LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES

12 Months Ended

Dec. 31, 2016

LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES

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



	December 31, 2016					December 31, 2015
	Amount			Percent of Total		Amount			Percent of Total
Commercial real estate:
Owner-occupied	$	1,352,999		18.1	%	$	1,327,807		18.2	%
Investment properties	1,986,336			26.7		1,765,353			24.1
Multifamily real estate	248,150			3.3		472,976			6.5
Commercial construction	124,068			1.7		72,103			1.0
Multifamily construction	124,126			1.7		63,846			0.9
One- to four-family construction	375,704			5.0		278,469			3.8
Land and land development:
Residential	170,004			2.3		126,773			1.7
Commercial	29,184			0.4		33,179			0.5
Commercial business	1,207,879			16.2		1,207,944			16.5
Agricultural business, including secured by farmland	369,156			5.0		376,531			5.1
One- to four-family residential	813,077			10.9		952,633			13.0
Consumer:
Consumer secured by one- to four-family	493,211			6.6		478,420			6.5
Consumer—other	157,254			2.1		158,470			2.2
Total loans outstanding	7,451,148			100.0	%	7,314,504			100.0	%
Less allowance for loan losses	(85,997		)			(78,008		)
Net loans	$	7,365,151				$	7,236,496

Loan amounts are net of unearned loan fees in excess of unamortized costs of $5.8 million at December 31, 2016 and $5.5 million at December 31, 2015. Net loans include net discounts on acquired loans of $31.1 million and $43.7 million as of December 31, 2016 and 2015, respectively.

The Company’s loans to directors, executive officers and related entities are on substantially the same terms and underwriting as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectability. Such loans had balances of $4.3 million and $7.9 million for the years ended December 31, 2016 and 2015, respectively.

Purchased credit-impaired loans: The outstanding contractual unpaid principal balance of PCI loans, excluding acquisition accounting adjustments, were $48.4 million at December 31, 2016 and $83.4 million at December 31, 2015. The carrying balance of PCI loans were $32.3 million at December 31, 2016 and $58.6 million at December 31, 2015.

The following table presents the changes in the accretable yield for PCI loans for the years ended December 31, 2016 and 2015 (in thousands):



	Years Ended December 31
	2016			2015
Balance, beginning of period	$	10,375		$	—
Additions	—			13,310
Accretion to interest income	(9,333		)	(2,202		)
Disposals and other	(1,018		)	(1,238		)
Reclassifications from non-accretable difference	8,693			505
Balance, end of period	$	8,717		$	10,375

As of December 31, 2016 and December 31, 2015, the non-accretable difference between the contractually required payments and cash flows expected to be collected was $15.7 million and $29.5 million, respectively.

Impaired Loans and the Allowance for Loan Losses: A loan is considered impaired when, based on current information and circumstances, the Company determines it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Factors involved in determining impairment include, but are not limited to, the financial condition of the borrower, the value of the underlying collateral and the current status of the economy. Impaired loans are comprised of loans on nonaccrual, TDRs, and loans that are 90 days or more past due, but are still on accrual. Purchased credit-impaired loans are considered performing within the scope of the PCI accounting guidance and are not included in the impaired loan tables.

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



	December 31, 2016
	Unpaid Principal Balance		Recorded Investment				Related Allowance
	Unpaid Principal Balance		Without Allowance ⁽¹⁾		With Allowance ⁽²⁾		Related Allowance
Commercial real estate:
Owner-occupied	$	3,786	$	1,778	$	1,798	$	175
Investment properties	9,916		4,015		5,854		580
Multifamily real estate	508		—		496		81
One- to four-family construction	1,180		—		1,180		156
Land and land development:
Residential	3,012		750		1,106		219
Commercial	1,608		998		—		—
Commercial business	3,753		2,294		1,431		154
Agricultural business/farmland	6,438		5,886		468		35
One- to four-family residential	11,439		90		11,085		655
Consumer:
Consumer secured by one- to four-family	1,904		—		1,865		179
Consumer—other	391		4		388		29
	$	43,935	$	15,815	$	25,671	$	2,263

