BUSINESS COMBINATIONS

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

Acquisition of Starbuck Bancshares, Inc.

Effective as of the close of business on October 1, 2015, the Company acquired Starbuck, the holding company of AmericanWest. As of October 1, 2015, Starbuck had $4.5 billion in total assets, $3.0 billion in loans and $3.6 billion in deposits.

The structure of the transaction was as follows:


•	Starbuck merged with and into the Company and, immediately following, AmericanWest Bank merged with and into Banner Bank.


•	Starbuck shareholders received 13.23 million shares of Banner common stock and nonvoting common stock and $130.0 million in cash.

The aggregate consideration for the purchase is estimated at $760.7 million and included the following:


•	Cash of $130.0 million.


•	Common stock and nonvoting common stock issued of $630.7 million.

The primary reason for the acquisition was to continue the Company’s growth strategy, including expanding our geographic footprint in markets throughout the Northwest and California. Preliminary fair values for all assets and liabilities are not reported herein as the Company is still in the process of determining the preliminary fair values. Goodwill expected to be recorded in the transaction will not be deductible for income tax purposes as the acquisition is accounted for as a tax-free exchange for tax purposes. The Company expects to disclose preliminary estimates of assets acquired and liabilities assumed, including fair value adjustments, as well as supplemental pro forma information, in a Form 8-K to be filed in the fourth quarter of 2015. In addition, the Company expects that the Form 8-K filing will include audited financial information for Starbuck Bancshares as of December 31, 2014 and unaudited financial information as of September 30, 2015. The Company's December 31, 2015 Form 10-K will include the results of operations produced by the acquired company beginning on October 2, 2015.

Acquisition of Siuslaw Financial Group, Inc.

Effective as of the close of business on March 6, 2015, the Company completed the acquisition of Siuslaw, the holding company of Siuslaw Bank. Siuslaw merged with and into the Company and, immediately following, Siuslaw Bank merged with and into Banner Bank. Siuslaw shareholders received 0.32231 shares of the Company's common stock and $1.41622 in cash in exchange for each share of Siuslaw common stock. The acquisition provided $370 million in assets, $316 million in deposits and $247 million in loans.

The application of the acquisition method of accounting resulted in recognition of a core deposit intangible asset of $3.9 million and goodwill of $21.1 million. The acquired core deposit intangible has been determined to have a useful life of approximately eight years and will be amortized on an accelerated basis. Goodwill is not amortized but will be evaluated for impairment on an annual basis or more often if circumstances dictate to determine if the carrying value remains appropriate. Goodwill will not be deductible for income tax purposes as the acquisition is accounted for as a tax-free exchange for tax purposes.

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



	Siuslaw
	March 6, 2015
Consideration to Siuslaw shareholders:
Cash paid			$	5,806
Fair value of common shares issued			58,100
Total consideration			63,906
Fair value of assets acquired:
Cash and cash equivalents	$	84,405
Securities—available-for-sale	12,865
Loans receivable (contractual amount of $252.2 million)	247,098
Real estate owned, held for sale	2,525
Property and equipment	8,127
Core deposit intangible	3,895
Other assets	11,391
Total assets acquired	370,306
Fair value of liabilities assumed:
Deposits	316,406
Junior subordinated debentures	5,959
Other liabilities	5,183
Total liabilities assumed	327,548
Net assets acquired			42,758
Goodwill			$	21,148

Acquired goodwill represents the premium the Company paid over the fair value of the net tangible and intangible assets acquired. The acquisition complements the Company's growth strategy, including expanding our geographic footprint in markets throughout the Northwest. The Company paid this premium for a number of reasons, including growing the Company's customer base, acquiring assembled workforces, and expanding its presence in new markets. See Note 8, Goodwill, Other Intangible Assets and Mortgage Servicing Rights for the accounting for goodwill and other intangible assets.

Amounts recorded are estimates of fair value. Additional adjustments to the purchase price allocation may be required and would most likely involve loans or property and equipment. As of March 6, 2015, the unpaid principal balance on purchased non-credit-impaired loans was $244.2 million. The fair value of the purchased non-credit-impaired loans was $241.4 million, resulting in a discount of $2.8 million recorded on these loans. This discount is being accreted into income over the life of the loans on an effective yield basis.

