Edgar Filing: BANNER CORP

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, 2018


[ ]	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]

[ ]

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, 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

[ ]

[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, 2018

Common Stock, $.01 par value per share

32,327,979 shares

Non-voting Common Stock, $.01 par value per share

74,933 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 June 30, 2018 and December 31, 2017	4

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017	5

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2018 and 2017	6

Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2018 and the Year Ended December 31, 2017	7

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017	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	44

Comparison of Financial Condition at June 30, 2018 and December 31, 2017	51

Comparison of Results of Operations for the Three and Six Months Ended June 30, 2018 and 2017	55

Asset Quality	62

Liquidity and Capital Resources	64

Capital Requirements	65

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Market Risk and Asset/Liability Management	66

Sensitivity Analysis	66

Item 4 – Controls and Procedures	71

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings	72

Item 1A – Risk Factors	72

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	72

Item 3 – Defaults upon Senior Securities	72

Item 4 – Mine Safety Disclosures	72

Item 5 – Other Information	72

Item 6 – Exhibits	73

SIGNATURES	75

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 proposed merger of Banner and Skagit Bancorp, Inc. (Skagit) 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 customer and employee retention, might be greater than expected; the requisite regulatory approvals for the proposed merger of Banner and Skagit may be delayed or may not be obtained (or may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the proposed merger); the requisite approval of Skagit shareholders may be delayed or may not be obtained, the other closing conditions to the merger may be delayed or may not be obtained, or the merger agreement may be terminated; business disruption may occur following or in connection with the proposed merger of Banner and Skagit; Banner’s or Skagit’s businesses may experience disruptions due to transaction-related uncertainty or other factors making it more difficult to maintain relationships with employees, customers, other business partners or governmental entities; the possibility that the proposed merger is more expensive to complete than anticipated, including as a result of unexpected factors or events; diversion of managements’ attention from ongoing business operations and opportunities as a result of the proposed merger or otherwise; the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses and provisions 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 the allowance for loan losses not being adequate to cover actual losses and require a material increase in reserves; results of examinations by regulatory authorities, including the possibility that any such regulatory authority may, among other things, require the writing down of assets or increases in the allowance for loan losses; the ability to manage loan delinquency rates; competitive pressures among financial services companies; changes in consumer spending or borrowing and spending habits; interest rate movements generally and the relative differences between short and long-term interest rates, loan and deposit interest rates, net interest margin and funding sources; the impact of repricing and competitors’ pricing initiatives on loan and deposit products; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values; the ability to adapt successfully to technological changes to meet customers’ needs and developments in the marketplace; the ability to access cost-effective funding; increases in premiums for deposit insurance; the ability to control operating costs and expenses; the use of estimates in determining fair value of certain assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect employees, and potential associated charges; disruptions, security breaches or other adverse events, failures or interruptions in, or attacks on, information technology systems or on the third-party vendors who perform critical processing functions; changes in financial markets; changes in economic conditions in general and in Washington, Idaho, Oregon and California in particular; secondary market conditions for loans and the ability to sell loans in the secondary market; the costs, effects and outcomes of litigation; legislation or regulatory changes or reforms, 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 of 2010 and the implementing regulations; results of safety and soundness and compliance examinations by the Board of Governors of the Federal Reserve System, 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 which could require an increase in reserves for loan losses, write-downs of assets or changes in regulatory capital position, or affect the ability to borrow funds, or maintain or increase deposits, or impose additional requirements and restrictions, any of which could adversely affect liquidity and earnings; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; the inability of key third-party providers to perform their obligations; changes in accounting principles, policies or guidelines, 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 operations, pricing, products and services; future acquisitions by Banner of other depository institutions or lines of business; and future goodwill impairment due to changes in Banner’s business, changes in market conditions, or other factors; 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.

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited) (In thousands, except shares)