	December 31, 2015
	Unpaid Principal Balance		Recorded Investment				Related Allowance
	Unpaid Principal Balance		Without Allowance ⁽¹⁾		With Allowance ⁽²⁾		Related Allowance
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 reserve allowance. Loans with a specific allowance reserve have been individually evaluated for impairment using either a discounted cash flow analysis or, for collateral dependent loans, current appraisals less costs to sell to establish realizable value.

The following table summarizes our average recorded investment and interest income recognized on impaired loans by loan class for the years ended December 31, 2016, 2015 and 2014 (in thousands):



	Year Ended December 31, 2016				Year Ended December 31, 2015				Year Ended December 31, 2014
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial real estate:
Owner-occupied	$	2,721	$	2	$	1,467	$	9	$	1,841	$	12
Investment properties	18,529		242		8,003		303		6,145		315
Multifamily real estate	513		21		362		18		795		45
One- to four-family construction	1,158		75		1,463		114		2,655		118
Land and land development:
Residential	1,948		85		2,406		49		2,872		89
Commercial	1,003		—		931		—		—		—
Commercial business	4,290		37		1,667		35		1,328		41
Agricultural business/farmland	5,004		119		1,143		19		1,866		—
One- to four-family residential	11,976		441		17,770		630		26,093		870
Consumer:
Consumer secured by one- to four-family	1,778		17		736		11		1,248		19
Consumer—other	615		17		392		18		597		19
	$	49,535	$	1,056	$	36,340	$	1,206	$	45,440	$	1,528

The following table presents TDRs by accrual and nonaccrual status at December 31, 2016 and 2015 (in thousands):



	December 31, 2016						December 31, 2015
	Accrual Status		Nonaccrual Status		Total TDRs		Accrual Status		Nonaccrual Status		Total TDRs
Commercial real estate:
Owner-occupied	$	203	$	96	$	299	$	181	$	104	$	285
Investment properties	4,304		—		4,304		5,834		13		5,847
Multifamily real estate	349		—		349		357		—		357
One- to four-family construction	1,180		—		1,180		1,741		—		1,741
Land and land development:
Residential	1,106		—		1,106		1,151		483		1,634
Commercial business	653		—		653		624		—		624
Agricultural business/farmland	3,125		79		3,204		545		277		822
One- to four-family residential	7,678		843		8,521		11,025		1,428		12,453
Consumer:
Consumer secured by one- to four-family	143		6		149		147		14		161
Consumer—other	166		—		166		172		—		172
	$	18,907	$	1,024	$	19,931	$	21,777	$	2,319	$	24,096

As of December 31, 2016 and 2015, the Company had commitments to advance funds up to an additional amount of $127,000 and $237,000, respectively, related to TDRs.

The following table presents new TDRs that occurred during the years ended December 31, 2016 and 2015 (dollars in thousands):



	Year Ended December 31, 2016					Year Ended December 31, 2015
	Number of Contracts	Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment		Number of Contracts	Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
Recorded Investment ^{(1) (2)}
Commercial real estate:
Owner-occupied	1	$	194	$	194	—	$	—	$	—
Land and land development:
Residential	—	—		—		2	1,302		483
Agricultural business/farmland	—	—		—		3	822		822
One- to four-family residential	1	78		78		2	431		431
	2	$	272	$	272	7	$	2,555	$	1,736


⁽¹⁾	Since most loans were already considered classified and/or on non-accrual status prior to restructuring, the modifications did not have a material effect on the Company’s determination of the allowance for loan losses.


⁽²⁾	The majority of these modifications do not fit into one separate type, such as rate, term, amount, interest-only or payment, but instead are a combination of multiple types of modifications; therefore, they are disclosed in aggregate.

