EXHIBIT 99.2

Index to Unaudited Interim Consolidated Financial Statements of SKBHC Holdings LLC and Subsidiaries

 

 

		PAGE
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Consolidated statements of financial condition as of September 30, 2015 and December 31, 2014			2
Consolidated statements of income for the three and nine months ended September 30, 2015 and 2014			3
Consolidated statements of comprehensive income for the three and nine months ended September 30, 2015 and 2014			4
Consolidated statements of cash flows for the nine months ended September 30, 2015 and 2014			5-6
Notes to interim consolidated financial statements			7-41

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SKBHC HOLDINGS LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

(in thousands)

 

 

		As of September 30, 2015				As of December 31, 2014
ASSETS
Cash and due from banks		$	74,545			$	62,889
Interest bearing deposits with other banks			23,103				31,625
Cash and cash equivalents			97,648				94,514
Securities:
Securities, available-for-sale at fair value			882,375				944,959
Securities, held-to-maturity at amortized cost			146,600				107,890
Loans held for sale			86,692				61,776
Loans, net of allowance for loan losses and deferred fees			2,888,626				2,596,549
Accrued interest receivable			13,007				11,888
Restricted equity securities			15,178				14,723
Premises and equipment, net			70,223				72,801
Foreclosed real estate and other foreclosed assets			8,362				15,263
Bank-owned life insurance			83,512				70,662
Goodwill			77,958				57,219
Intangible assets			20,970				23,294
Deferred tax asset, net			117,697				129,069
Other assets			17,937				11,369
Total assets		$	4,526,785			$	4,211,976
LIABILITIES AND MEMBERS’ EQUITY
LIABILITIES
Non-interest bearing demand deposits		$	966,647			$	818,512
Interest bearing deposits:
NOW, savings accounts, and money market accounts			1,951,794				1,796,887
Time, $250,000 and over			63,022				55,464
Other time			638,791				623,742
Total deposits			3,620,254				3,294,605
Accrued interest payable			670				724
Junior subordinated debentures			7,058				—
Federal Home Loan Bank advances and other borrowings			240,141				283,752
Deferred compensation and retirement plans			21,114				21,690
Management unit liability			13,833				12,601
Other liabilities			32,429				34,022
Total liabilities			3,935,499				3,647,394
Commitments and contingencies (Note 9)
MEMBERS’ EQUITY
Members’ capital			476,350				476,350
Accumulated earnings			109,057				87,299
Accumulated other comprehensive income, net of tax			5,879				933
Total members’ equity			591,286				564,582
Total liabilities and members’ equity		$	4,526,785			$	4,211,976

 

See accompanying notes.		2

 

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SKBHC HOLDINGS LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands)

 

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2015				2014				2015				2014
INTEREST INCOME
Interest and fees on loans		$	35,394			$	31,028			$	107,833			$	96,110
Interest and dividends on securities			5,304				5,928				16,885				18,725
Other interest income			71				39				287				193
Total interest income			40,769				36,995				125,005				115,028
INTEREST EXPENSE
Interest on deposits			2,035				1,547				6,224				4,430
Interest on borrowings			437				323				1,349				546
Total interest expense			2,472				1,870				7,573				4,976
NET INTEREST INCOME			38,297				35,125				117,432				110,052
PROVISION (BENEFIT) FOR LOAN LOSSES			—				(77	)			(1,189	)			997
Net interest income after provision (benefit) for loan losses			38,297				35,202				118,621				109,055
NON-INTEREST INCOME
Fees and service charges on deposits			4,119				4,190				12,217				11,312
Fees on mortgage loan sales, net			1,541				954				4,181				2,851
Other income			3,307				5,386				10,768				19,726
Total non-interest income			8,967				10,530				27,166				33,889
NON-INTEREST EXPENSE
Salaries and employee benefits			19,584				20,248				61,106				60,725
Occupancy expense, net			3,591				3,585				10,908				9,683
Equipment expense			3,497				3,404				10,498				10,498
Foreclosed real estate and other foreclosed assets expense, net			1,385				1,421				3,290				4,638
Amortization of intangible assets			735				902				2,205				2,598
Other expense			6,213				6,617				22,327				25,212
Total non-interest expense			35,005				36,177				110,334				113,354
INCOME BEFORE INCOME TAX EXPENSE			12,259				9,555				35,453				29,590
INCOME TAX EXPENSE			4,282				3,916				13,695				12,604
NET INCOME		$	7,977			$	5,639			$	21,758			$	16,986

 

See accompanying notes.		3

 

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SKBHC HOLDINGS LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

 

 

		For the Nine Months Ended September 30,
		2015				2014
Net income		$	21,758			$	16,986
Other comprehensive income:
Unrealized gains on available-for-sale securities arising during the nine months ended September 30			8,390				15,173
Reclassification adjustment for net gains on available-for-sale securities realized in net income			(427	)			(455	)
Income tax expense			(3,017	)			(5,577	)
Total other comprehensive income, net of tax			4,946				9,141
Comprehensive income		$	26,704			$	26,127
		For the Three Months Ended September 30,
		2015				2014
Net income		$	7,977			$	5,639
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities arising during the quarter			5,462				(1,719	)
Reclassification adjustment for net gains on available-for-sale securities realized in net income			(267	)			(10	)
Income tax (expense) benefit			(2,004	)			656
Total other comprehensive income (loss), net of tax			3,191				(1,073	)
Comprehensive income		$	11,168			$	4,566

 

See accompanying notes.		4

 

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SKBHC HOLDINGS LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

		For the Nine Months Ended September 30,
		2015				2014
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net income		$	21,758			$	16,986
Adjustments to reconcile net income to net cash provided by operating activities
Provisions for loan losses, unfunded commitments, repurchase reserve, write downs on foreclosed real estate and other foreclosed assets, and fixed asset impairments			1,372				4,244
Depreciation and amortization			19,619				19,045
Impairment recorded on intangible assets			—				3,131
Deferred income taxes			17,078				18,135
Compensation in the form of management units			1,232				1,054
Gain on sale of other premises and equipment, investments and foreclosed real estate, and other foreclosed assets			(1,283	)			(3,056	)
Stock dividends received			(84	)			(81	)
Originations of loans held for sale			(425,421	)			(240,969	)
Proceeds from loans sold			408,444				306,715
Gain on sale of loans			(9,223	)			(13,992	)
Fair value adjustments on derivatives			4,790				859
Changes in assets and liabilities
Accrued interest receivable			756				(1,489	)
Bank owned life insurance			(1,585	)			(1,563	)
Other assets			(3,618	)			(3,106	)
Accrued interest payable			(1,015	)			13
Other liabilities			(10,060	)			(9,735	)
Net cash provided by operating activities			22,760				96,191
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Securities available-for-sale
Maturities, calls, sales, and principal payments			248,085				176,758
Purchases			(72,173	)			(124,719	)
Securities held-to-maturity
Maturities, calls, sales, and principal payments			2,856				2,681
Purchases			—				(22,865	)
Restricted equity securities activity, net			1,936				1,331
Purchases of home equity lines of credit			—				(80,941	)
Purchases of residential mortgage loans			—				(98,091	)
Net increase in loans			(34,172	)			(153,931	)
Purchases of premises and equipment			(2,947	)			(3,916	)
Proceeds from sale of premises and equipment			344				2,511
Proceeds from foreclosed real estate and other foreclosed assets			9,603				13,426
Cash consideration paid in merger and branch transactions, net of cash acquired			(40,005	)			(21,347	)
Net cash provided by (used in) investing activities			113,527				(309,103	)
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES
Net increase in deposits			(73,542	)			(10,394	)
Proceeds of Federal Home Loan Bank advances and other borrowing activity			1,193,600				1,046,300

 

See accompanying notes.		5

 

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Repayments of Federal Home Loan Bank advances and other borrowing activity			(1,253,211	)			(867,922	)
Net cash (used in) provided by financing activities			(133,153	)			167,984
NET CHANGE IN CASH AND CASH EQUIVALENTS			3,134				(44,928	)
CASH AND CASH EQUIVALENTS, beginning of year			94,514				130,158
CASH AND CASH EQUIVALENTS, end of year		$	97,648			$	85,230
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for
Interest		$	8,588			$	4,963
Income taxes			840				2
Non-cash investing and financing activities
Change in fair value of available-for-sale securities, net of tax			(4,946	)			(9,141	)
Foreclosed real estate acquired in settlement of loans			1,811				7,616
Loans issued for sale of foreclosed assets			—				71
Fair value of assets acquired in acquisitions			487,280				—
Fair value of liabilities assumed in acquisitions			427,973				—
Transfer to property held for sale			255				482

 

See accompanying notes.		6

 

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Note 1 – Nature of Business

SKBHC Holdings LLC (Holdings or the Company) is a Delaware limited liability company which was organized in 2009 and is headquartered in Seattle, Washington. Holdings was organized with the intention of operating as a top tier bank holding company that acquires financial institutions, including distressed or failed institutions, and becoming a leading regional community banking franchise in the Western United States. Holdings’ wholly-owned subsidiary is Starbuck Bancshares which has two of its own wholly-owned subsidiaries (First National Bank of Starbuck and AmericanWest Bank) from which all significant operating activities are conducted.

