NOTE 2: ACQUISITIONS

On June 16, 2015, the Company completed the acquisition of Pacific Rim Bank (“PRB”), through a merger of PRB with and into the Bank, in exchange for 1,242,690 shares of its common stock with a fair value of $9.50 per share and $543,000 in cash, which was paid to dissenting shareholders. The primary reason for acquiring PRB was to expand our operations into Hawaii.

The acquisition of PRB was accounted for under the purchase method of accounting. The acquired assets, assumed liabilities and identifiable intangible assets are recorded at their respective acquisition date fair values. Goodwill of $1.3 million, which is not tax deductible, is included in intangible assets in the table below.

The following table represents the assets acquired and liabilities assumed of PRB as of June 15, 2015 and the fair value adjustments and amounts recorded by the Bank in 2016 under the acquisition method of accounting:


	PRB Book Value			Fair Value Adjustments			Fair Value
(dollars in thousands)
Assets Acquired:
Cash and cash equivalents	$	38,624		$	—		$	38,624
Securities AFS		7,179			115			7,294
Loans, net of deferred fees		80,192			(2,419	)		77,773
Allowance for loan losses		(2,034	)		2,034			—
Premises and equipment, net		251			(188	)		63
Investment in FHLB stock		152			—			152
Deferred taxes		—			2,258			2,258
REO		4,374			(672	)		3,702
Goodwill		—			1,300			1,300
Core deposit intangible		—			1,099			1,099
Other assets		269			—			269
Total assets acquired	$	129,007		$	3,527		$	132,534

Liabilities Assumed:
Deposits	$	119,663		$	178		$	119,841
Accounts payable and other liabilities		442			(98	)		344
Total liabilities assumed		120,105			80			120,185
Excess of assets acquired over liabilities assumed		8,902			3,447			12,349
Total	$	129,007		$	3,527		$	132,534

Consideration:
Stock issued							$	11,806
Cash paid								543
Total							$	12,349

In many cases, the fair values of assets acquired and liabilities assumed were determined by estimating the cash flows expected to result from those assets and liabilities and discounting them at appropriate market rates. The most significant category of assets for which this procedure was used was that of acquired loans. The excess of expected cash flows above the fair value of the majority of loans will be accreted to interest income over the remaining lives of the loans in accordance with FASB Accounting Standards Codification (“ASC”) 310-20.

Certain loans, for which specific credit-related deterioration since origination was identified, are recorded at fair value reflecting the present value of the amounts expected to be collected. Income recognition on these “purchased credit impaired” loans is based on a reasonable expectation about the timing and amount of cash flows to be collected. Acquired loans deemed impaired and considered collateral dependent, with the timing of the sale of loan collateral indeterminate, remain on nonaccrual status and have no accretable yield. All purchased credit impaired loans were classified as accruing loans as of and subsequent to the acquisition date.

For loans acquired from PRB, the contractual amounts due, expected cash flows to be collected and fair value as of the acquisition date were as follows:


(dollars in thousands)	Purchased Credit Impaired		All Other Acquired Loans


Contractual amounts due	$	9,418	$	86,466
Cash flows not expected to be collected		2,201		1,155
Expected cash flows		7,217		85,311
Interest component of expected cash flows		805		13,950
Fair value of acquired loans	$	6,412	$	71,361

In accordance with generally accepted accounting principles there was no carryover of the allowance for loan losses that had been previously recorded by PRB.

The Company recorded a deferred income tax asset of $2.3 million related to PRB’s operating loss carry-forward and other tax attributes of PRB, along with the effects of fair value adjustments resulting from applying the purchase method of accounting.

The fair value of savings and transaction deposit accounts acquired from PRB were assumed to approximate their carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit accounts were valued by comparing the contractual cost of the portfolio to an identical portfolio bearing current market rates. The portfolio was segregated into pools based on remaining maturity. For each pool, the projected cash flows from maturing certificates were then calculated based on contractual rates and prevailing market rates. The valuation adjustment for each pool is equal to the present value of the difference of these two cash flows, discounted at the assumed market rate for a certificate with a corresponding maturity. This valuation adjustment will be accreted to reduce interest expense over the remaining maturities of the respective pools. The Company also recorded a core deposit intangible, which represents the value of the deposit relationships acquired from PRB, of $1.1 million. The core deposit intangible will be amortized over a period of 7 years.

Pro Forma Information (unaudited)

The following table presents unaudited pro forma information as if the acquisition of PRB had occurred on January 1, 2015, and January 1, 2014, for 2015 and 2014, respectively, after giving effect to certain adjustments. The unaudited pro forma information for these periods includes adjustments for interest income on loans acquired, amortization of intangibles arising from the transaction, adjustments for interest expense on deposits acquired, and the related income tax effects of all these items and the income tax benefits derived from PRB’s loss before taxes. The net effect of these pro forma adjustments were increases of $0.3 million and $0.5 million in net income for 2015 and 2014, respectively. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed dates.


	2015		2014
(dollars in thousands)

Net interest income	$	59,918	$	46,935
Provision for loan losses		2,673		235
Noninterest income		28,891		25,156
Noninterest expenses		64,167		57,577
Income before taxes		21,969		14,279
Taxes on income		9,097		6,192
Net income	$	12,872	$	8,087

Net income per share:
Basic	$	0.55	$	0.49
Diluted	$	0.53	$	0.46

The revenues (net interest income and noninterest income) and income before taxes for the period from June 16, 2015 to December 31, 2015 related to the operations acquired from PRB and included in the results of operations for 2015 was approximately $2.5 million and $0.8 million, respectively.