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



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

The following table presents certain unaudited pro forma information for illustrative purposes only, for the three and nine months ended September 30, 2015 and 2014 as if Siuslaw had been acquired on January 1, 2014. This unaudited estimated pro forma financial information combines the historical results of Siuslaw with the Company’s consolidated historical results. The pro forma information is not indicative of what would have occurred had the acquisition actually occurred on January 1, 2014. In particular, no adjustments have been made to eliminate the impact of other-than-temporary impairment losses and losses recognized on the sale of securities that may not have been necessary had the investment securities been recorded at fair value as of January 1, 2014. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loan assets at fair value. Additionally, Banner expects to achieve further operating cost savings and other business synergies, including revenue growth, as a result of the acquisition which are not reflected in the pro forma amounts that follow. As a result, actual amounts would have differed from the unaudited pro forma information presented (in thousands except per share amounts):



	Pro Forma
	Three Months Ended September 30				Nine Months Ended September 30
	2015		2014		2015		2014
Total revenues (net interest income plus non-interest income)	$	66,286	$	65,444	$	197,048	$	189,944
Net income	$	12,947	$	16,048	$	38,714	$	45,438
Earnings per share - basic	$	0.62	$	0.78	$	1.87	$	2.20
Earnings per share - diluted	$	0.62	$	0.77	$	1.86	$	2.19

The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities of Siuslaw for the period March 7, 2015 to September 30, 2015. Disclosure of the amount of Siuslaw’s revenue and net income (excluding integration costs) included in the Company’s Consolidated Statements of Operations is impracticable due to the integration of the operations and accounting for this acquisition.

Acquisition of Six Oregon Branches

Effective as of the close of business on June 20, 2014, Banner Bank completed the purchase of six branches from Umpqua Bank, successor to Sterling Savings Bank (the Branch Acquisition). Five of the six branches are located in Coos County, Oregon and the sixth branch is located in Douglas County, Oregon. The purchase provided $212 million in deposit accounts, $88 million in loans, and $3 million in branch properties. Banner Bank received $128 million in cash from the transaction.

The application of the acquisition method of accounting resulted in recognition of a core deposit intangible asset of $2.4 million and an acquisition bargain purchase gain of $9.1 million. The bargain purchase gain consisted primarily of a $7.0 million discount on the assets acquired in this required branch divestiture combined with a $2.4 million core deposit intangible, net of approximately $300,000 in other fair value adjustments. The acquired core deposit intangible was determined to have a useful life of approximately eight years and is being amortized on an accelerated basis.

The following table displays the fair value as of the acquisition date for each major class of assets acquired and liabilities assumed (in thousands):



	Branch Acquisition
	June 20, 2014
Total consideration			$	—
Fair value of assets acquired:
Cash and cash equivalents	$	127,557
Loans receivable (contractual amount of $88.3 million)	87,923
Property and equipment	3,079
Core deposit intangible	2,372
Other assets	275
Total assets acquired	221,206

Fair value of liabilities assumed:
Deposits	212,085
Other liabilities	42
Total liabilities assumed	212,127
Net assets acquired			$	9,079
Acquisition bargain purchase gain			$	(9,079	)

The primary reason for the Branch Acquisition was to continue the Company's growth strategy, including expanding its geographic footprint in markets throughout the Northwest. As of June 20, 2014, the transaction had no remaining contingencies. The operating results of the Company include the operating results produced by the Branch Acquisition from June 21, 2014 to September 30, 2015. Pro forma results of operations for the nine months ended September 30, 2015 and 2014, as if the Branch Acquisition had occurred on January 1, 2014, have not been presented because historical financial information was not available. There were no purchased credit-impaired loans acquired in connection with the Branch Acquisition.

Acquisition-Related Costs

In the quarter ended September 30, 2014, Banner adjusted the accrued estimated acquisition-related expenses to reflect amounts actually incurred, which resulted in a net reversal of expense totaling $494,000 for the quarter. The following tables present the key components of acquisition-related costs in connection with the Branch Acquisition, the acquisition of Siuslaw and the acquisition of Starbuck, including AmericanWest, for the three and nine months ended September 30, 2015 and 2014 (in thousands):



	Three Months Ended September 30					Nine Months Ended September 30
	2015		2014			2015		2014
Acquisition-related costs recognized in other operating expenses:
Personnel severance/retention fees	$	227	$	—		$	443	$	—
Non-capitalized equipment and repairs	5		70			55		99
Client communications	151		(108		)	221		130
Information/computer data services	301		(335		)	807		297
Payment and processing expenses	16		(205		)	16		66
Professional services	1,185		55			5,411		674
Miscellaneous	322		29			788		264
	$	2,207	$	(494	)	$	7,741	$	1,530

The Branch Acquisition	$	—	$	(494	)	$	—	$	1,530
Siuslaw	340		—			1,867		—
Starbuck	1,867		—			5,874		—
	$	2,207	$	(494	)	$	7,741	$	1,530