The following table provides the Company’s acquisitions by date, location, and number of branches:

 

Acquired Institution		Acquisition Date		Location		# of Branches
Starbuck Bancshares (Bancshares) First National Bank of Starbuck (FNBS)		November 10, 2010		Starbuck, Minnesota		1
AmericanWest Bank (AWB)		December 20, 2010		Spokane, Washington		58
Bank of the Northwest (BONW)		July 28, 2011		Seattle, Washington		4
Sunrise Bank (Sunrise)		July 28, 2011		San Diego, California		4
Viking Financial Services Corporation Viking Bank (Viking)		November 30, 2011		Seattle, Washington		7
Security Business Bancorp Security Business Bank of San Diego (SBB)		July 2, 2012		San Diego, California		4
ICB Financial Inland Community Bank (ICB)		November 1, 2012		Los Angeles, California		5
PremierWest Bancorp PremierWest Bank (PWB)		April 9, 2013		Medford, Oregon		32
Greater Sacramento Bancorp Bank of Sacramento (BOS)		February 2, 2015		Sacramento, California		4

BONW, Sunrise, Viking, SBB, ICB, PWB, and BOS branches were merged with and into AWB on the date of acquisition. The operating activities resulting from each acquisition are incorporated in the consolidated financial statements of AWB, and therefore Holdings, since the date of each acquisition.

On October 4, 2013, Bancshares acquired 8 branches in Southern California from Pacific Trust Bancorp (PTB). These branches were merged with and into AWB on the date of acquisition, and the operating activities resulting from those branch acquisitions are incorporated in the consolidated financial statements of AWB, and therefore Holdings, since the date of acquisition.

On April 4, 2014, FNBS was merged into AWB. On July 25, 2014, the former FNBS branch was sold.

 

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Note 1 – Nature of Business (continued)

 

Unless otherwise indicated, reference to the Company shall include the consolidated information of Holdings and its wholly-owned subsidiaries Bancshares, FNBS, and AWB, and the unconsolidated information will be referred to as Holdings, Bancshares, FNBS, or AWB, respectively. Any reference to the Bank or Banks includes AWB for the period ended September 30, 2015 and AWB and FNBS for the year ended December 31, 2014.

The Banks provide community banking products and services, focusing on small and middle market businesses and their employees along with individual consumers in the local markets they serve. The Bank does business in the states of California, Idaho, Oregon, Utah and Washington. The Bank previously did business in the state of Minnesota, until the former FNBS branch was sold on July 25, 2014.

Note 2 – Basis of financial statement presentation

The accompanying unaudited consolidated financial statements have been prepared in a condensed format and therefore do not include all information and footnotes required by generally accepted accounting principles (GAAP) in the United States of America for complete financial statements, which are included in the Company’s annual financial statements and which should be read in conjunction with the interim unaudited condensed financial statements. The information furnished in these interim unaudited and condensed financial statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results of such period. All dollar amounts contained in the unaudited consolidated financial statements and disclosures are stated in thousands.

Note 3 – Business Combinations

Bank of Sacramento – On February 2, 2015, the Company acquired all of the outstanding shares of Greater Sacramento Bancorp, and its wholly-owned banking subsidiary Bank of Sacramento (collectively BOS), in an business combination accounted for under the acquisition method of accounting. The acquisition was consistent with the Company’s strategic plan to grow through acquisitions. Acquisition expense related to the transaction for the first nine months of 2015 were $887 thousand and are included in earnings. The operating results of BOS have been included in the Company’s consolidated financial statements since the date of acquisition. The aggregate purchase price included $59.3 million of cash paid to selling shareholders; simultaneous with the acquisition.

 

		8

 

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Note 3 – Business Combinations (continued)

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed for BOS at the date of acquisition:

 

Assets Acquired
Cash and Cash Equivalents		$	19,302
Securities			159,242
Loans			257,285
Goodwill			20,739
Other intangibles			17
Premises and equipment			72
Foreclosed assets			1,248
Deferred tax asset, net			5,706
Other assets			23,669
Total assets		$	487,280
Liabilities assumed
Deposits		$	399,191
Junior subordinated debentures			7,017
FHLB borrowings and other liabilities			21,765
Total liabilities		$	427,973
Net assets acquired/consideration paid		$	59,307

As a result of the acquisition, the Company recognized $20.7 million in goodwill which will not be amortized but will be evaluated for potential impairment on an annual basis or earlier if a triggering event merits evaluation.

All other acquisition accounting adjustments, with the exception of those for impaired loans, foreclosed assets, and income taxes, will be amortized or accreted to operations over the expected life of the related asset or liability. Adjustments for impaired loans and foreclosed assets will be realized in accordance with the Company’s accounting policy when the underlying assets are resolved or liquidated. Changes in acquired tax uncertainties after the measurement period are recognized in net income.

 

		9

 

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Note 4 – Securities

Debt and equity securities have been classified according to management’s intent to hold them as either available-for-sale or held-to-maturity. The amortized cost of securities, their gross unrealized gains and losses, and their fair values at September 30, 2015 and December 31, 2014 are shown in the following table:

 

September 30, 2015		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Securities available-for-sale:
Obligations of federal government agencies		$	18,525			$	229			$	(30	)		$	18,724
Obligations of states, municipalities, and political subdivisions			86,953				1,843				(200	)			88,596
Residential mortgage-backed securities			685,619				9,022				(1,007	)			693,634
Commercial mortgage-backed securities			50,067				500				—				50,567
Corporate securities			13,665				74				—				13,739
Other securities			17,211				50				(146	)			17,115
Total		$	872,040			$	11,718			$	(1,383	)		$	882,375
Securities held-to-maturity:
Obligations of states, municipalities, and political subdivisions		$	76,906			$	1,739			$	(260	)		$	78,385
Residential mortgage-backed securities			67,023				1,449				—				68,472
Other securities			2,671				—				—				2,671
Total		$	146,600			$	3,188			$	(260	)		$	149,528
December 31, 2014		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Securities available-for-sale:
Obligations of federal government agencies		$	19,425			$	94			$	(2	)		$	19,517
Obligations of states, municipalities, and political subdivisions			91,927				1,740				(987	)			92,680
Residential mortgage-backed securities			751,123				5,313				(3,339	)			753,097
Commercial mortgage-backed securities			53,718				5				(293	)			53,430
Corporate securities			7,031				82				—				7,113
Other securities			19,310				42				(230	)			19,122
Total		$	942,534			$	7,276			$	(4,851	)		$	944,959
Securities held-to-maturity:
Obligations of states, municipalities, and political subdivisions		$	35,817			$	1,134			$	—			$	36,951
Residential mortgage-backed securities			70,016				556				—				70,572
Other securities			2,057				—				—				2,057
Total		$	107,890			$	1,690			$	—			$	109,580

 

		10

 

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Note 4 – Securities (continued)

 

The following tables include information on securities with unrealized losses at September 30, 2015 and December 31, 2014:

September 30, 2015

 

		Less than 12 months								12 Months or Longer								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Securities available-for-sale:
Obligations of federal government agencies		$	—			$	—			$	5,955			$	(30	)		$	5,955			$	(30	)
Obligations of states, municipalities and political subdivisions			3,621				(9	)			16,917				(191	)			20,538				(200	)
Residential mortgage-backed securities			87,764				(396	)			48,791				(611	)			136,555				(1,007	)
Other securities			—				—				14,649				(146	)			14,649				(146	)
Total		$	91,385			$	(405	)		$	86,312			$	(978	)		$	177,697			$	(1,383	)
Securities held to maturity:
Obligations of states, municipalities and political subdivisions		$	25,365			$	(260	)		$	—			$	—			$	25,365			$	(260	)
Total		$	25,365			$	(260	)		$	—			$	—			$	25,365			$	(260	)

December 31, 2014

 

		Less than 12 months								12 Months or Longer								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Securities available-for-sale:
Obligations of federal government agencies		$	—			$	—			$	6,369			$	(2	)		$	6,369			$	(2	)
Obligations of states, municipalities and political subdivisions			7,061				(45	)			55,437				(942	)			62,498				(987	)
Residential mortgage-backed securities			227,717				(1,681	)			96,479				(1,658	)			324,196				(3,339	)
Commercial mortgage-backed securities			26,314				(63	)			12,078				(230	)			38,392				(293	)
Other securities			—				—				19,033				(230	)			19,033				(230	)
Total		$	261,092			$	(1,789	)		$	189,396			$	(3,062	)		$	450,488			$	(4,851	)

Certain securities have fair values less than amortized cost and therefore contain unrealized losses. At September 30, 2015 and December 31, 2014, the Company evaluated the securities which had an unrealized loss for Other Than Temporary Impairment (OTTI) and determined all declines in value to be temporary. There were 71 and 109 investment securities with unrealized losses at September 30, 2015 and December 31, 2014, respectively. The Company anticipates full recovery of amortized cost with respect to these securities by maturity, or sooner in the event of a more favorable market interest rate environment.