The following table presents TDRs which incurred a payment default within the year ended December 31, 2015 for which the payment default occurred within twelve months of the restructure date. There were no TDRs that incurred a payment default in the year ended December 31, 2016. A default on a restructured loan results in a transfer to nonaccrual status, a charge-off or a combination of both (dollars in thousands):



	December 31, 2015
	Number of Loans	Amount
Agricultural business/farmland	2	$	277
One- to four-family residential	1	387
Total	3	$	664

Credit Quality Indicators: To appropriately and effectively manage the ongoing credit quality of the Company’s loan portfolio, management has implemented a risk-rating or loan grading system for its loans. The system is a tool to evaluate portfolio asset quality throughout each applicable loan’s life as an asset of the Company. Generally, loans and leases are risk rated on an aggregate borrower/relationship basis with individual loans sharing similar ratings. There are some instances when specific situations relating to individual loans will provide the basis for different risk ratings within the aggregate relationship. Loans are graded on a scale of 1 to 9. A description of the general characteristics of these categories is shown below:

Overall Risk Rating Definitions: Risk-ratings contain both qualitative and quantitative measurements and take into account the financial strength of a borrower and the structure of the loan or lease. Consequently, the definitions are to be applied in the context of each lending transaction and judgment must also be used to determine the appropriate risk rating, as it is not unusual for a loan or lease to exhibit characteristics of more than one risk-rating category. Consideration for the final rating is centered in the borrower’s ability to repay, in a timely fashion, both principal and interest. There were no material changes in the risk-rating or loan grading system in 2016.

Risk Rating 1: Exceptional

A credit supported by exceptional financial strength, stability, and liquidity. The risk rating of 1 is reserved for the Company’s top quality loans, generally reserved for investment grade credits underwritten to the standards of institutional credit providers.

Risk Rating 2: Excellent

A credit supported by excellent financial strength, stability and liquidity. The risk rating of 2 is reserved for very strong and highly stable customers with ready access to alternative financing sources.

Risk Rating 3: Strong

A credit supported by good overall financial strength and stability. Collateral margins are strong, cash flow is stable although susceptible to cyclical market changes.

Risk Rating 4: Acceptable

A credit supported by the borrower’s adequate financial strength and stability. Assets and cash flow are reasonably sound and provide for orderly debt reduction. Access to alternative financing sources will be more difficult to obtain.

Risk Rating 5: Watch

A credit with the characteristics of an acceptable credit but one which requires more than the normal level of supervision and warrants formal quarterly management reporting. Credits in this category are not yet criticized or classified, but due to adverse events or aspects of underwriting require closer than normal supervision. Generally, credits should be watch credits in most cases for six months or less as the impact of stress factors are analyzed.

Risk Rating 6: Special Mention

A credit with potential weaknesses that deserves management’s close attention is risk rated a 6. If left uncorrected, these potential weaknesses will result in deterioration in the capacity to repay debt. A key distinction between Special Mention and Substandard is that in a Special Mention credit, there are identified weaknesses that pose potential risk(s) to the repayment sources, versus well defined weaknesses that pose risk(s) to the repayment sources. Assets in this category are expected to be in this category no more than 9-12 months as the potential weaknesses in the credit are resolved.

Risk Rating 7: Substandard

A credit with well defined weaknesses that jeopardize the ability to repay in full is risk rated a 7. These credits are inadequately protected by either the sound net worth and payment capacity of the borrower or the value of pledged collateral. These are credits with a distinct possibility of loss. Loans headed for foreclosure and/or legal action due to deterioration are rated 7 or worse.

Risk Rating 8: Doubtful

A credit with an extremely high probability of loss is risk rated 8. These credits have all the same critical weaknesses that are found in a substandard loan; however, the weaknesses are elevated to the point that based upon current information, collection or liquidation in full is improbable. While some loss on doubtful credits is expected, pending events may strengthen a credit making the amount and timing of any loss indeterminate. In these situations taking the loss is inappropriate until it is clear that the pending event has failed to strengthen the credit and improve the capacity to repay debt.

