Note 4 – Acquisitions

The Company accounted for the following transactions under the acquisition method of accounting which requires purchased assets and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Company determined the fair value of the core deposit intangible, securities and deposits with the assistance of third party valuations. The fair value of other real estate owned (“OREO”) was based on recent appraisals of the properties.

The estimated fair values in these acquisitions are subject to refinement as additional information relative to the closing date fair values become available through the measurement period, which can extend for up to one year after the closing date of the transaction. While additional significant changes to the closing date fair values are not expected, any information relative to the changes in these fair values will be evaluated to determine if such changes are due to events and circumstances that existed as of the acquisition date. During the measurement period, any such changes will be recorded as part of the closing date fair value.

Infinity Franchise Holdings Acquisition

On January 30, 2014, the Company completed its acquisition of Infinity Franchise Holdings, LLC (“Infinity Holdings”) and its wholly owned operating subsidiary Infinity Franchise Capital, LLC (“IFC” and together with Infinity Holdings, “IFH”), a national lender to franchisees in the quick service restaurant (“QSR”) industry, and other direct and indirect subsidiaries utilized in its business. The value of the total consideration paid for the Infinity acquisition was $17.4 million, which consisted of $8.3 million paid in cash and the issuance of 562,469 shares of the Corporation’s stock, which was valued at $16.02 per share as measured by the 10-day average closing price immediately prior to closing of the transaction.

The acquisition of IFH is expected to further diversify our loan portfolio with commercial and industrial and owner-occupied commercial real estate loans, to deploy excess liquidity into higher yielding assets, to positively impact our net interest margin and to further leverage our strong capital base. The QSR franchisee lending business is a niche market that we believe provides attractive growth opportunities for the Company in the future. Infinity had no delinquent loans or adversely classified assets as of the acquisition date; and the acquisition is expected to be accretive to our 2014 earnings per share.

Goodwill in the amount of $5.5 million was recognized in the IFH acquisition. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities. Goodwill recognized in this transaction is not deductible for income tax purposes.

The following table represents the assets acquired and liabilities assumed of Infinity as of January 30, 2014 and the provisional fair value adjustments and amounts recorded by the Company in 2014 under the acquisition method of accounting:

	IFH Book Value			Fair Value Adjustments			Fair Value
	(dollars in thousands)
ASSETS ACQUIRED
Cash and cash equivalents	$	555		$	—		$	555
Loans, gross	78,833			—			78,833
Deferred loan costs	1,082			(1,082		)	—
Allowance for loan losses	(268		)	268			—
Other assets	776			—			776
Total assets acquired	$	80,978		$	(814	)	$	80,164

LIABILITIES ASSUMED
Bank loan	$	67,617		$	—		$	67,617
Accrued compensation	495			—			495
Other liabilities	214			—			214
Total liabilities assumed	68,326			—			68,326
Excess of assets acquired over liabilities assumed	$	12,652		$	(814	)	11,838
Consideration paid							17,360
Goodwill recognized							$	5,522

San Diego Trust Bank Acquisition

On June 25, 2013, the Company completed its acquisition of San Diego Trust Bank (“SDTB”) in exchange for consideration valued at $30.6 million which consisted of $16.2 million of cash and 1,198,255 shares of the Corporation’s common stock.

SDTB was a San Diego, California based state-chartered bank. The acquisition was an opportunity for the Company to acquire a banking network that complemented our existing banking franchise and expanded into a new market area. Additionally, the SDTB acquisition improved the Company’s deposit base by lowering our cost of deposits and providing an opportunity to accelerate future core deposit growth in the San Diego, California, market area.

Goodwill in the amount of $5.6 million was recognized in the SDTB acquisition. Goodwill recognized in this transaction is not deductible for income tax purposes.