June 30, 2018 and December 31, 2017



ASSETS	June 30 2018			December 31 2017
Cash and due from banks	$	195,652		$	199,624
Interest bearing deposits	53,773			61,576
Total cash and cash equivalents	249,425			261,200
Securities—trading, amortized cost $27,303 and $27,246, respectively	25,640			22,318
Securities—available-for-sale, amortized cost $1,429,925 and $926,112, respectively	1,400,312			919,485
Securities—held-to-maturity, fair value $260,318 and $262,188, respectively	263,176			260,271
Federal Home Loan Bank (FHLB) stock	19,916			10,334
Loans held for sale (includes $75.8 million and $32.4 million, at fair value, respectively)	78,833			40,725
Loans receivable	7,684,732			7,598,884
Allowance for loan losses	(93,875		)	(89,028		)
Net loans receivable	7,590,857			7,509,856
Accrued interest receivable	34,004			31,259
Real estate owned (REO), held for sale, net	473			360
Property and equipment, net	153,224			154,815
Goodwill	242,659			242,659
Other intangibles, net	19,858			22,655
Bank-owned life insurance (BOLI)	164,225			162,668
Deferred tax assets, net	77,937			71,427
Other assets	58,655			53,177
Total assets	$	10,379,194		$	9,763,209
LIABILITIES
Deposits:
Non-interest-bearing	$	3,346,777		$	3,265,544
Interest-bearing transaction and savings accounts	4,032,283			3,950,950
Interest-bearing certificates	1,148,607			966,937
Total deposits	8,527,667			8,183,431
Advances from FHLB	239,190			202
Other borrowings	112,458			95,860
Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)	112,774			98,707
Accrued expenses and other liabilities	93,281			71,344
Deferred compensation	40,814			41,039
Total liabilities	9,126,184			8,490,583
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, 2018 and December 31, 2017	—			—
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized; 32,330,763 shares issued and outstanding at June 30, 2018; 32,626,456 shares issued and outstanding at December 31, 2017	1,172,402			1,185,919
Common stock (non-voting) and paid in capital - $0.01 par value per share, 5,000,000 shares authorized; 74,933 shares issued and outstanding at June 30, 2018; 100,029 shares issued and outstanding at December 31, 2017	1,254			1,208
Retained earnings	84,485			90,535
Carrying value of shares held in trust for stock related compensation plans	(7,083		)	(7,351		)
Liability for common stock issued to stock related compensation plans	7,083			7,351
Accumulated other comprehensive loss	(5,131		)	(5,036		)
Total shareholders' equity	1,253,010			1,272,626
Total liabilities & shareholders' equity	$	10,379,194		$	9,763,209

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 and Six Months Ended June 30, 2018 and 2017



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
INTEREST INCOME:
Loans receivable	$	99,853		$	94,795		$	193,875		$	186,083
Mortgage-backed securities	8,899			6,239			16,230			10,886
Securities and cash equivalents	3,671			3,402			7,138			6,563
Total interest income	112,423			104,436			217,243			203,532
INTEREST EXPENSE:
Deposits	4,264			3,182			7,622			5,973
FHLB advances	1,499			301			2,177			574
Other borrowings	49			83			119			157
Junior subordinated debentures	1,548			1,164			2,889			2,268
Total interest expense	7,360			4,730			12,807			8,972
Net interest income	105,063			99,706			204,436			194,560
PROVISION FOR LOAN LOSSES	2,000			2,000			4,000			4,000
Net interest income after provision for loan losses	103,063			97,706			200,436			190,560
NON-INTEREST INCOME:
Deposit fees and other service charges	11,985			11,165			23,281			21,553
Mortgage banking operations	4,643			6,754			9,507			11,357
Bank-owned life insurance (BOLI)	933			1,461			1,785			2,556
Miscellaneous	3,388			1,720			4,426			5,356
	20,949			21,100			38,999			40,822
Net gain (loss) on sale of securities	44			(54		)	48			(41		)
Net change in valuation of financial instruments carried at fair value	224			(650		)	3,532			(1,338		)
Total non-interest income	21,217			20,396			42,579			39,443
NON-INTEREST EXPENSE:
Salary and employee benefits	51,494			49,019			101,561			95,083
Less capitalized loan origination costs	(4,733		)	(4,598		)	(8,744		)	(8,914		)
Occupancy and equipment	11,574			12,045			23,340			24,041
Information/computer data services	4,564			4,100			8,945			8,094
Payment and card processing expenses	3,731			3,719			7,431			6,942
Professional services	3,838			3,732			8,266			8,885
Advertising and marketing	2,141			1,766			3,971			3,095
Deposit insurance	1,021			1,071			2,362			2,337
State/municipal business and use taxes	816			279			1,529			1,078
REO operations	(319		)	(363		)	121			(1,329		)
Amortization of core deposit intangibles	1,382			1,624			2,764			3,248
Miscellaneous	7,128			7,463			12,797			13,577
Total non-interest expense	82,637			79,857			164,343			156,137
Income before provision for income taxes	41,643			38,245			78,672			73,866
PROVISION FOR INCOME TAXES	9,219			12,791			17,458			24,619
NET INCOME	$	32,424		$	25,454		$	61,214		$	49,247
Earnings per common share:
Basic	$	1.01		$	0.77		$	1.89		$	1.49
Diluted	$	1.00		$	0.77		$	1.89		$	1.49
Cumulative dividends declared per common share	$	0.85		$	1.25		$	1.20		$	1.50
Weighted average number of common shares outstanding:
Basic	32,250,514			32,982,126			32,323,635			32,957,920
Diluted	32,331,609			33,051,527			32,422,287			33,052,205

See Selected Notes to the Consolidated Financial Statements

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited) (In thousands)