Risk Rating 9: Loss

A credit that is considered to be currently uncollectible or of such little value that it is no longer a viable Bank asset is risk rated 9. Losses are taken in the accounting period in which the credit is determined to be uncollectible. Taking a loss does not mean that a credit has absolutely no recovery or salvage value but, rather, it is not practical or desirable to defer writing off the credit, even though partial recovery may occur in the future.

The following tables show Banner’s portfolio of risk-rated loans and non-risk-rated loans by grade or other characteristic as of December 31, 2016 and 2015 (in thousands):



	December 31, 2016
By class:	Pass (Risk Ratings 1-5)⁽¹⁾		Special		Substandard		Doubtful		Loss		Total Loans
Commercial real estate:
Owner-occupied	$	1,313,142	$	14,394	$	25,463	$	—	$	—	$	1,352,999
Investment properties	1,948,822		23,846		13,668		—		—		1,986,336
Multifamily real estate	247,258		—		892		—		—		248,150
Commercial construction	124,068		—		—		—		—		124,068
Multifamily construction	124,126		—		—		—		—		124,126
One- to four-family construction	371,636		—		4,068		—		—		375,704
Land and land development:
Residential	167,764		—		2,240		—		—		170,004
Commercial	25,090		—		4,094		—		—		29,184
Commercial business	1,148,585		35,036		24,258		—		—		1,207,879
Agricultural business, including secured by farmland	356,656		3,335		9,165		—		—		369,156
One- to four-family residential	807,837		967		4,273		—		—		813,077
Consumer:
Consumer secured by one- to four-family	490,877		5		2,327		2		—		493,211
Consumer—other	156,547		108		594		5		—		157,254
Total	$	7,282,408	$	77,691	$	91,042	$	7	$	—	$	7,451,148



	December 31, 2015
By class:	Pass (Risk Ratings 1-5)⁽¹⁾		Special		Substandard		Doubtful		Loss		Total Loans
Commercial real estate:
Owner-occupied	$	1,281,561	$	19,400	$	26,846	$	—	$	—	$	1,327,807
Investment properties	1,740,720		11,528		13,105		—		—		1,765,353
Multifamily real estate	468,467		138		4,371		—		—		472,976
Commercial construction	72,103		—		—		—		—		72,103
Multifamily construction	63,846		—		—		—		—		63,846
One- to four-family construction	275,154		—		3,315		—		—		278,469
Land and land development:
Residential	121,536		76		5,161		—		—		126,773
Commercial	25,786		2,310		5,083		—		—		33,179
Commercial business	1,167,933		25,286		14,725		—		—		1,207,944
Agricultural business, including secured by farmland	354,760		17,526		4,245		—		—		376,531
One- to four-family residential	943,098		1,346		8,189		—		—		952,633
Consumer:
Consumer secured by one- to four-family	476,448		—		1,967		5		—		478,420
Consumer—other	157,286		22		1,157		5		—		158,470
Total	$	7,148,698	$	77,632	$	88,164	$	10	$	—	$	7,314,504

⁽¹⁾

The Pass category includes some performing loans that are part of homogenous pools which are not individually risk-rated. This includes all consumer loans, all one- to four-family residential loans and, as of December 31, 2016 and 2015, in the commercial business category, $225.0 million and $150.0 million, respectively, of credit-scored small business loans. As loans in these homogeneous pools become non-accrual, they are individually risk-rated.


⁽²⁾	Non-performing loans include non-accrual loans and loans past due greater than 90 days but still on accrual status.

