REGULATORY CAPITAL REQUIREMENTS

12 Months Ended

Dec. 31, 2018

Regulatory Capital Requirements [Abstract]

REGULATORY CAPITAL REQUIREMENTS

 REGULATORY CAPITAL REQUIREMENTS

Banner Corporation is a bank holding company registered with the Federal Reserve.  Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended (BHCA), and the regulations of the Federal Reserve.  Banner Bank and Islanders Bank, as state-chartered federally insured commercial banks, are subject to the capital requirements established by the FDIC.  The Federal Reserve requires Banner to maintain capital adequacy that generally parallels the FDIC requirements.

The following table shows the regulatory capital ratios of the Company and the Banks and the minimum regulatory requirements (dollars in thousands):

	Actual				Minimum for Capital Adequacy Purposes				Minimum to be Categorized as “Well-Capitalized” Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2018:
The Company—consolidated:
Total capital to risk-weighted assets	$	1,302,239	13.12	%	$	794,072	8.00	%	$	992,590	10.00	%
Tier 1 capital to risk-weighted assets	1,203,155		12.12		595,554		6.00		595,554		6.00
Tier 1 common equity to risk-weighted assets	1,067,155		10.75		446,665		4.50		n/a		n/a
Tier 1 capital to average leverage assets	1,203,155		10.98		438,379		4.00		n/a		n/a
Banner Bank:
Total capital to risk- weighted assets	1,217,173		12.50		778,766		8.00		973,457		10.00
Tier 1 capital to risk- weighted assets	1,120,523		11.51		584,074		6.00		778,766		8.00
Tier 1 common equity to risk-weighted assets	1,120,523		11.51		438,056		4.50		632,747		6.50
Tier 1 capital to average leverage assets	1,120,523		10.50		426,799		4.00		533,498		5.00
Islanders Bank:
Total capital to risk- weighted assets	34,567		18.26		15,142		8.00		18,928		10.00
Tier 1 capital to risk- weighted assets	32,200		17.01		11,357		6.00		15,142		8.00
Tier 1 common equity to risk-weighted assets	32,200		17.01		8,518		4.50		12,303		6.50
Tier 1 capital to average leverage assets	32,200		11.16		11,543		4.00		14,428		5.00
December 31, 2017:
The Company—consolidated:
Total capital to risk-weighted assets	$	1,214,631	13.81	%	$	703,508	8.00	%	$	879,385	10.00	%
Tier 1 capital to risk-weighted assets	1,123,154		12.77		527,631		6.00		527,631		6.00
Tier 1 common equity to risk-weighted assets	994,080		11.30		395,723		4.50		n/a		n/a
Tier 1 capital to average leverage assets	1,123,154		11.34		396,313		4.00		n/a		n/a
Banner Bank:
Total capital to risk- weighted assets	1,102,195		12.83		687,266		8.00		859,083		10.00
Tier 1 capital to risk- weighted assets	1,013,079		11.79		515,450		6.00		687,266		8.00
Tier 1 common equity to risk-weighted assets	1,013,079		11.79		386,587		4.50		558,404		6.50
Tier 1 capital to average leverage assets	1,013,079		10.53		384,920		4.00		481,150		5.00
Islanders Bank:
Total capital to risk- weighted assets	32,122		16.39		15,681		8.00		19,602		10.00
Tier 1 capital to risk- weighted assets	29,761		15.18		11,761		6.00		15,681		8.00
Tier 1 common equity to risk-weighted assets	29,761		15.18		8,821		4.50		12,741		6.50
Tier 1 capital to average leverage assets	29,761		10.65		11,183		4.00		13,979		5.00

At December 31, 2018, Banner Corporation and the Banks each exceeded all regulatory capital adequacy requirements.  There have been no conditions or events since December 31, 2018 that have materially adversely changed the Tier 1 or Tier 2 capital of the Company or the Banks.  However, events beyond the control of the Banks, such as weak or depressed economic conditions in areas where the Banks have most of their loans, could adversely affect future earnings and, consequently, the ability of the Banks to meet their respective capital requirements.  The Company may not declare or pay cash dividends on, or repurchase, any of its shares of common stock if the effect thereof would cause equity to be reduced below applicable regulatory capital maintenance requirements or if such declaration and payment would otherwise violate regulatory requirements.

Effective January 1, 2015 (with some changes transitioned into full effectiveness over several years), Banner Corporation and the Banks became subject to new capital regulations adopted by the Federal Reserve and the FDIC, which established minimum required ratios for common equity Tier 1 (“CET1”) capital, Tier 1 capital, total capital and the leverage ratio; risk-weightings of certain assets and other items for purposes of the risk-based capital ratios, a required capital conservation buffer over the required capital ratios, and defined what qualifies as capital for purposes of meeting the capital requirements. These regulations implement the regulatory capital reforms required by the Dodd-Frank Act and the “Basel III” regulatory capital requirements.

Under the capital regulations, the minimum capital ratios are: (1) a CET1 capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (3) a total risk-based capital ratio of 8.0% of risk-weighted assets; and (4) a leverage ratio (the ratio of Tier 1 capital to average total consolidated assets) of 4.0%.  CET1 generally consists of common stock; retained earnings; accumulated other comprehensive income (“AOCI”) unless an institution elects to exclude AOCI from regulatory capital; and certain minority interests; all subject to applicable regulatory adjustments and deductions. Tier 1 capital generally consists of CET1 and noncumulative perpetual preferred stock. Tier 2 capital generally consists of other preferred stock and subordinated debt meeting certain conditions plus an amount of the allowance for loan and lease losses up to 1.25% of assets. Total capital is the sum of Tier 1 and Tier 2 capital.

For purposes of determining risk-based capital, assets and certain off-balance sheet items are risk-weighted from 0% to 1,250%, depending on the risk characteristics of the asset or item. The regulations changed certain risk-weightings compared to the earlier capital rules, including a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (up from 0%); and a 250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital.

In addition to the minimum CET1, Tier 1, leverage ratio and total capital ratios, Banner and each of the Banks must maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based capital levels in

order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses.  The new capital conservation buffer requirement was phased in beginning on January 1, 2016 when a buffer greater than 0.625% of risk-weighted assets was required, which amount increased each year by 0.625% until the buffer requirement was fully implemented at 2.5% on January 1, 2019. The capital conservation requirement at December 31, 2018 was an amount greater than 1.875% of risk-weighted assets.