For the Three and Six Months Ended June 30, 2018 and 2017



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
NET INCOME	$	32,424		$	25,454		$	61,214		$	49,247
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF INCOME TAXES:
Unrealized holding (loss) gain on available-for-sale securities arising during the period	(8,305		)	2,900			(23,073		)	5,348
Reclassification for net (gains) losses on available-for-sale securities realized in earnings	(49		)	54			(51		)	41
Changes in fair value of junior subordinated debentures related to instrument specific credit risk	(258		)	—			(14,067		)	—
Income tax related to other comprehensive (loss) income	2,091			(1,064		)	8,893			(1,940		)
Other comprehensive (loss) income	(6,521		)	1,890			(28,298		)	3,449
COMPREHENSIVE INCOME	$	25,903		$	27,344		$	32,916		$	52,696

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 Six Months Ended June 30, 2018 and the Year Ended December 31, 2017



	Common Stock and Paid in Capital					Retained Earnings			Accumulated Other Comprehensive Loss			Shareholders’ Equity
	Shares		Amount			Retained Earnings			Accumulated Other Comprehensive Loss			Shareholders’ Equity
Balance, January 1, 2017	33,193,387		$	1,213,837		$	95,328		$	(3,455	)	$	1,305,710
Net income						60,776						60,776
Other comprehensive loss, net of income tax									(786		)	(786		)
Reclassification of stranded tax effects from Accumulated Other Comprehensive Income (AOCI) to retained earnings						795			(795		)	—
Accrual of dividends on common stock ($2.00/share cumulative)						(66,364		)				(66,364		)
Repurchase of common stock	(545,166	)	(31,045		)							(31,045		)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered	78,264		4,335									4,335
Balance, December 31, 2017	32,726,485		$	1,187,127		$	90,535		$	(5,036	)	$	1,272,626



Balance, January 1, 2018	32,726,485		$	1,187,127		$	90,535		$	(5,036	)	$	1,272,626
Cumulative effect of reclassification of the instrument-specific credit risk portion of junior subordinated debentures fair value adjustments and reclassification of equity securities from available-for-sale						(28,203		)	28,203			—
Net income						61,214						61,214
Other comprehensive loss, net of income tax									(28,298		)	(28,298		)
Accrual of dividends on common stock ($1.20/share cumulative)						(39,061		)				(39,061		)
Repurchase of common stock	(269,711	)	(15,359		)							(15,359		)
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered	(51,078	)	1,888									1,888
Balance, June 30, 2018	32,405,696		$	1,173,656		$	84,485		$	(5,131	)	$	1,253,010

See Selected Notes to the Consolidated Financial Statements

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)

For the Six Months Ended June 30, 2018 and 2017



	Six Months Ended June 30,
	2018			2017
OPERATING ACTIVITIES:
Net income	$	61,214		$	49,247
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation	7,253			6,484
Deferred income and expense, net of amortization	(1,518		)	(1,401		)
Amortization of core deposit intangibles	2,764			3,248
(Gain) loss on sale of securities	(48		)	41
Net change in valuation of financial instruments carried at fair value	(3,532		)	1,338
Principal repayments and maturities of securities—trading	—			17
Gain on branch divestiture	(249		)	—
(Increase) decrease in deferred taxes	(6,510		)	6,564
Increase in current taxes payable	5,603			2,407
Stock-based compensation	3,231			2,666
Increase in cash surrender value of BOLI	(1,768		)	(2,012		)
Gain on sale of loans, net of capitalized servicing rights	(6,533		)	(10,975		)
Gain on disposal of real estate held for sale and property and equipment	(1,858		)	(2,226		)
Provision for loan losses	4,000			4,000
Provision for losses on real estate held for sale	160			256
Origination of loans held for sale	(415,790		)	(394,585		)
Proceeds from sales of loans held for sale	384,215			585,749
Net change in:
Other assets	1,734			(4,863		)
Other liabilities	1,797			(3,338		)
Net cash provided from operating activities	34,165			242,617
INVESTING ACTIVITIES:
Purchases of securities—available-for-sale	(591,265		)	(580,321		)
Principal repayments and maturities of securities—available-for-sale	69,853			80,149
Proceeds from sales of securities—available-for-sale	8,363			15,647
Purchases of securities—held-to-maturity	(8,469		)	(4,605		)
Principal repayments and maturities of securities—held-to-maturity	4,422			3,317
Loan originations, net of principal repayments	(82,461		)	(32,266		)
Purchases of loans and participating interest in loans	(2,268		)	(64,618		)
Proceeds from sales of other loans	4,733			3,950
Net cash paid related to branch divestiture	(20,412		)	—
Purchases of property and equipment	(9,925		)	(5,356		)
Proceeds from sale of real estate held for sale and sale of other property, net	6,367			14,912
Proceeds from FHLB stock repurchase program	79,878			53,156
Purchase of FHLB stock	(89,460		)	(52,984		)
Other	417			298
Net cash used in investing activities	(630,227		)	(568,721		)
FINANCING ACTIVITIES:
Increase in deposits, net	364,890			362,317
Repayment of long term FHLB advances	(5		)	(4		)
Proceeds from (repayments of) overnight and short term FHLB advances, net	239,000			(4,000		)
Increase in other borrowings, net	16,598			10,770
Cash dividends paid	(19,494		)	(15,963		)
Taxes paid related to net share settlement of equity awards	(1,343		)	(1,187		)
Cash paid for the repurchase of common stock	(15,359		)	—
Net cash provided from financing activities	584,287			351,933
NET CHANGE IN CASH AND CASH EQUIVALENTS	(11,775		)	25,829
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	261,200			247,719
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	249,425		$	273,548

