Ended December 31, 2015	7

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015	8

Selected Notes to the Consolidated Financial Statements	10

Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview	46

Comparison of Financial Condition at March 31, 2016 and December 31, 2015	52

Comparison of Results of Operations for the Three Months Ended March 31, 2016 and 2015	54

Asset Quality	60

Liquidity and Capital Resources	62

Capital Requirements	62

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Market Risk and Asset/Liability Management	64

Sensitivity Analysis	64

Item 4 – Controls and Procedures	68

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings	69

Item 1A – Risk Factors	69

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	69

Item 3 – Defaults upon Senior Securities	69

Item 4 – Mine Safety Disclosures	69

Item 5 – Other Information	69

Item 6 – Exhibits	70

SIGNATURES	72

Special Note Regarding Forward-Looking Statements

Certain matters in this Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, liquidity, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance and projections of financial items. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: expected revenues, cost savings, synergies and other benefits from the merger of Banner Bank and Siuslaw Bank and of the merger of Banner Bank and AmericanWest Bank (AmericanWest) might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters, including but not limited to customers, systems and employee retention, might be greater than expected; the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and non-performing assets, and may result in our allowance for loan losses not being adequate to cover actual losses and require us to materially increase our reserves; changes in economic conditions in general and in Washington, Idaho, Oregon, Utah and California in particular; changes in the levels of general interest rates and the relative differences between short and long-term interest rates, loan and deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of safety and soundness and compliance examinations of us by the Board of Governors of the Federal Reserve System (the Federal Reserve Board) and of our bank subsidiaries by the Federal Deposit Insurance Corporation (the FDIC), the Washington State Department of Financial Institutions, Division of Banks (the Washington DFI) or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require restitution or institute an informal or formal enforcement action against us or any of our bank subsidiaries which could require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds, or maintain or increase deposits, or impose additional requirements and restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including changes related to Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation; difficulties in reducing risk associated with the loans and securities on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; the failure or security breach of computer systems on which we depend; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; future goodwill impairment due to changes in our business, changes in market conditions, or other factors; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies and changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common stock and non-voting common stock, and interest or principal payments on our junior subordinated debentures; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and other risks detailed from time to time in our filings with the U.S. Securities and Exchange Commission, including this report on Form 10-Q. Any forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. We do not undertake and specifically disclaim any obligation to update any forward-looking statements included in this report or the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. These risks could cause our actual results to differ materially from those expressed in any forward-looking statements by, or on behalf of, us. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.

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

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited) (In thousands, except shares)

March 31, 2016 and December 31, 2015



ASSETS	March 31 2016			December 31 2015
Cash and due from banks	$	153,706		$	117,657
Interest bearing deposits	106,864			144,260
Total cash and cash equivalents	260,570			261,917
Securities—trading, amortized cost $39,155 and $39,344, respectively	33,994			34,134
Securities—available-for-sale, amortized cost $1,186,995 and $1,139,740, respectively	1,199,279			1,138,573
Securities—held-to-maturity, fair value $255,823 and $226,627, respectively	246,320			220,666
Federal Home Loan Bank (FHLB) stock	13,347			16,057
Loans held for sale	47,523			44,712
Loans receivable	7,185,999			7,314,504
Allowance for loan losses	(78,197		)	(78,008		)
Net loans	7,107,802			7,236,496
Accrued interest receivable	30,674			29,627
Real estate owned (REO), held for sale, net	7,207			11,627
Property and equipment, net	168,807			167,604
Goodwill	244,811			247,738
Other intangibles, net	35,598			37,472
Bank-owned life insurance (BOLI)	156,928			156,865
Deferred tax assets, net	126,832			134,970
Other assets	65,902			57,840
Total assets	$	9,745,594		$	9,796,298
LIABILITIES
Deposits:
Non-interest-bearing	$	3,036,330		$	2,619,618
Interest-bearing transaction and savings accounts	3,705,658			4,081,580
Interest-bearing certificates	1,287,873			1,353,870
Total deposits	8,029,861			8,055,068
Advances from FHLB at fair value	75,400			133,381
Other borrowings	106,132			98,325
Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)	92,879			92,480
Accrued expenses and other liabilities	81,485			76,511
Deferred compensation	39,682			40,474
Total liabilities	8,425,439			8,496,239
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS’ EQUITY
Preferred stock - $0.01 par value per share, 500,000 shares authorized; no shares outstanding at March 31, 2016 and December 31, 2015	—			—
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized; 32,830,675 shares issued and outstanding at March 31, 2016; 32,817,789 shares issued and outstanding at December 31, 2015	1,197,306			1,195,755
Common stock (non-voting) and paid in capital- $0.01 par value per share, 5,000,000 shares authorized; 1,390,776 shares issued and outstanding at March 31, 2016; 1,424,466 shares issued and outstanding at December 31, 2015	64,744			65,419
Retained earnings	50,230			39,615
Carrying value of shares held in trust for stock related compensation plans	(7,310		)	(6,928		)
Liability for common stock issued to deferred, stock related, compensation plans	7,310			6,928
Accumulated other comprehensive income (loss)	7,875			(730		)
Total shareholders' equity	1,320,155			1,300,059
Total liabilities & shareholders' equity	$	9,745,594		$	9,796,298

