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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

 

Filed by the Registrant  x                             Filed by a Party other than the Registrant  ¨

Check the appropriate box:

 

¨		Preliminary Proxy Statement
¨		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
x		Definitive Proxy Statement
¨		Definitive Additional Materials
¨		Soliciting Material Pursuant to §240.14a-12

BANNER CORPORATION

(Name of Registrant as Specified in Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

¨		No fee required.
¨		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
		(1)		Title of each class of securities to which transaction applies:
		(2)		Aggregate number of securities to which transaction applies:
		(3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
		(4)		Proposed maximum aggregate value of transaction:
		(5)		Total fee paid:
x		Fee paid previously with preliminary materials.
¨		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
		(1)		Amount Previously Paid:
		(2)		Form, Schedule or Registration Statement No.:
		(3)		Filing Party:
		(4)		Date Filed:

 

 

 

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BANNER CORPORATION

10 S. FIRST AVENUE

WALLA WALLA, WASHINGTON 99362

(509) 527-3636

February 17, 2015

Dear Shareholders:

MERGER PROPOSED—YOUR VOTE IS IMPORTANT

We cordially invite you to attend a special meeting of shareholders of Banner Corporation to be held at 10 S. First Avenue, Walla Walla, Washington, on Tuesday, March 17, 2015. The meeting will begin at 10:00 a.m. local time.

On November 5, 2014, we entered into an Agreement and Plan of Merger, which we refer to as the merger agreement, with SKBHC Holdings LLC and Starbuck Bancshares, Inc. whereby Starbuck Bancshares, Inc. will merge with and into a subsidiary of Banner. Immediately following the merger, Starbuck’s wholly owned subsidiary bank, AmericanWest Bank, a Washington state-chartered commercial bank, will merge with and into Banner’s wholly owned subsidiary bank, Banner Bank, a Washington state-chartered commercial bank. Pursuant to the merger agreement, we will acquire all the outstanding shares of Starbuck for $130 million in cash and an aggregate of 13,230,000 shares of Banner common stock and a new class of Banner non-voting common stock to be approved by the Banner shareholders, which we refer to as the stock consideration. The stock consideration to be issued in connection with the merger will represent an ownership in Banner of approximately 38.77% immediately following the effective time of the merger, based on the number of shares of Banner common stock outstanding as of February 13, 2015 and after giving effect to the merger and including the Banner common stock to be issued upon the completion of Banner’s pending acquisition of Siuslaw Financial Group, Inc. As of November 4, 2014, based on the closing price of Banner common stock of $43.20, the transaction was valued at approximately $702 million, and based on the closing price of the Banner common stock as of February 13, 2015, the transaction is valued at approximately $724 million.

At the special meeting, we will ask you to:

 

•

approve an amendment to Banner’s articles of incorporation creating a new class of Banner non-voting common stock of 5,000,000 authorized shares;

 

•

approve the issuance of an aggregate of 13,230,000 shares of Banner common stock and Banner non-voting common stock in accordance with the Agreement and Plan of Merger, dated as of November 5, 2014, by and among SKBHC Holdings LLC, Starbuck Bancshares, Inc. and Banner Corporation; and

 

•

approve adjournments or postponements of the special meeting, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting in favor of the foregoing proposals.

This proxy statement provides information about the merger and Starbuck that holders of Banner common stock should know when they vote. We urge you to read this entire proxy statement carefully.

The Banner board of directors unanimously recommends that holders of common stock vote “for” each of the proposals. While each of the proposals is being voted upon separately, each of proposals 1 and 2 relate to the merger and each of proposals 1 and 2 must be approved in order for the merger to be consummated. The amendment to Banner’s articles of incorporation will go into effect if approved at the special meeting even if the merger is not consummated.

Your vote is very important, regardless of the number of shares you own. Whether or not you plan to attend the special meeting, please submit a proxy as soon as possible to make sure your shares are represented at the special meeting. Please take the time to submit your proxy by following the instructions presented in this proxy statement.

I strongly support this combination of our companies and join with our board of directors in recommending that you vote in favor of each of the proposals described in this proxy statement.

 

Mark J. Grescovich

President and Chief Executive Officer

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the merger, passed upon the merits or fairness of the merger agreement or the transactions contemplated thereby, including the proposed merger, or passed upon the adequacy or accuracy of the information contained in this document. Any representation to the contrary is a criminal offense.

The accompanying proxy statement is dated February 17, 2015, and is first being mailed to Banner shareholders on or about February 17, 2015.

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BANNER CORPORATION

10 S. FIRST AVENUE

WALLA WALLA, WASHINGTON 99362

(509) 527-3636

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

A special meeting of shareholders of Banner will be held on Tuesday, March 17, 2015 at 10:00 a.m. local time at 10 S. First Avenue, Walla Walla, Washington for the following matters:

 

•

Proposal 1: To approve an amendment to Banner’s articles of incorporation creating a new class of Banner non-voting common stock of 5,000,000 authorized shares;

 

•

Proposal 2: To approve the issuance of an aggregate of 13,230,000 shares of Banner common stock and Banner non-voting common stock in accordance with the Agreement and Plan of Merger, dated as of November 5, 2014, by and among SKBHC Holdings LLC, Starbuck Bancshares, Inc. and Banner Corporation; and

 

•

Proposal 3: To approve adjournments or postponements of the special meeting if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting in favor of the foregoing proposals.

The Banner board of directors unanimously recommends that you vote FOR all of the proposals described above.

Only shareholders of record at the close of business on February 13, 2015 are entitled to receive notice of and to vote at the special meeting and any adjournment or postponement of the special meeting. A list of shareholders entitled to vote will be available for examination at the meeting by any shareholder for any purpose germane to the meeting. The list will also be available for the same purpose beginning ten days prior to the meeting and continuing through the meeting at our principal executive office at 10 S. First Avenue, Walla Walla, Washington 99362.

Your vote is important, regardless of the number of shares you own. Whether or not you plan to attend the special meeting, please submit a proxy as soon as possible to make sure your shares are represented at the special meeting. Please take the time to submit your proxy by following the instructions presented in this proxy statement.

By Order of the Board of Directors

 

Albert H. Marshall,

Secretary

Walla Walla, Washington,

February 17, 2015

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SUMMARY TERM SHEET

This summary term sheet highlights selected information contained in this proxy statement and may not contain all of the information that is important to you. You are urged to read the entire proxy statement, along with the annexes, carefully.

 

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Merger and Merger Agreement—On November 5, 2014, we entered into an Agreement and Plan of Merger, which, as may be amended and together with the joinder agreement described below, we refer to as the merger agreement, with SKBHC Holdings LLC, which we refer to as Holdings, and Starbuck Bancshares, Inc., which we refer to as Starbuck, whereby Starbuck will merge with and into a subsidiary of Banner Corporation, with the Banner subsidiary surviving, which we refer to as the merger. As of November 4, 2014, based on the closing price of Banner common stock of $43.20, the transaction was valued at approximately $702 million, and based on the closing price of the Banner common stock as of February 13, 2015, the transaction is valued at approximately $724 million. Subsequent to signing the merger agreement, on December 17, 2014, Elements Merger Sub, LLC, a wholly owned subsidiary of Banner, which we refer to as merger sub, Banner, Holdings and Starbuck entered into a joinder agreement, which we refer to as the joinder agreement, pursuant to which merger sub agreed to be bound by the merger agreement and will be the Banner subsidiary into which Starbuck will merge at the effective time of the merger. Immediately following the merger, Starbuck’s wholly owned subsidiary bank, AmericanWest Bank, a Washington state-chartered commercial bank, will merge with and into Banner Corporation’s wholly owned subsidiary bank, Banner Bank, a Washington state-chartered commercial bank, with Banner Bank surviving, which we refer to as the bank merger. For a description of the merger, bank merger, joinder agreement and the merger agreement see the sections entitled “The Merger” and “The Agreement and Plan of Merger” beginning on pages 59 and 78 respectively.

In connection with Banner’s acquisition of all of the outstanding shares of common stock of Starbuck, pursuant to the merger agreement, Banner will:

 

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pay $130 million in cash; and

 

•

issue an aggregate of 13,230,000 shares of Banner common stock and Banner non-voting common stock, which we refer to as the stock consideration, and together with the cash consideration, we refer to as the merger consideration.

At the effective time of the merger, we will deliver the merger consideration to Holdings, who will distribute the merger consideration to the holders of outstanding equity interests of Holdings, who we refer to as the Starbuck holders, in accordance with the terms of the Holdings organizational documents. The stock consideration will represent an ownership in Banner of approximately 38.77% immediately following the effective time of the merger, based on the number of shares of Banner common stock outstanding as of February 13, 2015 and after giving effect to the merger and including the Banner common stock to be issued upon the completion of Banner’s pending acquisition of Siuslaw.

 

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Investor Letter Agreements—Also on November 5, 2014, Banner entered into letter agreements, which we refer to as the investor letter agreements, with investment funds affiliated with each of Oaktree Principal Fund V (Delaware), L.P. and certain of its respective affiliates, which we refer to collectively as Oaktree, Friedman Fleischer & Lowe Capital Partners III, L.P. and certain of its respective affiliates, which we refer to collectively as Friedman Fleischer & Lowe, and GS Capital Partners VI Fund, L.P. and certain of its respective affiliates, which we refer to collectively as GS Capital (each of which we also refer to as a Starbuck investor), who in the aggregate own a majority of the outstanding equity interests of Holdings. Based on certain assumptions, Banner expects that the shares included in the merger consideration issued to each Starbuck investor will represent approximately 7.79% of the number of outstanding shares of Banner common stock and Banner non-voting common stock, based on the number of shares of Banner stock outstanding as of February 13, 2015 and after giving effect to the merger and including the Banner common stock to be issued upon

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the completion of Banner’s pending acquisition of Siuslaw Financial Group, Inc., which we refer to as Siuslaw. For a description of the investor letter agreements see the section entitled “Investor Letter Agreements” beginning on page 91.

 

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Shareholder Vote—You, as a holder of Banner common stock, are being asked to consider and vote upon certain proposals in connection with the merger. You are being asked to vote on a total of three proposals, two of which are a condition to the completion of the merger. A “FOR” vote on these proposals will approve (i) an amendment to Banner’s articles of incorporation, which we refer to as the amendment to the articles of incorporation, to create a new class of non-voting common stock, par value $0.01, which we refer to as the Banner non-voting common stock, (ii) the issuance of an aggregate of 13,230,000 shares of Banner common stock and Banner non-voting common stock in accordance with the merger agreement and (iii) any necessary adjournments and postponements of the special meeting in order to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting in favor of the proposals. For a description of the proposals and the votes necessary for the proposals to be approved see the section entitled “Information about the Special Meeting and Voting” beginning on page 51.

 

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Effect of the Merger on Banner Shareholders—Because Starbuck is merging with and into merger sub, a wholly owned subsidiary of Banner, the shares of Banner common stock held by Banner shareholders will not be changed by the merger and Banner shareholders will continue to hold their existing shares following completion of the merger. Upon completion of the merger, current holders of Banner common stock will own approximately 57.36% and the Starbuck holders will own approximately 38.77% of Banner’s outstanding common stock and Banner non-voting common stock, based on the number of shares of Banner common stock outstanding as of February 13, 2015 and after giving effect to the merger and including the Banner common stock to be issued upon the completion of Banner’s pending acquisition of Siuslaw. See the section entitled “The Agreement and Plan of Merger” beginning on page 78.

 

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Reasons for Merger—In evaluating the merger, the Banner board of directors consulted with senior management, legal and financial advisers and considered certain factors to reach its decision to approve and adopt the merger agreement. Among other factors considered by the Banner board of directors, the Banner board of directors considered that the merger will establish the combined company as the twelfth largest publicly owned bank headquartered in the Western United States, will provide entry into attractive markets with compelling demographic trends, will combine our complementary lending strategies and lower the combined company’s loan / deposit ratio, given AmericanWest Bank’s low-cost core deposit base, and will provide Banner Bank with additional net interest margin protection. See the section entitled “The Merger—Reasons for Merger; Recommendation of the Banner Board of Directors” beginning on page 61.

 

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Conditions to Completion of Merger—Completion of the merger is subject to the approval of the amendment to the articles of association and the issuance of the stock consideration at the special meeting, as well as other conditions, including the accuracy of certain representations and warranties made by each party to the merger agreement, the receipt of required regulatory approvals and expiration or termination of any applicable waiting periods, certain amendments to the bylaws of Banner Bank, the receipt of an executed copy of certain consents by Holdings, and that the stock consideration shall have been authorized for listing on the Nasdaq Global Select Market, which we refer to as NASDAQ, among others. See the section entitled “The Agreement and Plan of Merger—Conditions to the Merger” beginning on page 88.

 

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Risk Factors—In deciding how to vote your shares of common stock on the matters described in this proxy statement, you should carefully consider the risks related to the merger. These risks include, among other things, risks related to the uncertainty that Banner will be able to realize the anticipated benefits and cost savings of the merger and integrate successfully its existing business with the Starbuck business. See the section entitled “Risk Factors” beginning on page 16.

 

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TABLE OF CONTENTS

 

		Page
SUMMARY TERM SHEET			i
QUESTIONS AND ANSWERS ABOUT THE MERGER AND SPECIAL MEETING OF SHAREHOLDERS			1
SUMMARY			7
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS			14
RISK FACTORS			16
PRICE RANGE OF BANNER COMMON STOCK AND RELATED SHAREHOLDER MATTERS			21
SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION OF BANNER			22
SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION OF STARBUCK			25
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION			27
COMPARATIVE UNAUDITED PRO FORMA PER SHARE DATA			28
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL INFORMATION			29
INFORMATION ABOUT THE SPECIAL MEETING AND VOTING			51
PROPOSALS TO BE CONSIDERED AND VOTED UPON BY HOLDERS OF BANNER STOCK AT THE SPECIAL MEETING			54
THE PARTIES TO THE MERGER			57
THE MERGER			59
THE AGREEMENT AND PLAN OF MERGER			78
INVESTOR LETTER AGREEMENTS			91
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—SKBHC HOLDINGS LLC AND SUBSIDIARIES			94
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT			126
SHAREHOLDER PROPOSALS			129
WHERE YOU CAN FIND MORE INFORMATION			129
ANNEX A—AMENDMENT TO ARTICLES OF INCORPORATION			A-1
ANNEX B—AGREEMENT AND PLAN OF MERGER			B-1
ANNEX C—JOINDER AGREEMENT			C-1
ANNEX D—INVESTOR LETTER AGREEMENTS			D-1
ANNEX E—OPINION OF SANDLER O’NEILL & PARTNERS, L.P			E-1

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER

AND SPECIAL MEETING OF SHAREHOLDERS

The following questions and answers are intended to address briefly some commonly asked questions regarding the special meeting and the merger. These questions and answers may not address all of the information that may be important to you. Please refer to the more detailed information contained elsewhere in this proxy statement and the annexes to this proxy statement.

 

Q:	What are the merger agreement and the merger?

 

A.

On November 5, 2014, we entered into the merger agreement with Holdings and Starbuck, pursuant to which Starbuck will merge with and into merger sub, with merger sub as the surviving company in the merger. Immediately following the merger, Starbuck’s wholly owned subsidiary bank, AmericanWest Bank, will merge with and into Banner’s wholly owned subsidiary bank, Banner Bank.

 

Q:	Why am I receiving this proxy statement?

 

A.

You are receiving this proxy statement because you have been identified as a holder of Banner common stock. This proxy statement is being used to solicit proxies on behalf of the Banner board of directors for the special meeting. This proxy statement contains important information about the merger and related transactions and the special meeting, and you should read it carefully.

 

Q:	What am I being asked to vote upon?

 

A.	You are being asked to consider and vote upon the following proposals:

Proposal 1—To approve an amendment to Banner’s articles of incorporation creating a new class of Banner non-voting common stock of 5,000,000 authorized shares;

Proposal 2—To approve the issuance of an aggregate of 13,230,000 shares of Banner common stock and Banner non-voting common stock in accordance with the merger agreement; and

Proposal 3—To approve adjournments or postponements of the special meeting if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting in favor of the foregoing proposals.

 

Q:	What is required to complete the merger?

 

A.	To complete the merger, Banner shareholders must approve proposals 1 and 2.

In addition to obtaining approval of these proposals, Banner and Holdings must satisfy or waive all other closing conditions set forth in the merger agreement. For a more complete discussion of the conditions to the closing, see the section entitled “The Agreement and Plan of Merger—Conditions to the Merger” on page 88.

 

Q:	Why do I need to approve the issuance of the Banner common stock?

 

A.	The issuance of the common stock in connection with the merger requires the approval of holders of Banner under NASDAQ Stock Market rules because the number of shares of common stock to be issued in the merger is in excess of 20% of the number of shares of Banner common stock currently outstanding.

 

Q:	What happens to existing shares of Banner common stock in the merger?

 

A.	Because Starbuck is merging into merger sub, a wholly owned subsidiary of Banner, the shares of Banner common stock held by Banner shareholders will not be changed by the merger and Banner shareholders will continue to hold their existing shares following completion of the merger.

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Q:	What will the Starbuck shareholders be entitled to receive pursuant to the merger?

 

A.