The following tables provide additional detail on the age analysis of Banner’s past due loans as of December 31, 2016 and 2015 (in thousands):



	December 31, 2016
	30–59 Days Past Due		60–89 Days Past Due		90 Days or More Past Due		Total Past Due		Purchased Credit-Impaired		Current		Total Loans		Loans 90 Days or More Past Due and Accruing		Non-accrual
Commercial real estate:
Owner-occupied	$	1,938	$	—	$	2,538	$	4,476	$	13,281	$	1,335,242	$	1,352,999	$	—	$	3,373
Investment properties	117		—		5,447		5,564		10,168		1,970,604		1,986,336		701		4,864
Multifamily real estate	—		—		147		147		139		247,864		248,150		147		—
Commercial construction	—		—		—		—		—		124,068		124,068		—		—
Multifamily construction	—		—		—		—		—		124,126		124,126		—		—
One- to four-family construction	—		—		—		—		862		374,842		375,704		—		—
Land and land development:
Residential	48		—		750		798		—		169,206		170,004		—		750
Commercial	—		—		998		998		3,016		25,170		29,184		—		998
Commercial business	2,314		647		1,591		4,552		3,821		1,199,506		1,207,879		—		3,074
Agricultural business/farmland	360		1,244		2,768		4,372		684		364,100		369,156		—		3,229
One- to four-family residential	1,793		249		2,110		4,152		274		808,651		813,077		1,233		2,263
Consumer:
Consumer secured by one- to four-family	932		160		986		2,078		18		491,115		493,211		61		1,660
Consumer—other	1,421		154		147		1,722		59		155,473		157,254		11		215
Total	$	8,923	$	2,454	$	17,482	$	28,859	$	32,322	$	7,389,967	$	7,451,148	$	2,153	$	20,426



	December 31, 2015
	30–59 Days Past Due		60–89 Days Past Due		90 Days or More Past Due		Total Past Due		Purchased Credit-Impaired		Current		Total Loans		Loans 90 Days or More Past Due and Accruing		Non-accrual
Commercial real estate:
Owner-occupied	$	3,981	$	139	$	885	$	5,005	$	24,261	$	1,298,541	$	1,327,807	$	—	$	1,235
Investment properties	1,763		132		2,503		4,398		16,724		1,744,231		1,765,353		—		2,516
Multifamily real estate	4		—		—		4		1,994		470,978		472,976		—		—
Commercial construction	—		—		—		—		—		72,103		72,103		—		—
Multifamily construction	771		13		—		784		—		63,062		63,846		—		—
One- to four-family construction	2,466		220		—		2,686		905		274,878		278,469		—		1,233
Land and land development:
Residential	—		—		747		747		77		125,949		126,773		—		1,027
Commercial	—		96		—		96		4,668		28,415		33,179		—		—
Commercial business	1,844		174		1,024		3,042		7,302		1,197,600		1,207,944		8		2,159
Agricultural business/farmland	323		729		278		1,330		1,529		373,672		376,531		—		697
One- to four-family residential	620		873		3,811		5,304		1,066		946,263		952,633		899		4,700
Consumer:
Consumer secured by one- to four-family	465		60		38		563		40		477,817		478,420		4		565
Consumer—other	488		155		131		774		34		157,662		158,470		41		138
Total	$	12,725	$	2,591	$	9,417	$	24,733	$	58,600	$	7,231,171	$	7,314,504	$	952	$	14,270

The following tables provide additional information on the allowance for loan losses and loan balances individually and collectively evaluated for impairment at or for the year ended December 31, 2016 (in thousands):



	For the Year Ended December 31, 2016
	Commercial Real Estate			Multifamily Real Estate			Construction and Land			Commercial Business			Agricultural Business			One- to Four-Family Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	20,716		$	4,195		$	27,131		$	13,856		$	3,645		$	4,732		$	902		$	2,831	$	78,008
Provision for loan losses	441			(2,835		)	5,566			1,632			(170		)	(3,402		)	4,079			719		6,030
Recoveries	582			—			2,171			1,993			59			1,283			610			—		6,698
Charge-offs	(746		)	—			(616		)	(948		)	(567		)	(375		)	(1,487		)	—		(4,739		)
Ending balance	$	20,993		$	1,360		$	34,252		$	16,533		$	2,967		$	2,238		$	4,104		$	3,550	$	85,997