During the nine month period ended September 30, 2015, proceeds from sales of securities available-for-sale totaled $35.9 million resulting in realized gains of $454 thousand and realized losses of $27 thousand. During the three month period ended September 30, 2015, proceeds from sales of securities available-for-sale totaled $7.4 million resulting in realized gains of $267 thousand and no realized losses. During the nine month period ended September 30, 2014, proceeds from sales of securities available-for-sale totaled $68.0 million resulting in realized gains of $575 thousand and realized losses of $120 thousand. During the three month period ended September 30, 2014, proceeds from sales of securities available-for-sale totaled $31.9 million resulting in realized gains of $110 thousand and realized losses of $100 thousand.

 

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Note 4 – Securities (continued)

 

Securities with an amortized cost of $472.9 million and $525.0 million at September 30, 2015 and December 31, 2014, respectively, were pledged for purposes required or permitted by law. The market value of these securities was $480.6 million and $528.1 million at September 30, 2015 and December 31, 2014, respectively.

The contractual scheduled maturity of securities at September 30, 2015 was as follows:

 

		Amortized Cost				Fair Value
Securities available-for-sale:
Due in one year or less		$	5,196			$	5,231
Due from one to five years			76,688				77,604
Due from five to ten years			206,155				208,562
Due after ten years			578,557				585,527
Other non-maturity securities			5,444				5,451
Total		$	872,040			$	882,375
Securities held-to-maturity:
Due in one year or less		$	131			$	131
Due from one to five years			1,909				1,923
Due from five to ten years			46,560				48,302
Due after ten years			98,000				99,172
Total		$	146,600			$	149,528

Expected maturities will differ from contractual maturities as the issuers of certain debt securities have the right to call or prepay their obligations without penalties. Mortgage-backed securities have been classified above based on contractual maturities.

 

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Note 5 – Loans

Loan categories as of September 30, 2015 and December 31, 2014 were as follows:

 

		September 30, 2015				December 31, 2014
Commercial real estate		$	1,665,088			$	1,473,072
Residential real estate			616,605				586,033
Construction, land development, and other land			64,690				51,408
Agricultural			144,690				139,781
Commercial and industrial			376,374				326,789
Installment and other			37,541				35,833
Total loans			2,904,988				2,612,916
Allowance for loan losses			(16,602	)			(16,576	)
Deferred loan fees, net of deferred costs			240				209
Net loans		$	2,888,626			$	2,596,549

Installment and other loans included $358 thousand and $362 thousand in overdraft deposits which were reclassified as loans as of September 30, 2015 and December 31, 2014, respectively. At September 30, 2015, there were $1.6 billion in loans pledged as security for borrowings including excess collateral.

 

		13

 

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Note 5 – Loans (continued)

 

Total loans consist of originated loans, “B” notes, acquired impaired loans, and acquired non-impaired loans. “B” notes represent advances on acquired impaired loans after acquisition date. The following table summarizes the carrying balances for each respective loan category as of September 30, 2015 and December 31, 2014:

 

September 30, 2015		Originated				B Notes				Acquired Impaired				Acquired Non-impaired				Total
Commercial real estate		$	925,560			$	13,148			$	231,680			$	494,700			$	1,665,088
Residential real estate			510,634				10,265				38,170				57,536				616,605
Construction, land development, and other land			38,986				44				9,400				16,260				64,690
Agricultural			122,640				7,892				8,107				6,051				144,690
Commercial and industrial			269,266				6,145				6,419				94,544				376,374
Installment and other			27,490				1,065				939				8,047				37,541
Total loans		$	1,894,576			$	38,559			$	294,715			$	677,138			$	2,904,988

 

December 31, 2014		Originated				B Notes				Acquired Impaired				Acquired Non-impaired				Total
Commercial real estate		$	789,746			$	11,751			$	264,611			$	406,964			$	1,473,072
Residential real estate			466,626				9,713				45,168				64,526				586,033
Construction, land development, and other land			17,585				1				16,319				17,503				51,408
Agricultural			111,112				10,613				9,925				8,131				139,781
Commercial and industrial			239,869				9,405				7,101				70,414				326,789
Installment and other			27,495				1,101				1,010				6,227				35,833
Total loans		$	1,652,433			$	42,584			$	344,134			$	573,765			$	2,612,916

 

		14

 

---

Note 5 – Loans (continued)

 

Acquired impaired loans – The Company acquired certain impaired loans as part of the AWB, BONW, Sunrise, Viking, SBB, ICB, PWB and BOS transactions. The carrying amount of those loans includes an allowance for loan losses for acquired impaired loans of $1.1 million and $1.7 million at September 30, 2015 and December 31, 2014, respectively. The balances of these loans, net of the allowance for loan losses, at September 30, 2015 and December 31, 2014 are summarized as follows:

 

September 30, 2015		Unpaid Principal Balance				Carrying Value
Commercial real estate		$	257,481			$	230,880
Residential real estate			50,806				38,066
Construction, land development, and other land			11,792				9,278
Agricultural			8,979				8,107
Commercial and industrial			10,011				6,354
Installment and other			1,482				939
Total Loans		$	340,551			$	293,624

 

December 31, 2014		Unpaid Principal Balance				Carrying Value
Commercial real estate		$	269,222			$	246,382
Residential real estate			60,058				44,930
Construction, land development, and other land			20,915				16,169
Agricultural			10,926				9,925
Commercial and industrial			10,594				6,917
Installment and other			1,682				1,010
Total Loans		$	394,787			$	342,393

 

		15

 

---

Note 5 – Loans (continued)

 

Impaired loan unpaid principal balances and carrying values, net of the allowance for loan losses, by acquired financial institution at September 30, 2015 and December 31, 2014 are summarized as follows:

 

September 30, 2015		Unpaid Principal Balance				Carrying Value
AWB		$	221,835			$	202,858
BONW			430				112
Sunrise			1,140				853
Viking			7,361				5,000
SBB			7,679				6,041
ICB			3,597				2,107
PWB			76,269				58,785
BOS			22,240				17,868
Total loans		$	340,551			$	293,624

 

December 31, 2014		Unpaid Principal Balance				Carrying Value
AWB		$	269,222			$	246,382
BONW			605				186
Sunrise			2,776				2,017
Viking			8,763				5,951
SBB			8,050				6,310
ICB			4,565				2,700
PWB			100,806				78,847
Total loans		$	394,787			$	342,393

 

		16

 

---

Note 5 – Loans (continued)

 

The following tables summarize the changes in accretable yield for acquired impaired loans for the nine month periods ended September 30, 2015 and 2014 and the year ended December 31, 2014:

 

		AWB				BONW				Sunrise				Viking				SBB				ICB				PWB				BOS				Total
Balance, December 31, 2014		$	75,639			$	399			$	715			$	4,235			$	4,320			$	2,760			$	32,464			$	—			$	120,532
Additions resulting from acquisitions			—				—				—				—				—				—				—				4,987				4,987
Accretion to interest income			(13,017	)			(121	)			(54	)			(762	)			(351	)			(312	)			(7,796	)			(1,019	)			(23,432	)
Change related to prepayments			(3,507	)			—				—				(32	)			2				—				(1,289	)			43				(4,783	)
Reclassification from nonaccretable difference			—				—				—				—				—				—				—				—				—
Impact of change in assumptions			—				(8	)			—				(190	)			—				—				—				—				(198	)
Disposals			(1,494	)			—				(406	)			(79	)			—				(453	)			(486	)			(664	)			(3,582	)
Balance, September 30, 2015		$	57,621			$	270			$	255			$	3,172			$	3,971			$	1,995			$	22,893			$	3,347			$	93,524

 

		AWB				BONW				Sunrise				Viking				SBB				ICB				PWB				BOS				Total
Balance, December 31, 2013		$	99,845			$	1,222			$	1,239			$	7,185			$	6,325			$	4,309			$	27,927			$	—			$	148,052
Additions resulting from acquisitions			—				—				—				—				—				—				—				—				—
Accretion to interest income			(15,772	)			(311	)			(803	)			(1,309	)			(564	)			(577	)			(12,324	)			—				(31,660	)
Change related to prepayments			(6,926	)			3				(531	)			28				59				4				3,583				—				(3,780	)
Reclassification from nonaccretable difference			2,471				355				(881	)			1,646				571				802				23,672				—				28,636
Impact of change in assumptions			5,377				(808	)			1,630				(1,759	)			(1,434	)			(283	)			(4,150	)			—				(1,427	)
Disposals			(821	)			(44	)			85				(271	)			(200	)			(1,395	)			(2,877	)			—				(5,523	)
Balance, September 30, 2014		$	84,174			$	417			$	739			$	5,520			$	4,757			$	2,860			$	35,830			$	—			$	134,297

Accretion to interest income includes $5.3 million and $9.4 million recognized in interest income related to prepayment removals for the nine month periods ended September 30, 2015 and 2014, respectively.