See Selected Notes to the Consolidated Financial Statements

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited) (In thousands, except shares and per share amounts)

For the Three Months Ended March 31, 2016 and 2015



	Three Months Ended March 31,
	2016			2015
INTEREST INCOME:
Loans receivable	$	86,958		$	46,365
Mortgage-backed securities	5,390			1,027
Securities and cash equivalents	2,953			1,677
Total interest income	95,301			49,069
INTEREST EXPENSE:
Deposits	2,946			1,733
FHLB advances	279			17
Other borrowings	75			43
Junior subordinated debentures	958			740
Total interest expense	4,258			2,533
Net interest income before provision for loan losses	91,043			46,536
PROVISION FOR LOAN LOSSES	—			—
Net interest income	91,043			46,536
NON-INTEREST INCOME:
Deposit fees and other service charges	11,818			8,126
Mortgage banking operations	5,643			4,109
Bank-owned life insurance (BOLI)	1,185			438
Miscellaneous	1,263			483
	19,909			13,156
Gain (loss) on sale of securities	21			(510		)
Net change in valuation of financial instruments carried at fair value	29			1,050
Total non-interest income	19,959			13,696
NON-INTEREST EXPENSE:
Salary and employee benefits	46,564			24,287
Less capitalized loan origination costs	(4,250		)	(2,838		)
Occupancy and equipment	10,388			6,006
Information/computer data services	4,920			2,253
Payment and card processing expenses	4,785			3,016
Professional services	2,614			814
Advertising and marketing	1,734			1,610
Deposit insurance	1,338			567
State/municipal business and use taxes	838			453
REO operations	397			24
Amortization of core deposit intangibles	1,808			616
Miscellaneous	6,085			3,458
	77,221			40,266
Acquisition-related costs	6,813			1,648
Total non-interest expense	84,034			41,914
Income before provision for income taxes	26,968			18,318
PROVISION FOR INCOME TAXES	9,194			6,184
NET INCOME	$	17,774		$	12,134
Earnings per common share:
Basic	$	0.52		$	0.61
Diluted	$	0.52		$	0.61
Cumulative dividends declared per common share	$	0.21		$	0.18
Weighted average number of common shares outstanding:
Basic	34,023,800			19,760,645
Diluted	34,103,727			19,845,019

See Selected Notes to the Consolidated Financial Statements

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited) (In thousands)

For the Three Months Ended March 31, 2016 and 2015



	Three Months Ended March 31,
	2016			2015
NET INCOME	$	17,774		$	12,134
OTHER COMPREHENSIVE INCOME, NET OF INCOME TAXES:
Unrealized holding gain on available-for-sale securities arising during the period	13,473			2,283
Income tax expense related to available-for-sale securities unrealized holding gain	(4,854		)	(822		)
Reclassification for net gains on available-for-sale securities realized in earnings	(21		)	(104		)
Income tax benefit related to available-for-sale securities realized gains	7			38
Other comprehensive income	8,605			1,395
COMPREHENSIVE INCOME	$	26,379		$	13,529

See Selected Notes to the Consolidated Financial Statements

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited) (In thousands, except shares)

For the Three Months Ended March 31, 2016 and the Year Ended December 31, 2015



	Common Stock and Paid in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Shareholders’ Equity
	Shares	Amount		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Shareholders’ Equity
Balance, January 1, 2015	19,571,548	$	568,882	$	14,264		$	(258	)	$	582,888
Net income				45,222						45,222
Other comprehensive income, net of income tax							(472		)	(472		)
Accrual of dividends on common stock ($0.72/share cumulative)				(19,871		)				(19,871		)
Proceeds from issuance of common stock for shareholder reinvestment program	810	34								34
Issuance of restricted stock and recognition of share-based compensation	120,043	3,088								3,088
Issuance of shares for acquisitions	14,549,854	688,773								688,773
Excess tax benefit on stock-based compensation		397								397
Balance, December 31, 2015	34,242,255	$	1,261,174	$	39,615		$	(730	)	$	1,300,059