(Continued on next page)

BANNER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited) (In thousands)

For the Six Months Ended June 30, 2018 and 2017



	Six Months Ended June 30,
	2018		2017
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid in cash	$	11,720	$	8,464
Taxes paid, net	8,806		17,106
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	1,419		10
Dividends accrued but not paid until after period end	27,833		41,733

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 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, 2018 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 2017 Consolidated Financial Statements and/or schedules to conform to the 2018 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, 2017 filed with the SEC (2017 Form 10-K). There have been no significant changes in our application of these accounting policies during the first six months of 2018, except as described in Note 2.

On July 25, 2018, Banner and Skagit Bancorp, Inc. (“Skagit”), the holding company for Skagit Bank, a Washington state-chartered commercial bank, announced that they have entered into a definitive merger agreement pursuant to which Banner will acquire Skagit in an all-stock transaction, subject to the terms and conditions set forth therein. Under the merger agreement, Skagit will merge with and into Banner, and immediately thereafter Skagit Bank will merge with and into Banner Bank. The combined company will have approximately $11.4 billion in assets. See Note 15 for additional information on the transaction.

The information included in this Form 10-Q should be read in conjunction with our 2017 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. Subsequent to the issuance of ASU 2014-09, FASB issued ASU 2016-10 in April 2016 and issued ASU 2016-12 in May 2016. Both of these ASUs amend or clarify aspects of Topic 606. 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. The Company adopted Topic 606 on January 1, 2018 using the full retrospective method, meaning the standard is applied to all periods presented in the financial statements with the cumulative effect of initially applying the standard recognized at the beginning of the earliest period presented. In adopting Topic 606, the Company applied the following five steps in determining the correct treatment for the applicable revenue streams:


1.	Identify the contract with a customer;


2.	Identify the performance obligations in the contract;


3.	Determine the transaction price;


4.	Allocate the transaction price to performance obligations in the contract, and


5.	Recognize revenue when or as the Company satisfies the performance obligation.

The majority of the Company’s revenue streams including interest income, deferred loan fee accretion, premium/discount accretion, gains on sales of loans and investments, loan servicing income and other loan fee income are outside the scope of Topic 606. Revenue streams reported as deposit fees and other service charges which include transaction based deposit fees, non-transaction based deposit fees, interchange fees on credit and debit cards and merchant service fees are within the scope of Topic 606. The Company applied the requirements of Topic 606 to the revenue streams that are within its scope. The adoption of Topic 606 did not result in any changes in the either timing or amount of recognized revenue in prior periods by the Company however, the presentation of certain costs associated with our merchant services will now be offset against deposit fees and other service charges in non-interest income. The Company previously recognized payment network related fees that were collected by Company and passed through to another party related to its merchant services as non-interest expense. The change in presentation resulted in $3.7 million of expenses for the six months ended June 30, 2018 being netted against deposit fees and other services charges and reported in non-interest income instead of as payment and card processing expenses in non-interest expense. In addition, to conform to the current period presentation, $3.9 million of merchant services related expenses for the six months ended June 30, 2017 were reclassified from payment and card processing expense in non-interest expense to being netted against deposit fees and other service charges in non-interest income. The Company elected to apply the practical expedient and therefore does not disclose information about remaining performance obligations that have an original expected term of one year or less and allows the Company to expense costs related to obtaining a contract as incurred when the amortization period would have been one year or less.