Holdings, as the sole shareholder of Starbuck, will be entitled to receive $130 million in cash and an aggregate of 13,230,000 shares of newly issued Banner common stock and newly issued Banner non-voting common stock. The exact number of Banner non-voting common shares will be determined shortly before consummation of the merger, but in no event will we issue more than 3 million shares of Banner non-voting common stock pursuant to the merger. Following the merger, the merger consideration will be distributed to the Starbuck holders in accordance with the terms of the Holdings organizational documents, which we refer to as the distribution.

 

Q:	Upon completion of the merger, will Starbuck holders have the ability to exert influence over Banner?

 

A.

After completion of the merger and the distribution, the Starbuck holders in the aggregate will own approximately 38.77% of Banner common stock and Banner non-voting common stock, based on the number of shares of Banner common stock outstanding as of February 13, 2015 and after giving effect to the merger and including the Banner common stock to be issued upon the completion of Banner’s pending acquisition of Siuslaw. However, no Starbuck holder will have more than 8.00% of the outstanding voting shares of the combined company. The Starbuck investors will each have the right to appoint one director to the Banner board of directors, subject to maintaining continued ownership of at least 5% of the outstanding shares of Banner common stock and Banner non-voting common stock on an as-converted basis (calculated to exclude the dilutive impact of any primary issuance of shares by Banner).

As a result of the merger, each of the Starbuck investors would have the ability to exert some influence over Banner’s management policies and affairs, but none of them would control the outcome of any matter submitted to Banner’s shareholders. See “Investor Letter Agreements” beginning on page 91.

 

Q:	Why does Banner need to amend its articles of incorporation to issue the Banner non-voting common stock?

 

A.

The amendment to the articles of incorporation authorizing the creation of the Banner non-voting common stock is a condition to the closing of the merger and is necessary for Banner to issue the Banner non-voting common stock as part of the consideration for the merger. Certain of the Starbuck holders have requested a portion of the stock consideration in non-voting common stock, to limit their ownership of Banner common stock to no more than 4.9% of the outstanding Banner common stock. The Banner non-voting common stock to be issued to Starbuck holders in the merger in no event shall exceed 3,000,000 shares of Banner non-voting common stock.

Banner’s articles of incorporation currently does not currently authorize the issuance of Banner non-voting common stock. Authorizing the creation of the Banner non-voting common stock is required to enable Banner to have sufficient shares of Banner non-voting common stock authorized for issuance in the merger.

At present, the Banner board of directors has no plans to issue the additional shares of Banner non-voting common stock authorized by the amendment to the articles of incorporation. However, it is possible that some of these additional shares could be used in the future for various other purposes without further shareholder approval, except as such approval may be required in particular cases by Banner’s articles of incorporation or bylaws, applicable law or the rules of any stock exchange or other quotation system on which our securities may then be listed. These purposes may include raising capital, providing equity incentives to employees, officers or directors, establishing strategic relationships with other companies and expanding our business or product lines through the acquisition of other businesses or products.

 

Q:	When do you expect the merger to be completed?

 

A.

We anticipate that the closing of the merger will occur in the second quarter of 2015, assuming the requisite shareholder approvals at the special meeting are received and all regulatory approvals are received, and assuming the other conditions to closing of the merger are satisfied or waived. The merger will become effective as set forth in the articles of merger to be filed with the Secretary of State of the State of

 

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Washington and the Secretary of State of the State of Minnesota on the closing date of the merger. For more information, see “The Agreement and Plan of Merger—Expected Timing of the Merger” and “The Agreement and Plan of Merger—Conditions to the Merger” on pages 79 and 88 respectively.

 

Q:	Am I entitled to appraisal rights?

 

A.	Holders of Banner common stock are not entitled to appraisal rights in connection with the merger under the Washington Business Corporation Act of the State of Washington, which we refer to as the WBCA, or Banner’s articles of incorporation.

 

Q:	Who may vote at the special meeting?

 

A.

Holders of record of common stock at the close of business on February 13, 2015, which we refer to as the record date, are entitled to notice of and to vote at the special meeting. As of the record date, 19,572,141 shares of Banner common stock were issued and outstanding. A list of shareholders entitled to vote will be available for examination at the meeting by any shareholder for any purpose germane to the meeting. The list will also be available for the same purpose beginning ten days prior to the meeting and continuing through the meeting at our principal executive office at 10 S. First Avenue, Walla Walla, Washington 99362.

 

Q:	How many votes do Banner shareholders have?

 

A.	Each holder of record of Banner common stock as of the close of business on the record date will be entitled to one vote, in person or by proxy, for each share of Banner common stock held in his, her or its name on the books of Banner on that date.

As of the record date, directors and executive officers of Banner and their affiliates as a group beneficially owned and were entitled to vote approximately 450,512 shares of Banner common stock, representing approximately 2.30% of the shares of Banner common stock issued and outstanding as of February 13, 2015. To Banner’s knowledge, all of the directors and executive officers of Banner who are entitled to vote at the special meeting intend to vote their shares of Banner common stock in favor of each of the proposals, although such persons have not entered into agreements obligating them to do so.

 

Q:	What shareholder approvals are required for Banner?

 

A.

Proposal 1 requires the affirmative vote of holders of at least a majority of our outstanding common stock as of the record date of the special meeting. As of the record date, there were 19,572,141 shares of Banner common stock outstanding and therefore 9,786,071 votes are required for proposal 1 to be approved by Banner shareholders. Abstentions and broker non-votes will have the same effect as a vote against the proposal.

Proposal 2 requires the affirmative vote of a majority of those shares voting on the proposal. Any shareholder represented in person or by proxy at the meeting and entitled to vote on the subject matter may elect to abstain from voting on this proposal. If so, such abstention will not be counted as a vote cast on the proposal and, therefore, will have no effect on the outcome of the vote on the proposal. Provided there is a quorum of shareholders present in person or by proxy, shareholders not attending the meeting, in person or by proxy, will also have no effect on the outcome of this proposal.

Proposal 3 requires the affirmative vote of a majority of those shares voting on the proposal to authorize the Banner board of directors to adjourn, postpone or continue the special meeting, should such authorization be necessary for an adjournment, postponement or continuation. Any shareholder represented in person or by proxy at the meeting and entitled to vote on the subject matter may elect to abstain from voting on this proposal. If so, such abstention will not be counted as a vote cast on the proposal and, therefore, will have no effect on the outcome of the vote on the proposal. Provided there is a quorum of shareholders present in person or by proxy, shareholders not attending the meeting, in person or by proxy, will also have no effect on the outcome of this proposal.

 

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Q:	Why did I receive more than one proxy card?

 

A.

You will receive multiple proxy cards if you hold your shares in multiple accounts or in different ways (e.g., custodial accounts, trusts, joint tenancy). If your shares are held by a broker (i.e., in “street name”), you will receive your proxy card or other voting information from your broker, and you will need to return your proxy card or cards to your broker.

 

Q:	What constitutes a quorum?

 

A.

In order to conduct business at the special meeting, a quorum must be present. The holders of a majority of the votes entitled to be cast at the special meeting, present in person or represented by proxy, constitute a quorum under Banner’s bylaws. Banner will treat shares of Banner’s common stock represented by a properly signed and returned proxy, including abstentions and broker non-votes, as present at the Banner special meeting for the purposes of determining the existence of a quorum.

 

Q:	What if a quorum is not present at the meeting?

 

A.

If a quorum is not present at the scheduled time of the meeting, a majority of the shareholders present or represented by proxy may adjourn the meeting until a quorum is present. The time and place of the adjourned meeting will be announced at the time the adjournment is taken, and no other notice will be given unless the meeting is adjourned for 120 days or more. An adjournment will have no effect on the business that may be conducted at the meeting.

 

Q:	How are votes counted?

 

A.

For all proposals, you may vote “for,” “against” or “abstain.” If you “abstain,” it has the same effect as a vote “against” proposal 1. Abstentions will have no effect on proposal 2 or proposal 3 but will reduce the number of votes required to approve such proposals. With respect to any other matter that properly comes before the meeting, the proxy holders will vote as recommended by the Banner board of directors or, if no recommendation is given, in their own discretion.

 

Q:	What are the Board’s recommendations on how I should vote my shares?

 

A.	The Banner board of directors recommends that you vote your shares “FOR” each of the proposals.

While each of the proposals is being voted upon separately, each of proposals 1 and 2 relate to the merger and related matters and each of proposals 1 and 2 must be approved in order for the merger to be consummated. The amendment to the articles of incorporation will go into effect if approved at the special meeting even if the merger is not consummated.

 

Q:	When and where is the special meeting?

 

A.	The special meeting of shareholders will be held on Tuesday, March 17, 2015 at 10:00 a.m. local time at 10 S. First Avenue, Walla Walla, Washington.

 

Q:	What is the difference between a “shareholder of record” and a “street name” holder?

 

A.

These terms describe how shares are held. If your shares are registered directly in your name with Computershare Trust Company, N.A., our transfer agent, you are a “shareholder of record.” If your shares are held in the name of a brokerage, bank, trust or other nominee as a custodian, you are a “street name” holder.

 

Q:	What do I need to do now and how do I vote?

 

A.	We encourage you to read this proxy statement carefully, including its annexes, and then vote your proxy for the relevant proposals.

 

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If you are a “shareholder of record,” you have several choices. You can vote your proxy:

 

•

by mailing the enclosed proxy card using the enclosed envelope;

 

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over the telephone; or

 

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via the Internet.

Please refer to the specific instructions set forth on the enclosed proxy card.

If you hold your shares in “street name,” your broker/bank/trust/nominee will provide you with materials and instructions for voting your shares. Please follow those instructions carefully.

 

Q:	Can I vote my shares in person at the special meeting?

 

A.	If you are a “shareholder of record,” you may vote your shares in person at the special meeting. If you hold your shares in “street name,” you must obtain a legal proxy from your broker, banker, trustee or nominee, giving you the right to vote the shares at the special meeting.

 

Q:	May I change my vote after I have submitted my proxy?

 

A.	Yes. You may revoke your proxy by doing one of the following:

 

•

by sending a written notice of revocation to the Secretary of Banner that is received by Banner prior to the special meeting, stating that you revoke your proxy;

 

•

by signing a later-dated proxy card and submitting it so that it is received prior to the special meeting in accordance with the instructions included in the proxy card(s); or

 

•

by attending the special meeting and voting your shares in person.

 

Q:	Are there risks associated with the merger that shareholders of Banner should be aware of?

 

A.

In deciding how to vote your shares of common stock on the matters described in this proxy statement, you should carefully consider the risks related to the merger. These risks include, among other things, risks related to the uncertainty that Banner will be able to realize the anticipated benefits and cost savings of the merger and integrate successfully its existing business with Starbuck. For a discussion of these risks and other risks, see “Risk Factors” beginning on page 16 of this proxy statement.

 

Q:	Who is paying for this proxy solicitation?

 

A.	Banner pays the costs of soliciting proxies. Upon request, we will reimburse brokers, dealers, banks and trustees, or their nominees, for reasonable expenses incurred by them in forwarding proxy materials to beneficial owners of shares of our common stock.

 

Q:	Is this proxy statement the only way that proxies are being solicited?

 

A.	In addition to mailing these proxy materials, certain directors, officers or employees of Banner may solicit proxies by telephone, facsimile, e-mail or personal contact. They will not be specifically compensated for doing so.

 

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Q:	Who can help answer my questions?

 

A.	If you would like to receive additional copies of this proxy statement, without charge, or if you have questions about the special meeting, including the procedures for voting your shares, you should contact us at:

(800) 272-9933 (U.S. and Canada)

(509) 526-8894 (International).

You may also obtain additional information about Banner from the documents we file with the Securities and Exchange Commission, which we refer to as the SEC, or by following the instructions in the section entitled “Where You Can Find More Information” beginning on page 129.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement contains or incorporates by reference a number of forward-looking statements regarding the financial condition, results of operations, earnings outlook and business prospects of Banner, Starbuck and the potential combined company and may include statements for the period following the completion of the merger. You can find many of these statements by looking for words such as “believe,” “will,” “will likely result,” “may,” “shall,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” “forecast,” “initiative,” “objective,” “goal,” “outlook,” “priorities,” “target,” “intend,” “evaluate,” “pursue,” “commence,” or the negative of any of those words or phrases or similar expressions are intended to identify “forward-looking statements” within the meaning of applicable federal securities laws, including the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date such statements are made. These statements may relate to future financial performance, strategic plans or objectives, revenues or earnings projections, or other financial information. By their nature, these statements are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the statements. Statements about the expected timing, completion and effects of the proposed transactions and all other statements in this proxy statement other than historical facts constitute forward-looking statements.

Some of the factors that may cause actual results or earnings to differ materially from those contemplated by forward-looking statements include, but are not limited to, those discussed under “Risk Factors” beginning on page 16 and those discussed in the filings of Banner that are incorporated into this proxy statement by reference, as well as the following:

 

(1)

expected revenues, cost savings, synergies and other benefits from the proposed business combination of Banner and Starbuck 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;

 

(2)

the requisite shareholder and regulatory approvals for the transactions might not be obtained;

 

(3)

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, which could necessitate additional provisions for loan losses, resulting both from loans originated and loans acquired from other financial institutions;

 

(4)

changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, net interest margin and funding sources;

 

(5)

risks related to acquiring assets in or entering markets in which Banner has not previously operated and may not be familiar;

 

(6)

results of examinations by bank regulators or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require increases to the allowance for loan losses, the write-down of assets or a change in regulatory capital position of our banks, or affect the ability of our banks to borrow funds or maintain or increase deposits, which could adversely affect liquidity and earnings;

 

(7)

increased competitive pressures among financial services companies;

 

(8)

changes in consumer spending, borrowing and savings habits;

 

(9)

the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;

 

(10)

Banner’s ability to pay dividends on its common stock;

 

(11)

increases in premiums for deposit insurance;

 

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(12)

the use of estimates in determining fair value of certain assets, which estimates may prove to be incorrect and result in significant declines in valuation;

 

(13)

difficulties in reducing risk associated with the loans on our balance sheet;

 

(14)

staffing fluctuations in response to product demand or the implementation of corporate strategies that affect the workforce and potential associated changes;

 

(15)

failure or security breach of computer systems on which we depend;

 

(16)

our ability to retain key members of the senior management team;

 

(17)

interest rate movements and their impact on customer behavior and net interest margin;

 

(18)

the impact of repricing and competitors’ pricing initiatives on loan and deposit products;

 

(19)

fluctuations in the demand for loans, the number of unsold homes and other properties and real estate values;

 

(20)

the ability to adapt successfully to technological changes to meet customers’ needs and developments in the market place;

 

(21)

the ability to access cost-effective funding;

 

(22)

adverse changes in the securities markets;

 

(23)

changes in economic conditions in general and in Washington, Idaho, Oregon and California in particular;

 

(24)

the costs, effects and outcomes of litigation, including settlements and judgments;

 

(25)

Banner’s ability to implement its business strategies;

 

(26)

new legislation or regulatory changes, including but not limited to the Dodd-Frank Act and regulations adopted thereunder, changes in capital requirements pursuant to the Dodd-Frank Act and the implementation of the Basel III capital standards, other governmental initiatives affecting the financial services industry and changes in federal and/or state tax laws or interpretations thereof by taxing authorities;

 

(27)

changes in accounting principles, policies practices or guidelines, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;

 

(28)

future acquisitions by Banner or Starbuck of other depository institutions or lines of business;

 

(29)

inability of key third-party providers to perform their obligations to us;

 

(30)

Banner’s pending acquisition of Siuslaw Financial Group, Inc. or Starbuck’s pending acquisition of Greater Sacramento Bancorp, which we refer to as GSB, may fail to be consummated;

 

(31)

future goodwill impairment due to changes in Banner’s business, changes in market conditions, or other factors;

 

(32)

other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and

 

(33)

other risks detailed from time to time in Banner’s filings with the SEC.

All subsequent written and oral forward-looking statements concerning the merger or other matters addressed in this proxy statement and attributable to Banner or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Banner does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date on which the forward-looking statement is made except where expressly required by law.

 

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RISK FACTORS

In addition to general investment risks and the other information contained in or incorporated by reference into this proxy statement, including the matters addressed under the caption “Cautionary Statement Regarding Forward-Looking Statements” on page 14 and the discussion under “Risk Factors” in Banner’s Annual Report on Form 10-K for the year ended December 31, 2013, as updated by subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, you should carefully consider the following risk factors in deciding how to vote your shares. You should also consider the other documents incorporated by reference into this proxy statement. See “Where You Can Find More Information” beginning on page 129.

Banner may fail to realize all of the anticipated benefits of the merger.

The success of the merger will depend on, among other things, Banner’s ability to realize anticipated cost savings and to combine the businesses of Banner and Starbuck in a manner that does not materially disrupt the existing customer relationships of the companies or result in decreased revenues from their customers. If Banner is not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully, if at all, or may take longer to realize than expected.

It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect Banner’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the merger. Integration efforts between the two companies will also divert management attention and resources. Any such distraction on the part of management, if significant, could affect Banner’s ability to service existing business and develop new business and adversely affect the business and earnings of each of Banner and Starbuck during the transition period and on the combined company following completion of the merger.

The value of Banner common stock after the merger may be affected by factors different from those currently affecting the values of Banner common stock.

The number of shares of Banner common stock and Banner non-voting common stock to be issued in the merger to the Starbuck holders is not adjustable based on the market price of Banner common stock, so the merger consideration at the closing may have a greater or lesser implied value than at the time the merger agreement was signed.