The following table represents the assets acquired and liabilities assumed of SDTB as of June 25, 2013 and the provisional fair value adjustments and amounts recorded by the Company in 2013 under the acquisition method of accounting:

	SDTB Book Value			Fair Value Adjustments			Fair Value
	(dollars in thousands)
ASSETS ACQUIRED
Cash and cash equivalents	$	30,252		$	—		$	30,252
Investment securities	124,960			(155		)	124,805
Loans, gross	42,945			(223		)	42,722
Allowance for loan losses	(1,013		)	1,013			—
Other real estate owned	752			—			752
Core deposit intangible	—			2,836			2,836
Other assets	9,856			—			9,856
Total assets acquired	$	207,752		$	3,471		$	211,223

LIABILITIES ASSUMED
Deposits	$	183,901		$	6		$	183,907
Deferred tax liability (asset)	(333		)	1,507			1,174
Other liabilities	1,823			(729		)	1,094
Total liabilities assumed	185,391			784			186,175
Excess of assets acquired over liabilities assumed	$	22,361		$	2,687		25,048
Consideration paid							30,622
Goodwill recognized							$	5,574

First Association Bank Acquisition

On March 15, 2013, the Company completed its acquisition of First Association Bank (“FAB”) in exchange for consideration valued as of the closing at $57.9 million which consisted of $43.0 million of cash and 1,279,217 shares of the Corporation’s common stock.

FAB was a Dallas, Texas, based bank which specialized in providing commercial banking services to home owner association (“HOA”) management companies throughout the United States. The FAB acquisition was an opportunity for the Company to acquire a highly efficient, consistently profitable and niche-focused business that complimented our banking franchise. Additionally, this acquisition improved the Company’s deposit base by lowering our cost of deposits and providing a platform to accelerate future core deposit growth from HOAs.

Goodwill in the amount of $11.9 million was recognized in the FAB acquisition. Goodwill recognized in this transaction is not deductible for income tax purposes.

The following table represents the assets acquired and liabilities assumed of FAB as of March 15, 2013, the provisional fair value adjustments and amounts recorded by the Company in 2013 under the acquisition method of accounting:

	FAB Book Value			Fair Value Adjustments		Fair Value
	(dollars in thousands)
ASSETS ACQUIRED
Cash and cash equivalents	$	167,663		$	—	$	167,663
Investment securities	219,913			2,478		222,391
Loans, gross	26,264			158		26,422
Allowance for loan losses	(224		)	224		—
Core deposit intangible	—			1,930		1,930
Other assets	5,823			—		5,823
Total assets acquired	$	419,439		$	4,790	$	424,229

LIABILITIES ASSUMED
Deposits	$	356,737		$	81	$	356,818
Borrowings	16,905			—		16,905
Deferred tax liability	—			3,918		3,918
Other Liabilities	536			—		536
Total liabilities assumed	374,178			3,999		378,177
Excess of assets acquired over liabilities assumed	$	45,261		$	791	46,052
Consideration paid						57,906
Goodwill recognized						$	11,854

There were no purchased credit impaired loans acquired from FAB, SDTB or Infinity. For loans acquired from FAB, SDTB and Infinity, the contractual amounts due, expected cash flows to be collected, interest component and fair value as of the respective acquisition dates were as follows:

	Acquired Loans
	FAB		SDTB		IFH
	(dollars in thousands)

Contractual amounts due	$	32,107	$	47,251	$	98,320
Cash flows not expected to be collected	—		—		—

Expected cash flows	32,107		47,251		98,320
Interest component of expected cash flows	5,685		4,529		19,487

Fair value of acquired loans	$	26,422	$	42,722	$	78,833

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

The operating results of the Company for the three months ending March 31, 2014 include the operating results of FAB, SDTB and Infinity since their respective acquisition dates. The following table presents the net interest and other income, net income and earnings per share as if the acquisitions of FAB, SDTB and Infinity were effective as of January 1, 2014 and 2013. There were no material, nonrecurring adjustments to the pro forma net interest and other income, net income and earnings per share presented below:

	Three months Ended March 31,
	2014		2013

Net interest and other income	$	18,722	$	16,543

Net income	$	2,251	$	1,909

Basic earnings per share	$	0.13	$	0.12

Diluted earnings per share	$	0.13	$	0.12