Balance, January 1, 2016	34,242,255		$	1,261,174	$	39,615		$	(730	)	$	1,300,059
Net income					17,774						17,774
Other comprehensive income, net of income tax								8,605			8,605
Accrual of dividends on common stock ($0.21/share cumulative)					(7,159		)				(7,159		)
Issuance of (forfeiture of) restricted stock and recognition of share-based compensation	(20,804	)	876								876
Balance, March 31, 2016	34,221,451		$	1,262,050	$	50,230		$	7,875		$	1,320,155

See Selected Notes to the Consolidated Financial Statements

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)

For the Three Months Ended March 31, 2016 and 2015



	Three Months Ended March 31,
	2016			2015
OPERATING ACTIVITIES:
Net income	$	17,774		$	12,134
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation	2,859			2,002
Deferred income and expense, net of amortization	1,158			885
Amortization of core deposit intangibles	1,808			616
(Gain) loss on sale of securities	(21		)	510
Net change in valuation of financial instruments carried at fair value	(29		)	(1,050		)
Purchases of securities—trading	(1,725		)	—
Proceeds from sales of securities—trading	—			2,290
Principal repayments and maturities of securities—trading	1,946			679
Decrease in deferred taxes	8,745			1,344
Increase (decrease) in current taxes payable	2,540			(3,555		)
Equity-based compensation	876			539
Increase in cash surrender value of BOLI	(1,169		)	(432		)
Gain on sale of loans, net of capitalized servicing rights	(3,873		)	(2,692		)
Loss (gain) on disposal of real estate held for sale and property and equipment	427			(122		)
Provision for losses on real estate held for sale	205			—
Origination of loans held for sale	(202,471		)	(137,290		)
Proceeds from sales of loans held for sale	205,023			133,349
Net change in:
Other assets	(15,571		)	(4,703		)
Other liabilities	2,894			776
Net cash provided from operating activities	21,396			5,280
INVESTING ACTIVITIES:
Purchases of securities—available-for-sale	(123,197		)	(22,622		)
Principal repayments and maturities of securities—available-for-sale	41,376			29,255
Proceeds from sales of securities—available-for-sale	30,566			22,310
Purchases of securities—held-to-maturity	(26,991		)	(7,664		)
Principal repayments and maturities of securities—held-to-maturity	843			4,972
Loan originations, net of principal repayments	57,558			(1,805		)
Purchases of loans and participating interest in loans	(70,551		)	(41,684		)
Proceeds from sales of other loans	144,499			15,000
Net cash received from acquisitions	—			78,599
Purchases of property and equipment	(4,331		)	(1,418		)
Proceeds from sale of real estate held for sale, net	4,666			1,738
Proceeds from FHLB stock repurchase program	19,624			2,029
Purchase of FHLB stock	(16,914		)	—
Other	1,276			37
Net cash provided from investing activities	58,424			78,747
FINANCING ACTIVITIES:
Increase (decrease) in deposits, net	(25,206		)	104,061
Proceeds from FHLB advances	422,200			222,500
Repayment of FHLB advances	(479,802		)	(254,502		)
Increase in other borrowings, net	7,807			19,835
Cash dividends paid	(6,166		)	(3,512		)
Cash proceeds from issuance of common stock for shareholder reinvestment plan	—			34
Net cash provided from (used by) financing activities	(81,167		)	88,416
NET CHANGE IN CASH AND CASH EQUIVALENTS	(1,347		)	172,443
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	261,917			126,072
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	260,570		$	298,515

(Continued on next page)

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited) (In thousands)

For the Three Months Ended March 31, 2016 and 2015



	Three Months Ended March 31,
	2016		2015
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid in cash	$	4,349	$	2,576
Taxes paid, net of refunds received in cash	2,581		8,935
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	135		690
ACQUISITIONS (Note 3):
Assets acquired	—		370,306
Liabilities assumed	—		327,548

See Selected Notes to the Consolidated Financial Statements

BANNER CORPORATION AND SUBSIDIARIES

SELECTED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

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

These unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (SEC). In preparing these financial statements, the Company has evaluated events and transactions subsequent to March 31, 2016 for potential recognition or disclosure. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC and the accounting standards for interim financial statements. Certain reclassifications have been made to the 2015 Consolidated Financial Statements and/or schedules to conform to the 2016 presentation. These reclassifications may have affected certain ratios for the prior periods. The effect of these reclassifications is considered immaterial. All significant intercompany transactions and balances have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are significant to an understanding of Banner’s financial statements. These policies relate to (i) the methodology for the recognition of interest income, (ii) determination of the provision and allowance for loan losses, (iii) the valuation of financial assets and liabilities recorded at fair value, including other-than-temporary impairment (OTTI) losses, (iv) the valuation of intangibles, such as goodwill, core deposit intangibles (CDI) and mortgage servicing rights, (v) the valuation of real estate held for sale, (vi) the valuation of assets and liabilities acquired in business combinations and subsequent recognition of related income and expense, and (vii) the valuation or recognition of deferred tax assets and liabilities. These policies and judgments, estimates and assumptions are described in greater detail in subsequent notes to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations (Critical Accounting Policies) in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC. There have been no significant changes in our application of accounting policies during the first three months of 2016.