The parties to the merger agreement have determined the number of shares of Banner common stock and Banner non-voting common stock to be issued to the Starbuck holders, and this number is not adjustable based on changes in the market price of Banner common stock. Any changes in the market price of Banner common stock will not affect the number of shares that the Starbuck holders will be entitled to receive pursuant to the merger. Therefore, if the market price of Banner common stock declines from the market price on the date of the merger agreement prior to the consummation of the merger, the Starbuck holders could receive merger consideration with considerably less implied value. Similarly, if the market price of Banner common stock increases from the market price on the date of the merger agreement prior to the consummation of the merger, the Starbuck holders could receive merger consideration with considerably more implied value than their Starbuck shareholdings, and Banner shareholders immediately prior to the merger will not be compensated for the increased market value of Banner common stock. Because the number of shares of Banner common stock and Banner non-voting common stock to be issued in the merger to the Starbuck holders does not adjust as a result of changes in the value of Banner common stock, for any amount that the market value of Banner common stock rises or declines, there is a corresponding rise or decline, respectively, in the value of the total merger consideration issued to the Starbuck holders.

 

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Holders of Banner common stock will have a reduced ownership and voting interest after the merger and will exercise less influence over management.

Holders of Banner common stock currently possess all voting rights with respect to the election of the Banner board of directors and on other matters affecting Banner. Upon the completion of the merger, the former shareholders of Holdings as a group will receive shares in the merger constituting approximately 38.77% of the outstanding shares of Banner common stock immediately after the merger. As a result, current shareholders of Banner as a group will own approximately 57.36% of the outstanding shares of Banner common stock immediately after the merger. In addition, the Starbuck investors will have certain rights to appoint directors to the Banner board of directors. As a result, current Banner shareholders may have less influence on the management and policies of Banner than they now have on the management and policies of the company.

The unaudited pro forma combined condensed consolidated financial statements, which we refer to as the pro forma financial statements, are presented for illustrative purposes only and may not be an indication of the combined company’s financial condition or results of operations following the merger.

The pro forma financial statements contained in this proxy statement are presented for illustrative purposes only and may not be an indication of the combined company’s financial condition or results of operations following the merger for several reasons. For example, the pro forma financial statements have been derived from the historical financial statements of Banner and Starbuck, and include the proposed acquisitions of Siuslaw and GSB by Banner and Starbuck respectively, and certain adjustments and assumptions have been made regarding the combined company after giving effect to the merger and the bank merger by which each entity would become a part of the combined company. The information upon which these adjustments and assumptions have been made is preliminary, and such adjustments and assumptions are difficult to make with complete accuracy.

Moreover, the pro forma financial statements do not reflect all costs that are expected to be incurred by the combined company in connection with the merger and the bank merger. For example, the impact of any incremental costs incurred in integrating the companies is not reflected in the pro forma financial statements. As a result, the actual financial condition and results of operations of the combined company following the merger and the bank merger may differ significantly from these pro forma financial statements.

In addition, the assumptions used in preparing the pro forma financial statements may not prove to be accurate, and other factors may affect the combined company’s financial condition or results of operations following the merger and the bank merger. Any potential decline in the combined company’s financial condition or results of operations may cause significant variations in the stock price of the combined company. See the sections entitled “Selected Unaudited Pro Forma Condensed Combined Financial Information” and “Unaudited Pro Forma Combined Condensed Consolidated Financial Information” beginning on pages 27 and 29 respectively.

If the Starbuck holders, or other holders of Banner common stock, immediately sell Banner common stock or Banner non-voting common stock received in the merger, they could depress Banner’s stock price.

If the Starbuck holders who receive Banner common stock or Banner non-voting common stock in the merger, or other holders of Banner common stock, sell significant amounts of Banner common stock following the merger (in the case of the Starbuck investors, after the shares are released from lockups, and in the case of certain Starbuck holders, other transfer restrictions specified in the registration rights agreements as described in the section entitled “Investor Letter Agreements—Registration Rights” beginning on page 92), the market price of Banner common stock could decrease. These sales may also make it more difficult for Banner to sell equity securities or equity-related securities in the future at a time and at a price that we otherwise would deem appropriate.

 

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The market price of Banner common stock after the merger may be affected by factors different from those affecting Banner currently.

The results of operations of the combined company and the market price of Banner common stock after the completion of the merger may be affected by factors different from those currently affecting the independent results of operations of each of Banner and Starbuck. For a discussion of the businesses of Banner and Starbuck and of some important factors to consider in connection with those businesses, please read this proxy statement carefully and see the documents incorporated by reference in this proxy statement and referred to under “Where You Can Find More Information” on page 129.

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the merger.

Before the merger and the bank merger may be completed, Banner must obtain approvals from the Federal Reserve Board, the FDIC and the Washington DFI. The U.S. Department of Justice may also review the impact of the merger and the bank merger on competition. Other approvals, waivers or consents from regulators may also be required. An adverse development in either Banner’s or Starbuck’s regulatory standing or other factors could result in an inability to obtain approvals or delay their receipt. These regulators may impose conditions on the completion of the merger or the bank merger or require changes to the terms of the merger or the bank merger. Such conditions or changes could have the effect of delaying or preventing completion of the merger or the bank merger or imposing additional costs on or limiting the revenues of the combined company following the merger and the bank merger, any of which might have an adverse effect on the combined company following the merger. See the section entitled “The Merger—Regulatory Approvals” beginning on page 77.

The fairness opinion obtained by Banner from its financial advisor will not reflect changes in circumstances subsequent to the date of the fairness opinion.

Sandler O’Neill, Banner’s financial advisor in connection with the merger, has delivered to the Banner board of directors its opinion dated as of November 5, 2014, that as of such date, and based upon and subject to the factors and assumptions set forth therein, the merger consideration to be paid to the holders of the outstanding shares of Starbuck common stock pursuant to the merger agreement was fair from a financial point of view to Banner. The opinion does not reflect changes that may occur or may have occurred after the date of the opinion, including changes to the operations and prospects of Banner or Starbuck, changes in general market and economic conditions or regulatory or other factors. Any such changes, or changes in other factors on which the opinion is based, may materially alter or affect the relative values of Banner and Starbuck. The fairness opinion will not be updated as of the date of the mailing of the proxy statement.

Starbuck will be subject to business uncertainties and contractual restrictions while the merger is pending.

Banner and Starbuck have operated and, until the completion of the merger, will continue to operate, independently. Uncertainty about the effect of the merger on employees and customers may have an adverse effect on Starbuck and consequently on Banner. These uncertainties may impair Starbuck’s ability to attract, retain or motivate key personnel until the merger is consummated, and could cause customers and others that deal with Starbuck to seek to change existing business relationships with Starbuck. Retention of certain employees may be challenging during the pendency of the merger, as certain employees may experience uncertainty about their future roles with Banner. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with Banner, Banner’s business following the merger could be harmed. In addition, the merger agreement restricts Starbuck from making certain acquisitions and taking other specified actions until the merger occurs without the consent of Banner. These restrictions may prevent Starbuck from pursuing attractive business opportunities that may arise prior to the completion of the merger. Please see the section entitled “The Agreement and Plan of Merger—Covenants and Agreements—Conduct of Business of Starbuck Pending the Merger” beginning on page 83 for a description of the restrictive covenants to which Starbuck is subject.

 

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The merger is subject to closing conditions, including the approval of the amendment to the articles of incorporation and the issuance of the stock consideration by the Banner shareholders at the special meeting or an adjournment or postponement thereof, that, if not satisfied or waived, will result in the merger not being completed, which may result in material adverse consequences to Banner’s business and operations.

The merger is subject to closing conditions, including the approval of the amendment to the articles of incorporation and the issuance of the stock consideration by the Banner shareholders at the special meeting or an adjournment or postponement thereof, that, if not satisfied, will prevent the merger from being completed. To Banner’s knowledge, all of the directors and executive officers of Banner who are entitled to vote at the special meeting intend to vote their shares of Banner common stock in favor of each of the proposals, although such persons have not entered into agreements obligating them to do so If the merger is not completed, Banner’s business and operations could be adversely affected by the loss of employees and customers, the costs incurred in pursuing the transaction, and potential reputational harm. In addition to the required approvals and consents from regulatory agencies and governmental entities and the approval of Banner shareholders, the merger is subject to other conditions beyond Banner’s control that may prevent, delay or otherwise materially adversely affect its completion. Banner cannot predict whether and when these other conditions will be satisfied. See “The Agreement and Plan of Merger—Conditions to the Merger” beginning on page 88.

If the merger is not completed, Banner will have incurred substantial expenses without realizing the expected benefits of the merger.

Banner has incurred and will incur substantial expenses in connection with the due diligence, negotiation and completion of the transactions contemplated by the merger agreement, as well as the costs and expenses of preparing, filing, printing and mailing this proxy statement and all filing fees paid to the SEC in connection with the merger. If the merger is not completed, Banner would have to recognize these expenses without realizing the expected benefits of the merger.

Our expansion into new market areas in California and Utah may present increased risk.

Starbuck’s lending operations are concentrated in the states of California, Utah, Oregon and Washington. The merger with Starbuck will result in Banner’s initial entry into the states of California and Utah where Banner has little or no operating experience. Although Banner will retain a number of Starbuck’s lending and business development officers with experience in these markets, Banner is new to these market areas and has conducted only limited banking business in California and Utah. Our entry into these markets will present us with different competitive conditions, customer preferences and banking products than we have experienced in the Pacific Northwest markets we know. As a result, it is possible that our operations in these states may be less successful than our operations in the Pacific Northwest. In addition, the financial condition and results of operations of the combined company will be subject to general economic conditions and the conditions in the real estate markets prevailing in California and Utah as well as the Pacific Northwest markets we know. If economic conditions in any one of these states worsens or if the real estate market declines, the combined company may suffer decreased net income or losses associated with higher default rates and decreased collateral values on its existing portfolio, and may not be able to originate loans at acceptable risk levels and upon acceptable terms, to maintain Banner’s risk profile and asset quality.

We may be subject to additional regulatory scrutiny if and when Banner Bank’s total assets exceed $10.0 billion.

Banner Bank’s total assets were $4.759 billion at September 30, 2014 and AmericanWest Bank had $4.095 billion in total assets at that date. Following the closing of the merger with AmericanWest Bank, Banner Bank’s assets will be approaching $10 billion. If and when Banner Bank’s total assets exceed $10.0 billion, it will be considered a “very large” institution by bank regulators under The Dodd-Frank Wall Street Reform and Consumer Protection Act, which we refer to as the Dodd-Frank Act. As a result, there may be higher expectations from regulators, and there will be formal capital stress testing requirements and direct examination

 

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by the Consumer Financial Protection Bureau or CFPB. The CFPB has near exclusive supervision authority, including examination authority, over “very large” institutions and their affiliates to assess compliance with federal consumer financial laws, to obtain information about the institutions’ activities and compliance systems and procedures, and to detect and assess risks to consumers and markets.

Under the Dodd-Frank Act, the minimum ratio of net worth to insured deposits of the Deposit Insurance Fund was increased from 1.15% to 1.35% and the FDIC is required, in setting deposit insurance assessments, to offset the effect of the increase on institutions with assets of less than $10 billion, which results in institutions with assets of $10 billion or more paying higher assessments. In addition, if Banner Bank has $10 billion or more in assets, its assessment rate will be determined, in part, by the scorecard method. The scorecard method uses a performance score and a loss severity score, which are combined and converted into an initial base assessment rate. The performance score is based on measures of the bank’s ability to withstand asset-related stress and funding-related stress and weighted CAMELS ratings. The loss severity score is a measure of potential losses to the FDIC in the event of the bank’s failure. Under a formula, the performance score and loss severity score are combined and converted to a total score that determines the bank’s initial base assessment rate. The FDIC has the discretion to alter the total score based on factors not captured by the scorecard. The resulting initial base assessment rate is also subject to adjustments downward based on long term unsecured debt issued by the bank, to adjustment upward based on long term unsecured debt held by the bank that is issued by other FDIC-insured institutions, and to further adjustment upward if the bank’s brokered deposits exceed 10% of its domestic deposits.

Further, Banner Bank may be impacted by the Durbin Amendment to the Dodd-Frank Act regarding limits on debit card interchange fees. The Durbin Amendment gave the Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion or more and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. The Federal Reserve Board has adopted rules under this provision that limit the swipe fees that a debit card issuer can charge a merchant for a transaction to the sum of 21 cents and five basis points times the value of the transaction, plus up to one cent for fraud prevention costs.

The Dodd-Frank Act also requires publicly traded bank holding companies with assets of $10 billion or more to establish a risk committee responsible for enterprise-wide risk management practices, comprised of independent directors, including one risk management expert.

As a result of the above, if and when Banner Bank’s total assets exceed $10 billion, deposit insurance assessments are likely to increase, as well as expenses related to regulatory compliance, which may be significant. In addition, compliance with the Durbin Amendment would reduce our non-interest income significantly. We currently believe the impact of the Durbin Amendment on combined debit card revenues for Banner Bank and AmericanWest Bank could be a reduction of approximately $8.0 million annually.

Risk Factors Relating to Banner and Banner’s Business.

Banner is, and will continue to be, subject to the risks described in the section entitled “Risk Factors” beginning on page 16 and in Banner’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as updated by subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, all of which are filed with the SEC and incorporated by reference into this proxy statement. See “Where You Can Find More Information” beginning on page 129.

 

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PRICE RANGE OF BANNER COMMON STOCK AND RELATED SHAREHOLDER MATTERS

Our common stock trades on NASDAQ under the symbol “BANR.” Starbuck common stock is not publicly traded. The following are the high and low sale prices for our common stock during the periods indicated as reported by the NASDAQ Stock Market, and the quarterly cash dividends per share declared. The high and low sales prices are based on intraday sales for the periods reported.

 

		High				Low				Dividends
Quarterly for 2014:
First Quarter		$	45.08			$	35.51			$	0.18
Second Quarter			42.29				37.03				0.18
Third Quarter			40.78				37.50				0.18
Fourth Quarter			44.05				37.52				0.18
Quarterly for 2013:
First Quarter			32.03				29.14				0.12
Second Quarter			34.30				29.33				0.12
Third Quarter			38.44				33.78				0.15
Fourth Quarter			45.15				35.62				0.15
Quarterly for 2012:
First Quarter			22.97				17.13				0.01
Second Quarter			22.80				18.05				0.01
Third Quarter			27.41				20.04				0.01
Fourth Quarter			31.32				26.49				0.01

We had approximately 1,437 holders of record of our common stock on February 13, 2015, and we estimate that we have more than 7,010 beneficial owners of our common stock.

On November 4, 2014 the day immediately prior to the public announcement of the merger agreement, the high and low sales prices of shares of Banner common stock as reported on NASDAQ were $43.38 and $42.41, respectively. On February 13, 2015, the last trading day before the date of this proxy statement, the high and low sales prices of shares of Banner common stock as reported on NASDAQ were $45.00 and $44.38, respectively.

 

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SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION OF BANNER

The following selected consolidated financial information is intended to help you in understanding certain financial aspects of the merger. The tables on the following pages present selected consolidated historical financial data for Banner. The annual consolidated historical information for Banner is derived from its audited consolidated financial statements as of and for each of the years ended 2009 through 2013. The information is only a summary and should be read with Banner’s historical consolidated financial statements and related notes. Banner’s audited consolidated financial statements as of December 31, 2013 and 2012 and for the years ended December 31, 2013, 2012 and 2011 are contained in its Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC. The unaudited consolidated financial information as of and for the nine months ended September 30, 2014 and 2013 is derived from Banner’s unaudited consolidated financial statements which are included in Banner’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, which is incorporated by reference into this proxy statement, and which, in Banner’s opinion, include all adjustments (consisting of normal, recurring adjustments) necessary for a fair statement of Banner’s financial position and results of operations for such periods. The results of operations for the nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the entire fiscal year ending 2014. You should not assume the results of operations for any past periods indicate results for any future period. See the section entitled “Where You Can Find More Information” beginning on page 129.

