Acquisition of Four Bank of America Branches

On January 22, 2016, 1st Security Bank purchased four branches from Bank of America. The acquisition includes the branch banking operations of a total of four retail bank branches located in the communities of Port Angeles, Sequim, Port Townsend, and Hadlock, Washington. In accordance with the Purchase and Assumption Agreement, dated as of September 1, 2015, by and between Bank of America, 1st Security Bank acquired approximately $186.4 million of deposits, $1.1 million of performing loans and the bank facilities and certain other assets of the acquired branches. In consideration of the purchased assets and transferred liabilities, 1st Security Bank paid (a) the recorded investment of the loans acquired, (b) the net book value, or approximately $1.1 million, for the bank facilities and certain assets located at the acquired branches, (c) a deposit premium of 2.5% on substantially all of the deposits assumed, which equated to approximately $4.8 million. The acquisition settled by Bank of America paying cash of $180.4 million to 1st Security Bank for the difference between these amounts and the total deposits assumed.

The branch purchase was accounted for under the acquisition method in accordance with ASC 805, “Business Combinations,” and accordingly the assets and liabilities were recorded at their fair values on the date of acquisition. Determining the fair value of assets and liabilities is a complicated process involving significant judgment regarding

methods and assumptions used to calculate estimated fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as information relative to closing date fair values become available.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition.



January 22, 2016	Acquired Book Value		Fair Value Adjustments			Amount Recorded
(In thousands)
Assets
Cash and cash equivalents	$	180,356	$	—		$	180,356
Loans receivable	417		—			417
Premises and equipment, net	697		267		⁽¹⁾	964
Accrued interest receivable	2		—			2
Core deposit intangible	—		2,139		⁽²⁾	2,139
Goodwill	—		2,412		⁽³⁾	2,412
Other assets	103		—			103
Total assets acquired	$	181,575	$	4,818		$	186,393

Liabilities
Deposits	$	186,364	$	—		186,364
Accrued interest payable	7		—			7
Other liabilities	22		—			22
Total liabilities assumed	$	186,393	$	—		$	186,393

Explanation of Fair Value Adjustments

(1) The fair value adjustment represents the difference between the fair value of the acquired branches and the book value of the assets acquired. The Company utilized third party appraisals to assist in the determination of fair value.

(2) The fair value adjustment represents the value of the core deposit base assumed in the acquisition based on a study performed by an independent consulting firm. This amount was recorded by the Company as an identifiable intangible asset and will be amortized as an expense on a double-declining balance over the average life of the core deposit base, which is estimated to be nine years.

(3) The fair value adjustment represents the value of the goodwill calculated from the acquisition based on the purchase price, less the fair value of assets acquired net of liabilities assumed.

Included in noninterest expense for the year ended December 31, 2015 was approximately $876,000 in acquisition related expenses.