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

Note 2: ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which creates 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.

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.

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 adoption of 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 the three months ended March 31, 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.

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 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 ASU excludes from net income gains or losses that the entity may not realize because those financial liabilities are not usually transferred or settled at their fair values before maturity. The amendments in this ASU require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or in the accompanying notes to the financial statements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the provisions of ASU No. 2016-01 to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.

Leases (Topic 842)

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

Derivatives and Hedging (Topic 815)

In March 2016, FASB issued ASU No. 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The amendments in this ASU clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 (Derivatives and Hedging) does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. An entity has an option to apply the amendments in this ASU on either a prospective basis or a modified retrospective basis. Early adoption is permitted, including adoption in an interim period. At March 31, 2016, Banner had four swap relationships using hedge accounting with a total market value of approximately $1.0 million. This ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In March 2016, FASB issued ASU No. 2016-06, Contingent Put and Call Options in Debt Instruments. The amendments in this ASU clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. To determine how to account for debt instruments with embedded features, including contingent put and call options, an entity is required to assess whether the embedded derivatives must be bifurcated from the host contract and accounted for separately. Part of this assessment consists of evaluating whether the embedded derivative features are clearly and closely related to the debt host. Under existing guidance, for contingently exercisable options to be considered clearly and closely related to a debt host, they must be indexed only to interest rates or credit risk. ASU 2016-06 addresses inconsistent interpretations of whether an event that triggers an entity’s ability to exercise the embedded contingent option must be indexed to interest rates or credit risk for that option to qualify as clearly and closely related. Diversity in practice has developed because the existing four-step decision sequence in ASC 815 focuses only on whether the payoff was indexed to something other than an interest rate or credit risk. As a result, entities have been uncertain whether they should (1) determine whether the embedded features are clearly and closely related to the debt host solely on the basis of the four-step decision sequence or (2) first apply the four-step decision sequence and then also evaluate whether the event triggering the exercisability of the contingent put or call option is indexed only to an interest rate or credit risk. This ASU clarifies that in assessing whether an embedded contingent put or call option is clearly and closely related to the debt host, an entity is required to perform only the four-step decision sequence in ASC 815 as amended by this ASU. The entity does not have to separately assess whether the event that triggers its ability to exercise the contingent option is itself indexed only to interest rates or credit risk. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. This ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.

Compensation-Stock Compensation (Topic 718)

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

Note 3: BUSINESS COMBINATIONS

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

Acquisition of Starbuck Bancshares, Inc.

Effective as of the close of business on October 1, 2015, the Company acquired Starbuck Bancshares, Inc. and its subsidiary, AmericanWest Bank (AmericanWest), a Washington state chartered commercial bank headquartered in Spokane, Washington with 98 branches serving markets in Washington, Oregon, Idaho, California and Utah. On that date, Starbuck merged with and into Banner and AmericanWest merged with and into Banner Bank. The merged banks are operating as Banner Bank. Pursuant to the previously announced terms of the merger, the equity holders of Starbuck received an aggregate of $130.0 million in cash and 13.23 million shares of Banner voting common stock and 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 $223.1 million. The acquired CDI has been determined to have a useful life of approximately ten years and will be amortized on an accelerated basis. Goodwill is not amortized but will be evaluated for impairment on an annual basis or more often if circumstances dictate to determine if the carrying value remains appropriate. Goodwill will not be deductible for income tax purposes as the acquisition is accounted for as a tax-free exchange for tax purposes.

The following table presents a summary of the consideration paid and the estimated fair values as of the acquisition date for each major class of assets acquired and liabilities assumed (in thousands):



	Starbuck
	October 1, 2015
Consideration to Starbuck equityholders:
Cash paid			$	130,000
Fair value of common shares issued			630,674
Total consideration			760,674
Fair value of assets acquired:
Cash and cash equivalents	$	95,821
Securities	1,037,238
Loans receivable (contractual amount of $3.04 billion)	2,999,130
REO, held for sale	6,105
Property and equipment	66,728
CDI	33,500
Deferred tax asset	108,454
Other assets	112,782
Total assets acquired	4,459,758
Fair value of liabilities assumed:
Deposits	3,638,596
FHLB advances	221,442
Junior subordinated debentures	5,806
Other liabilities	56,359
Total liabilities assumed	3,922,203
Net assets acquired			537,555
Goodwill			$	223,119

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

Amounts recorded are preliminary estimates of fair value. Additional adjustments to the acquisition accounting may be required and would most likely involve loans, or property and equipment, or the deferred tax asset. As of October 1, 2015, the unpaid principal balance on purchased non-credit-impaired loans was $2.95 billion. The fair value of the purchased non-credit-impaired loans was $2.94 billion, resulting in a discount of $17.7 million recorded on these loans. The principal cash flows not expected to be collected on these loans was estimated to be $44.1 million. This discount is being accreted into income over the life of the loans on an effective yield basis.