The following tables summarize the changes in accretable yield for acquired impaired loans for the three month periods ended September 30, 2015 and 2014:

 

		AWB				BONW				Sunrise				Viking				SBB				ICB				PWB				BOS				Total
Balance at June 30, 2015		$	63,121			$	299			$	268			$	3,467			$	4,082			$	2,107			$	24,694			$	3,686			$	101,724
Additions resulting from acquisitions			—				—				—				—				—				—				—				—				—
Accretion to interest income			(4,033	)			(29	)			(13	)			(235	)			(111	)			(112	)			(1,719	)			(382	)			(6,634	)
Change related to prepayments			(1,430	)			—				—				(9	)			—				—				(83	)			43				(1,479	)
Reclassification from nonaccretable difference			—				—				—				—				—				—				—				—				—
Impact of change in assumptions			—				—				—				(53	)			—				—				—				—				(53	)
Disposals			(37	)			—				—				2				—				—				1				—				(34	)
Balance, September 30, 2015		$	57,621			$	270			$	255			$	3,172			$	3,971			$	1,995			$	22,893			$	3,347			$	93,524

 

		17

 

---

Note 5 – Loans (continued)

 

		AWB				BONW				Sunrise				Viking				SBB				ICB				PWB				BOS				Total
Balance at June 30, 2014		$	87,483			$	832			$	745			$	6,102			$	5,755			$	3,679			$	21,758			$	—			$	126,354
Additions resulting from acquisitions			—				—				—				—				—				—				—				—				—
Accretion to interest income			(4,967	)			(46	)			(29	)			(457	)			(152	)			(146	)			(1,985	)			—				(7,782	)
Change related to prepayments			(1,940	)			—				—				35				—				—				(197	)			—				(2,102	)
Reclassification from nonaccretable difference			348				139				71				778				348				95				14,838				—				16,617
Impact of change in assumptions			3,835				(464	)			(48	)			(902	)			(1,194	)			(1	)			2,742				—				3,968
Disposals			(585	)			(44	)			—				(36	)			—				(767	)			(1,326	)			—				(2,758	)
Balance, September 30, 2014		$	84,174			$	417			$	739			$	5,520			$	4,757			$	2,860			$	35,830			$	—			$	134,297

Accretion to interest income includes $1.1 million and $846 thousand recognized in interest income related to prepayment removals for the three month periods ended September 30, 2015 and 2014, respectively.

The following table presents a reconciliation of the undiscounted contractual cash flows, non-accretable difference, accretable yield, and fair value of impaired loans acquired during the nine month period ended September 30, 2015 as of the acquisition date:

 

		BOS
		February 2, 2015
As of respective acquisition date in 2015
Undiscounted contractual cash flows		$	38,354
Undiscounted cash flows not expected to be collected (non-accretable difference)			(11,289	)
Undiscounted cash flows expected to be collected			27,065
Accretable yield at acquisition			(4,987	)
Estimated fair value of impaired loans acquired at acquisition			22,078
Accrued interest acquired reclassified to loans			123
Total impaired loans at acquisition		$	22,201

 

		18

 

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Note 5 – Loans (continued)

 

Acquired non-impaired loans – The Company acquired certain non-impaired loans as part of the FNBS, BONW, Sunrise, Viking, SBB, ICB, PWB, PTB, and BOS transactions. The balances of these loans at September 30, 2015 and December 31, 2014 are as follows:

 

September 30, 2015		Unpaid Principal Balance				Carrying Value
Commercial real estate		$	491,530			$	494,700
Residential real estate			60,652				57,536
Construction, land development, and other land			16,218				16,260
Agricultural			6,033				6,051
Commercial and industrial			95,427				94,544
Installment and other			8,392				8,047
Total acquired non-impaired loans		$	678,252			$	677,138
December 31, 2014		Unpaid Principal Balance				Carrying Value
Commercial real estate		$	403,144			$	406,964
Residential real estate			68,160				64,526
Construction, land development, and other land			17,344				17,503
Agricultural			8,072				8,131
Commercial and industrial			71,124				70,414
Installment and other			6,677				6,227
Total acquired non-impaired loans		$	574,521			$	573,765

 

		19

 

---

Note 5 – Loans (continued)

 

The following table presents the fair value of acquired non-impaired loans, gross contractual amounts receivable (including contractual principal and interest), and estimated contractual cash flows not expected to be received (fair value adjustments related to credit) for the BOS acquisition as of the acquisition date. There were no acquisitions consummated during 2014:

 

As of acquisition dates in the period ended September 30, 2015		Fair Value				Gross Contractual Ammounts Receivable				Estimated Contractual Cash Flows Not Expected to be Collected
Loans secured by real estate		$	195,280			$	253,716			$	3,657
Commercial and industrial loans			37,085				40,203				1,068
Loans to individuals for household, family, and other personal expenditures			2,018				2,441				317
All other loans			701				727				15
Total loans at acquisition		$	235,084			$	297,087			$	5,057

Note 6 – Allowance for Loan Losses and Reserve for Unfunded Commitments

Allowance for loan losses – The allowance for loan losses evaluation includes “B” notes, acquired impaired loans with deteriorated credit quality, acquired non-impaired loans, and originated loans. Although all acquired non-impaired loans are included in the following allowance tables, only those loans without a remaining discount or that have incurred credit deterioration subsequent to acquisition date are included in the allowance for loan losses calculation.

The activity related to the allowance for loan losses for the three month and nine month periods ended September 30, 2015 and 2014 is presented below:

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2015				2014				2015				2014
Balance, beginning of period		$	16,012			$	13,982			$	16,576			$	12,514
(Benefit)/Provision for loan losses			—				(77	)			(1,189	)			997
Loans charged-off			(322	)			(211	)			(1,062	)			(2,747	)
Recoveries			912				1,465				2,277				4,395
Balance, end of period		$	16,602			$	15,159			$	16,602			$	15,159

 

		20

 

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Note 6 – Allowance for Loan Losses and Reserve for Unfunded Commitments (continued)

The following tables summarize the balance and activity within the allowance for loan losses, the components of the allowance for loan losses in terms of loans individually and collectively evaluated for impairment, and corresponding loan balances by type for the nine month and three month periods ended September 30, 2015 and 2014:

Nine Months Ended September 30, 2015

 

		Commercial Real Estate				Residential Real Estate				Construction, Land Development and Other Land				Agricultural				Commercial and Industrial				Installment and Other				Unallocated				Total
Allowance for loan losses
Beginning balance		$	6,795			$	3,582			$	639			$	525			$	4,107			$	304			$	624			$	16,576
Charge-offs			(368	)			(368	)			(42	)			—				(207	)			(77	)			—				(1,062	)
Recoveries			328				426				308				7				1,117				91								2,277
Provisions			46				(29	)			(11	)			(19	)			(945	)			163				(394	)		$	(1,189	)
Ending balance		$	6,801			$	3,611			$	894			$	513			$	4,072			$	481				230			$	16,602
Ending balance: individually evaluated for impairment		$	—			$	6			$	—			$	—			$	38			$	—			$	—			$	44
Ending balance: collectively evaluated for impairment			6,001				3,501				772				513				3,969				481				230				15,467
Ending balance: loans acquired with deteriorated credit quality			800				104				122				—				65				—				—				1,091
Total allowance for loan losses		$	6,801			$	3,611			$	894			$	513			$	4,072			$	481			$	230			$	16,602

 

		Commercial Real Estate				Residential Real Estate				Construction, Land Development and Other Land				Agricultural				Commercial and Industrial				Installment and Other				Total
Ending balance: individually evaluated for impairment		$	3,062			$	876			$	199			$	313			$	2,407			$	37			$	6,894
Ending balance: collectively evaluated for impairment			1,430,346				577,559				55,091				136,270				367,548				36,565				2,603,379
Ending balance: loans acquired with deteriorated credit quality			52,479				7,495				274				—				324				11				60,583
Total loans evaluated for allowance for loan losses		$	1,485,887			$	585,930			$	55,564			$	136,583			$	370,279			$	36,613			$	2,670,856

Nine Months Ended September 30, 2014

 