The following table presents the impact of adopting of the new revenue standard on our Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017, respectively (in thousands):



	For the three months ended June 30, 2018							For the three months ended June 30, 2017
	As Reported		Balance without Adoption of ASC 606		Effect of Change			As Reported		Balance without Adoption of ASC 606		Effect of Change
Non-interest income:
Deposit fees and other service charges	$	11,985	$	13,909	$	(1,924	)	$	11,165	$	13,238	$	(2,073	)

Non-interest expense:
Payment and card processing expenses	$	3,731	$	5,655	$	(1,924	)	$	3,719	$	5,792	$	(2,073	)



	For the six months ended June 30, 2018							For the six months ended June 30, 2017
	As Reported		Balance without Adoption of ASC 606		Effect of Change			As Reported		Balance without Adoption of ASC 606		Effect of Change
Non-interest income:
Deposit fees and other service charges	$	23,281	$	27,010	$	(3,729	)	$	21,553	$	25,423	$	(3,870	)

Non-interest expense:
Payment and card processing expenses	$	7,431	$	11,160	$	(3,729	)	$	6,942	$	10,812	$	(3,870	)

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 Company adopted this ASU on January 1, 2018. The adoption of this ASU resulted in the Company reclassifying $28.1 million from retained earnings to AOCI for the cumulative fair value adjustments on its junior subordinated debentures related to instrument specific credit risk. During the six months ended June 30, 2018, the Company recorded a $10.7 million, net of tax, reduction in other comprehensive income (loss) for the change in instrument specific credit risk on its junior subordinated debentures; prior to the adoption of this ASU this amount would have been recorded in the Consolidated Statement of Operations. In addition, as a result of adopting this ASU the Company recorded a $137,000 reduction in retained earnings representing the unrealized loss on available for sale equity securities at the date of adoption. Any future changes in fair value on equity securities will be recorded in the Consolidated Statement of Operations. During the six months ended June 30, 2018, the Company recorded a $114,000 gain for the decrease in fair value of its equity securities as a component of the net change in financial instruments carried at fair value in the Consolidated Statement of Operations. At June 30, 2018, the Company held $461,000 of equity investment securities which were previously reported as available for sale securities and are now reported in other assets.

In addition, the adoption of this ASU resulted in changing how the Company estimates the fair value of portfolio loans for disclosure purposes. Fair values are estimated first by stratifying the portfolios of loans with similar financial characteristics. Loans are segregated by type such as multifamily real estate, residential mortgage, nonresidential mortgage, commercial/agricultural, consumer and other. Each loan category is further segmented into fixed- and adjustable-rate interest terms. An estimate of fair value is then calculated based on discounted cash flows using as a discount rate based on the current rate offered on similar products, plus an adjustment for liquidity to reflect the non-homogeneous nature of the loans, as well as, a quarterly loss rate based on historical losses to arrive at an estimated exit price fair value. Fair value for impaired loans is also based on recent appraisals or estimated cash flows discounted using rates commensurate with risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information.

In February 2018, FASB issued ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU do not change the core principle of the guidance in Subtopic 825-10. Rather, the amendments in this ASU clarify the application of the guidance regarding the fair value measurement of equity securities without readily determinable fair value. The Company adopted this ASU upon issuance. The impact of the Company's adoption of this ASU is described in the preceding paragraph.

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 and regulatory capital ratios and has contracted with a third party software solution to meet the new requirements of this ASU, with implementation currently in process. The Company leases 117 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.

In July 2018, FASB issued ASU No. 2018-11, Targeted Improvements. The amendments in this ASU provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases). In addition, the amendments in this ASU provide lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component and, instead, to account for those components as a single component if the nonlease components otherwise would be accounted for under the new revenue guidance (Topic 606). For entities that have not adopted Topic 842 before the issuance of this ASU, the effective date and transition requirements for the amendments in this ASU related to separating components of a contract are the same as the effective date and transition requirements in ASU No. 2016-02.

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 ASU 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 ASU replaces 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. This ASU requires 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. This ASU broadens 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. 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, engaged a third-party vendor to assist with the project and has completed its gap analysis phase of the project. In addition, the Company has selected a second third-party vendor to assist with building and developing the required models. Upon adoption, the Company expects changes in the processes and procedures used 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 change 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.

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 premium amortization period for callable debt securities purchased 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.

Derivatives and Hedging (Topic 815)

In August 2017, FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU are intended to provide investors better insight to an entity's risk management hedging strategies by permitting a company to recognize the economic results of its hedging strategies in its financial statements. The amendments in this ASU permit hedge accounting for hedging relationships involving nonfinancial risk and interest rate risk by removing certain limitations in cash flow and fair value hedging relationships. In addition, the ASU requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. This ASU is effective for fiscal years beginning after December 15, 2018, and early adoption is permitted. Adoption of ASU 2017-12 is not expected to have a material impact on the Company's Consolidated Financial Statements.

Income Statement - Reporting Comprehensive Income (Topic 220)

In February 2018, FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows a reclassification from AOCI to retained earnings for the stranded tax effects on available-for-sale securities resulting from the 2017 Tax Act. The ASU eliminates the stranded tax effects resulting from the 2017 Tax Act and improves the usefulness of information reported to financial statement users. The ASU also requires certain disclosures about the stranded tax effects. This ASU is effective for all entities for fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. The ASU should be applied to either in the period of adoption or retrospectively to each

period in which the effect of the change in the federal corporate tax rate is recognized. The Company elected to early adopt this ASU and to reclassify $795,000 of stranded tax effects from AOCI to retained earnings in the fourth quarter of 2017.