 

Selected Financial Data:		(unaudited) September 30, 2014
						December 31,
(In thousands)						2013				2012				2011				2010				2009
Total assets		$	4,759,389			$	4,388,166			$	4,265,564			$	4,257,312			$	4,406,082			$	4,722,221
Cash and securities (1)			769,615				772,614				811,902				754,396				729,345				640,657
Loans receivable, net			3,732,364				3,343,455				3,158,223				3,213,426				3,305,716				3,694,852
Deposits			3,991,181				3,617,926				3,557,804				3,475,654				3,591,198				3,865,550
Borrowings			145,479				184,234				160,000				212,649				267,761				414,315
Common shareholders’ equity			574,058				538,972				506,919				411,748				392,472				287,721
Total stockholders’ equity			574,058				538,972				506,919				532,450				511,472				405,128
Shares outstanding			19,572				19,544				19,455				17,553				16,165				3,077
Shares outstanding excluding unearned, restricted shares held in the Banner Employee Stock Ownership Plan (ESOP)			19,572				19,509				19,421				17,519				16,130				3,042

 

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Operating Data:		(unaudited)
		Nine Months Ended September 30,								For the Years Ended December 31,
(In thousands)		2014				2013				2013				2012				2011				2010				2009
Interest income		$	141,410				135,116			$	179,712			$	187,162			$	197,563			$	218,082			$	237,370
Interest expense			8,199				10,007				12,996				19,514				32,992				60,312				92,797
Net interest income before provision for loan losses			133,211				125,109				166,716				167,648				164,571				157,770				144,573
Provision for loan losses			—				—				—				13,000				35,000				70,000				109,000
Net interest income			133,211				125,109				166,716				154,648				129,571				87,770				35,573
Deposit fees and other service charges			22,237				19,911				26,581				25,266				22,962				22,009				21,394
Mortgage banking operations revenue			7,282				9,002				11,170				13,812				6,146				6,370				8,893
Other-than-temporary impairment recoveries (losses)			—				409				409				(409	)			3,000				(4,231	)			(1,511	)
Net change in valuation of financial instruments carried at fair value			1,662				(1,954	)			(2,278	)			(16,515	)			(624	)			1,747				12,529
All other operating income			11,161				3,395				7,460				4,748				2,506				3,253				2,385
Total other operating income			42,342				30,763				43,342				26,902				33,990				29,148				43,690
REO operations expense (recoveries), net			(260	)			(1,047	)			(689	)			3,354				22,262				26,025				7,147
All other operating expenses			112,772				105,093				141,664				138,099				135,842				134,776				134,933
Total other operating expense			112,512				104,046				140,975				141,453				158,104				160,801				142,080
Income (loss) before provision for income tax expense (benefit)			63,041				51,826				69,083				40,097				5,457				(43,883	)			(62,817	)
Provision for income tax expense (benefit)			20,620				16,825				22,528				(24,785	)			—				18,013				(27,053	)
Net income (loss)		$	42,421				35,001			$	46,555			$	64,882			$	5,457			$	(61,896	)		$	(35,764	)

 

Per Common Share Data:		(unaudited)
		Nine Months Ended September 30,								At or For the Years Ended December 31,
		2014				2013				2013				2012				2011				2010				2009
Net income (loss):
Basic		$	2.19			$	1.81			$	2.40			$	3.17			$	(0.15	)		$	(7.21	)		$	(16.31	)
Diluted			2.19				1.80				2.40				3.16				(0.15	)			(7.21	)			(16.31	)
Common stockholders’ equity per share (2)(9)			29.33				27.17				27.63				26.10				23.50				24.33				94.58
Cash dividends			0.54				0.39				0.54				0.04				0.10				0.28				0.28
Dividend payout ratio (basic)			24.66	%			21.55	%			22.50	%			1.26	%			(66.67	)%			(3.88	)%			(1.72	)%
Dividend payout ratio (diluted)			24.66	%			21.67	%			22.50	%			1.27	%			(66.67	)%			(3.88	)%			(1.72	)%

 

Other Data: (unaudited)		September 30, 2014				December 31,
						2013				2012				2011				2010				2009
Full time equivalent employees			1,106				1,104				1,074				1,078				1,060				1,060
Number of branches			93				88				88				89				89				89

 

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Key Financial Ratios: (unaudited)		At or For the Nine Months Ended September 30,								At or For the Years Ended December 31,
		2014				2013				2013				2012				2011				2010				2009
Performance Ratios:
Return on average assets (3)(9)			1.24	%			1.10	%			1.09	%			1.54	%			0.13	%			(1.36	)%			(0.78	)%
Return on average common equity (4)(9)			10.17				8.97				8.85				14.03				1.37				(17.19	)			(11.69	)%
Average common equity to average assets			12.17				12.31				12.36				10.96				9.31				7.90				6.71
Interest rate spread (5)(9)			4.05				4.12				4.08				4.13				3.99				3.61				3.23
Net interest margin (6)(9)			4.07				4.15				4.11				4.17				4.05				3.67				3.33
Non-interest income to average assets (9)			1.23				0.97				1.02				0.64				0.79				0.64				0.96
Non-interest expense to average assets (9)			3.28				3.28				3.31				3.35				3.69				3.53				3.12
Efficiency ratio (7)			64.09				66.75				67.11				72.71				79.62				86.03				75.47
Average interest-earning assets to interest-bearing liabilities			108.72				108.10				108.28				109.11				106.90				104.32				104.55
Selected Financial Ratios:
Allowance for loan losses as a percent of total loans at end of period			1.95				2.32				2.19				2.39				2.52				2.86				2.51
Net charge-offs as a percent of average outstanding loans during the period			—				0.03				0.30				0.57				1.50				1.88				2.28
Non-performing assets as a percent of total assets			0.50				0.70				0.66				1.18				2.79				5.77				6.27
Allowance for loan losses as a percent of non-performing loans (8)			375.81				305.39				302.77				225.33				110.09				64.30				44.55
Consolidated Capital Ratios:
Total capital to risk-weighted assets			16.59				17.41				16.99				16.96				18.07				16.92				12.73
Tier 1 capital to risk-weighted assets			15.33				16.15				15.73				15.70				16.80				15.65				11.47
Tier 1 leverage capital to average assets			13.14				13.63				13.64				12.74				13.44				12.24				9.62

 

(1)	Includes securities available-for-sale and held-to-maturity and held for trading.

(2)	Calculated using shares outstanding excluding unearned restricted shares held in ESOP and adjusted for 1-for-7 reverse stock split.

(3)	Net income divided by average assets.

(4)	Net income divided by average common equity.

(5)	Difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(6)	Net interest income before provision for loan losses as a percent of average interest-earning assets.

(7)	Other operating expenses divided by the total of net interest income before loan losses and other operating income (non-interest income).

(8)	Non-performing loans consist of nonaccrual and 90 days past due loans.

(9)	Results for nine month periods annualized.

 

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SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION OF STARBUCK

The following tables set forth selected historical consolidated financial and other data of Holdings, the holding company of Starbuck for the periods and at the dates indicated. Audited financial information for Starbuck alone is not available; however, as noted in the pro forma financial statements beginning on pages 27 and 29 of this document, Starbuck comprises more than 99.9% of the consolidated assets of Holdings as of September 30, 2014 and more than 105.0% of Holdings’ net income for the nine months ended September 30, 2014 and the twelve months ended December 31, 2013. The information in the tables is derived in part from the audited financial statements of Holdings for the years ended December 31, 2010 to 2013 and should be read in conjunction with Holdings annual audited financial statements and unaudited interim financial statements which have been filed with the SEC in Banner’s Current Report on Form 8-K filed on December 4, 2014, which is incorporated by reference into this proxy statement. The selected financial data tables below reflect only four years as Holdings was organized in 2009 and it did not begin acquiring any substantial subsidiaries through Starbuck until 2010. In 2010 and subsequent years additional acquisitions continued to add to the size of the consolidated company and contributed to the year-over-year growth trends noted below. See “Where You Can Find More Information” beginning on page 129. The selected financial and other data as of and for the nine months ended September 30, 2014 and 2013 are derived from the unaudited financial statements of Holdings which are also contained in Banner’s Current Report on Form 8-K filed on December 4, 2014, and which, in Holdings’ opinion, include all adjustments (consisting of normal, recurring adjustments) necessary for a fair statement of Holdings’ financial position and results of operations for such periods. The results of operations for the nine months ended September 30, 2014 and 2013 are not necessarily indicative of the results of operations to be expected for any subsequent period or for the entire year.

 

Selected Financial Data:				(unaudited) September 30,				December 31,
(In thousands)				2014				2013				2012				2011				2010
Total assets				$	4,094,783			$	3,943,195			$	2,763,445			$	2,299,081			$	1,664,456
Cash and securities					1,144,057				1,217,242				723,685				725,269				524,191
Loans receivable, net					2,543,034				2,283,548				1,717,631				1,350,073				965,896
Deposits					3,228,776				3,274,081				2,196,530				1,901,990				1,418,393
Borrowings					251,473				73,095				88,179				1,104				10,600
Total members’ equity					561,312				534,131				444,036				368,408				202,924

 

Operating Data:		(unaudited) Nine Months Ended September 30,								Years Ended December 31,
(In thousands)		2014				2013				2013				2012				2011				2010
Interest income		$	115,028			$	110,499			$	149,298			$	113,111			$	86,102			$	2,738
Interest expense			4,976				3,998				5,739				4,594				4,149				159
Net interest income before provision for loan losses			110,052				106,501				143,559				108,517				81,953				2,579
Provision for loan losses			997				4,148				4,211				3,807				366				203
Net interest income			109,055				102,353				139,348				104,710				81,587				2,376
Deposit fees and other service charges			11,312				10,445				13,999				10,306				8,702				311
Mortgage banking operations revenue			2,851				5,766				6,846				7,202				2,408				131
All other non-interest income			19,726				15,164				22,210				13,153				9,388				334
Total non-interest income			33,889				31,375				43,055				30,661				20,498				776
REO operations expense			4,638				6,585				8,560				7,929				5,753				273
All other non-interest expenses			108,716				129,000				166,243				120,665				90,138				20,658
Total non-interest expense			113,354				135,585				174,803				128,594				95,891				20,931
Income (loss) before provision for income tax expense (benefit)			29,590				(1,857	)			7,600				6,777				6,194				(17,779	)
Provision for income tax expense (benefit)			12,604				(294	)			579				(63,307	)			(56	)			—
Net income (loss)		$	16,986			$	(1,563	)		$	7,021			$	70,084			$	6,250			$	(17,779	)

 

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Condensed Quarterly Results of Operations for the each of the Quarters

for the Periods/Years Ended 2014, 2013, 2012:

 

		2014 Quarter Ended
(In thousands)				September 30,				June 30,				March 31,
Interest income				$	36,995			$	37,400			$	40,633
Interest expense					1,870				1,585				1,521
Net interest income					35,125				35,815				39,112
Provision for loan losses					(77	)			295				779
Non-interest income					10,530				9,838				13,521
Non-interest expenses					36,177				36,831				40,346
Income before income taxes					9,555				8,527				11,508
Income tax provision					3,916				3,261				5,427
Net income				$	5,639			$	5,266			$	6,081

 

		2013 Quarter Ended
(In thousands)		December 31,				September 30,				June 30,				March 31,
Interest income		$	38,799			$	40,075			$	41,509			$	28,915
Interest expense			1,741				1,429				1,365				1,204
Net interest income			37,058				38,646				40,144				27,711
Provision for loan losses			63				1,110				1,604				1,434
Non-interest income			11,612				10,836				10,585				10,022
Non-interest expenses			39,150				53,202				49,867				32,584
Income before income taxes			9,457				(4,830	)			(742	)			3,715
Income tax provision			873				(1,924	)			197				1,433
Net income		$	8,584			$	(2,906	)		$	(939	)		$	2,282

 

		2012 Quarter Ended
(In thousands)		December 31,				September 30,				June 30,				March 31,
Interest income		$	30,095			$	29,923			$	25,968			$	27,125
Interest expense			1,279				1,265				953				1,097
Net interest income			28,816				28,658				25,015				26,028
Provision for loan losses			1,458				1,234				1,110				5
Non-interest income			8,603				9,156				7,449				5,453
Non-interest expenses			35,801				34,085				29,023				29,685
Income before income taxes			160				2,495				2,331				1,791
Income tax provision			(4,658	)			(58,652	)			—				3
Net income		$	4,818			$	61,147			$	2,331			$	1,788

 

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SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following selected preliminary unaudited pro forma condensed combined financial data give effect to the merger based on the assumption that the merger occurred as of September 30, 2014 for the preliminary unaudited selected financial and other data, as of January 1, 2013 for the preliminary unaudited results of operations for the year ended December 31, 2013 and as of January 1, 2013 for the nine months ended September 30, 2014.

The selected preliminary unaudited pro forma condensed combined financial data is presented for illustrative purposes only and should not be read for any other purpose. Banner and Starbuck may have performed differently had they always been combined. You should not rely on this information as being indicative of the historical results that would have been achieved had the companies always been combined or the future results that Banner will experience after the merger. The selected preliminary unaudited pro forma condensed combined financial data (i) has been derived from and should be read in conjunction with the section entitled “Unaudited Pro Forma Combined Condensed Consolidated Financial Information” and the related notes beginning on page 29 of this proxy statement/prospectus and (ii) should be read in conjunction with the historical consolidated financial statements of Banner and Starbuck incorporated by reference into this proxy statement.

 

Selected Financial Data:		(unaudited)
(In thousands)		At September 30, 2014
Total assets		$	9,676,709
Cash and securities (1)			2,041,175
Loans receivable, net			6,786,911
Deposits			7,977,548
Borrowings			428,750
Common stockholders’ equity			1,159,557
Total stockholders’ equity			1,159,557
Shares outstanding			34,122

 

OPERATING DATA:		(unaudited)				(unaudited)
(in thousands except shares and per share data)		Nine months ended September 30, 2014				Twelve months ended December 31, 2013
Interest income		$	281,711			$	361,849
Interest expense			15,026				21,298
Net interest income before provision for loan losses			266,685				340,351
Provision for loan losses			1,314				4,761
Net interest income			265,371				335,790
Deposit fees and other service charges			34,294				41,850
Mortgage banking operations revenue			11,609				20,830
Other-than-temporary impairment recoveries (losses)			—				409
Net change in valuation of financial instruments carried at fair value			1,452				(2,278	)
All other operating income			34,170				34,073
Total other operating income			81,525				94,884
Real estate operations			—				(689	)
All other operating expenses			249,279				349,537
Total other operating expense			249,279				348,848
Income before provision for income taxes			97,617				81,826
Provision for income tax expense (benefit)			33,955				23,774
Net income (loss)		$	63,622			$	58,052

 

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COMPARATIVE UNAUDITED PRO FORMA PER SHARE DATA

The table below sets forth the book value per common share, cash dividends per common share, and basic and diluted earnings per common share data for each of Banner and Starbuck on a historical basis and for Banner on a pro forma combined basis. The pro forma combined information give effect to the merger of Banner with Siuslaw and of Banner with Starbuck, assuming Starbuck had completed the acquisition of GSB as if each merger had been effective on the dates presented in the case of the book value per common share data, and as each merger had been effective as of January 1 of the applicable pro forma period, in the case of the cash dividends paid per common share and earnings per common share data. The pro forma combined amounts are calculated by combining the Banner historical share amounts with pro forma amounts from Siuslaw, assuming an exchange ratio of 0.32231, and pro forma amounts from Starbuck, assuming 13,230,000 shares of Banner are issued to the Starbuck holders, along with a cash payment by Banner of $130,000,000 to the Starbuck holders. The pro forma combined amounts for Banner reflect certain acquisition accounting adjustments, which are based on estimates that are subject to change depending on fair values as of each merger completion date. These adjustments are described in the notes to unaudited pro forma combined condensed consolidated financial information contained elsewhere in this document under the heading “Unaudited Pro Forma Combined Condensed Consolidated Financial Information” of Banner beginning on page 29. The pro forma data combine the historical results of Siuslaw, GSB and Starbuck into Banner’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other merger-related activity, they are not indicative of what could have occurred had the merger taken place on January 1 of the applicable pro forma period.

The pro forma financial information in the table below is provided for illustrative purposes, does not include any projected cost savings, revenue enhancements or other possible financial benefits of the merger to the combined company and does not attempt to suggest or predict future results. This information also does not necessarily reflect what the historical financial condition or results of operations of the combined company would have been had Banner, Siuslaw, GSB and Starbuck been combined as of the dates and for the periods shown.

 

		Banner				Starbuck				Pro Forma Combined Amounts (4)
Book value per common share: (1)
September 30, 2014		$	29.33				n/a			$	33.98
Cash dividends paid per common share: (2)
Year ended December 31, 2013		$	0.54				n/a			$	0.54
Nine months ended September 30, 2014		$	0.54				n/a			$	0.54
Basic and diluted earnings per common share: (3)
Year ended December 31, 2013
Basic		$	2.40				n/a			$	1.71
Diluted		$	2.40				n/a			$	1.71
Nine months ended September 30, 2014
Basic		$	2.19				n/a			$	1.88
Diluted		$	2.19				n/a			$	1.87

 

(1)	Calculated by dividing the total equity by total common shares outstanding

(2)	Represents the historical cash dividends per share paid by Banner for the period.

(3)	Pro forma earnings per common share are based on pro forma combined net income and pro forma combined weighted average shares outstanding during the period.

(4)

Pro forma adjustments include new Banner common equity issued to former Siuslaw shareholders (1,319,995 shares times $40.50) and former Starbuck equity holders (13,230,000 shares times $40.50) and the impact of the pro forma adjustments for the acquisitions as noted in the pro forma financial statements for the periods indicated.

 

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UNAUDITED PRO FORMA COMBINED CONDENSED

CONSOLIDATED FINANCIAL INFORMATION

The following is the unaudited pro forma combined condensed consolidated financial information for Banner, Siuslaw, GSB and Starbuck, giving effect to the mergers. The unaudited pro forma combined condensed consolidated balance sheet as of September 30, 2014 gives effect to the merger of Banner with Siuslaw, Starbuck with GSB, and Banner with Starbuck, as if the mergers had occurred on that date. The unaudited pro forma combined condensed consolidated statements of operations for the nine months ended September 30, 2014 and the year ended December 31, 2013 give effect to the merger of Banner with Siuslaw, Starbuck with GSB, and Banner with Starbuck, as if the mergers had occurred on January 1, 2013.

