NOTE

10.

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 Merchants National Bank of Sacramento (“Merchants Bank”), a

-year-old bank with approximately

$211.7

million in assets as of

January 31, 2019.

Merchants operated

one

full service branch and

one

limited service branch in the Sacramento metropolitan area. In

May

2019,

we successfully converted all of Merchant’s computer records onto our core system.

We paid

$15.3

million in cash and issued

1,834,142

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

10%

of our outstanding common stock on

January 31, 2019.

One former member of the Merchants board now serves on our board of directors. The acquisition, after fair value adjustments added

$190.2

million in deposits,

$107.4

million in investment securities and

$85.3

million in loans 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. 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.

The calculation of goodwill recorded during

2019

is detailed below.

(Amounts in thousands)	As Recorded by Merchants Holding Company			Fair Value And Other Acquisition Related Adjustments			As Recorded by 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 assets, net		1,374			(1,352	)		22
Federal Home Loan Bank of San Francisco stock		1,454			—			1,454
Life insurance		755			—			755
Other assets		371			95			466
Core deposit intangible		—			4,353			4,353
Total assets acquired	$	211,660		$	3,395		$	215,055

Liabilities assumed:
Demand, money market and savings	$	152,213		$	—		$	152,213
Certificates of deposit		38,003			—			38,003
Total deposits		190,216			—			190,216
Other liabilities		916			22			938
Total liabilities assumed	$	191,132		$	22		$	191,154
Net identifiable assets acquired over liabilities assumed	$	20,528		$	3,373		$	23,901
Goodwill							$	11,006

Goodwill

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

$11.0

million. 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 and was calculated as 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 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 were 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 were

not

in an active market, other inputs that were 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. A fair value discount of

$2.3

million was recorded for loans acquired from Merchants and is being accreted over the life of the loans as a yield adjustment. We recorded

$163

thousand and

$48

thousand in accretion of the discount for these loans during the

three

months ended

March 31, 2020

and

2019.

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

Deferred income tax assets were recorded to reflect the difference between the carrying values of the acquired assets and liabilities for financial reporting purposes and the basis for income tax purposes using the Company’s statutory federal and state income tax rates. During

2019,

the final tax returns were completed for Merchants and the net deferred tax assets were adjusted to fair value.

Core Deposit Intangible

We engaged an independent

third

party to assist us in determining the core deposit intangible asset of

$4.4

million associated with non-maturity deposits acquired from Merchants. 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 being amortized on a straight line basis over an estimated

eight

-year life, and is evaluated periodically for impairment.

impairment loss was recognized in

2020

2019.

Core deposit intangible amortization from this acquisition is

not

deductible for tax purposes. We recorded amortization of the core deposit intangible totaling

$136

thousand and

$91

thousand during the

three

months ended

March 31, 2020

and

2019.

The future estimated amortization expense on the CDI from the Merchants acquisition at

March 31, 2020

is as follows:

(Amounts in thousands)		2020				2021				2022				2023				2024				Thereafter				Total
Core deposit intangible amortization		$	408			$	544			$	544			$	544			$	544			$	1,633			$	4,217

Pro Forma Results of Operations

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

January 1, 2019.

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.

	For the Three Months Ended
Pro forma revenue and earnings	March 31,
(Amounts in thousands)	2019
Net interest income	$	13,199
Net income (1)	$	2,269

(

)

Net income for the

three

months ended

March 31, 2019

includes acquisition-related costs of

$1.9

million.

It is impracticable to separately provide information regarding the amount of revenue and earnings from Merchants included in our

Consolidated Statement of Income

because the operations of Merchants were substantially comingled with the operations of the Company as of the acquisition date.