Income Taxes (Topic 740)

In March 2018, FASB issued ASU No. 2018-05, Income Taxes (Topic 740). This ASU was issued to provide guidance on the income tax accounting implications of the Tax Cuts and Jobs Act (the Act) and allows for entities to report provisional amounts for specific income tax effects of the Act for which the accounting under ASC Topic 740 was not yet complete but a reasonable estimate could be determined. A measurement period of one year is allowed to complete the accounting effects under ASC Topic 740 and revise any previous estimates reported. Any provisional amounts or subsequent adjustments included in an entity’s financial statements during the measurement period should be included in income from continuing operations as an adjustment to tax expense in the reporting period the amounts are determined. The Company adopted this ASU with the provisional adjustments as reported in the Consolidated Financial Statements in the 2017 Form 10-K. As of June 30, 2018, the Company did not incur any adjustments to the provisional recognition.

Note 3: SECURITIES

The amortized cost, gross unrealized gains and losses and estimated fair value of securities at June 30, 2018 and December 31, 2017 are summarized as follows (in thousands):



	June 30, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Trading:
Municipal bonds	$	100						$	100
Corporate bonds	27,203							25,540
	$	27,303						$	25,640
Available-for-Sale:
U.S. Government and agency obligations	$	143,733	$	12	$	(2,720	)	$	141,025
Municipal bonds	65,563		242		(761		)	65,044
Corporate bonds	5,053		5		(20		)	5,038
Mortgage-backed or related securities	1,188,772		51		(26,403		)	1,162,420
Asset-backed securities	26,804		121		(140		)	26,785
	$	1,429,925	$	431	$	(30,044	)	$	1,400,312
Held-to-Maturity:
U.S. Government and agency obligations	$	1,152	$	28	$	(3	)	$	1,177
Municipal bonds	194,431		2,105		(3,115		)	193,421
Corporate bonds	3,805		—		(10		)	3,795
Mortgage-backed or related securities	63,788		—		(1,863		)	61,925
	$	263,176	$	2,133	$	(4,991	)	$	260,318



	December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Trading:
Municipal bonds	$	100						$	100
Corporate bonds	27,132							22,058
Equity securities	14							160
	$	27,246						$	22,318
Available-for-Sale:
U.S. Government and agency obligations	$	72,829	$	68	$	(431	)	$	72,466
Municipal bonds	68,513		665		(445		)	68,733
Corporate bonds	5,431		6		(44		)	5,393
Mortgage-backed or related securities	745,956		1,003		(7,402		)	739,557
Asset-backed securities	27,667		184		(93		)	27,758
Equity securities	5,716		10		(148		)	5,578
	$	926,112	$	1,936	$	(8,563	)	$	919,485
Held-to-Maturity:
U.S. Government and agency obligations	$	1,024	$	29	$	—		$	1,053
Municipal bonds	189,860		3,385		(1,252		)	191,993
Corporate bonds	3,978		7		—			3,985
Mortgage-backed or related securities	65,409		266		(518		)	65,157
	$	260,271	$	3,687	$	(1,770	)	$	262,188

At June 30, 2018 and December 31, 2017, 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, 2018
	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	$	109,860	$	(2,091	)	$	23,566	$	(629	)	$	133,426	$	(2,720	)
Municipal bonds	28,771		(373		)	13,466		(389		)	42,237		(762		)
Corporate bonds	4,123		(19		)	—		—			4,123		(19		)
Mortgage-backed or related securities	995,793		(21,357		)	125,657		(5,046		)	1,121,450		(26,403		)
Asset-backed securities	759		(1		)	9,874		(139		)	10,633		(140		)
	$	1,139,306	$	(23,841	)	$	172,563	$	(6,203	)	$	1,311,869	$	(30,044	)
Held-to-Maturity
U.S. Government and agency obligations	$	146	$	(3	)	$	—	$	—		$	146	$	(3	)
Municipal bonds	53,087		(890		)	30,815		(2,225		)	83,902		(3,115		)
Corporate bonds	490		(10		)	—		—			490		(10		)
Mortgage-backed or related securities	57,619		(1,607		)	4,254		(256		)	61,873		(1,863		)
	$	111,342	$	(2,510	)	$	35,069	$	(2,481	)	$	146,411	$	(4,991	)