The following table presents the acquired purchased credit-impaired loans as of the acquisition date (in thousands):



	Starbuck
	October 1, 2015
Acquired PCI loans:
Contractually required principal and interest payments	$	98,746
Nonaccretable difference	(26,162		)
Cash flows expected to be collected	72,584
Accretable yield	(11,071		)
Fair value of PCI loans	$	61,513

The following table presents certain unaudited pro forma information for illustrative purposes only, for the three months ended March 31, 2016 and 2015 as if Starbuck had been acquired on January 1, 2014. This unaudited estimated pro forma financial information combines the historical results of Starbuck with the Company’s consolidated historical results. Pro forma adjustments include accretion of loan discount, accretion of investment premiums, amortization of deposit premium, amortization of CDI, reversal of acquisition expense, and reversal of historical recorded amounts for similar items, with all adjustments tax effected. The pro forma information is not indicative of what would have occurred had the acquisition actually occurred on January 1, 2014. In particular, no adjustments have been made to eliminate the impact of other-than-temporary impairment losses and losses recognized on the sale of securities that may not have been necessary had the investment securities been recorded at fair value as of January 1, 2014. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loan assets at fair value. Additionally, Banner expects to achieve further operating cost savings and other business synergies, including revenue growth, as a result of the acquisition which are not reflected in the pro forma amounts that follow. As a result, actual amounts would have differed from the unaudited pro forma information presented (in thousands except per share amounts):



	Pro Forma
	Three months ended
	March 31, 2015
Total revenues (net interest income plus non-interest income)	$	113,926
Net income	$	19,924
Earnings per share - basic	$	0.61
Earnings per share - diluted	$	0.61

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

Acquisition of Siuslaw Financial Group, Inc.

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

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



	Siuslaw
	March 6, 2015
Consideration to Siuslaw shareholders:
Cash paid			$	5,806
Fair value of common shares issued			58,100
Total consideration			63,906
Fair value of assets acquired:
Cash and cash equivalents	$	84,405
Securities—available-for-sale	12,865
Loans receivable (contractual amount of $252.2 million)	247,098
REO, held for sale	2,525
Property and equipment	8,127
Core deposit intangible	3,895
Other assets	10,848
Total assets acquired	369,763
Fair value of liabilities assumed:
Deposits	316,406
Junior subordinated debentures	5,959
Other liabilities	5,183
Total liabilities assumed	327,548
Net assets acquired			42,215
Goodwill			$	21,691

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

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

The following table presents the acquired purchased credit-impaired loans as of the acquisition date (in thousands):



	Siuslaw
	March 6, 2015
Acquired purchased credit-impaired loans:
Contractually required principal and interest payments	$	11,134
Nonaccretable difference	(3,238		)
Cash flows expected to be collected	7,896
Accretable yield	(2,239		)
Fair value of purchased credit-impaired loans	$	5,657

The following table presents certain unaudited pro forma information for illustrative purposes only, for the three months ended March 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):



	Pro Forma
	Three Months Ended March 31,
	2015
Total revenues (net interest income plus non-interest income)	$	66,453
Net income	$	10,582
Earnings per share - basic	$	0.51
Earnings per share - diluted	$	0.51

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

Acquisition-Related Costs

The following tables present the key components of acquisition-related costs in connection with the acquisition of Siuslaw and the acquisition of Starbuck, including AmericanWest, for the three months ended March 31, 2016 and 2015 (in thousands):



	Three Months Ended March 31,
	2016		2015
Acquisition-related costs recognized in non-interest expenses:
Personnel severance/retention fees	$	1,313	$	—
Branch consolidation and other occupancy expenses	1,949		24
Client communications	251		66
Information/computer data services	1,417		40
Professional services	852		1,280
Miscellaneous	1,031		238
	$	6,813	$	1,648

Siuslaw	$	—	$	670
Starbuck	6,813		978
	$	6,813	$	1,648

Note 4: SECURITIES

The amortized cost, gross unrealized gains and losses and estimated fair value of securities at March 31, 2016 and December 31, 2015 are summarized as follows (in thousands):



