NOTE 2: ACQUISITIONS

On November 10, 2017, the Company completed the acquisition of Community 1st Bancorp and its wholly owned subsidiary, Community 1st Bank (collectively “C1B”), through a merger of C1B with and into the Bank, in exchange for 2,955,623 shares of common stock of FFI with a fair value of $17.55 per share. The primary reason for acquiring C1B was to expand our operations in Northern California.

The acquisition of C1B 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 $26 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 C1B as of November 10, 2017 and the fair value adjustments and amounts recorded by the Bank in 2017 under the acquisition method of accounting:


	C1B Book Value			Fair Value Adjustments			Fair Value
(dollars in thousands)
Assets Acquired:
Cash and cash equivalents	$	91,018		$	—		$	91,018
Securities AFS		114,796			(583	)		114,213
Loans, net of deferred fees		230,203			(2,979	)		227,224
Allowance for loan losses		(3,097	)		3,097			—
Premises and equipment, net		1,636			(1,636	)		—
Deferred taxes		1,288			(738	)		550
REO		248			(248	)		—
Goodwill		—			26,000			26,000
Core deposit intangible		—			5,793			5,793
FHLB stock and other stock holdings		2,116			(140	)		1,976
Other assets		8,556			(641	)		7,915
Total assets acquired	$	446,764		$	27,925		$	474,689

Liabilities Assumed:
Deposits	$	411,463		$	98		$	411,561
Borrowings		7,857			143			8,000
Accounts payable and other liabilities		4,931			(1,674	)		3,257
Total liabilities assumed		424,251			(1,433	)		422,818
Excess of assets acquired over liabilities assumed		22,513			29,358			51,871
Total	$	446,764		$	27,925		$	474,689

Consideration:
Stock issued							$	51,871

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 C1B, 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	$	3,718	$	302,537
Cash flows not expected to be collected		955		3,687
Expected cash flows		2,763		298,850
Interest component of expected cash flows		603		73,786
Fair value of acquired loans	$	2,160	$	225,064

In accordance with generally accepted accounting principles there was no carryover of the allowance for loan losses that had been previously recorded by C1B.

The Company recorded a deferred income tax asset of $0.6 million related to C1B’s operating loss carry-forward and other tax attributes of C1B, 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 C1B 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 C1B, of $5.8 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 (i) acquisition of C1B had occurred on January 1, 2017, January 1, 2016 and January 1, 2015, for 2017, 2016 and 2015, respectively, after giving effect to certain adjustments and (ii) the acquisition of Pacific Rim Rank (“PRB”) had occurred on January 1, 2015 for 2015, 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 costs or benefits derived from the income or loss before taxes of C1B and PRB. The net effect of these pro forma adjustments were decreases of $0.5 million, $0.7 million and $0.3 million in net income for 2017, 2016 and 2015, 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.


	2017		2016		2015
(dollars in thousands)

Net interest income	$	123,809	$	98,663	$	67,843
Provision for loan losses		2,882		4,911		2,673
Noninterest income		39,242		35,169		29,453
Noninterest expenses		109,103		89,705		71,674
Income before taxes		51,066		39,216		22,949
Taxes on income		23,229		15,377		9,503
Net income	$	27,837	$	23,839	$	13,446

Net income per share:
Basic	$	0.75	$	0.67	$	0.52
Diluted	$	0.74	$	0.65	$	0.50

The revenues (net interest income and noninterest income) and income before taxes for the period from November 10, 2017 to December 31, 2017 related to the operations acquired from C1B and included in the results of operations for 2017 was approximately $1.4 million and $0.9 million, respectively. The revenues 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.