	December 31, 2016
	Commercial Real Estate			Multifamily Real Estate			Construction and Land			Commercial Business			Agricultural Business			One- to Four-Family Residential			Consumer			Unallocated		Total
Allowance individually evaluated for impairment	$	428		$	64		$	374		$	69		$	—		$	480		$	5		$	—	$	1,420
Allowance collectively evaluated for impairment	20,565			1,296			33,845			16,464			2,967			1,758			4,099			3,550		84,544
Allowance for purchased credit-impaired loans	—			—			33			—			—			—			—			—		33
Total allowance for loan losses	$	20,993		$	1,360		$	34,252		$	16,533		$	2,967		$	2,238		$	4,104		$	3,550	$	85,997



	December 31, 2016
	Commercial Real Estate		Multifamily Real Estate		Construction and Land		Commercial Business		Agricultural Business		One- to Four-Family Residential		Consumer		Unallocated		Total
Loan balances:
Loans individually evaluated for impairment	$	10,300	$	349	$	4,034	$	2,946	$	4,766	$	7,678	$	309	$	—	$	30,382
Loans collectively evaluated for impairment	3,305,586		247,662		815,174		1,201,112		363,706		805,125		650,079		—		7,388,444
Purchased credit-impaired loans	23,449		139		3,878		3,821		684		274		77		—		32,322
Total loans	$	3,339,335	$	248,150	$	823,086	$	1,207,879	$	369,156	$	813,077	$	650,465	$	—	$	7,451,148



	For the Year Ended December 31, 2015
	Commercial Real Estate			Multifamily Real Estate			Construction and Land			Commercial Business			Agricultural Business			One- to Four-Family Residential			Consumer			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	18,784		$	4,562		$	25,545		$	12,043		$	3,821		$	5,447		$	483		$	5,222		$	75,907
Provision for loan losses	1,177			(480		)	666			1,611			(878		)	(1,068		)	1,363			(2,391		)	—
Recoveries	819			113			1,811			948			1,927			772			570			—			6,960
Charge-offs	(64		)	—			(891		)	(746		)	(1,225		)	(419		)	(1,514		)	—			(4,859		)
Ending balance	$	20,716		$	4,195		$	27,131		$	13,856		$	3,645		$	4,732		$	902		$	2,831		$	78,008

	December 31, 2015
	Commercial Real Estate			Multifamily Real Estate			Construction and Land			Commercial Business			Agricultural Business			One- to Four-Family Residential			Consumer			Unallocated			Total
Allowance individually evaluated for impairment	$	605		$	71		$	418		$	69		$	—		$	728		$	29		$	—		$	1,920
Allowance collectively evaluated for impairment	20,111			4,124			26,713			13,732			3,645			4,004			873			2,831			76,033
Allowance for purchased credit-impaired loans	—			—			—			55			—			—			—			—			55
Total allowance for loan losses	$	20,716		$	4,195		$	27,131		$	13,856		$	3,645		$	4,732		$	902		$	2,831		$	78,008



	December 31, 2015
	Commercial Real Estate		Multifamily Real Estate		Construction and Land		Commercial Business		Agricultural Business		One- to Four-Family Residential		Consumer		Unallocated		Total
Loan balances:
Loans individually evaluated for impairment	$	8,519	$	357	$	4,669	$	2,223	$	544	$	12,185	$	319	$	—	$	28,816
Loans collectively evaluated for impairment	3,043,656		470,625		564,051		1,198,419		374,458		939,382		636,497		—		7,227,088
Purchased credit-impaired loans	40,985		1,994		5,650		7,302		1,529		1,066		74		—		58,600
Total loans	$	3,093,160	$	472,976	$	574,370	$	1,207,944	$	376,531	$	952,633	$	636,890	$	—	$	7,314,504

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

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