The unaudited pro forma combined condensed consolidated financial statements have been prepared using the acquisition method of accounting for business combinations under GAAP. Banner will be the acquirer for accounting purposes in its acquisitions, and Starbuck will be the acquirer in its acquisition of GSB. Certain reclassifications have been made to the historical financial statements of Siuslaw, GSB and Starbuck to conform to the presentation in Banner’s financial statements. These reclassifications had no impact on net income.

A final determination of the fair values of Siuslaw’s, GSB’s and Starbuck’s assets and liabilities, which cannot be made prior to the completion of each merger, will be based on the actual net tangible and intangible assets of Siuslaw, GSB and Starbuck that exist as of the dates of completion of the transactions. Consequently, fair value adjustments and amounts preliminarily attributed to goodwill and identifiable intangibles could change significantly from those adjustments used in the unaudited pro forma combined condensed consolidated financial statements presented herein and could result in a material change in amortization of acquired intangible assets. In addition, the value of the final purchase price of the mergers will be based on the closing price of Banner common stock on the closing dates of the merger of Banner with Siuslaw and Banner with Starbuck. For purposes of the accompanying pro forma financial information, the closing price of Banner common stock on December 1, 2014 was used for purposes of presenting the pro forma combined consolidated balance sheet at September 30, 2014.

In connection with the plan to integrate the operations of Banner, Siuslaw, GSB and Starbuck following the completion of the merger of Banner with Siuslaw and Banner with Starbuck, Banner anticipates that nonrecurring charges, such as costs associated with systems implementation, severance and other costs related to exit or disposal activities, will be incurred. Banner is not able to determine the timing, nature and amount of these charges as of the date of this document. However, these charges will affect the results of operations of Banner, Siuslaw, GSB and Starbuck, as well as those of the combined company following the completion of the mergers, in the periods in which they are recorded. The unaudited pro forma combined condensed consolidated statements of operations do not include the effects of the non-recurring costs associated with any restructuring or integration activities resulting from the mergers, as they are nonrecurring in nature and not factually supportable at this time. Additionally, the unaudited pro forma adjustments do not give effect to any nonrecurring or unusual restructuring charges that may be incurred as a result of the integration of the two companies or any anticipated disposition of assets that may result from such integration. However, the unaudited pro forma combined condensed consolidated balance sheet includes a pro forma adjustment to reduce cash and equity to reflect the payment of certain anticipated merger costs and the write off, as of the date of closing, of certain assets with little to no utility or value.

The actual amounts recorded as of the completion of the mergers may differ materially from the information presented in these unaudited pro forma combined condensed consolidated financial statements as a result of:

 

•

changes in the trading price for Banner’s common stock;

 

•

capital used or generated in Siuslaw’s, GSB’s and Starbuck’s operations before completion of their respective mergers;

 

•

changes in the fair values of Siuslaw’s, GSB’s and Starbuck’s assets and liabilities;

 

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•

other changes in Siuslaw’s, GSB’s and Starbuck’s net assets that occur prior to the completion of their respective mergers, which could cause material changes in the information presented below; and

 

•

the actual financial results of the combined company.

The unaudited pro forma combined condensed consolidated financial statements are provided for informational purposes only. These financial statements reflect the merger of Siuslaw into Banner, the segregation of Starbuck from its parent holding company Holdings, the merger of GSB into Starbuck, and the merger of Starbuck into Banner, with all appropriate adjustments for each combination. The unaudited pro forma combined condensed consolidated financial statements are not necessarily, and should not be assumed to be, an indication of the results that would have been achieved had the transactions been completed as of the dates indicated or that may be achieved in the future. The preparation of the unaudited pro forma combined condensed consolidated financial statements and related adjustments required management to make certain assumptions and estimates. The unaudited pro forma combined condensed consolidated financial information is based on, and should be read together with, the historical consolidated financial statements and related notes of Banner incorporated into this document by reference from its Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 and its Annual Report on Form 10-K for the year ended December 31, 2013, and the historical consolidated financial statements and related notes of Holdings incorporated into this document by reference to Banner’s Current Report on Form 8-K filed on December 4, 2014. Audited financial information for Starbuck alone is not available; however, Starbuck comprises more than 99.9% of the consolidated assets and equity of Holdings as of September 30, 2014, and more than 105.0% of Holdings’ consolidated net income for the nine months ended September 30, 2014 and the twelve months ended December 31, 2013. See the section entitled “Where You Can Find More Information” beginning on page 129.

 

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Pro Forma Consolidated Statements of Financial Condition

September 30, 2014

(in thousands)

 

		Banner				Siuslaw				Pro Forma Adjustments				Notes				Banner & Siuslaw Combined Pro Forma
ASSETS
Cash and equivalents		$	151,725			$	114,851			$	(7,691	)			A			$	258,885
Investment securities			646,996				13,178				—								660,174
Total cash and securities			798,721				128,029				(7,691	)							919,059
Loans receivable			3,806,695				250,111				(5,000	)			B				4,051,806
Allowance for loan losses			(74,331	)			(4,070	)			4,070				C				(74,331	)
Net loans			3,732,364				246,041				(930	)							3,977,475
OREO			3,928				3,172				—								7,100
Premises and equipment			91,291				5,769				2,000				D				99,060
Intangibles/CDI			3,362				—				5,600				E				8,962
Goodwill			—				—				13,808				F				13,808
Deferred taxes			21,830				3,617				(1,520	)			G				23,927
Other assets			107,893				12,852				—								120,745
Total Assets		$	4,759,389			$	399,480			$	11,267							$	5,170,136
LIABILITIES
Non-interest bearing		$	1,304,720			$	101,706			$	—							$	1,406,426
Interest bearing deposits			2,686,398				245,606				—								2,932,004
Total deposits			3,991,118				347,312				—								4,338,430
Borrowings			67,855				—				—								67,855
Junior subordinated debentures			77,624				8,248				(2,327	)			H				83,545
Other liabilities			48,734				4,438				—								53,172
Total liabilities			4,185,331				359,998				(2,327	)							4,543,002
EQUITY
Equity (Banner)			574,058				—				53,076				I				627,134
Equity (Siuslaw)			—				39,482				(39,482	)			J				—
Total Equity			574,058				39,482				13,594								627,134
Total Liabilities and Equity		$	4,759,389			$	399,480			$	11,267							$	5,170,136

 

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Pro Forma Consolidated Statements of Financial Condition

September 30, 2014

(in thousands)

 

		Holdings				Eliminations				Notes		Starbuck				GSB				Pro Forma Adjustments				Notes		Starbuck Combined Pro Forma
ASSETS
Cash and equivalents		$	85,230			$	—					$	85,230			$	25,690			$	(60,319	)		A		$	50,601
Investment securities			1,058,827				—						1,058,827				160,896				1,504			B			1,221,227
Total cash and securities			1,144,057				—						1,144,057				186,586				(58,815	)					1,271,828
Loans receivable			2,558,193				—						2,558,193				273,279				(5,938	)		C			2,825,534
Allowance for loan losses			(15,159	)			—						(15,159	)			(3,717	)			3,717			D			(15,159	)
Net loans			2,543,034				—						2,543,034				269,562				(2,221	)					2,810,375
OREO			16,335				—						16,335				2,462				(1,619	)		E			17,178
Premises and equipment			72,487				—						72,487				172				(31	)		F			72,628
Intangibles/CDI			24,713				—						24,713				—				423			G			25,136
Goodwill			57,219				—						57,219				—				21,615			H			78,834
Deferred taxes			128,124				—						128,124				4,836				76			I			133,036
Other assets			108,813				(2	)		A			108,811				17,256				(74	)		J			125,993
Total Assets		$	4,094,782			$	(2	)				$	4,094,780			$	480,874			$	(40,646	)				$	4,535,008
LIABILITIES
Non-interest bearing		$	809,248			$	519			B		$	809,767			$	135,002			$	—					$	944,769
Interest bearing deposits			2,419,527				—						2,419,527				274,749				73			K			2,694,349
Total deposits			3,228,775				519						3,229,294				409,751				73						3,639,118
Borrowings			251,473				—						251,473				20,039				—						271,512
Junior subordinated debentures			—				—						—				8,248				(2,410	)		L			5,838
Other liabilities			53,222				(67	)		C			53,155				3,991				536			M			57,682
Total liabilities			3,533,470				452						3,533,922				442,029				(1,801	)					3,974,150
EQUITY
Equity (Starbuck)			561,312				(454	)		D			560,858				—				—						560,858
Equity (GSB)			—				—						—				38,845				(38,845	)		N			—
Total Equity			561,312				(454	)					560,858				38,845				(38,845	)					560,858
Total Liabilities and Equity		$	4,094,782			$	(2	)				$	4,094,780			$	480,874			$	(40,646	)				$	4,535,008

 

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Pro Forma Consolidated Statements of Financial Condition

September 30, 2014

(in thousands)

 

		Banner & Siuslaw Combined Pro Forma				Starbuck Combined Pro Forma				Pro Forma Adjustments				Notes		Pro Forma Totals
ASSETS
Cash and equivalents		$	258,885			$	50,601			$	(149,712	)		A		$	159,774
Investment securities			660,174				1,221,227				—						1,881,401
Total cash and securities			919,059				1,271,828				(149,712	)					2,041,175
Loans receivable			4,051,806				2,825,534				(16,098	)		B			6,861,242
Allowance for loan losses			(74,331	)			(15,159	)			15,159			C			(74,331	)
Net loans			3,977,475				2,810,375				(939	)					6,786,911
OREO			7,100				17,178				—						24,278
Premises and equipment			99,060				72,628				(8,000	)		D			163,688
Intangibles/CDI			8,962				25,136				17,971			E			52,069
Goodwill			13,808				78,834				115,406			F			208,048
Deferred taxes			23,927				133,036				(3,161	)		G			153,802
Other assets			120,745				125,993				—						246,738
Total Assets		$	5,170,136			$	4,535,008			$	(28,435	)				$	9,676,709
LIABILITIES
Non-interest bearing		$	1,406,426			$	944,769			$	—					$	2,351,195
Interest bearing deposits			2,932,004				2,694,349				—						5,626,353
Total deposits			4,338,430				3,639,118				—						7,977,548
Borrowings			67,855				271,512				—						339,367
Junior subordinated debentures			83,545				5,838				—						89,383
Other liabilities			53,172				57,682				—						110,854
Total liabilities			4,543,002				3,974,150				—						8,517,152
EQUITY
Equity (Banner)			627,134				—				532,423			H			1,159,557
Equity (Starbuck)			—				560,858				(560,858	)		I			—
Total Equity			627,134				560,858				(28,435	)					1,159,557
Total Liabilities and Equity		$	5,170,136			$	4,535,008			$	(28,435	)				$	9,676,709

 

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Pro Forma Consolidated Statement of Operations

Nine Months Ended September 30, 2014

(in thousands)

 

		Banner				Siuslaw				Pro Forma Adjustments				Notes				Banner & Siuslaw Combined Pro Forma
Interest income:
Interest and fees on loans		$	131,439			$	9,377			$	—							$	140,816
Interest on cash and securities			9,971				540				(93	)			K				10,418
Total interest income			141,410				9,917				(93	)							151,234
Interest expense:
Interest on deposits			5,776				301				—								6,077
Interest on borrowings			2,423				184				54				L				2,661
Total interest expense			8,199				485				54								8,738
Net interest income before provision			133,211				9,432				(147	)							142,496
Loan loss provision expense			—				—				—								—
Net interest income after provision for loan losses			133,211				9,432				(147	)							142,496
Other operating income:
Deposit fees and charges			22,237				493				—								22,730
Mortgage banking operations			7,282				1,476				—								8,758
Other			12,823				2,397				—								15,220
Total other operating income			42,342				4,366				—								46,708
Other operating expense:
Compensation			57,777				5,558				—								63,335
Occupancy and equipment			17,055				684				150				M				17,889
Amortization of core deposit intangibles			1,460				—				630				N				2,090
Other			36,220				4,196				—								40,416
Total other operating expense			112,512				10,438				780								123,730
Pre-tax income			63,041				3,360				(927	)							65,474
Provision for income taxes			20,620				277				(324	)			O				20,573
Net income		$	42,421			$	3,083			$	(603	)						$	44,901

 

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Pro Forma Consolidated Statement of Operations

Nine Months Ended September 30, 2014

(in thousands)

 

		Holdings				Eliminations				Notes				Starbuck				GSB				Pro Forma Adjustments				Notes				Starbuck Combined Pro Forma
Interest income:
Interest and fees on loans		$	96,110			$	—							$	96,110			$	9,524			$	437				O			$	106,071
Interest on cash and securities			18,918				—								18,918				2,915				204				P				22,037
Total interest income			115,028				—								115,028				12,439				641								128,108
Interest expense:
Interest on deposits			4,430				—								4,430				917				21				Q				5,368
Interest on borrowings			546				—								546				312				62				R				920
Total interest expense			4,976				—								4,976				1,229				83								6,288
Net interest income before provision			110,052				—								110,052				11,210				558								121,820
Loan loss provision expense			1,714				—								1,714				(400	)			—								1,314
Net interest income after provision for loan losses			108,338				—								108,338				11,610				558								120,506
Other operating income:
Deposit fees and charges			11,312				—								11,312				252				—								11,564
Mortgage banking operations			2,851				—								2,851				—				—								2,851
Other			19,727				387				E				20,114				288				—								20,402
Total other operating income			33,890				387								34,277				540				—								34,817
Other operating expense:
Compensation			60,725				(1,054	)			F				59,671				5,383				—								65,054
Occupancy and equipment			17,362				—								17,362				1,100				—								18,462
Amortization of core deposit intangibles			2,598				—								2,598				—				48				S				2,646
Other			31,953				134				H				32,087				2,451				—								34,538
Total other operating expense			112,638				(920	)							111,718				8,934				48								120,700
Pre-tax income			29,590				1,307								30,897				3,216				510								34,623
Provision for income taxes			12,604				457				I				13,061				1,010				179				T				14,250
Net income		$	16,986			$	850							$	17,836			$	2,206			$	331							$	20,373

 

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Pro Forma Consolidated Statement of Operations

Nine Months Ended September 30, 2014

(in thousands)

 

		Banner & Siuslaw Combined Pro Forma				Starbuck Combined Pro Forma				Pro Forma Adjustments				Notes		Pro Forma Totals
Interest income:
Interest and fees on loans		$	140,816			$	106,071			$	1,785			J		$	248,672
Interest on cash and securities			10,418				22,037				584			K			33,039
Total interest income			151,234				128,108				2,369						281,711
Interest expense:
Interest on deposits			6,077				5,368				—						11,445
Interest on borrowings			2,661				920				—						3,581
Total interest expense			8,738				6,288				—						15,026
Net interest income before provision			142,496				121,820				2,369						266,685
Loan loss provision expense			—				1,314				—						1,314
Net interest income after provision for loan losses			142,496				120,506				2,369						265,371
Other operating income:
Deposit fees and charges			22,730				11,564				—						34,294
Mortgage banking operations			8,758				2,851				—						11,609
Other			15,220				20,402				—						35,622
Total other operating income			46,708				34,817				—						81,525
Other operating expense:
Compensation			63,335				65,054				—						128,389
Occupancy and equipment			17,889				18,462				—						36,351
Amortization of core deposit intangibles			2,090				2,646				4,849			L			9,585
Other			40,416				34,538				—						74,954
Total other operating expense			123,730				120,700				4,849						249,279
Pre-tax income			65,474				34,623				(2,480	)					97,617
Provision for income taxes			20,573				14,250				(868	)		M			33,955
Net income		$	44,901			$	20,373			$	(1,612	)				$	63,622

 

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Pro Forma Consolidated Statement of Operations

Twelve Months Ended December 31, 2013

(in thousands)

 

		Banner				Siuslaw				Pro Forma Adjustments				Notes		Banner & Siuslaw Combined Pro Forma
Interest income:
Interest and fees on loans		$	167,204			$	11,923			$	—					$	179,127
Interest on cash and securities			12,508				675				(121	)		K			13,062
Total interest income			179,712				12,598				(121	)					192,189
Interest expense:
Interest on deposits			9,737				506				—						10,243
Interest on borrowings			3,259				249				68			L			3,576
Total interest expense			12,996				755				68						13,819
Net interest income before Provision			166,716				11,843				(189	)					178,370
Loan loss provision expense			—				550				—						550
Net interest income after provision for loan losses			166,716				11,293				(189	)					177,820
Other operating income:
Deposit fees and charges			26,581				586				—						27,167
Mortgage banking operations			11,170				2,814				—						13,984
Other			5,591				3,352				—						8,943
Total other operating income			43,342				6,752				—						50,094
Other operating expense:
Compensation			73,161				8,088				—						81,249
Occupancy and equipment			21,423				861				200			M			22,484
Amortization of core deposit intangibles			1,941				—				896			N			2,837
Other			44,450				5,540				—						49,990
Total other operating expense			140,975				14,489				1,096						156,560
Pre-tax income			69,083				3,556				(1,285	)					71,354
Provision for income taxes			22,528				466				(450	)		O			22,544
Net income		$	46,555			$	3,090			$	(835	)				$	48,810

 

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Pro Forma Consolidated Statement of Operations

Twelve Months Ended December 31, 2013

(in thousands)

 

