Business Combinations

12 Months Ended

Sep. 30, 2021

Business Combination

On October 1, 2018, the Company completed the South Sound Acquisition. The primary reason for the acquisition was to expand the Company's presence along Washington State's economically important I-5 corridor.

Pursuant to the terms of the merger agreement, South Sound Bank shareholders received 0.746 of a share of the Company's common stock and $5.68825 in cash per share of South Sound Bank common stock. The Company issued 904,826 shares of its common stock (valued at $28,267,000 based on the Company's closing stock price on September 30, 2018 of $31.24 per share) and paid $6,903,000 in cash in the transaction for total consideration paid of $35,170,000.

The South Sound Acquisition constitutes a business combination as defined by GAAP, which establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its consolidated financial statements the identifiable assets acquired and liabilities assumed. The Company was considered the acquirer in this transaction. Accordingly, the estimated fair values of the acquired assets, including the identifiable intangible assets, and the assumed liabilities in the South Sound Acquisition were measured and recorded as of October 1, 2018. The excess of the total consideration paid over the fair value of the net assets acquired was allocated to goodwill. The South Sound Acquisition resulted in $9,481,000 of goodwill. The goodwill arising from this transaction consists largely of the synergies and expected economies of scale from combining the operations of the Company and South Sound Bank. This goodwill is not deductible for tax purposes.

In most instances, determining the estimated fair values of the acquired assets and assumed liabilities requires the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at the appropriate rate of interest. Differences may arise between contractually required payments and the expected cash flows at the acquisition date due to items such as estimated credit losses, prepayments or early withdrawal, and other factors. One of the most significant of those determinations relates to the valuation of acquired loans. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans. In accordance with GAAP, there was no carry-over of South Sound Bank's previously established allowance for loan losses.

The following table summarizes the fair value of consideration paid, the estimated fair values of assets acquired and liabilities assumed as of the acquisition date, and the resulting goodwill relating to the transaction:


	At October 1, 2018
	Book Value		Fair Value Adjustment		Estimated Fair Value
	(Dollars in thousands)
Total acquisition consideration					$	35,170

Recognized amounts of identifiable assets acquired and liabilities assumed
Identifiable assets acquired:
Cash and cash equivalents	$	21,187	$	—	21,187
CDs held for investment	2,973		—		2,973
FHLB stock	205		—		205
Investment securities held to maturity	19,891		(189)		19,702
Investment securities available for sale	5,022		—		5,022
Loans receivable	123,627		(2,083)		121,544
Premises and equipment	3,225		112		3,337
OREO	25		—		25
Accrued interest receivable	554		—		554
BOLI	2,629		—		2,629
CDI	—		2,483		2,483
Loan servicing rights	285		(4)		281
Other assets	1,087		(511)		576
Total assets	180,710		(192)		180,518

Liabilities assumed:
Deposits	151,378		160		151,538
Other liabilities and accrued expenses	3,291		—		3,291
Total liabilities assumed	154,669		160		154,829
Total identifiable net assets acquired	$	26,041	$	(352)	25,689
Goodwill recognized					$	9,481

The acquired loan portfolio was valued using Level 3 inputs (see Note 22) and included the use of present value techniques, including cash flow estimates and incorporated assumptions that the Company believes that marketplace participants would use in estimating fair values.

The operating results of the Company for the years ended September 30, 2021, 2020 and 2019 include the operating results produced by the net assets acquired in the South Sound Acquisition since the October 1, 2018 acquisition date. The Company determined that the disclosure requirements related to the amounts of revenues and earnings from the net assets acquired in the South Sound Acquisition since the October 1, 2018 acquisition date is impracticable. The financial activity and operating results of the net assets acquired in the South Sound Acquisition were commingled with the Company's financial activity and operating results as of the acquisition date.

During the year ended September 30, 2020, the Company incurred acquisition-related expenses of $2,000 related to the South Sound Acquisition. During the year ended September 30, 2019, the Company incurred acquisition-related expenses of $462,000 related to the South Sound Acquisition, of which $317,000 is included in data processing and $145,000 is included in

professional fees in the accompanying 2019 consolidated statement of income.