		Commercial Real Estate				Residential Real Estate				Construction, Land Development and Other Land				Agricultural				Commercial and Industrial				Installment and Other				Unallocated				Total
Allowance for loan losses
Beginning balance		$	4,415			$	2,247			$	1,176			$	500			$	3,634			$	255			$	287			$	12,514
Charge-offs			(912	)			(437	)			(656	)			—				(663	)			(79	)			—				(2,747	)
Recoveries			1,363				368				1,797				19				695				153				—				4,395
Provisions			956				1,303				(1,640	)			(47	)			419				(29	)			35				997
Ending balance		$	5,822			$	3,481			$	677			$	472			$	4,085			$	300			$	322			$	15,159
Ending balance: individually evaluated for impairment		$	—			$	7			$	—			$	—			$	216			$	—			$	—			$	223
Ending balance: collectively evaluated for impairment			4,655				3,250				533				472				3,627				300				322				13,159
Ending balance: loans acquired with deteriorated credit quality			1,167				224				144								242												1,777
Total allowance for loan losses		$	5,822			$	3,481			$	677			$	472			$	4,085			$	300			$	322			$	15,159

 

		21

 

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Note 6 – Allowance for Loan Losses and Reserve for Unfunded Commitments (continued)

 

		Commercial Real Estate				Residential Real Estate				Construction, Land Development and Other Land				Agricultural				Commercial and Industrial				Installment and Other				Total
Ending balance: individually evaluated for impairment		$	8,439			$	525			$	—			$	—			$	2,665			$	58			$	11,687
Ending balance: collectively evaluated for impairment			1,102,340				525,290				38,713				118,445				312,518				34,438				2,131,744
Ending balance: loans acquired with deteriorated credit quality			67,819				9,797				586				—				818				14				79,034
Total loans evaluated for allowance for loan losses		$	1,178,598			$	535,612			$	39,299			$	118,445			$	316,001			$	34,510			$	2,222,465

The following tables summarize the recorded investment, unpaid principal balance, and related allowance for originated and B note loans considered impaired as of September 30, 2015 and December 31, 2014, respectively:

Nine Months Ended September 30, 2015

 

		Commercial Real Estate				Residential Real Estate				Construction, Land Development and Other Land				Agricultural				Commercial and Industrial				Installment and Other				Unallocated				Total
Allowance for loan losses
Beginning balance		$	6,795			$	3,582			$	639			$	525			$	4,107			$	304			$	624			$	16,576
Charge-offs			(368	)			(368	)			(42	)			—				(207	)			(77	)			—				(1,062	)
Recoveries			328				426				308				7				1,117				91				—				2,277
Provisions			46				(29	)			(11	)			(19	)			(945	)			163				(230	)			(1,189	)
Ending balance		$	6,801			$	3,611			$	894			$	513			$	4,702			$	481			$	230			$	1602
Ending balance: individually evaluated for impairment		$	—			$	6			$	—			$	—			$	38			$	—			$	—			$	44
Ending balance: collectively evaluated for impairment			6,001				3,501				772				513				3,969				481				230				15,467
Ending balance: loans acquired with deteriorated credit quality			800				104				122				—				65				—				—				1,091
Total allowance for loan losses		$	6,801			$	3,611			$	894			$	513			$	4,702			$	481			$	230			$	1602

 

		Commercial Real Estate				Residential Real Estate				Construction, Land Development and Other Land				Agricultural				Commercial and Industrial				Installment and Other				Total
Ending balance: individually evaluated for impairment		$	3,062			$	876			$	199			$	313			$	2,407			$	37			$	6,894
Ending balance: collectively evaluated for impairment			1,430,346				577,559				55,091				136,270				367,548				36,565				2,603,379
Ending balance: loans acquired with deteriorated credit quality			52,479				7,495				274				—				324				11				60,583
Total loans evaluated for allowance for loan losses		$	1,485,887			$	585,930			$	55,564			$	136,583			$	370,279			$	36,613			$	2,670,856

 

		22

 

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Nine Months Ended September 30, 2014

 

		Commercial Real Estate				Residential Real Estate				Construction, Land Development and Other Land				Agricultural				Commercial and Industrial				Installment and Other				Unallocated				Total
Allowance for loan losses
Beginning balance		$	4,415			$	2,247			$	1,176			$	500			$	3,634			$	255			$	287			$	12,514
Charge-offs			(912	)			(437	)			(656	)			—				(663	)			(79	)			0				(2,747	)
Recoveries			1,363				368				1,797				19				695				153				—				4,395
Provisions			956				1,303				(1,640	)			(47	)			419				(29	)			35				997
Ending balance		$	5,822			$	3,481			$	677			$	472			$	4,085			$	300			$	322			$	15,159
Ending balance: individually evaluated for impairment		$	—			$	7			$	—			$	—			$	216			$	—			$	—			$	223
Ending balance: collectively evaluated for impairment			4,655				3,250				533				472				3,627				300				322				13,159
Ending balance: loans acquired with deteriorated credit quality			1,167				224				144				—				242				—				—				1,777
Total allowance for loan losses		$	5,822			$	3,481			$	677			$	472			$	4,085			$	300			$	322			$	15,159

 

		Commercial Real Estate				Residential Real Estate				Construction, Land Development and Other Land				Agricultural				Commercial and Industrial				Installment and Other				Total
Ending balance: individually evaluated for impairment		$	8,439			$	525			$	—			$	—			$	2,665			$	58			$	11,687
Ending balance: collectively evaluated for impairment			1,102,340				525,290				38,713				118,445				312,518				34,438				2,131,744
Ending balance: loans acquired with deteriorated credit quality			67,819				9,797				586				—				818				14				79,034
Total loans evaluated for allowance for loan losses		$	1,178,598			$	535,612			$	39,299			$	118,445			$	316,001			$	34,510			$	2,222,465

 

		23

 

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September 30, 2015		Recorded Investment				Unpaid Principal Balance				Related Allowance
With no related allowance recorded:
Commercial real estate		$	3,062			$	3,648			$	—
Residential real estate			858				1,519				—
Construction, land development, and other land			199				228				—
Agricultural			313				673				—
Commercial and industrial			1,700				2,648				—
Installment and Other			37				102				—
Total		$	6,169			$	8,818			$	—
With a related allowance recorded:
Commercial real estate		$	—			$	—			$	—
Residential real estate			18				24				6
Construction, land development, and other land			—				—				—
Agricultural			—				—				—
Commercial and industrial			707				731				38
Installment and Other			—				—				—
Total		$	725			$	755			$	44
Total Impaired Loans		$	6,894			$	9,573			$	44
December 31, 2014		Recorded Investment				Unpaid Principal Balance				Related Allowance
With no related allowance recorded:
Commercial real estate		$	3,269			$	5,821			$	—
Residential real estate			597				962				—
Construction, land development, and other land			409				409				—
Agricultural			—				—				—
Commercial and industrial			569				2,528				—
Installment and Other			42				112				—
Total		$	4,886			$	9,832			$	—
With a related allowance recorded:
Commercial real estate		$	—			$	—			$	—
Residential real estate			20				24				7
Construction, land development, and other land			—				—				—
Agricultural			—				—				—
Commercial and industrial			1,933				2,224				215
Installment and Other			—				—				—
Total		$	1,953			$	2,248			$	222
Total Impaired Loans		$	6,839			$	12,080			$	222

 

		24

 

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Note 6 – Allowance for Loan Losses and Reserve for Unfunded Commitments (continued)

 

The following tables present the average recorded investment and interest income recognized for originated and B note loans considered impaired as of and for the three and nine month periods ended September 30, 2015 and 2014:

 

		Three Months Ended September 30, 2015								Nine Months Ended September 30, 2015
		Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized
With no related allowance recorded:
Commercial real estate		$	2,438			$	—			$	3,140			$	—
Residential real estate			874				—				744				—
Construction, land development, and other land			201				—				262				—
Agricultural			345				—				241				—
Commercial and industrial			1,723				—				1,761				—
Installment and other			37				—				38				—
Total		$	5,618			$	—			$	6,186			$	—
With related allowance recorded:
Commercial real estate		$	—			$	—			$	—			$	—
Residential real estate			18				—				19				—
Construction, land development, and other land			—				—				—				—
Agricultural			—				—				—				—
Commercial and industrial			709				10				712				28
Installment and other			—				—				—				—
Total		$	727			$	10			$	731			$	28
Total impaired loans		$	6,345			$	10			$	6,917			$	28
		Three Months Ended September 30, 2014								Nine Months Ended September 30, 2014
		Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized
With no related allowance recorded:
Commercial real estate		$	7,673			$	—			$	5,361			$	—
Residential real estate			530				—				588				—
Construction, land development, and other land			—				—				41				—
Agricultural			1				—				1				—
Commercial and industrial			2,178				—				1,788				—
Installment and other			59				—				92				—
Total		$	10,441			$	—			$	7,871			$	—
With related allowance recorded:
Commercial real estate		$	—			$	—			$	—			$	—
Residential real estate			20				—				21				—
Construction, land development, and other land			—				—				—				—
Agricultural			—				—				—				—
Commercial and industrial			731				10				735				29
Installment and other			—				—				—				—
Total		$	751			$	10			$	756			$	29
Total impaired loans		$	11,192			$	10			$	8,627			$	29

 

		25

 

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Note 6 – Allowance for Loan Losses and Reserve for Unfunded Commitments (continued)

 

AWB’s risk rating methodology assigns risk ratings from 1 to 9, where a higher rating represents higher risk. FNBS uses a similar risk rating methodology. The risk rating categories are described by the following groupings:

Pass – Ratings 1–4 define the risk levels of borrowers and guarantors that offer a minimal to an acceptable level of risk.