		Holdings				Eliminations				Notes		Starbuck				GSB				Pro Forma Adjustments				Notes		Starbuck Combined Pro Forma
Interest income:
Interest and fees on loans		$	133,195			$	—					$	133,195			$	12,779			$	582			O		$	146,556
Interest on cash and securities			16,103				—						16,103				3,458				268			P			19,829
Total interest income			149,298				—						149,298				16,237				850						166,385
Interest expense:
Interest on deposits			5,273				—						5,273				1,313				28			Q			6,614
Interest on borrowings			466				—						466				320				79			R			865
Total interest expense			5,739				—						5,739				1,633				107						7,479
Net interest income before Provision			143,559				—						143,559				14,604				743						158,906
Loan loss provision expense			4,211				—						4,211				—				—						4,211
Net interest income after provision for loan losses			139,348				—						139,348				14,604				743						154,695
Other operating income:
Deposit fees and charges			13,999				—						13,999				684				—						14,683
Mortgage banking operations			6,846				—						6,846				—				—						6,846
Other			22,210				426			E			22,636				625				—						23,261
Total other operating income			43,055				426						43,481				1,309				—						44,790
Other operating expense:
Compensation			87,759				(1,389	)		F			86,370				6,805				—						93,175
Occupancy and equipment			37,274				(6	)		G			37,268				1,480				—						38,748
Amortization of core deposit intangibles			3,376				—						3,376				—				67			S			3,443
Other			46,394				(26	)		H			46,368				3,656				—						50,024
Total other operating expense			174,803				(1,421	)					173,382				11,941				67						185,390
Pre-tax income			7,600				1,847						9,447				3,972				676						14,095
Provision for income taxes			579				646			I			1,225				1,036				237			T			2,498
Net income		$	7,021			$	1,201					$	8,222			$	2,936			$	439					$	11,597

 

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Pro Forma Consolidated Statement of Operations

Twelve Months Ended December 31, 2013

(in thousands)

 

		Banner & Siuslaw Combined Pro Forma				Starbuck Combined Pro Forma				Pro Forma Adjustments				Notes		Pro Forma Totals
Interest income:
Interest and fees on loans		$	179,127			$	146,556			$	2,512			J		$	328,195
Interest on cash and securities			13,062				19,829				763			K			33,654
Total interest income			192,189				166,385				3,275						361,849
Interest expense:
Interest on deposits			10,243				6,614				—						16,857
Interest on borrowings			3,576				865				—						4,441
Total interest expense			13,819				7,479				—						21,298
Net interest income before provision			178,370				158,906				3,275						340,351
Loan loss provision expense			550				4,211				—						4,761
Net interest income after provision for loan losses			177,820				154,695				3,275						335,790
Other operating income:
Deposit fees and charges			27,167				14,683				—						41,850
Mortgage banking operations			13,984				6,846				—						20,830
Other			8,943				23,261				—						32,204
Total other operating income			50,094				44,790				—						94,884
Other operating expense:
Compensation			81,249				93,175				—						174,424
Occupancy and equipment			22,484				38,748				—						61,232
Amortization of core deposit intangibles			2,837				3,443				6,898			L			13,178
Other			49,990				50,024				—						100,014
Total other operating expense			156,560				185,390				6,898						348,848
Pre-tax income			71,354				14,095				(3,623	)					81,826
Provision for income taxes			22,544				2,498				(1,268	)		M			23,774
Net income		$	48,810			$	11,597			$	(2,355	)				$	58,052

 

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Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial Information

Note 1—Basis of Presentation

The unaudited pro forma combined condensed consolidated financial information has been prepared under the acquisition method of accounting for business combinations. The unaudited pro forma combined condensed consolidated statements of operations for the year ended December 31, 2013 and nine months ended September 30, 2014, are presented as if the acquisitions occurred on January 1, 2013. The unaudited pro forma combined condensed consolidated statements of financial condition as of September 30, 2014 are presented as if the acquisitions occurred as of that date. This information is not intended to reflect the actual results that would have been achieved had the acquisition actually occurred on those dates. The pro forma adjustments are preliminary, based on estimates, and are subject to change as more information becomes available and after final analyses of the fair values of both tangible and intangible assets acquired and liabilities assumed are completed. Accordingly, the final fair value adjustments may be materially different from those presented in this document.

Under the acquisition method of accounting, the assets and liabilities and any identifiable intangible assets of entities being acquired, Siuslaw Bank, GSB and Starbuck, will be recorded at the respective fair values on the merger date. The fair values on the merger date are to represent management’s best estimates based on available information and facts and circumstances in existence on the merger date. The pro forma adjustments reflected in the unaudited pro forma combined condensed consolidated financial information are subject to adjustment and may vary from the actual purchase price allocation that will be recorded at the time the merger is completed. Adjustments may include, but not be limited to, changes in (i) the acquired entity’s balance sheets through the effective time of the mergers; (ii) the aggregate value of merger consideration paid if the price of Banner’s stock varies from the assumed prices per share; (iii) total merger related expenses if consummation and/or implementation costs vary from currently estimated amounts; and (iv) the underlying values of assets and liabilities if market conditions differ from current assumptions.

Certain historical data of the entities being acquired has been reclassified on a pro forma basis to conform to Banner’s classifications.

Note 2—Purchase Price

Siuslaw Acquisition: Each share of Siuslaw common stock will be converted into the right to receive, promptly following completion of the merger, (1) 0.32231 shares of Banner common stock and (2) $1.41622 in cash. Banner will issue approximately 1,319,995 shares of common stock in the merger, resulting in approximately 20,891,500 shares of common stock outstanding after the merger, and pay aggregate cash consideration in the merger of approximately $5.8 million, representing an aggregate consideration mix of approximately 90% Banner stock and 10% cash. All preferred stock of Siuslaw will be converted to common stock of Siuslaw immediately prior to the merger and preferred shareholders will receive the same merger consideration as the other Siuslaw common shareholders.

Any changes in the price of Banner common stock would change the purchase price and goodwill. The following table presents the sensitivity of purchase price and resulting goodwill to changes in the price of Banner’s common stock using a price of $40.50 as of December 1, 2014 as the baseline.

 

Price Sensitivity		Banner Stock Price				Siuslaw Purchase Price (in thousands)				Estimated Goodwill (in thousands)
Up 20%		$	48.600			$	69,952			$	24,500
Up 10%		$	44.550			$	64,606			$	19,154
Baseline presented in pro forma		$	40.500			$	59,260			$	13,808
Down 10%		$	36.450			$	53,914			$	8,462
Down 20%		$	32.400			$	48,568			$	3,116

 

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GSB Acquisition: Each share of GSB common stock will be converted into the right to receive, promptly following completion of the merger with Starbuck, $22.05 in cash.

Starbuck Acquisition: The aggregate consideration to be received by Starbuck holders will consist of a fixed amount of 13.23 million shares of Banner common stock and $130.0 million in cash. Upon completion of the transaction, such shares will represent an approximately 38.77% pro forma ownership interest in Banner assuming completion of merger with Siuslaw. Based on the closing price of Banner common stock on February 13, 2015, the aggregate value of the transaction is approximately $724 million.

Note 3—Allocation of Purchase Price

Siuslaw Acquisition: At the merger date, Siuslaw’s assets and liabilities are required to be adjusted to their estimated fair values. The purchase price is then allocated to the identifiable assets and liabilities based on the fair values. The excess of the purchase price over the fair value of the net assets acquired is allocated to goodwill.

The pro forma purchase price was preliminarily allocated to the assets acquired and liabilities assumed based on their estimated fair values as summarized in the following table:

 

		September 30, 2014
		(in thousands)
Pro forma purchase price of Siuslaw Bank
Fair value of Banner common stock at $40.50 per share						$	53,460
Cash to be paid							5,800
Total consideration paid							59,260
Fair value of assets acquired:
Cash		$	113,344
Investment securities			13,178
Loans, net			245,111
OREO			3,172
Premises and equipment			7,769
Intangible assets			5,600
Other assets			14,949
Total assets acquired			403,123
Fair value of liabilities assumed:
Deposits			347,312
Junior subordinated debentures			5,921
Accrued expenses and other liabilities			4,438
Total liabilities assumed			357,671
Fair value of net assets acquired							45,452
Excess of consideration paid over the net assets acquired (Goodwill)						$	13,808

 

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GSB Acquisition. At the merger date, GSB’s assets and liabilities are required to be adjusted to their estimated fair values. The purchase price is then allocated to the identifiable assets and liabilities based on the fair values. The excess of the purchase price over the fair value of the net assets acquired is allocated to goodwill.

The pro forma purchase price was preliminarily allocated to the assets acquired and liabilities assumed based on their estimated fair values as summarized in the following table:

 

		September 30, 2014
		(in thousands)
Pro forma purchase price of GSB
Cash to be paid						$	59,633
Total pro forma purchase price							59,633
Fair value of assets acquired:
Cash		$	25,004
Investment securities			162,400
Loans, net			267,341
OREO			843
Premises and equipment			141
Intangible assets			423
Other assets			22,094
Total assets acquired			478,246
Fair value of liabilities assumed:
Deposits			409,824
Borrowings			20,039
Junior subordinated debentures			5,838
Accrued expenses and other liabilities			4,527
Total liabilities assumed			440,228
Fair value of net assets acquired							38,018
Excess of consideration paid over the net assets acquired (Goodwill)						$	21,615

 

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Starbuck Acquisition. At the merger date, Starbuck’s assets and liabilities are required to be adjusted to their estimated fair values. The purchase price is then allocated to the identifiable assets and liabilities based on the fair values. The excess of the purchase price over the fair value of the net assets acquired is allocated to goodwill.

The pro forma purchase price was preliminarily allocated to the assets acquired and liabilities assumed based on their estimated fair values as summarized in the following table:

 

		September 30, 2014
		(in thousands)
Pro forma purchase price of Starbuck
Fair value of Banner common stock at $40.50 per share						$	535,815
Cash to be paid							130,000
Total pro forma purchase price							665,815
Fair value of assets acquired:
Cash		$	34,281
Investment securities			1,221,227
Loans			2,809,436
OREO			17,178
Premises and equipment			64,628
Intangible assets			43,107
Other assets			255,868
Total assets acquired			4,445,725
Fair value of liabilities assumed:
Deposits			3,639,118
Borrowings			271,512
Junior subordinated debentures			5,838
Accrued expenses and other liabilities			57,682
Total liabilities assumed			3,974,150
Fair value of net assets acquired							471,575
Excess of consideration paid over the net assets acquired (Goodwill)						$	194,240

 

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Note 4—Pro Forma Combined Condensed Consolidated Financial Information Adjustments

The following pro forma adjustments have been included in the unaudited pro forma condensed combined financial information. Estimated fair value adjustments are based upon available information, and certain assumptions considered reasonable, and may be revised as additional information becomes available. The following are the pro forma adjustments made to record the transactions and to adjust Siuslaw’s, GSB’s and Starbuck’s assets and liabilities to their estimated fair values at September 30, 2014.

Notes to Pro Forma Adjustments for Siuslaw Merging Into Banner

Statement of Financial Condition

As of September 30, 2014

 

(in thousands)

 

A		Adjustments to Cash and cash equivalents						$	(7,691	)
		To reflect cash used to purchase Siuslaw Financial Group shares (4,095,421 common shares outstanding at September 30, 2014 at $1.41622 cash consideration per share).		$	(5,800	)
		Payment of after-tax merger costs		$	(1,891	)
B		Adjustments to Loans receivable, excluding allowance for loan losses						$	(5,000	)
		A total discount of 2% was estimated to reflect the fair value of loans at merger date. This discount represents the expected credit losses. The net interest rate adjustments and resulting accretable yield are estimated to be immaterial.
C		Adjustments to Allowance for loan losses						$	4,070
		To remove the Siuslaw allowance for loan losses at period end as the credit risk is accounted for in the fair value adjustment for the loans receivable.
D		Adjustments to Premises and equipment						$	2,000
		To reflect the estimated fair value of premises and equipment.
E		Adjustments to Intangibles/CDI						$	5,600
		To record the estimated fair value of the core deposit intangible (CDI).
F		Adjustment to Goodwill						$	13,808
		To record the difference between the consideration paid and the estimated fair value of assets acquired and liabilities assumed in the merger.
G		Adjustments to Deferred taxes						$	(1,520	)
		To reflect the deferred taxes related to the net fair value adjustments of $4.3 million at Banner’s estimated statutory rate of 35%.
H		Adjustments to Junior subordinated debentures						$	(2,327	)
		To reflect the fair value of Siuslaw’s junior subordinated debentures.
I		Adjustments to Equity-Banner						$	53,076
		To record the issuance of Banner common stock as purchase price consideration (1,319,995 shares at $40.50 per share).		$	53,460
		Payment of after-tax merger costs by Banner		$	(384	)
J		Adjustments to Equity-Siuslaw						$	(39,482	)

 

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Notes to Pro Forma Adjustments for Siuslaw Merging Into Banner

Statement of Operations

 

(in thousands)

 

				For the Nine Months Ended Sep. 30, 2014				For the Twelve Months Ended Dec. 31, 2013
K		Adjustments to Interest on cash and securities		$	(93	)		$	(121	)
		AFS securities’ mark-to market balance sheet adjustments are reclassified on the balance sheet as a net premium and are being amortized against income over the weighted average life of 5.1 years.
L		Adjustments to Interest expense on borrowings		$	54			$	68
		To reflect the amortization of the discount resulting from the pro forma junior subordinated debenture fair value adjustment using the effective yield method over the remaining 20 year life of the debentures.
M		Adjustments to Occupancy and equipment expense		$	150			$	200
		To reflect the increase of the estimated depreciation expense on the premises and equipment resulting from the pro forma fair value adjustment using straight line method over the estimated weighted average life of 10 years.
N		Adjustments to Amortization of core deposit intangibles		$	630			$	896
		To reflect the amortization of the core deposit intangible asset based on an amortization period of eight years and using an accelerated amortization method.
O		Adjustments to Provision for income taxes		$	(324	)		$	(450	)
		To reflect the income tax effect of the pro forma adjustments above at the statutory rate of 35%.

 

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Notes to Pro Forma Adjustments to Segregate Starbuck from Holdings

Statement of Financial Condition

As of September 30, 2014

 

(in thousands)

 

A		Other assets		$	(2	)
		To eliminate parent company other assets.
B		Non-interest bearing deposits		$	519
		To recognize parent company deposits at AmericanWest Bank.
C		Other liabilities		$	(67	)
		To eliminate parent company other liabilities.
D		Equity		$	(454	)
		To eliminate parent company impact on equity.

Statement of Operations

 

(in thousands)

 

				For the Nine Months Ended Sep. 30, 2014				For the Twelve Months Ended Dec. 31, 2013
E		Other operating income		$	387			$	426
		To eliminate management fee income recorded at Starbuck
		for services provided to and paid for by the Holdings stand-alone entity.
F		Compensation expense		$	(1,054	)		$	(1,389	)
		To eliminate management unit compensation expense recorded by the Holdings stand-alone entity as required by the LLC operating agreement.
G		Occupancy and equipment expense		$	—			$	(6	)
		To eliminate occupancy and equipment expense attributed to the Holdings stand-alone entity.
H		Other operating expense		$	134			$	(26	)
		To eliminate other operating expense attributed to the Holdings stand-alone entity.
I		Adjustments to Provision for income taxes		$	457			$	646
		To reflect the income tax effect of the pro forma adjustments above at the statutory rate of 35%.

 

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Notes to Pro Forma Adjustments for Greater Sacramento Bancorp Merging Into Starbuck

Statement of Financial Condition

As of September 30, 2014

 

(in thousands)

 

A		Adjustments to Cash and cash equivalents						$	(60,319	)
		To reflect cash used to purchase GSB shares and payout options ($57.7 million for 2,617,347 shares outstanding, plus $1.9 million for 179,024 options outstanding).		$	(59,633	)
		Payment of after-tax merger costs		$	(686	)
B		Adjustments to Investment securities						$	1,504
		To reflect the estimated fair value of acquired held to maturity securities.
C		Adjustments to Loans receivable						$	(5,938	)
		A total discount of 2.2% was estimated to adjust loans to fair value at merger date, including 2.4% for credit losses and (0.2%) for accretable yield.
D		Adjustments to Allowance for loan losses						$	3,717
		To eliminate the allowance for loan losses at period end as the credit risk is accounted for in the fair value adjustment for the loans receivable.
E		Adjustments to OREO						$	(1,619	)
		To reflect the estimated fair value of other real estate owned.
F		Adjustments to Premises and equipment						$	(31	)
		To reflect the estimated fair value of premises and equipment.
G		Adjustments to Intangibles/CDI						$	423
		To record the estimated fair value of the CDI.
H		Adjustments to Goodwill						$	21,615
		To record the difference between the consideration paid and the estimated fair value of assets acquired and liabilities assumed in the merger.
I		Adjustments to Deferred taxes						$	76
		To reflect the deferred taxes related to the net fair value adjustments of ($217,000) at Banner’s estimated statutory rate 35%
J		Adjustments to Other assets						$	(74	)
		Write-off CD placement costs and debt issuance costs.
K		Adjustments to Interest bearing deposits						$	73
		To record time deposit premium of 0.06% based on estimated fair value
L		Adjustments to Junior subordinated debentures						$	(2,410	)
		To reflect the fair value of junior subordinated debentures.
M		Adjustments to Other liabilities						$	536
		To mark to fair value certain employee benefit liabilities, write off deferred rent, and record leasehold intangible liability.
N		Adjustments to Equity						$	(38,845	)
		To eliminate the equity of GSB.

