NOTE

. ACQUISITION

January 31, 2019

we completed the acquisition of Merchants Holding Company (“Merchants”), to extend our presence in the Sacramento marketplace. Merchants, headquartered in Sacramento, California, was the parent company of The Merchants National Bank of Sacramento (“Merchants Bank”), a

-year-old bank with approximately

$211.7

million in assets as of

January 31, 2019.

Merchants Bank operated

one

full service branch and

one

limited service branch in the Sacramento metropolitan area.

We paid

$15.3

million in cash and issued

1,834,142

shares of common stock to Merchants shareholders who now hold, in the aggregate, approximately

10%

of our outstanding common stock. One former member of the Merchants board now serves on our board of directors. The acquisition added

$85.3

million in loans,

$190.2

million in deposits and

$107.4

million in investment securities after fair value adjustments to our bank as of

January 31, 2019.

The acquisition of Merchants constituted a business combination and has been accounted for using the acquisition method of accounting. 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. Due to the timing of the acquisition, fair values related to loans, deferred tax assets, other assets and other liabilities are preliminary and subject to refinement as additional information regarding the closing date fair values becomes available. The Bank engaged

third

party specialists to assist in valuing certain assets, including investment securities, loans, real estate and the core deposit intangible that resulted from the acquisition. The acquisition was treated as a "reorganization" within the definition of section

368

(a) of the Internal Revenue Code and is generally considered tax-free for U.S. federal income tax purposes.

805,

third

368

(a) of the Internal Revenue Code and is generally considered tax-free for U.S. federal income tax purposes.

The preliminary calculation of goodwill recorded during the

first

quarter of

2019

is detailed below.

				Preliminary
	As Recorded by			Fair Value and Other Acquisition
	Merchants			Related			As Recorded by
(Amounts in thousands)	Holding Company			Adjustments			the Company
Consideration paid:
Cash							$	15,300
Stock 1,834,142 shares at $10.69 per share								19,607
Total consideration							$	34,907

Assets acquired:
Cash and fed funds sold	$	12,425		$	—		$	12,425
Investment securities		107,931			(551	)		107,380
Loans, gross		87,570			(2,292	)		85,278
Allowance for loan and lease losses		(1,286	)		1,286			—
Interest receivable		688			—			688
Premises and equipment, net		378			1,856			2,234
Deferred tax asset, net		1,374			(1,287	)		87
Federal Home Loan Bank of San Francisco stock		1,454			—			1,454
Life insurance		755			—			755
Other assets		371			(10	)		361
Core deposit intangible		—			4,353			4,353
Total assets acquired	$	211,660		$	3,355		$	215,015

Liabilities assumed:
Demand and savings deposits	$	152,213		$	—		$	152,213
Certificates of deposit		38,003			—			38,003
Total deposits		190,216			—			190,216
Other liabilities		916			15			931
Total liabilities assumed	$	191,132		$	15		$	191,147
Net identifiable assets acquired over liabilities assumed	$	20,528		$	3,340		$	23,868
Goodwill							$	11,039

Goodwill

As a result of the Merchants acquisition, we have recorded a provisional amount of goodwill totaling

$11.0

million, which represents the excess of the total purchase price paid over the fair value of the assets acquired, net of the fair values of liabilities assumed. The goodwill recorded is preliminary and subject to refinement as additional information regarding the closing date fair values becomes available. We are in the process of obtaining and reviewing valuation reports for the acquired loans and completing the final federal and state income tax returns for Merchants. We also expect that there

may

be additional fair value adjustments to the other assets and other liabilities as work to finalize the entries to record the transaction. Goodwill is amortized over

years for tax purposes.

Goodwill reflects the expected value of Merchants reputation in the community, stable customer base and expected synergies created through the combined operations with our company.

The following is a description of the methods used to determine the fair values of significant assets and liabilities whose fair values are different from their carrying amounts on Merchants' books at acquisition date presented above.

Investment Securities

Fair values for securities were obtained from an independent pricing service and are based on quoted market prices, where available. If quoted market prices were

not

available, fair value estimates were based on observable inputs including quoted market prices for similar instruments, quoted market prices that are

not

in an active market, other inputs that are observable in the market or a discounted cash flow model.

Loans

We engaged a

third

party to assist us in determining the fair values for the loans acquired from Merchants based upon the present values of the expected cash flows and market-derived discount rates. There were

loans acquired with evidence of deterioration of credit quality since origination for which we believe it is probable that we will be unable to collect all contractually required payments receivable. The amounts recognized for loans have been determined only provisionally. Due to the timing of the transaction, we are still in the process of evaluating the fair value of the acquired loans.

Premises and Equipment

We engaged an independent licensed appraiser to determine the fair value of the acquired branch located in Sacramento. The fair value of tangible personal property was

not

material.

Deferred Tax Assets

The deferred income tax assets are recorded to reflect the differences in the carrying values of the acquired assets and liabilities for financial reporting purposes and the basis for federal income tax purposes at the company’s statutory federal and state income tax rate. The amounts recognized for deferred tax assets have been determined only provisionally, and will

not

be finalized until the

2018

and

2019

tax returns for Merchants have been completed..

Core Deposit Intangible

We recorded a core deposit intangible asset of

$4.4

million for the deposits acquired in the Merchants acquisition during the

first

quarter of

2019.

The core deposit intangible represents the estimated future benefits of acquired deposits and is booked separately from the related deposits. The value of the core deposit intangible asset was determined using a discounted cash flow approach to arrive at the cost differential between the core deposits (non-maturity deposits such as transaction, savings and money market accounts) and alternative funding sources. It was calculated as the present value of the difference in cash flows between maintaining the core deposits (interest and net maintenance costs) and the cost of an equal amount of funds with a similar term from an alternative source. The core deposit intangible is amortized on an accelerated basis over an estimated

eight

-year life, and is evaluated periodically for impairment.

impairment loss was recognized in

2018.

December 31, 2018,

the future estimated amortization expense on the CDI from the Merchants acquisition is as follows:

(Amounts in thousands)		2019				2020				2021				2022				2023				Thereafter				Total
Core deposit intangible amortization		$	499			$	544			$	544			$	544			$	544			$	1678			$	4,353

Pro Forma Results of Operations

The following table presents pro forma information of the combined entity as if the acquisition occurred on

January 1, 2016.

The pro forma information does

not

necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the periods presented, nor is it indicative of the results of operations in future periods. Furthermore, cost savings and other business synergies related to the acquisition are

not

reflected in the pro forma amounts.

Pro forma revenue and earnings
(Amounts in thousands)	2018			2017		2016
Net interest income	$	52,948		$	46,592	$	41,287
Net income	$	16,313	(1)	$	8,069	$	6,566

(

)

Net income for

2018

includes acquisition-related costs of

$1.3

million for both entities