	March 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Trading:
U.S. Government and agency obligations	$	1,230						$	1,381
Municipal bonds	332							339
Corporate bonds	26,828							20,543
Mortgage-backed or related securities	10,751							11,650
Equity securities	14							81
	$	39,155						$	33,994
Available-for-Sale:
U.S. Government and agency obligations	$	52,009	$	270	$	(51	)	$	52,228
Municipal bonds	148,358		2,884		(39		)	151,203
Corporate bonds	15,747		50		(804		)	14,993
Mortgage-backed or related securities	939,515		11,683		(1,235		)	949,963
Asset-backed securities	31,278		—		(484		)	30,794
Equity securities	88		10		—			98
	$	1,186,995	$	14,897	$	(2,613	)	$	1,199,279
Held-to-Maturity:
U.S. Government and agency obligations	$	1,096	$	25	$	—		$	1,121
Municipal bonds:	172,968		8,169		(41		)	181,096
Corporate bonds	4,236		—		—			4,236
Mortgage-backed or related securities	68,020		1,396		(46		)	69,370
	$	246,320	$	9,590	$	(87	)	$	255,823



	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Trading:
U.S. Government and agency obligations	$	1,230						$	1,368
Municipal bonds	332							341
Corporate bonds	25,063							18,699
Mortgage-backed or related securities	12,705							13,663
Equity securities	14							63
	$	39,344						$	34,134
Available-for-Sale:
U.S. Government and agency obligations	$	30,211	$	213	$	(193	)	$	30,231
Municipal bonds	142,898		853		(432		)	143,319
Corporate bonds	15,937		56		(12		)	15,981
Mortgage-backed or related securities	919,318		4,056		(5,115		)	918,259
Asset-backed securities	31,288		—		(603		)	30,685
Equity securities	88		10		—			98
	$	1,139,740	$	5,188	$	(6,355	)	$	1,138,573
Held-to-Maturity:
U.S. Government and agency obligations	$	1,106	$	5	$	—		$	1,111
Municipal bonds:	162,778		6,219		(191		)	168,806
Corporate bonds	4,273		—		—			4,273
Mortgage-backed or related securities	52,509		253		(325		)	52,437
	$	220,666	$	6,477	$	(516	)	$	226,627

At March 31, 2016 and December 31, 2015, the gross unrealized losses and the fair value for securities available-for-sale and held-to-maturity aggregated by the length of time that individual securities have been in a continuous unrealized loss position was as follows (in thousands):



	March 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	$	10,792	$	(42	)	$	10,439	$	(9	)	$	21,231	$	(51	)
Municipal bonds	6,892		(35		)	906		(4		)	7,798		(39		)
Corporate bonds	9,943		(804		)	—		—			9,943		(804		)
Mortgage-backed or related securities	119,249		(925		)	46,833		(310		)	166,082		(1,235		)
Asset-backed securities	30,794		(484		)	—		—			30,794		(484		)
	$	177,670	$	(2,290	)	$	58,178	$	(323	)	$	235,848	$	(2,613	)
Held-to-Maturity
Municipal bonds	$	3,179	$	(30	)	$	1,229	$	(11	)	$	4,408	$	(41	)
Corporate bonds	—		—			—		—			—		—
Mortgage-backed or related securities	2,906		(46		)	229		—			3,135		(46		)
	$	6,085	$	(76	)	$	1,458	$	(11	)	$	7,543	$	(87	)

	December 31, 2015
	Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-Sale:
U.S. Government and agency obligations	$	8,707	$	(97	)	$	10,489	$	(96	)	$	19,196	$	(193	)
Municipal bonds	69,848		(426		)	905		(6		)	70,753		(432		)
Corporate bonds	5,153		(12		)	—		—			5,153		(12		)
Mortgage-backed or related securities	533,143		(4,380		)	68,562		(735		)	601,705		(5,115		)
Asset-backed securities	20,893		(355		)	9,792		(248		)	30,685		(603		)
	$	637,744	$	(5,270	)	$	89,748	$	(1,085	)	$	727,492	$	(6,355	)
Held-to-Maturity
Municipal bonds	$	28,545	$	(188	)	$	254	$	(3	)	$	28,799	$	(191	)
Corporate bonds	—		—			—		—			—		—
Mortgage-backed or related securities	34,493		(323		)	255		(2		)	34,748		(325		)
	$	63,038	$	(511	)	$	509	$	(5	)	$	63,547	$	(516	)

At March 31, 2016, there were 85 securities—available-for-sale with unrealized losses, compared to 242 at December 31, 2015. At March 31, 2016, there were seven securities—held-to-maturity with unrealized losses, compared to 32 at December 31, 2015. Management does not believe that any individual unrealized loss as of March 31, 2016, or December 31, 2015 represented other-than-temporary impairment (OTTI). The decline in fair market value of these securities was generally due to changes in interest rates and changes in market-desired spreads subsequent to their purchase.