 

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Notes to Pro Forma Adjustments for Greater Sacramento Bancorp Merging Into Starbuck

Statement of Operations

 

(in thousands)

 

				For the Nine Months Ended Sep. 30, 2014				For the Twelve Months Ended Dec. 31, 2013
O		Adjustments to Interest and fee income on loans		$	437			$	582
		To reflect accretion of interest income for acquired impaired and non-impaired loans, using the effective interest method of amortization over the estimated lives of the acquired loan portfolio of approximately five years, as adjusted for expected prepayments.
P		Adjustments to Interest on cash and securities
		To reflect the amortization of the estimated fair value adjustment of held-to-maturity securities using the effective interest method of amortization over the estimated lives of the portfolio of approximately eight years.		$	(131	)		$	(167	)
		Accumulated other comprehensive income on GSB’s books at acquisition is considered the mark to fair value and no additional balance sheet adjustment is needed. The AOCI of $2.8 million is amortized against interest income over the weighted average life of 6.0 years.		$	335			$	435
Q		Adjustments to Interest expense on deposits		$	21			$	28
		To reflect the amortization of deposit premium resulting from time deposit fair value adjustments based on a weighted average life of time deposits of approximately one year using contractual time deposit maturities.
R		Adjustments to Interest expense on borrowings		$	62			$	79
		To reflect the amortization of the discount resulting from the pro forma junior subordinated debenture fair value adjustment using the effective yield method over the remaining 20 year life of the debentures.
S		Adjustments to Other operating expense		$	48			$	67
		To reflect the amortization of the core deposit intangible asset based on an amortization period of eight years and using an accelerated amortization method.
T		Adjustments to Provision for income taxes		$	179			$	237
		To reflect the income tax effect of the pro forma adjustments above at the statutory rate of 35%.

 

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Notes to Pro Forma Adjustments for Starbuck Merging Into Banner

Statement of Financial Condition

As of September 30, 2014

 

(in thousands)

 

A		Adjustments to Cash and cash equivalents						$	(149,712	)
		To reflect cash used to purchase Starbuck.		$	(130,000	)
		Payment of after-tax merger costs		$	(19,712	)
B		Adjustments to Loans receivable, excluding allowance for loan losses						$	(16,098	)
		To eliminate Starbuck prior loan discount.		$	55,938
		A total discount of 2.5% was estimated to reflect the fair value of loans at merger date, including 2.0% for credit losses and 0.5% for accretable yield.		$	(72,036	)
C		Adjustments to Allowance for loans						$	15,159
		To eliminate the allowance for loan losses at period end as the credit risk is accounted for in the fair value adjustment for the loans receivable.
D		Adjustments to Premises and equipment						$	(8,000	)
		To reflect the estimated fair value of premises and equipment.
E		Adjustments to Intangibles/CDI						$	17,971
		To eliminate Starbuck prior CDI.		$	(25,136	)
		To record the estimated fair value of the CDI.		$	43,107
F		Adjustment to Goodwill						$	115,406
		To eliminate Starbuck prior goodwill.		$	(78,834	)
		To record the difference between the consideration paid and the estimated fair value of assets acquired and liabilities assumed in the merger.		$	194,240
G		Adjustments to Deferred taxes						$	(3,161	)
		To reflect the deferred taxes related to the net fair value adjustments of $9.0 million at Banner’s estimated statutory rate of 35%.
H		Adjustments to Equity-Banner						$	532,423
		To record the issuance of Banner common stock as purchase price consideration (13,230,000 shares at $40.50 per share).		$	535,815
		Payment of after-tax merger costs by Banner		$	(3,392	)
I		Adjustments to Equity- Starbuck						$	(560,858	)
		To eliminate the equity of Starbuck.

 

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Notes to Pro Forma Adjustments for Starbuck Merging Into Banner

Statement of Operations

 

(in thousands)

 

				For the Nine Months Ended Sep. 30, 2014				For the Twelve Months Ended Dec. 31, 2013
J		Adjustments to Interest and fees on loans		$	1,785			$	2,512
		To reflect accretion of interest income for acquired impaired and non-impaired loans, using the effective interest method of amortization over the estimated lives of the acquired loan portfolio of approximately nine years, as adjusted for expected prepayments.
K		Adjustments to interest on cash and securities		$	584			$	763
		AFS securities’ mark-to-market balance sheet adjustments are reclassified on the balance sheet as a net discount and are being accreted into income over the weighted average life of 4.9 years.
L		Adjustments to Noninterest expense		$	4,849			$	6,898
		To reflect the amortization of the core deposit intangible asset based on an amortization period of eight years and using an accelerated amortization method.
M		Adjustments to income tax expense (benefit)		$	(868	)		$	1,268
		To reflect the income tax effect of the pro forma adjustments above at the statutory rate of 35%.

 

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INFORMATION ABOUT THE SPECIAL MEETING AND VOTING

Banner is furnishing this proxy statement to you in order to provide you with important information regarding the matters to be considered at the special meeting and at any adjournment or postponement of the special meeting. Banner first mailed this proxy statement and the accompanying form of proxy to its shareholders on or about February 17, 2015.

Special Meeting Date, Time and Place

A special meeting of shareholders will be held on Tuesday, March 17, 2015, at 10:00 a.m. local time at 10 S. First Avenue, Walla Walla, Washington.

Agenda

At the special meeting, shareholders of Banner will be asked to consider and vote upon the following proposals:

 

•

Proposal 1: To approve an amendment to Banner’s articles of incorporation creating a new class of Banner non-voting common stock of 5,000,000 authorized shares;

 

•

Proposal 2: To approve the issuance of an aggregate of 13,230,000 shares of Banner common stock and Banner non-voting common stock in accordance with the merger agreement; and

 

•

Proposal 3: To approve adjournments or postponements of the special meeting, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting in favor of the foregoing proposals.

These proposals are being voted upon separately, and the approval of both proposal 1 and proposal 2 is a condition to completion of the merger. The amendment to the articles of incorporation will go into effect if approved at the special meeting even if the merger is not consummated.

Record Date; Shareholders Entitled to Vote

Only shareholders of record at the close of business on February 13, 2015 are entitled to receive notice of and to vote at the meeting and any adjournment or postponement of the special meeting.

As of the record date, directors and executive officers of Banner and their affiliates as a group beneficially owned and were entitled to vote approximately 450,512 shares of Banner common stock, representing approximately 2.30% of the shares of Banner common stock issued and outstanding as of February 13, 2015. To Banner’s knowledge, all of the directors and executive officers of Banner who are entitled to vote at the special meeting intend to vote their shares of Banner common stock in favor of each of the proposals, although such persons have not entered into agreements obligating them to do so.

Voting and Revocation of Proxies

The proxy accompanying this proxy statement is solicited on behalf of the Banner board of directors for use at the special meeting.

General. Assuming a quorum is present, shares represented by a properly signed and dated proxy will be voted at the special meeting in accordance with the instructions indicated on the proxy. Proxies that are properly signed and dated but that do not contain voting instructions will be voted FOR each of the proposals.

Abstentions. Banner will count a properly executed proxy marked “abstain” with respect to a particular proposal as present for purposes of determining whether a quorum is present. If you “abstain” from voting with respect to proposal 1 it will have the same effect as if you voted “against” such proposal.

 

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Broker Non-Votes. Proxies submitted by brokers that do not indicate a vote for some or all of the proposals because the brokers do not have discretionary voting authority and have not received instructions from you as to how to vote on those proposals (so-called “broker non-votes”) are considered “shares present” for purposes of determining whether a quorum exists. Broker non-votes with respect to each of the proposals are not deemed to be “present.”

Voting Shares in Person that are Held Through Brokers. If you are a “shareholder of record,” you may vote your shares in person at the special meeting. If you hold your shares in “street name,” you must obtain a legal proxy from your broker, banker, trustee or nominee, giving you the right to vote the shares at the special meeting.

Submitting a Proxy by Telephone or Through the Internet. You may vote your shares by telephone or electronically through the Internet, instead of submitting proxies by mail on the enclosed proxy card. Thus, shareholders of record and many shareholders who hold their shares through a broker or bank will have the option to submit their proxies or voting instructions by telephone or electronically through the Internet. Please note that there are separate arrangements for using the telephone and the Internet depending on whether your shares are registered in Banner’s stock records in your name or in the name of a broker/bank/trust/nominee. If you hold your shares through a broker/bank/trust/nominee, your broker/bank/trust/nominee will provide you with materials and instructions for voting your shares.

Revocation of Proxies. You may revoke your proxy by doing one of the following:

 

•

by sending a written notice of revocation to the Secretary of Banner that is received by Banner prior to the special meeting, stating that you revoke your proxy;

 

•

by signing a later-dated proxy card and submitting it so that it is received prior to the special meeting in accordance with the instructions included in the proxy card(s); or

 

•

by attending the special meeting and voting your shares in person.

Required Shareholder Vote

In order to conduct business at the special meeting, a quorum must be present. The holders of a majority of the votes entitled to be cast at the special meeting, present in person or represented by proxy, constitute a quorum under Banner’s bylaws. Banner will treat shares of Banner common stock represented by a properly signed and returned proxy, including abstentions and broker non-votes, as present at the Banner special meeting for the purposes of determining the existence of a quorum.

With respect to any matter submitted to a vote of Banner shareholders, each holder of Banner common stock will be entitled to one vote, in person or by proxy, for each share of Banner common stock held in his, her or its name on the books of Banner on the record date.

Proposal 1 requires the affirmative vote of holders of at least a majority of our outstanding common stock as of the record date of the special meeting. As of the record date, there were 19,572,141 shares of Banner common stock outstanding and therefore 9,786,071 votes are required for proposal 1 to be approved by Banner shareholders. Abstentions and broker non-votes will have the same effect as a vote against the proposal.

Proposal 2 requires the affirmative vote of a majority of those shares voting on the proposal. Any shareholder represented in person or by proxy at the meeting and entitled to vote on the subject matter may elect to abstain from voting on this proposal. If so, such abstention will not be counted as a vote cast on the proposal and, therefore, will have no effect on the outcome of the vote on the proposal. Provided there is a quorum of shareholders present in person or by proxy, shareholders not attending the meeting, in person or by proxy, will also have no effect on the outcome of this proposal.

Proposal 3 requires the affirmative vote of a majority of those shares voting on the proposal to authorize the Banner board of directors to adjourn, postpone or continue the special meeting, should such authorization be necessary for an adjournment, postponement or continuation. Any shareholder represented in

 

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person or by proxy at the meeting and entitled to vote on the subject matter may elect to abstain from voting on this proposal. If so, such abstention will not be counted as a vote cast on the proposal and, therefore, will have no effect on the outcome of the vote on the proposal. Provided there is a quorum of shareholders present in person or by proxy, shareholders not attending the meeting, in person or by proxy, will also have no effect on the outcome of this proposal.

All other actions considered at the meeting may be taken upon the affirmative vote of a majority of those shares present in person or represented by proxy and voting thereon at the special meeting.

As of the record date, directors and executive officers of Banner and their affiliates as a group beneficially owned and were entitled to vote approximately 450,512 shares of Banner common stock, representing approximately 2.30% of the shares of Banner common stock issued and outstanding as of February 13, 2015. To Banner’s knowledge, all of the directors and executive officers of Banner who are entitled to vote at the special meeting intend to vote their shares of Banner common stock in favor of each of the proposals, although such persons have not entered into agreements obligating them to do so.

Recommendations by the Banner Board of Directors

The Banner board of directors unanimously recommends that Banner shareholders vote FOR each of the proposals.

The matters to be considered at the special meeting are of great importance to the shareholders of Banner. Accordingly, you are encouraged to read and carefully consider the information presented in this proxy statement, and to submit your proxy by telephone or mail in the enclosed postage-paid envelope.

Proxy Solicitation

Banner will pay the costs of soliciting proxies. Pursuant to the terms of the merger agreement, the fees and expenses associated with the filing, printing and mailing of this proxy statement will be borne by Banner. Certain directors, officers or employees of Banner may solicit proxies by telephone, facsimile, email or personal contact. They will not be specifically compensated for doing so. The extent to which any proxy soliciting efforts will be necessary depends upon how promptly proxies are received. You should send in your proxy by mail without delay or vote by telephone. Banner also reimburses brokers and other custodians, nominees and fiduciaries for their expenses in sending these materials to you and getting your voting instructions. A more complete description of how to send your proxy is included on the proxy accompanying this proxy statement.

Other Business

Banner is not currently aware of any business other than the named proposals to be acted upon at the special meeting. If, however, any other matters are properly brought before the meeting, or any adjournment or postponement thereof, the persons named in the enclosed form of proxy, and acting under that proxy, will have discretion to vote or act on those matters in accordance with their best judgment.

No Appraisal Rights

Under the WBCA and our articles of incorporation, holders of Banner common stock are not entitled to appraisal rights with respect to the matters to be considered at the special meeting.

Other Information

Representatives of Moss Adams LLP, our principal accounting firm and also the principal accountants of Starbuck, are not expected to be present at the special meeting, will not have an opportunity to make a statement, and are not expected to be available to respond to questions from shareholders.

 

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PROPOSALS TO BE CONSIDERED AND VOTED UPON BY HOLDERS OF BANNER STOCK AT

THE SPECIAL MEETING

Proposal One

Approval of an Amendment to Banner’s Articles of Incorporation

to Create a New Class of Banner Non-Voting Common Stock

The merger agreement requires that Banner issue up to a maximum of 3,000,000 shares of Banner non-voting common stock, par value $0.01, as part of the merger consideration. In order to issue the Banner non-voting common stock, it is necessary to amend our articles of incorporation. The Banner board of directors has unanimously adopted resolutions approving and declaring advisable, and recommending that our shareholders approve, the adoption of the amendment to the articles of incorporation, which will authorize the creation of five million shares of Banner non-voting common stock. Holders of shares of Banner non-voting common stock will have no voting rights, unless otherwise required by the WBCA, but will otherwise have all the rights of holders of Banner common stock. The Banner non-voting common stock will automatically convert to Banner common stock upon transfer of such stock, subject to certain exceptions.

The amendment to the articles of incorporation is required under the terms of the merger agreement and is necessary to enable Banner to have enough shares of Banner non-voting common stock to issue shares of Banner non-voting common stock in connection with the merger. Accordingly, if this proposal is not approved by shareholders at the special meeting, a condition to the closing of the merger will not be satisfied and the merger will not be consummated. The amendment to the articles of incorporation will go into effect if approved at the special meeting even if the merger is not consummated. If this proposal is approved by shareholders, Banner will have the ability to issue the remaining unissued shares of Banner non-voting common stock in the future.

Summary of the Terms of the Banner Non-Voting Common Stock

The following is a summary of the material provisions of the amendment to the articles of incorporation of Banner, which is included as Annex A, and is incorporated by reference into this proxy statement. This summary describes the material provisions of the Banner non-voting common stock. We encourage you to read the amendment to the articles of incorporation.

Rights and Privileges; Ranking; Dividends and Other Matters. Except as set forth in the amendment to the articles of incorporation with respect to voting, Banner common stock and Banner non-voting common stock shall have the same rights, preferences and privileges, share ratably in all assets of Banner upon its liquidation, dissolution or winding-up, be entitled to receive dividends in the same amount per share and at the same time when, as and if declared by the Banner board of directors, and be equal and identical in all other respects as to all other matters.

Voting Rights. The holders of Banner non-voting common stock will have no voting rights except as required by the WBCA. Without limiting the generality of the preceding sentence, the application of separate voting group rights under sections 23B.10.040(1)(a), (e) or (f), or 23B.11.035 of the Revised Code of Washington (or any related section concerning voting group rights as to mergers or share exchanges), is explicitly denied in the amendment to the articles of incorporation. Notwithstanding the foregoing, and in addition to any other vote required by law, the affirmative vote of the holders of a majority of the outstanding shares of Banner non-voting common stock, voting separately as a class, will be required to amend Banner’s articles of incorporation, as amended, to alter or change the designation, preferences, limitations or relative rights of all or part of the shares of Banner non-voting common stock. Where shares of Banner non-voting common stock are entitled to vote, each holder of Banner non-voting common stock will have one vote in respect of each share of Banner non-voting common stock held of record solely on the matters as to which such shares are entitled to vote and subject to the rights and limitations specified by the WBCA.

 

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Stock Splits; Combinations; Reclassifications of Shares. In the event of any stock split, combination or other reclassification of shares of either the Banner common stock or the Banner non-voting common stock, the outstanding shares of the other class will be proportionately split, combined or reclassified in a similar manner; provided, however, that in any such transaction, holders of Banner common stock will receive only shares of Banner common stock in respect of their shares of Banner common stock and holders of Banner non-voting common stock will receive only shares of Banner non-voting common stock in respect of their shares of Banner non-voting common stock.

Transfer Restrictions; Automatic Conversion to Banner Common Stock. No transfer of shares of Banner non-voting common stock by the initial holder thereof (or by any affiliate of the initial holder to which such shares are transferred pursuant to clause (ii) of this sentence) will be permitted, except (i) in certain permitted transfers or (ii) to an affiliate of the initial holder of the Banner non-voting common stock. Any transfer in violation of the foregoing sentence shall be null and void and Banner shall not have any obligation to recognize such transfer. Each share of Banner non-voting common stock will be converted automatically into one share of Banner common stock upon a permitted transfer of such share of Banner non-voting common stock, and shall be registered as one share of Banner common stock on the books and records of Banner. Banner shall cooperate with the timely conversion of Banner non-voting common stock subject to compliance with applicable law and regulations.