Watch – A watch asset (rating of 5) has credit exposure that presents higher than average risk and warrants greater than routine attention by Bank personnel due to conditions affecting the borrower, the borrower’s industry or the economic environment.

Special mention – A special mention asset (rating of 6) has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date.

Substandard – A substandard asset (rating of 7) is inadequately protected by the current sound worth and paying capacity of the borrower or the collateral pledged, if any. Assets so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.

Doubtful – A doubtful asset (rating of 8) has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loss – A loss asset (rating of 9) is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted.

 

		26

 

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Note 6 – Allowance for Loan Losses and Reserve for Unfunded Commitments (continued)

 

The following table summarizes the credit quality of the loans considered for inclusion in the allowance for loan losses calculation, excluding acquired impaired loans, as of September 30, 2015 and December 31, 2014:

 

September 30, 2015		Commercial Real Estate				Residential Real Estate				Construction, Land Development, and Other Land				Agricultural				Commercial and Industrial				Installment and Other				Total
Pass		$	1,312,306			$	572,933			$	35,441			$	121,781			$	307,245			$	28,683			$	2,378,389
Watch			85,236				4,315				18,148				12,647				38,790				7,079				166,215
Special Mention			22,898				119				1,502				931				15,704				800				41,954
Substandard			12,968				1,068				199				1,224				8,216				40				23,715
Doubtful			—				—				—				—				—				—				—
Loss			—				—				—				—				—				—				—
Total		$	1,433,408			$	578,435			$	55,290			$	136,583			$	369,955			$	36,602			$	2,610,273
December 31, 2014		Commercial Real Estate				Residential Real Estate				Construction, Land Development, and Other Land				Agricultural				Commercial and Industrial				Installment and Other				Total
Pass		$	1,052,175			$	529,027			$	22,833			$	112,610			$	252,457			$	34,085			$	2,003,187
Watch			117,257				7,278				10,075				13,398				45,286				696				193,990
Special Mention			25,615				138				1,573				2,825				12,788				—				42,939
Substandard			13,414				4,422				608				1,023				9,157				42				28,666
Doubtful			—				—				—				—				—				—				—
Loss			—				—				—				—				—				—				—
Total		$	1,208,461			$	540,865			$	35,089			$	129,856			$	319,688			$	34,823			$	2,268,782

The following tables summarize loan portfolio by type and payment status at the dates indicated (excluding acquired impaired loans):

 

		September 30, 2015
		Commercial Real Estate				Residential Real Estate				Construction/land Development				Agricultural				Commercial & Industrial				Installments & Other				Total
Performing		$	1,430,346			$	577,559			$	55,091			$	136,270			$	368,255			$	36,565			$	2,604,086
Nonperforming			3,062				876				199				313				1,700				37				6,187
Total loans		$	1,433,408			$	578,435			$	55,290			$	136,583			$	369,955			$	36,602			$	2,610,273
		December 31, 2014
		Commercial Real Estate				Residential Real Estate				Construction/land Development				Agricultural				Commercial & Industrial				Installments & Other				Total
Performing		$	1,205,192			$	540,248			$	34,680			$	129,856			$	317,909			$	34,781			$	2,262,666
Nonperforming			3,269				617				409				—				1,779				42				6,116
Total loans		$	1,208,461			$	540,865			$	35,089			$	129,856			$	319,688			$	34,823			$	2,268,782

 

		27

 

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Note 6 – Allowance for Loan Losses and Reserve for Unfunded Commitments (continued)

 

The following tables summarize past due loan information by category, excluding acquired impaired loans, as of September 30, 2015 and December 31, 2014:

 

September 30, 2015		30-59 Days Past Due				60-89 Days Past Due				Greater than 90 Days and Accruing				Total Past Due				Non-accrual				Current				Total
Commercial real estate		$	232			$	241			$	—			$	473			$	3,062			$	1,429,873			$	1,433,408
Residential real estate			582				—				—				582				876				576,977				578,435
Construction, land development, and other land			1,199				—				—				1,199				199				53,892				55,290
Agricultural			—				—				—				—				313				136,270				136,583
Commercial and industrial			3,308				25				41				3,374				1,700				364,881				369,955
Installment and other			13				7				—				20				37				36,545				36,602
Total		$	5,334			$	273			$	41			$	5,648			$	6,187			$	2,598,438			$	2,610,273
December 31, 2014		30-59 Days Past Due				60-89 Days Past Due				Greater than 90 Days and Accruing				Total Past Due				Non-accrual				Current				Total
Commercial real estate		$	1,822			$	526			$	—			$	2,348			$	3,269			$	1,202,844			$	1,208,461
Residential real estate			185				925				214				1,324				617				538,924				540,865
Construction, land development, and other land			12				—				—				12				409				34,668				35,089
Agricultural			110				—				—				110				—				129,746				129,856
Commercial and industrial			355				23				—				378				1,779				317,531				319,688
Installment and other			20				—				—				20				42				34,761				34,823
Total		$	2,504			$	1,474			$	214			$	4,192			$	6,116			$	2,258,474			$	2,268,782

Non-accrual loans have related government guaranteed balances of $2.4 million and $1.0 million as of September 30, 2015 and December 31, 2014, respectively.

 

Not considering purchased impaired loans, impaired loans of $725 thousand and $742 thousand were classified as troubled debt restructurings as of September 30, 2015 and December 31, 2014, respectively. The restructurings were granted in response to borrower financial difficulty and generally provide for a modification of loan repayment terms or interest rate. Impaired restructured loans carry a specific allowance, and the allowance on impaired restructured loans is calculated consistently for all loans. The Bank did not restructure any loans during the nine month period ended September 30, 2015, or for the year ended December 2014. There were no available commitments for troubled debt restructurings outstanding as of September 30, 2015 or December 31, 2014.

 

		28

 

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Note 6 – Allowance for Loan Losses and Reserve for Unfunded Commitments (continued)

 

The following table presents troubled debt restructurings by accrual versus non-accrual status and by loan class as of September 30, 2015 and December 31, 2014:

 

September 30, 2015
		Number of Contracts				Accrual Status				Number of Contracts				Non- Accrual Status				Number of Contracts				Total Modifications
Commercial real estate			—			$	—				—			$	—				—			$	—
Residential real estate			—				—				1				18				1				18
Construction, land development and other land			—				—				—				—				—				—
Agricultural			—				—				—				—				—				—
Commercial and industrial			2				707				—				—				2				707
Installment and other			—				—				—				—				—				—
Total			2			$	707				1			$	18				3			$	725
December 31, 2014
		Number of Contracts				Accrual Status				Number of Contracts				Non- Accrual Status				Number of Contracts				Total Modifications
Commercial real estate			—			$	—				—			$	—				—			$	—
Residential real estate			—				—				1				20				1				20
Construction, land development and other land			—				—				—				—				—				—
Agricultural			—				—				—				—				—				—
Commercial and industrial			2				722				—				—				2				722
Installment and other			—				—				—				—				—				—
Total			2			$	722				1			$	20				3			$	742

 

		29

 

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Note 6 – Allowance for Loan Losses and Reserve for Unfunded Commitments (continued)

 

Reserve for unfunded commitments – The activity related to the reserve for unfunded commitments for the three month and nine month periods ended September 30, 2015 and 2014 is presented below:

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
Balance, beginning of period		$	3,212			$	1,657			$	2,145			$	1,090
Reserve for acquired unfunded commitments			—				—				195				—
Provision (benefit) for unfunded commitments			(109	)			151				763				718
Balance, end of period		$	3,103			$	1,808			$	3,103			$	1,808

There were no charge-offs or recoveries related to the reserve for unfunded commitments for the three and nine month periods ended September 30, 2015 and 2014.