There were no sales of securities—trading for the three months ended March 31, 2016 compared to $2.3 million with a resulting net loss of $642,000 for the three months ended March 31, 2015. The Company did not recognize any OTTI charges or recoveries on securities—trading during the three months ended March 31, 2016, or the three months ended March 31, 2015. There were no securities—trading in a nonaccrual status at March 31, 2016, or December 31, 2015. Net unrealized holding gains of $49,000 were recognized during the three months ended March 31, 2016.

Sales of securities—available-for-sale totaled $30.6 million with a resulting net gain of $21,000 for the three months ended March 31, 2016. Sales of securities—available-for-sale totaled $22.3 million with a resulting net gain of $103,000 for the three months ended March 31, 2015. There were no securities—available-for-sale in a nonaccrual status at March 31, 2016 or December 31, 2015.

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

The amortized cost and estimated fair value of securities at March 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.



	March 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	$	—	$	—	$	12,792	$	12,741	$	4,984	$	5,014
Maturing after one year through five years	7,004		7,476		241,156		241,714		14,600		14,846
Maturing after five years through ten years	3,401		3,786		242,007		243,516		98,569		101,401
Maturing after ten years through twenty years	1,908		2,109		327,867		333,014		106,288		112,487
Maturing after twenty years	26,828		20,542		363,085		368,196		21,879		22,075
	39,141		33,913		1,186,907		1,199,181		246,320		255,823
Equity securities	14		81		88		98		—		—
	$	39,155	$	33,994	$	1,186,995	$	1,199,279	$	246,320	$	255,823

The following table presents, as of March 31, 2016, investment securities which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law (in thousands):



	Carrying Value		Amortized Cost		Fair Value
Purpose or beneficiary:
State and local governments public deposits	$	183,462	$	182,730	$	191,364
Interest rate swap counterparties	29,303		28,980		29,736
Repurchase agreements	122,566		121,595		123,018
Other	1,865		1,786		1,865
Total pledged securities	$	337,196	$	335,091	$	345,983

Note 5: LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES

Loans receivable at March 31, 2016 and December 31, 2015 are summarized as follows (dollars in thousands):



	March 31, 2016					December 31, 2015
	Amount			Percent of Total		Amount			Percent of Total
Commercial real estate:
Owner-occupied	$	1,328,034		18.5	%	$	1,327,807		18.2	%
Investment properties	1,805,243			25.1		1,765,353			24.1
Multifamily real estate	307,019			4.3		472,976			6.5
Commercial construction	87,711			1.2		72,103			1.0
Multifamily construction	79,737			1.1		63,846			0.9
One- to four-family construction	297,348			4.1		278,469			3.8
Land and land development:
Residential	142,841			2.0		126,773			1.7
Commercial	24,493			0.3		33,179			0.5
Commercial business	1,224,915			17.1		1,207,944			16.5
Agricultural business, including secured by farmland	340,350			4.7		376,531			5.1
One- to four-family residential	910,719			12.7		952,633			13.0
Consumer:
Consumer secured by one- to four-family	481,590			6.7		478,420			6.5
Consumer—other	155,999			2.2		158,470			2.2
Total loans outstanding	7,185,999			100.0	%	7,314,504			100.0	%
Less allowance for loan losses	(78,197		)			(78,008		)
Net loans	$	7,107,802				$	7,236,496

Loan amounts are net of unearned loan fees in excess of unamortized costs of $2.8 million as of March 31, 2016 and $5.5 million as of December 31, 2015. Net loans include net discounts on acquired loans of $42.3 million and $43.7 million as of March 31, 2016 and December 31, 2015, respectively.

Purchased credit-impaired loans and purchased non-credit-impaired loans. Purchased loans, including loans acquired in business combinations, are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan and lease losses is not recorded at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased credit-impaired or purchased non-credit-impaired. PCI loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments. The outstanding contractual unpaid principal balance of purchased credit-impaired loans, excluding acquisition accounting adjustments, was $76.6 million at March 31, 2016 and $83.4 million at December 31, 2015. The carrying balance of purchased credit-impaired loans was $53.3 million at March 31, 2016 and $58.6 million at December 31, 2015.

The following table presents the changes in the accretable yield for purchased credit-impaired loans for the three months ended March 31, 2016 and 2015 (in thousands):



	Three Months Ended March 31,
	2016			2015
Balance, beginning of period	$	10,375		$	—
Additions	—			2,239
Accretion to interest income	(1,931		)	(35		)
Disposals	(18		)	—
Reclassifications from non-accretable difference	2,291			—
Balance, end of period	$	10,717		$	2,204

As of March 31, 2016 and December 31, 2015, the non-accretable difference between the contractually required payments and cash flows expected to be collected were $25.3 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, troubled debt restructures (TDRs) that are performing under their restructured terms, and loans that are 90 days or more past due, but are still on accrual. Purchased credit-impaired loans are considered performing within the scope of the purchased credit-impaired accounting guidance and are not included in the impaired loan tables.

