2. Business Combinations

Bank of Rio Vista

On April 5, 2017, the Company purchased 4.9% of the voting shares of Bank of Rio Vista (BRV). On July 3, 2017, the Federal Reserve Bank of San Francisco approved the Company’s application to acquire additional voting shares and between July 2017 and March 2018 the Company acquired shares bringing its total to 39.65% of the outstanding shares. Initially, the Company, as per requirements outlined in ASC 323-10-15-6, did not have the ability to exercise significant influence over BRV’s operating and financial policies. Accordingly, the investment in BRV was accounted for under the cost method of accounting until March 26, 2018 when the Company entered into a definitive agreement for the acquisition of the remaining 60.35% of the voting shares of Bank of Rio Vista, at which time it changed to the equity method of accounting retroactive to January 1, 2018. On October 10, 2018, the Company completed the acquisition of the remaining shares.

Bank of Rio Vista was incorporated under the laws of the State of California on April 12, 1904, and operated as a commercial bank with branches in the cities of Rio Vista, Walnut Grove, and Lodi, California. The acquisition enhances our market presence and added $80.5 million in loans, $191.6 million in deposits and $104.1 million in investment securities to the Company. Effective November 30, 2018, the Lodi branch was closed after Management determined that our customers and the business community could be easily supported from our current Lodi locations. The assets acquired and liabilities assumed, both tangible and intangible, were recorded at their fair values as of the acquisition date in accordance with ASC 805, Business Combinations. The acquisition was treated as a “reorganization” within the meaning of section 368(a)(1)(A) of the Internal Revenue Code and is considered tax-free for U.S. federal income tax purposes.

The following table reflects the book value and estimated fair value of the assets acquired and liabilities assumed related to the Bank of Rio Vista acquisition:

	Bank of Rio Vista
(in thousands)	Book Value		Fair Value
Assets Acquired:
Cash and Cash Equivalents	$	22,655	$	22,655
Investments		104,118		104,118
Loans		78,437		80,494
Core Deposit Intangible		-		4,670
Goodwill		-		11,183
Deferred Tax		2,813		298
Other Assets		9,470		11,038
Total Assets Acquired	$	217,493	$	234,456

Liabilities Assumed
Deposits:
Demand		54,450		54,450
Interest-Bearing Transaction		48,469		48,469
Savings and Money Market		62,839		62,839
Time		25,813		25,813
Total Deposits	$	191,571	$	191,571

Other Liabilities		1,238		1,238
Total liabilities assumed	$	192,809	$	192,809

Cash Paid				28,642
Value of Previously Held Equity Interest				13,005
Total Merger Consideration			$	41,647

The following table presents the net assets acquired from Bank of Rio Vista and the estimated fair value adjustment:

(in thousands)	Acquisition Date October 10, 2018
Book Value of Net Assets Acquired	$	24,684
Fair Value Adjustments:
Loans		440
Reversal of Allowance for Loan Loss		1,616
Core Deposit Intangible Asset		4,670
Other Assets & Liabilities, net		1,568
Total Purchase Accounting Adjustments	$	8,294

Deferred Tax Asset (tax effect of purchase
accounting adjustments at 29.56%)		(2,452	)
DTA Adjustment		(62	)
Fair Value of Net Assets Acquired	$	30,464

Merger Consideration		41,647
Fair Value of Net Assets Acquired		(30,464	)
Goodwill	$	11,183

The following is a description of the methods used to determine the fair value of significant assets and liabilities presented above.

Cash and Cash Equivalents: The carrying amount for cash and due from banks, interest-bearing deposits with banks and federal funds sold are a reasonable estimate of fair value based on the short-term nature of these assets.

Investments: Fair value for investments was obtained from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment spreads, credit information and the bond’s terms and conditions.

Loans: Fair value for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan, and amortization status. Loans were individually assessed, with some assumptions being applied from the aggregate pool level to the individual loan itself. The discount rates used for loans are based on a build-up method that considers credit ratings, funding, liquidity, and other adjustments. No credit impaired loans were acquired as part of this business combination.

Core Deposit Intangible (CDI): This intangible asset represents the value of the relationships with deposit customers. The fair value was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost the deposit base, reserve requirements and the net maintenance cost attributable to customer deposits. The CDI is being amortized over 10 years based on the estimated economic benefits received.

The Company recorded a core deposit intangible asset acquisition of $4.7 million which $120 thousand was amortized in 2018. At December 31, 2018, the future estimated amortization expense on the CDI from the Bank of Rio Vista acquisition is as follows:

(in thousands)		2019				2020				2021				2022				2023				Thereafter				Total
Core deposit Intangible amortization		$	533			$	524			$	512			$	499			$	481			$	2,001			$	4,550

Other Assets: Other assets are composed of real property assets which include two bank premises. These assets were valued in November 13, 2018 via USPAP-compliant appraisals for the 100% interest in the fee simple estate by a state licensed appraiser.

Deposits: The fair values used for the demand and savings deposits by definition equal the amount payable on demand at the acquisition date. The fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered to the contractual interest rates on such time deposits.

The merger consideration is $41.65 million, which includes $28.6 million in cash, to purchase the remaining 2,414 (60.35%) shares outstanding as of October 10, 2018 plus the value of existing 39.65% investment of $13.0 million. The existing holdings were revalued at $8,200 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm.

The Company incurred acquisition-related expenses in 2018 for the Bank of Rio Vista acquisition as follows:

(in thousands)	Year Ended December 31, 2018

Data Processing	$	1,978
Professional Services		950
Other		5
Total	$	2,933