Note 7 – Goodwill, Intangible Assets, and Intangible Liabilities

The following table summarizes the changes in the Company’s goodwill and intangible assets and intangible liabilities for the nine months ended September 30, 2015 and the year ended December 31, 2014:

 

		Goodwill				Core Deposit Intangible				Trade Name Intangible				Favorable Leasehold Interest Intangible				Unfavorable Leasehold Interest Intangible
Balance, December 31, 2013		$	59,620			$	22,039			$	2,642			$	2,378			$	(2,372	)
Measurement period adjustments			562				—				—				—				—
Amortization or accretion			—				(3,028	)			(155	)			(312	)			590
Impairment			(2,963	)			(270	)			—				—				—
Balance, December 31, 2014			57,219				18,741				2,487				2,066				(1,782	)
Acquired			17,253				17												(230	)
Measurement period adjustments			3,486				—				—				—				—
Amortization or accretion			—				(2,088	)			(117	)			(136	)			355
Impairment			—				—				—				—				—
Balance, September 30, 2015		$	77,958			$	16,670			$	2,370			$	1,930			$	(1,657	)
Accumulated amortization or accretion			n/a			$	14,570			$	746			$	1,126			$	(2,750	)
Weighted average remaining amortization or accretion period (years)			n/a				12				15				14				7

 

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The following table presents the forecasted amortization expense for intangible assets acquired in all mergers:

 

		Expected Amortization
Remainder of 2015		$	735
2016			2,710
2017			2,481
2018			2,252
2019			2,023
Thereafter			8,839

 

		31

 

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Note 8 – Fair Value of Financial Instruments

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 and indicates the fair value hierarchy of the valuation techniques utilized by the Bank to determine such fair value.

 

						Fair Value Measurements Using
September 30, 2015		Fair Value				Level 1				Level 2				Level 3
Recurring assets
Obligations of federal government agencies		$	18,724			$	—			$	18,724			$	—
Obligations of states, municipalities, and political subdivisions			88,596				—				88,596				—
Residential mortgage backed securities			693,634				—				693,634				—
Commercial mortgage backed securities			50,567				—				50,567				—
Corporate securities			13,739				—				13,739				—
Other securities			17,115				5,451				11,664				—
Rate lock commitments			33				—				33				—
Forward sales commitments			18				—				18				—
Interest rate swaps			5,940				—				5,940				—
Recurring liabilities
Rate lock commitments			107				—				107				—
Forward sales commitments			24				—				24				—
Interest rate swaps			6,150				—				6,150				—
						Fair Value Measurements Using
December 31, 2014		Fair Value				Level 1				Level 2				Level 3
Recurring assets
Obligations of federal government agencies		$	19,517			$	—			$	19,517			$	—
Obligations of states, municipalities, and political subdivisions			92,680				—				92,680				—
Residential mortgage backed securities			753,097				—				753,097				—
Commercial mortgage backed securities			53,430				—				53,430				—
Corporate securities			7,113				—				7,113				—
Other securities			19,122				5,338				13,784				—
Rate lock commitments			11				—				11				—
Forward sales commitments			5				—				5				—
Interest rate swaps			3,685				—				3,685				—
Recurring liabilities
Rate lock commitments			6				—				6				—
Forward sales commitments			11				—				11				—
Interest rate swaps			3,640				—				3,640				—
Risk participation agreement			40								40

 

		32

 

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Note 8 – Fair Value of Financial Instruments (continued)

 

Certain assets are also measured at fair value on a non-recurring basis. Adjustments to fair value based on such non-recurring transactions generally result from the application of lower of cost or fair value accounting or write-downs of individual assets due to impairment. The following table summarizes the Company’s assets and liabilities that were measured at fair value on a non-recurring basis at September 30, 2015 and December 31, 2014:

 

						Fair Value Measurements Using
September 30, 2015		Fair Value				Level 1				Level 2				Level 3
Non-recurring
Foreclosed real estate and other foreclosed assets		$	8,090			$	—			$	—			$	8,090
Premises and equipment held for sale			1,930				—				—				1,930
						Fair Value Measurements Using
December 31, 2014		Fair Value				Level 1				Level 2				Level 3
Non-recurring
Foreclosed real estate and other foreclosed assets		$	9,928			$	—			$	—			$	9,928
Premises and equipment held for sale			2,925				—				—				2,925

 

		33

 

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Note 8 – Fair Value of Financial Instruments (continued)

 

The following fair value table includes those financial instruments for which it is practical to estimate fair value. It does not include the value of non-financial assets and liabilities such as premises and equipment and intangible assets such as goodwill, customer relationships, trade name and core deposit intangibles. The table summarizes carrying amounts, estimated fair values, and assumptions used by the Company to estimate fair value as of September 30, 2015 and December 31, 2014:

 

September 30, 2015		Assumptions Used in Estimating Fair Value		Carrying Amount				Estimated Fair Value
Financial assets
Cash and due from banks		Equal to carrying value		$	74,545			$	74,545
Overnight interest bearing deposits with other banks		Equal to carrying value			23,103				23,103
Securities available-for-sale		Quoted market prices for identical or similar instruments or model-derived valuations			882,375				882,375
Securities held to maturity		Quoted market prices for identical or similar instruments or model-derived valuations			146,600				149,528
Loans, held for sale		Quoted market prices for similar loan products			86,692				87,508
Loans		Fixed-rate loans at discounted expected future cash flows, and variable rate loans equal to carrying value, net of allowance for loan losses and liquidity discount			2,904,988				2,862,346
Restricted equity securities		Par value			15,178				15,178
Bank-owned life insurance		Equal to carrying value			83,512				83,512
Derivative assets		Quoted market prices for similar instruments or model-derived valuations			5,991				5,991
Financial liabilities
Deposits		Fixed-rate certificates of deposit at discounted expected future cash flows and all other deposits equal to carrying value			3,620,254				3,490,263
Junior Subordinated Debentures		Equal to carrying value			7,058				7,058
Federal Home Loan Bank advances and other borrowings		Discounted expected future cash flows			240,141				240,463
Derivative liabilities		Quoted market prices for similar instruments or model-derived valuations			6,281				6,281
December 31, 2014		Assumptions Used in Estimating Fair Value		Carrying Amount				Estimated Fair Value
Financial assets
Cash and due from banks		Equal to carrying value		$	62,889			$	62,889
Overnight interest bearing deposits with other banks		Equal to carrying value			31,625				31,625
Securities available-for-sale		Quoted market prices for identical or similar instruments or model-derived valuations			944,959				944,959
Securities held to maturity		Quoted market prices for identical or similar instruments or model-derived valuations			107,890				109,580
Loans, held for sale		Quoted market prices for similar loan products			61,776				63,191
Loans		Fixed-rate loans at discounted expected future cash flows, and variable rate loans equal to carrying value, net of allowance for loan losses and liquidity discount			2,612,916				2,517,031
Restricted equity securities		Par value			14,723				14,723
Bank-owned life insurance		Equal to carrying value			70,662				70,662
Derivative assets		Quoted market prices for similar instruments or model-derived valuations			3,701				3,701
Financial liabilities
Deposits		Fixed-rate certificates of deposit at discounted expected future cash flows and all other deposits equal to carrying value			3,294,605				3,131,708
Federal Home Loan Bank advances and other borrowings		Discounted expected future cash flows			283,752				283,769
Derivative liabilities		Quoted market prices for similar instruments or model-derived valuations			3,697				3,697

 

		34

 

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Note 9 – Commitments, Contingencies, and Derivatives

At September 30, 2015 and December 31, 2014, the Company had commitments to originate mortgage loans held for sale at pre-determined interest rates and forward sales commitments totaling $24.9 million and $8.2 million, respectively.

At September 30, 2015, the Company had risk participation agreements and interest rate swaps with notional values of $7.7 million and $267.9 million, respectively. At December 31, 2014, the Company had risk participation agreements and interest rate swaps with notional values of $7.8 million and $247.9 million, respectively. The aggregate value of assets posted as collateral for derivatives totaled $7.1 million and $4.7 million at September 30, 2015 and December 31, 2014, respectively.

Interest rate swap agreements are used for interest rate risk management and to accommodate the credit needs of the Bank’s customers. These transactions involve both credit and market risk, and their value is derived from the underlying interest rates. The notional amounts are amounts on which calculations, payments, and the value of the derivative are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Such difference, which represents the fair value of the derivative instruments, is reflected in the Company’s consolidated statements of financial condition as other assets and other liabilities. The interest rate swap agreements are not designated as hedges and do not receive hedge accounting treatment; thus, changes in fair values are recorded in current operations.

Changes in the fair value of interest rate derivatives are recorded in other non-interest income. For the nine month periods ended September 30, 2015 and 2014, losses on interest rate derivatives were $214 thousand and $495 thousand, respectively. For the three month periods ended September 30, 2015 and 2014, losses on interest rate derivatives were $318 thousand and $13 thousand, respectively.