	December 31, 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	$	31,276	$	(211	)	$	23,341	$	(220	)	$	54,617	$	(431	)
Municipal bonds	20,879		(185		)	13,360		(260		)	34,239		(445		)
Corporate bonds	296		(4		)	4,682		(40		)	4,978		(44		)
Mortgage-backed or related securities	559,916		(5,138		)	100,662		(2,264		)	660,578		(7,402		)
Asset-backed securities	—		—			9,926		(93		)	9,926		(93		)
Equity securities	5,480		(148		)	—		—			5,480		(148		)
	$	617,847	$	(5,686	)	$	151,971	$	(2,877	)	$	769,818	$	(8,563	)
Held-to-Maturity
Municipal bonds	21,839		(171		)	34,314		(1,081		)	56,153		(1,252		)
Mortgage-backed or related securities	38,023		(378		)	4,434		(140		)	42,457		(518		)
	$	59,862	$	(549	)	$	38,748	$	(1,221	)	$	98,610	$	(1,770	)

At June 30, 2018, there were 305 securities—available-for-sale with unrealized losses, compared to 226 at December 31, 2017. At June 30, 2018, there were 98 securities—held-to-maturity with unrealized losses, compared to 66 at December 31, 2017. Management does not believe that any individual unrealized loss as of June 30, 2018 or December 31, 2017 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-month periods ended June 30, 2018 or 2017. The Company did not recognize any OTTI charges or recoveries on securities—trading during the six-month periods ended June 30, 2018 or 2017. There were no securities—trading in a nonaccrual status at June 30, 2018 or December 31, 2017. Net unrealized holding gains of $3.4 million were recognized during the six months ended June 30, 2018 compared to $315,000 of net unrealized holdings gains recognized during the six months ended June 30, 2017.

There were nine sales of securities—available-for-sale during the six months ended June 30, 2018, and partial calls of securities resulted in a net gain of $51,000 for the six months ended June 30, 2018. Sales of securities—available-for-sale totaled $15.6 million which resulted in a net

gain of $41,000 for the six months ended June 30, 2017. There were no securities—available-for-sale in a nonaccrual status at June 30, 2018 or December 31, 2017.

There were no sales of securities—held-to-maturity during the six-month periods ended June 30, 2018 and 2017 although there were partial calls of securities that resulted in a net gain of $2,000 for the six months ended June 30, 2018. There were no securities—held-to-maturity in a nonaccrual status at June 30, 2018 or December 31, 2017.

The amortized cost and estimated fair value of securities at June 30, 2018, 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, 2018
	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	$	100	$	100	$	6,059	$	6,045	$	2,292	$	2,291
Maturing after one year through five years	—		—		60,892		59,950		40,544		40,024
Maturing after five years through ten years	—		—		280,920		273,773		94,377		93,574
Maturing after ten years through twenty years	27,203		25,540		193,883		191,218		85,138		85,732
Maturing after twenty years	—		—		888,171		869,326		40,825		38,697
	$	27,303	$	25,640	$	1,429,925	$	1,400,312	$	263,176	$	260,318

The following table presents, as of June 30, 2018, investment securities which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law (in thousands):



	June 30, 2018
	Carrying Value		Amortized Cost		Fair Value
Purpose or beneficiary:
State and local governments public deposits	$	128,867	$	128,919	$	129,642
Interest rate swap counterparties	14,535		14,719		14,312
Repurchase agreements	123,817		126,129		123,817
Other	3,876		3,876		3,701
Total pledged securities	$	271,095	$	273,643	$	271,472

Note 4: LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES

Loans receivable at June 30, 2018 and December 31, 2017 are summarized as follows (dollars in thousands):



	June 30, 2018					December 31, 2017
	Amount			Percent of Total		Amount			Percent of Total
Commercial real estate:
Owner-occupied	$	1,256,730		16.3	%	$	1,284,363		16.9	%
Investment properties	1,920,790			25.0		1,937,423			25.5
Multifamily real estate	330,384			4.3		314,188			4.1
Commercial construction	166,089			2.2		148,435			2.0
Multifamily construction	147,576			1.9		154,662			2.0
One- to four-family construction	480,591			6.3		415,327			5.5
Land and land development:
Residential	163,335			2.1		164,516			2.2
Commercial	22,849			0.3		24,583			0.3
Commercial business	1,312,424			17.1		1,279,894			16.8
Agricultural business, including secured by farmland	336,709			4.4		338,388			4.4
One- to four-family residential	840,470			10.9		848,289			11.2
Consumer:
Consumer secured by one- to four-family	536,007			7.0		522,931			6.9
Consumer—other	170,778			2.2		165,885			2.2
Total loans	7,684,732			100.0	%	7,598,884			100.0	%
Less allowance for loan losses	(93,875		)			(89,028		)
Net loans	$	7,590,857				$	7,509,856

Loan amounts are net of unearned loan fees in excess of unamortized costs of $1.4 million as of June 30, 2018 and were net of unamortized costs of $158,000 as of December 31, 2017. Net loans include net discounts on acquired loans of $18.1 million and $21.1 million as of June 30, 2018 and December 31, 2017, 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 $28.1 million at June 30, 2018 and $32.5 million at December 31, 2017. The carrying balance of PCI loans was $18.1 million at June 30, 2018 and $21.3 million at December 31, 2017.