Reservation of Banner Common Stock. Banner shall at all times reserve and keep available out of its authorized but unissued shares of Banner common stock, such number of its shares of Banner common stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Banner non-voting common stock into Banner common stock.

Fundamental Transactions. In the event of any merger, consolidation, reclassification or other transaction in which the shares of Banner common stock are exchanged for or changed into other stock or securities, cash and/or any other property, each share of Banner non-voting common stock will at the same time be similarly exchanged or changed into an amount per whole share equal to the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, that such share of Banner non-voting common stock would be entitled to receive if it was converted into a share of Banner common stock immediately prior to such transaction. In the event of any pro rata subscription offer, rights offer or similar offer to holders of Banner common stock, Banner shall provide the holders of Banner non-voting common stock the right to participate based upon the number of shares of Banner common stock such holders would be entitled to receive if such shares were converted into shares of Banner common stock immediately prior to such offering.

If this proposal is not approved by shareholders at the special meeting, a condition to the closing of the merger will not be satisfied and the merger will not be consummated.

Effects of the Authorization of Banner Non-Voting Common Stock

The additional shares of Banner non-voting common stock authorized by the amendment to the articles of incorporation but not issued in the merger will have the same rights as the shares issued in the merger as described above. Although the authorization of additional shares will not, in itself, have any effect on the rights of any holder of Banner common stock, the future issuance of additional shares of Banner non-voting common stock (other than by way of a stock split or dividend) could, as with any other issuances of common stock, have the effect of diluting earnings per share and book value per share of existing shareholders.

At present, the Banner board of directors has no plans to issue the additional shares of Banner non-voting common stock authorized by the amendment to the articles of incorporation. However, it is possible that some of these additional shares could be used in the future for various other purposes without further shareholder approval, except as such approval may be required in particular cases by Banner’s articles of incorporation or bylaws, applicable law or the rules of any stock exchange or other quotation system on which our securities may

 

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then be listed. These purposes may include raising capital, providing equity incentives to employees, officers or directors, establishing strategic relationships with other companies and expanding our business or product lines through the acquisition of other businesses or products.

Proposal Two

Approval of the Issuance of an Aggregate of 13,230,000 Shares

of Banner Common Stock and Banner Non-Voting Common Stock

Banner is seeking the approval of holders of Banner common stock for the issuance of an aggregate of 13,230,000 shares of Banner common stock and Banner non-voting common stock in accordance with the merger agreement.

These shares, if all Banner non-voting common stock to be issued in the merger were converted into Banner common stock, represent approximately 38.77% of the number of shares of Banner common stock outstanding as of February 13, 2015. The issuance of the Banner common stock and Banner non-voting common stock in connection with the merger requires the approval of holders of Banner common stock under NASDAQ Stock Market rules because the number of shares of Banner common stock and Banner non-voting common stock to be issued in the merger is in excess of 20% of the number of shares of Banner common stock currently outstanding. Accordingly, if this proposal is not approved by shareholders at the special meeting, a condition to the closing of the merger will not be satisfied and the merger will not be consummated.

Proposal Three

Approval of Adjournments or Postponements of the Special Meeting

Banner is asking holders of Banner common stock to approve adjournments or postponements of the special meeting if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting in favor of the foregoing proposals. Approval of this proposal is not a condition to the completion of the merger.

 

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THE PARTIES TO THE MERGER

Banner Corporation

10 S. First Avenue

Walla Walla, Washington 99362

(509) 527-3636

Banner is a bank holding company incorporated in the State of Washington. It is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiaries, Banner Bank and Islanders Bank. Banner Bank is a Washington-chartered commercial bank that conducts business from its main office in Walla Walla, Washington and, as of September 30, 2014, its 90 branch offices included 60 offices located in Washington, 21 offices located in Oregon and nine offices located in Idaho. Islanders Bank is also a Washington-chartered commercial bank that conducts business from three locations in San Juan County, Washington. Banner is subject to regulation by the Federal Reserve Board.

Banner Bank is a regional bank which offers a wide variety of commercial banking services and financial products to individuals, businesses and public sector entities in its primary market areas. Islanders Bank is a community bank which offers similar banking services to individuals, businesses and public entities located primarily in the San Juan Islands. The Banks’ primary business is that of traditional banking institutions, accepting deposits and originating loans in locations surrounding their offices in portions of Washington, Oregon and Idaho. Banner Bank is also an active participant in the secondary market, engaging in mortgage banking operations largely through the origination and sale of one- to four-family residential loans. Lending activities include commercial business and commercial real estate loans, agriculture business loans, construction and land development loans, one- to four-family residential loans and consumer loans. A portion of Banner Bank’s construction and mortgage lending activities are conducted through its subsidiary, Community Financial Corporation (CFC), which is located in the Lake Oswego area of Portland, Oregon.

Elements Merger Sub, LLC

10 S. First Avenue

Walla Walla, Washington 99362

(509) 527-3636

Merger sub, a Washington limited liability company and a wholly owned subsidiary of Banner, was formed solely for the purpose of facilitating the merger. Merger sub has not carried on any activities or operations to date, except for those activities incidental to its formation and undertaken in connection with the transactions contemplated by the merger agreement. By operation of the merger, Starbuck will be merged with and into merger sub, with merger sub surviving the merger as a wholly owned subsidiary of Banner.

SKBHC Holdings LLC

1201 Third Ave., Ste. 1580

Seattle, WA 98101

(509) 467-6993

Holdings is a bank holding company organized as a limited liability company under the laws of the state of Delaware. It is engaged in the planning, directing and coordinating the business activities of its wholly-owned subsidiaries, Starbuck and AmericanWest Bank. Holdings is subject to regulation by the Federal Reserve Board.

 

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Starbuck Bancshares, Inc.

1201 Third Ave., Ste. 1580

Seattle, WA 98101

(509) 467-6993

Starbuck is a bank holding company incorporated in the State of Minnesota. It is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary, AmericanWest Bank. Based in Spokane, Washington, AmericanWest Bank is a regional business-focused community bank offering commercial and business banking, mortgage lending, treasury management products and a full line of consumer products and services. The bank currently operates 94 branches in California, Washington, Idaho, Oregon and Utah.

 

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THE MERGER

Background of the Merger

The Banner board of directors has periodically participated with senior management in reviews of the business and strategic direction of Banner and has considered ways to enhance the company’s performance and prospects in light of competitive and other relevant developments. These reviews have focused on, among other things, the business environment facing financial institutions generally, as well as conditions and ongoing consolidation in the financial services industry. These reviews have also included periodic discussions with respect to potential transactions that would further the company’s strategic objectives, and the potential benefits and risks of those transactions, and from time to time have focused on the possibility of a merger with another major regional banking organization in the Western region of the United States.

Over the past several years at industry conferences and in other settings, members of senior management of Banner and Starbuck have had informal discussions about their respective companies and trends in the banking industry. On March 11, 2014, members of senior management of Banner met with representatives of Sandler O’Neill, Banner’s financial advisor in the merger, and discussed generally the possibility of a potential combination with Starbuck. Following that meeting, at the request of senior management of Banner, Sandler O’Neill contacted senior management of Starbuck on a very preliminary basis to inquire about Starbuck’s interest in considering a merger of the two companies. Following this initial contact, informal discussions continued between senior management of the two companies and representatives of Sandler O’Neill during March and April. In addition, during this period Banner senior management briefed the Banner board of directors and the board’s executive committee about the course of discussions, and were authorized to continue to explore a possible transaction with Starbuck.

On April 21, 2014, Mark Grescovich, Banner’s President and Chief Executive Officer, and Scott Kisting, Starbuck’s Chairman and Chief Executive Officer had a meeting. During the meeting, Messrs. Grescovich and Kisting discussed the companies’ respective corporate cultures and a range of possible valuations in the event of a merger.

On April 22, 2014 at its regularly scheduled meeting, Banner senior management briefed the Banner board of directors about the discussions with Starbuck, including the potential financial, operational, governance and other terms and conditions of a combination with Starbuck. At this meeting, the Banner board of directors authorized senior management to further evaluate a possible transaction with Starbuck.

Over the course of late April through June 2014, after entering into a mutual nondisclosure agreement, in order to conduct due diligence of each company for a potential merger, Banner senior management and representatives of Sandler O’Neill had several meetings and conversations with Starbuck senior management and Starbuck’s financial advisor, Jefferies LLC, which we refer to as Jefferies. In addition, Banner and Starbuck senior management each provided diligence materials in response to diligence requests of the other party.

At a regularly scheduled meeting on June 24, 2014, the Banner board of directors was briefed on the status of discussions with Starbuck senior management. During and after a presentation by Sander O’Neill with respect to certain financial analyses related to the potential merger, the Banner board of directors discussed various aspects of the proposed combination of Banner and Starbuck. The board of directors instructed Banner senior management, with the assistance of Sandler O’Neill, to continue exploring the merger with its Starbuck counterparts.

On July 15, 2014, Banner senior management reviewed materials prepared by Sandler O’Neill regarding the potential transaction structure with the executive committee, after which the executive committee authorized senior management to proceed with the due diligence process to facilitate a potential business combination.

At a regularly scheduled meeting on July 22, 2014, the Banner board of directors was further briefed on the status of Banner senior management’s discussions with Starbuck senior management. The board of directors

 

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instructed management to continue exploring the potential business combination with its Starbuck counterparts, and authorized management to propose non-binding terms for a potential transaction structure to Starbuck and to request exclusivity for negotiations with Starbuck.

Over the course of July and August, the two companies, with the assistance of their financial advisors, engaged in a series of discussions and negotiations around the merger consideration, transaction structure and certain other terms of a potential combination.

On August 26, 2014, Starbuck and Banner entered into a non-binding letter of intent that outlined certain terms of a proposed merger between Banner and Starbuck, including, among other things, that the consideration to be delivered to Starbuck holders in the merger would be 13,230,000 shares of Banner stock and $130 million in cash, equal to 137% of Starbuck’s tangible book value as of June 30, 2014, that the combined company’s headquarters would be located in Walla Walla, Washington and that Banner’s Chief Executive Officer would be the Chief Executive Officer of the combined company, that the Banner board of directors would be increased by up to five directors, two of which would be independent directors of Starbuck’s current board of directors, and one director would be appointed by each of the Starbuck investors. In addition, as a condition for proceeding with the negotiations, Banner required that Starbuck enter into an exclusivity agreement, which committed the parties to negotiate on an exclusive basis for 45 days during which each party would complete its due diligence review of the other and endeavor to negotiate a definitive merger agreement and related transaction documents.

Also at this time, counsel for the parties, Cleary Gottlieb Steen & Hamilton LLP, which we refer to as Cleary Gottlieb, as counsel to Banner and Wachtell, Lipton, Rosen & Katz, which we refer to as Wachtell Lipton, as counsel to Starbuck, began drafting the transaction documents to reflect the terms and conditions outlined in the non-binding letter of intent. On September 17, 2014, Cleary Gottlieb, on behalf of Banner, distributed an initial draft of the merger agreement to Starbuck and Wachtell Lipton. Mutual due diligence reviews also continued over the course of the next several weeks, as the parties and their counsel continued to negotiate the terms of the definitive merger agreement and other related agreements.

At a meeting of the Banner board of directors on September 22 and 23, 2014, Banner’s senior management and advisors updated the Banner board of directors on the status of their due diligence review of Starbuck and the related negotiations and discussions with Starbuck on the terms of the merger agreement and related transaction documents.

On September 24, 2014, at a meeting of the Holdings board of directors, Holdings’ senior management and advisors updated the board on the status of their due diligence review of Banner and the status of the negotiations with Banner. In addition, at the invitation of the Holdings board, Mr. Grescovich attended the Holdings board meeting to review and discuss with the Starbuck board among other things, the strategic value to Starbuck holders of a merger of Banner and Starbuck and financial information and other analyses related to Banner and Starbuck.

On October 3, 2014, Banner’s senior management and advisors updated the Banner board of directors on the status of the negotiations and discussions with Starbuck. At this meeting, the Banner board of directors authorized senior management to negotiate an extension of the exclusivity period of the negotiations between Banner and Starbuck for another 30-day period.

Following the meeting, on October 7, 2014, Banner and Starbuck executed a revised letter of intent that extended the exclusivity of Banner and Starbuck’s negotiations, due to expire on October 10, 2014, for another 30-day period ending on November 10, 2014.

In late October, 2014, Cleary Gottlieb sent drafts of the investor letter agreements to counsel for the Starbuck investors, who thereafter negotiated the terms of such agreements, including terms related to transfer restrictions on shares of Banner common stock received as part of the merger consideration, the right of each such investor to designate a member of the Banner board of directors and the registration rights with respect to such shares.

 

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On November 3, 2014, at a meeting of the Holdings board of directors, at the invitation of the Starbuck board, Mr. Grescovich reviewed with the Starbuck board an overview of a communication strategy for announcing the merger, a potential integration plan for the combined company, and a plan for mitigating risks related to the merger, including, among others, employee and customer retention risks, and operational and system conversion risks.

On November 4, 2014, at a special meeting of the Banner board of directors, Banner’s senior management and advisors updated the Banner board of directors on the status of the negotiations and discussions with Starbuck. Also, at that meeting, management reviewed for the Banner board of directors the progress of its negotiations with Starbuck and reported on the status of its due diligence investigation of Starbuck. Sandler O’Neill reviewed with the Banner board of directors the structure and other terms of the proposed transaction and financial information regarding Starbuck, Banner and the transaction, information regarding peer companies and comparable transactions and other relevant analyses.

Also at the November 4 meeting, representatives of Cleary Gottlieb reviewed with the Banner board of directors (i) the legal standards applicable to its decisions and actions with respect to its consideration of the proposed merger, (ii) the legal terms of the proposed merger agreement and related transaction agreements, including the proposed terms of the investor letter agreements with the Starbuck investors granting, among other things, registration rights and board representation, as described in the section entitled “Investor Letter Agreements” beginning on page 91, (iii) the composition of the Banner board and senior management subsequent to the closing of the proposed merger, and (iv) the proposed employment agreements with Peter Conner and James Claffee and consulting agreement with Mr. Kisting that would become effective upon completion of the merger.

On November 5, 2014, the Banner board of directors held another special meeting with its outside financial and legal advisors. At that meeting, representatives of Cleary Gottlieb reviewed with the board changes to the terms of the merger agreement and investor letter agreements that had changed since the November 4 meeting and Sandler O’Neill delivered to the Banner board of directors its oral opinion, which was subsequently confirmed in writing, as described in the section entitled “The Merger—Opinion of Banner’s Financial Advisor” beginning on page 63, that as of November 5, 2014, the merger consideration was fair to Banner from a financial point of view. After review and discussion among members of the Banner board of directors, including consideration of the factors described under “The Merger—Reasons for the Merger; Recommendation of the Banner Board of Directors” beginning on page 61, the Banner board of directors determined that the transactions contemplated by the merger agreement and the related transactions and agreements were advisable and in the best interests of Banner and its shareholders and the directors voted unanimously to approve the merger with Starbuck, to approve and adopt the merger agreement and the related transactions and agreements, including the investor letter agreements, and to recommend that the Banner shareholders approve the amendment to the articles of association and the issuance of the stock consideration in accordance with the merger agreement.

Following completion of the meeting of the Banner board of directors on November 5, 2014, the merger agreement and related agreements were placed in final form and were executed and delivered. The transaction was announced after the market closed on November 5, 2014 in a joint press release issued by Banner and Starbuck.

Reasons for the Merger; Recommendation of the Banner Board of Directors

After careful consideration, at a meeting held on November 5, 2014, the Banner board of directors determined that the merger is in the best interests of Banner and its shareholders and unanimously recommended its shareholders approve the amendment to the articles of incorporation and the issuance of an aggregate of 13,230,000 shares of Banner common stock and Banner non-voting common stock.

 

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In reaching its decision to recommend, the Banner board of directors consulted with Banner management, our legal and financial advisors, and considered a number of factors, including the following material factors:

 

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its knowledge of Starbuck’s business, operations, financial condition, earnings and prospects, taking into account the results of Banner’s due diligence review of Starbuck, including Banner’s assessments of Starbuck’s credit policies, asset quality, adequacy of loan loss reserves, interest rate risk and litigation;

 

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the fact that Starbuck would enable Banner to meaningfully expand its strategic presence in Oregon, Washington and Idaho, as well as expand into Utah and California;

 

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that the merger will establish the combined company as the twelfth largest publicly-owned bank headquartered in the Western United States, will improve provide entry into attractive markets with compelling demographic trends, and will combine complementary lending strategies;

 

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that the merger will lower the combined company’s loan / deposit ratio, given AmericanWest Bank’s low-cost core deposit base and will provide Banner with additional net interest margin protection;

 

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the reports of Banner’s management and the financial presentation of Banner’s financial advisor concerning the business, operations, financial condition and earnings of Starbuck on an historical and prospective basis and the pro forma financial impact of the merger;

 

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the fact that the Starbuck holders would own approximately 38.77% of the shares outstanding of Banner common stock and Banner non-voting common stock, based on the number of shares of Banner common stock outstanding as of February 13, 2015 and after giving effect to the merger and including the Banner common stock to be issued upon the comp