Legal contingencies – In the ordinary course of business, the Company has various outstanding commitments and contingent liabilities that are not reflected in the accompanying unaudited consolidated financial statements. In addition, the Company is a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the consolidated financial condition or results of operations of the Company.

Commitments to extend credit – The Banks are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of their customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of condition. The contract or notional amounts of those instruments reflect the extent of involvement the Banks have in particular classes of financial instruments.

 

		35

 

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Note 9 – Commitments, Contingencies and Derivatives (continued)

 

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for instruments recognized on the statement of condition. The Banks do not anticipate any material losses as a result of the commitments and standby letters of credit.

The following table summarizes the contract or notional amount of outstanding loan commitments at September 30, 2015 and December 31, 2014:

 

		September 30,				December 31,
		2015				2014
Commitments to extend credit		$	670,303			$	538,865
Standby letters of credit			13,583				10,863
Total		$	683,886			$	549,728

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Banks evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Banks upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral required varies but may include accounts receivable, inventory, property, plant, and equipment, and income producing commercial properties.

Standby letters of credit are conditional commitments issued by the Banks to guarantee to a third-party the performance of a customer. Those guarantees are primarily issued to support public and private borrowing arrangements, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The related liability for the Banks’ obligation under standby letters of credit and guarantees is immaterial.

Note 10 – Holdings and Bancshares Only Statements

Certain intercompany transactions are affected by timing differences, and the impact of those differences on the Company’s statements of income are reflected in the following tables. The following are the condensed statements of financial condition, income, and cash flows for Holdings:

 

		36

 

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SKBHC Holdings LLC

Condensed Statements of Financial Condition

 

		As of September 30,				As of December 31,
		2015				2014
Cash		$	299			$	372
Investment in subsidiary			604,976				576,941
Total assets		$	605,275			$	577,313
Other liabilities		$	13,989			$	12,731
Members’ equity			591,286				564,582
Total liabilities and members’ equity		$	605,275			$	577,313

SKBHC Holdings LLC

Condensed Statements of Income

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
INCOME
Other income		$	—			$	—			$	—			$	—
			—				—				—				—
EXPENSES
Other operating expenses			395				579				1,632				1,307
			395				579				1,632				1,307
LOSS BEFORE BENEFIT FOR INCOME TAX AND NET INCOME OF SUBSIDIARY, NET OF DIVIDENDS PAID TO HOLDINGS			(395	)			(579	)			(1,632	)			(1,307	)
INCOME TAXES			—				—				—				—
LOSS BEFORE NET INCOME OF SUBSIDIARY, NET OF DIVIDENDS PAID TO HOLDINGS			(395	)			(579	)			(1,632	)			(1,307	)
Equity in earnings from subsidiaries			8,372				6,218				23,390				18,293
NET INCOME		$	7,977			$	5,639			$	21,758			$	16,986

 

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Note 10 – Holdings and Bancshares Only Statements (continued)

 

SKBHC Holdings LLC

Condensed Statements of Cash Flows

 

		For the Nine Months Ended
		September 30,
		2015				2014
CASH FLOWS USED IN OPERATING ACTIVITIES
Net income		$	21,758			$	16,986
Adjustments to reconcile net income to cash used in operating activities:
Net income of subsidiaries, net of dividends paid to Holdings			(23,390	)			(18,293	)
Compensation expense for management units			1,232				1,054
Net change in other assets			—				(3	)
Net change in other liabilities			27				(204	)
Net cash used in operating activities			(373	)			(460	)
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES
Capital contributions to subsidiary			—				—
Dividends received from subsidiary			300				—
Net cash provided by investing activities			300				—
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Proceeds from members			—				—
Net cash provided by financing activities			—				—
Net change in cash			(73	)			(460	)
CASH, beginning of year			372				978
CASH, end of period		$	299			$	518

 

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Note 10 – Holdings and Bancshares Only Statements (continued)

 

The following are the condensed statements of financial condition, operations and cash flows for Bancshares:

Starbuck Bancshares, Inc.

Condensed Statements of Financial Condition

 

		As of September 30,				As of December 31,
		2015				2014
Cash		$	5,579			$	4,420
Investment in Bank subsidiaries			598,038				568,177
Other assets			12,090				9,195
Total assets		$	615,707			$	581,792
Junior subordinated debentures		$	7,058			$	—
Other liabilities		$	3,673				4,851
Shareholder equity			604,976				576,941
Total liabilities and shareholder equity		$	615,707			$	581,792

Starbuck Bancshares, Inc.

Condensed Statements of Income

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
INCOME
Management and service fees		$	773			$	374			$	2,318			$	1,139
Other income			4				121				5				385
			777				495				2,323				1,524
EXPENSES
Interest expense on junior suboridinated debentures			73				—				191				—
Other operating expenses			(106	)			1,840				4,333				4,596
			(33	)			1,840				4,524				4,596
INCOME (LOSS) BEFORE BENEFIT FOR INCOME TAX AND NET INCOME OF SUBSIDIARIES, NET OF DIVIDENDS PAID TO PARENT			810				(1,345	)			(2,201	)			(3,072	)
BENEFIT FOR INCOME TAX			116				265				677				923
INCOME (LOSS) BEFORE NET INCOME OF SUBSIDIARIES, NET OF DIVIDENDS PAID TO PARENT			926				(1,080	)			(1,524	)			(2,149	)
Net income of subsidiaries, net of dividends paid to Parent			7,446				7,298				24,914				20,465
NET INCOME		$	8,372			$	6,218			$	23,390			$	18,316

 

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Note 10 – Holdings and Bancshares Only Statements (continued)

 

Starbuck Bancshares, Inc.

Condensed Statements of Cash Flows

 

		For the Nine Months Ended September 30,
		2015				2014
CASH FLOWS USED IN OPERATING ACTIVITIES
Net income		$	23,390			$	18,316
Adjustments to reconcile net income to cash used in operating activities:
Net income of subsidiaries, net of dividends paid to Parent			(24,914	)			(20,465	)
Net change in other assets			(2,895	)			(298	)
Net change in other liabilities			(1,180	)			(134	)
Net cash used in operating activities			(5,599	)			(2,581	)
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital contributions to subsidiary			—				—
Net cash used in investing activities			—				—
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Acquisition of junior subordinated debt			7,058				—
Dividends paid to Holdings			(300	)			—
Net cash provided by financing activities			6,758				—
Net change in cash			1,159				(2,581	)
CASH, beginning of year			4,420				7,089
CASH, end of period		$	5,579			$	4,508

 

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Note 11 – Other Non-interest Income and Expense

Components of other non-interest income which exceed 1% of the aggregate total net interest income and total non-interest income for the three month and nine month periods ended September 30, 2015 and 2014, respectively, are as follows:

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
Loan sales income		$	1,485			$	2,768			$	4,798			$	10,983
Bank-owned life insurance			569				452				1,578				1,563
Net gains on sales of foreclosed assets and rental income			390				776				1,047				3,135
Net gains on sales of securities			267				9				427				455
Other			596				1,381				2,918				3,590
Total		$	3,307			$	5,386			$	10,768			$	19,726

Components of other non-interest expense which exceed 1% of the aggregate total net interest income and total non-interest income for the three month and nine month periods ended September 30, 2015 and 2014, respectively, are as follows:

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
Acquisition-related expenses		$	1,025			$	194			$	1,203			$	246
FDIC assessment			625				594				1,925				1,823
Travel			529				552				1,587				1,833
Bankcard and debit cards			525				442				1,511				1,553
Postage and supplies			415				491				1,237				1,748
Insurance			404				442				1,324				1,279
Telephone			308				285				921				1,031
Advertising and marketing			286				477				797				1,234
Other professional fees			264				570				906				1,907
Mortgage repurchase expense			14				732				14				734
Other			1,818				1,838				10,902				11,824
Total		$	6,213			$	6,617			$	22,327			$	25,212

Note 12 – Subsequent Event

On October 2, 2015, Banner Corporation (“Banner”), announced that it had completed the acquisition of AmericanWest Bank, effective as of 11:59 p.m. October 1, 2015. Pursuant to the terms of the previously announced Agreement and Plan of Merger, dated as of November 5, 2014, by and among Banner, Elements Merger Sub, LLC, a wholly owned subsidiary of Banner (“Merger Sub”), SKBHC Holdings LLC and Starbuck Bancshares, Inc. (“Starbuck”) (as amended, the “Merger Agreement”), Starbuck merged with and into Merger Sub (the “Merger”), and immediately following the Merger, Starbuck’s wholly owned subsidiary bank, AmericanWest Bank merged with and into Banner’s wholly owned subsidiary bank, Banner Bank (the “Bank Merger”). The consideration paid by Banner pursuant to the Merger Agreement was 13,230,000 shares of Banner’s common stock and non-voting common stock and $130.0 million in cash.

 

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