The following table presents the changes in the accretable yield for PCI loans for the three and six months ended June 30, 2018 and 2017 (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Balance, beginning of period	$	6,288		$	8,670		$	6,520		$	8,717
Accretion to interest income	(734		)	(2,170		)	(1,831		)	(3,490		)
Disposals	—			(497		)	58			(497		)
Reclassifications from non-accretable difference	555			1,663			1,362			2,936
Balance, end of period	$	6,109		$	7,666		$	6,109		$	7,666

As of June 30, 2018 and December 31, 2017, the non-accretable difference between the contractually required payments and cash flows expected to be collected was $9.2 million and $11.3 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 restructurings (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, 2018 and December 31, 2017. 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, 2018
	Unpaid Principal Balance		Recorded Investment				Related Allowance
	Unpaid Principal Balance		Without Allowance ⁽¹⁾		With Allowance ⁽²⁾		Related Allowance
Commercial real estate:
Owner-occupied	$	3,827	$	3,395	$	202	$	21
Investment properties	6,874		946		5,668		257
One- to four-family construction	378		378		—		—
Land and land development:
Residential	1,918		1,582		—		—
Commercial business	3,398		2,674		369		13
Agricultural business/farmland	4,613		1,712		2,560		59
One- to four-family residential	8,027		3,413		4,562		108
Consumer:
Consumer secured by one- to four-family	1,551		1,374		136		6
Consumer—other	125		55		69		4
	$	30,711	$	15,529	$	13,566	$	468

	December 31, 2017
	Unpaid Principal Balance		Recorded Investment				Related Allowance
	Unpaid Principal Balance		Without Allowance ⁽¹⁾		With Allowance ⁽²⁾		Related Allowance
Commercial real estate:
Owner-occupied	$	7,807	$	6,447	$	199	$	18
Investment properties	11,296		4,200		6,884		263
One- to four-family construction	298		298		—		—
Land and land development:
Residential	1,134		798		—		—
Commercial business	4,441		3,424		555		50
Agricultural business/farmland	9,388		6,230		3,031		264
One- to four-family residential	9,547		3,709		5,775		178
Consumer:
Consumer secured by one- to four-family	1,498		1,324		139		7
Consumer—other	134		58		73		2
	$	45,543	$	26,488	$	16,656	$	782


⁽¹⁾	Includes loans without an allowance reserve that have been individually evaluated for impairment and that evaluation concluded that no reserve was needed, and $10.7 million and $10.6 million, respectively, of homogenous and small balance loans as of June 30, 2018 and December 31, 2017, 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.

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, 2018 and 2017 (in thousands):



	Three Months Ended June 30, 2018				Three Months Ended June 30, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial real estate:
Owner-occupied	$	3,544	$	2	$	2,662	$	2
Investment properties	7,561		75		7,438		38
Multifamily real estate	—		—		395		5
One- to four-family construction	314		—		393		7
Land and land development:
Residential	1,582		10		1,727		19
Commercial	—		—		944		—
Commercial business	3,206		5		4,857		50
Agricultural business/farmland	4,357		23		4,339		30
One- to four-family residential	8,226		59		9,503		84
Consumer:
Consumer secured by one- to four-family	1,360		3		1,591		2
Consumer—other	141		1		175		1
	$	30,291	$	178	$	34,024	$	238

	Six Months Ended June 30, 2018				Six Months Ended June 30, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial real estate:
Owner-occupied	$	4,464	$	5	$	2,789	$	4
Investment properties	8,767		158		8,165		87
Multifamily real estate	—		—		445		9
One- to four-family construction	459		4		787		27
Land and land development:
Residential	1,190		10		1,813		36
Commercial	—		—		961		—
Commercial business	3,606		12		4,692		57
Agricultural business/farmland	6,733		56		5,310		62
One- to four-family residential	8,559		160		9,953		167
Consumer:
Consumer secured by one- to four-family	1,375		5		1,666		5
Consumer—other	145		2		222		4
	$	35,298	$	412	$	36,803	$	458

Troubled Debt Restructurings. 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 table presents TDRs by accrual and nonaccrual status at June 30, 2018 and December 31, 2017 (in thousands):



	June 30, 2018						December 31, 2017
	Accrual Status		Nonaccrual Status		Total TDRs		Accrual Status		Nonaccrual Status		Total TDRs
Commercial real estate:
Owner-occupied	$	202	$	83	$	285	$	199	$	87	$	286
Investment properties	5,668		—		5,668		6,884		—		6,884
Commercial business	369</