BUSINESS COMBINATION

3 Months Ended

Mar. 31, 2020

Acquisition of AltaPacific Bancorp

On November 1, 2019, the Company completed the acquisition of 100% of the outstanding common shares of AltaPacific Bancorp (AltaPacific), the holding company for AltaPacific Bank, a California state-chartered commercial bank. AltaPacific was merged into Banner and AltaPacific Bank was merged into Banner Bank. Pursuant to the previously announced terms of the acquisition, AltaPacific shareholders received 0.2712 shares of Banner common stock in exchange for each share of AltaPacific common stock, plus cash in lieu of any fractional shares and to cancel in-the-money AltaPacific stock options. The merged banks operate as Banner Bank. The primary reason for the acquisition was to expand the Company's presence in California by adding density within our existing geographic footprint. The acquisition provided $425.7 million in assets, $313.4 million in deposits and $332.4 million in loans to Banner.

The application of the acquisition method of accounting resulted in recognition of a CDI asset of $4.6 million and goodwill of $34.0 million. The acquired CDI has been determined to have a useful life of approximately ten years and will be amortized on an accelerated basis. Goodwill is not amortized but will be evaluated for impairment on an annual basis or more often if circumstances dictate to determine if the carrying value remains appropriate. Goodwill will not be deductible for income tax purposes as the acquisition is accounted for as a tax-free exchange for tax purposes.

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



	AltaPacific
	November 1, 2019
Consideration to AltaPacific equity holders:
Cash paid		$	2,360
Fair value of common shares issued		85,200
Total consideration		87,560

Fair value of assets acquired:
Cash and cash equivalents	39,686
Securities	20,348
Federal Home Loan Bank stock	2,005
Loans receivable (contractual amount of $338.2 million)	332,355
Real estate owned held for sale	650
Property and equipment	3,809
Core deposit intangible	4,610
Bank-owned life insurance	11,890
Deferred tax asset	166
Other assets	10,150
Total assets acquired	425,669

Fair value of liabilities assumed:
Deposits	313,374
Advances from FHLB	40,226
Junior subordinated debentures	5,814
Deferred compensation	4,508
Other liabilities	8,154
Total liabilities assumed	372,076

Net assets acquired		53,593
Goodwill		$	33,967

Acquired goodwill represents the premium the Company paid over the fair value of the net tangible and intangible assets acquired. 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 existing markets. See Note 7, Goodwill, Other Intangible Assets and Mortgage Servicing Rights for the accounting for goodwill and other intangible assets.

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. Additional adjustments to the acquisition accounting that may be required would most likely involve loans, property and equipment, or the deferred tax asset. As of November 1, 2019, the unpaid principal balance on purchased non-credit-impaired loans was $333.5 million. The fair value of the purchased non-credit-impaired loans was $328.2 million, resulting in a discount of $5.3 million recorded on these loans, which includes $5.8 million of a credit related discount. This discount is being accreted into income over the life of the loans on an effective yield basis.

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



	AltaPacific
	November 1, 2019
Acquired PCI loans:
Contractually required principal and interest payments	$	5,881
Nonaccretable difference	(1,046		)
Cash flows expected to be collected	4,835
Accretable yield	(683		)
Fair value of PCI loans	$	4,152

The financial results of the Company include the revenues and expenses produced by the acquired assets and assumed liabilities of AltaPacific since November 1, 2019. Disclosure of the amount of AltaPacific'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. The pro forma impact of the AltaPacific acquisition to the historical financial results was determined to not be significant.