The following tables provide information on impaired loans, excluding purchased credit impaired loans, with and without allowance reserves at March 31, 2016 and December 31, 2015. Recorded investment includes the unpaid principal balance or the carrying amount of loans less charge-offs and net deferred loan fees (in thousands):



	March 31, 2016
	Unpaid Principal Balance		Recorded Investment				Related Allowance
			Without Allowance ⁽¹⁾		With Allowance ⁽²⁾
Commercial real estate:
Owner-occupied	$	1,985	$	—	$	1,737	$	126
Investment properties	8,774		2,458		5,923		455
Multifamily real estate	357		—		355		68
Commercial construction	—		—		—		—
One- to four-family construction	1,644		—		1,644		40
Land and land development:
Residential	3,139		—		1,984		481
Commercial	1,628		1,027		—		—
Commercial business	2,314		928		1,191		152
Agricultural business/farmland	1,294		563		663		48
One- to four-family residential	16,170		1,344		13,775		564
Consumer:
Consumer secured by one- to four-family	1,096		—		1,036		8
Consumer—other	526		9		427		7
	$	38,927	$	6,329	$	28,735	$	1,949

	December 31, 2015
	Unpaid Principal Balance		Recorded Investment				Related Allowance
			Without Allowance ⁽¹⁾		With Allowance ⁽²⁾
Commercial real estate:
Owner-occupied	$	1,465	$	—	$	1,416	$	70
Investment properties	8,740		2,503		5,846		602
Multifamily real estate	359		—		357		71
Commercial construction	1,141		1,069		—		—
One- to four-family construction	1,741		—		1,741		161
Land and land development:
Residential	3,540		750		1,634		444
Commercial	1,628		1,027		—		—
Commercial business	2,266		538		1,184		150
Agricultural business/farmland	1,309		544		697		43
One- to four-family residential	17,897		2,206		14,418		736
Consumer:
Consumer secured by one- to four-family	776		—		716		23
Consumer—other	433		—		351		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 was needed.


⁽²⁾	Includes general reserves for loans evaluated in pools of homogeneous loans and loans with a specific allowance reserve. 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.

The following tables summarize our average recorded investment and interest income recognized on impaired loans by loan class for the three months ended March 31, 2016 and 2015 (in thousands):



	Three Months Ended March 31, 2016				Three Months Ended March 31, 2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial real estate:
Owner-occupied	$	2,116	$	4	$	2,698	$	3
Investment properties	8,415		75		6,490		77
Multifamily real estate	356		4		975		11
Commercial construction	—		—		—		—
One- to four-family construction	1,610		27		3,097		31
Land and land development:
Residential	1,988		10		2,547		16
Commercial	1,027		—		1,624		—
Commercial business	2,495		8		1,172		9
Agricultural business/farmland	1,215		5		2,317		5
One- to four-family residential	15,181		126		24,025		204
Consumer:
Consumer secured by one- to four-family	1,042		3		1,209		3
Consumer—other	455		4		773		4
	$	35,900	$	266	$	46,927	$	363

Troubled Debt Restructures (TDRs). 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.

The following tables present TDRs at March 31, 2016 and December 31, 2015 (in thousands):



	March 31, 2016
	Accrual Status		Nonaccrual Status		Total TDRs
Commercial real estate:
Owner-occupied	$	181	$	102	$	283
Investment properties	5,792		6		5,798
Multifamily real estate	355		—		355
Commercial construction	—		—		—
One- to four-family construction	1,644		—		1,644
Land and land development:
Residential	762		472		1,234
Commercial	—		—		—
Commercial business	561		—		561
Agricultural business, including secured by farmland	563		243		806
One- to four-family residential	9,277		1,401		10,678
Consumer:
Consumer secured by one- to four-family	146		12		158
Consumer—other	169		—		169
	$	19,450	$	2,236	$	21,686



	December 31, 2015
	Accrual Status		Nonaccrual Status		Total TDRs
Commercial real estate:
Owner-occupied	$	181	$	104	$	285
Investment properties	5,834		13		5,847
Multifamily real estate	357		—		357
One- to four-family construction	1,741		—		1,741
Land and land development:
Residential	1,151		483		1,634
Commercial business	624		—		624
Agricultural business, including secured by farmland	545		277		822
One- to four-family residential	11,025		1,428		12,453
Consumer: