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Acquisitions
12 Months Ended
Dec. 31, 2017
Business Combinations [Abstract]  
Acquisitions
Acquisitions

Plaza Bancorp Acquisition

Effective as of November 1, 2017, the Company completed the acquisition of Plaza Bancorp (OTC Market Group Pink Sheets: PLZZ) (“Plaza”), the holding company of Plaza Bank, a California chartered banking corporation headquartered in Irvine, California with $1.3 billion in total assets, $1.1 billion in gross loans and $1.1 billion in total deposits.

Pursuant to the terms of the merger agreement, each outstanding share of PLZZ common stock was converted into the right to receive 0.2000 shares of Company common stock. The value of the total deal consideration was approximately $251 million, which included approximately $6.5 million of aggregate cash consideration payable to holders of unexercised options and warrants exercisable for shares of PLZZ common stock, and the issuance of 6,049,373 shares of the Company's common stock, which had a value of $40.40 per share, which was the closing price of the Company's common stock on October 31, 2017, the last trading day prior to the consummation of the acquisition.

Goodwill in the amount of $122 million was recognized in the PLZZ 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 PLZZ as of November 1, 2017 and the fair value adjustments and amounts recorded by the Company in 2017 under the acquisition method of accounting, which are subject to adjustment for up to one year after the merger date: 

 
PLZZ
 
Fair Value
 
Fair
 
Book Value
 
Adjustment
 
Value
 
(dollars in thousands)
ASSETS ACQUIRED
 
Cash and cash equivalents
$
150,459

 
$

 
$
150,459

Loans, gross
1,069,359

 
(6,418
)
 
1,062,941

Allowance for loan losses
(13,009
)
 
13,009

 

Fixed assets
7,389

 
(194
)
 
7,195

Core deposit intangible
198

 
11,382

 
11,580

Deferred tax assets
11,849

 
(6,876
)
 
4,973

Other assets
19,495

 
(330
)
 
19,165

Total assets acquired
$
1,245,740

 
$
10,573

 
$
1,256,313

LIABILITIES ASSUMED
  
 
  
 
  
Deposits
$
1,081,727

 
$
1,224

 
$
1,082,951

Borrowings
40,755

 
397

 
41,152

Other Liabilities
8,956

 
(622
)
 
8,334

Total liabilities assumed
1,131,438

 
999

 
1,132,437

Excess of assets acquired over liabilities assumed
$
114,302

 
$
9,574

 
123,876

Consideration paid
  
 
  
 
250,939

Paid by PLZZ prior to close
 
 
 
 
6,544

Capitalized merger-related expense
 
 
 
 
1,366

Goodwill recognized
  
 
  
 
$
121,885



Heritage Oaks Bancorp Acquisition

Effective as of April 1, 2017, the Company completed the acquisition of HEOP, the holding company of Heritage Oaks Bank, a Paso Robles, California based state-chartered bank (“Heritage Oaks Bank”) with $2.0 billion in total assets, $1.4 billion in gross loans and $1.7 billion in total deposits at March 31, 2017. Heritage Oaks Bank operates branches within San Luis Obispo and Santa Barbara Counties and a loan production office in Ventura County.

Pursuant to the terms of the merger agreement, each outstanding share of HEOP common stock was converted into the right to receive 0.3471 shares of corporate common stock. The value of the total deal consideration was approximately $465 million, which included approximately $3.9 million of aggregate cash consideration payable to holders of Heritage Oaks share-based compensation awards, and the issuance of 11,959,022 shares of the Corporation's common stock, which had a value of $38.55 per share, which was the closing price of the Corporation's common stock on March 31, 2017, the last trading day prior to the consummation of the acquisition.

Goodwill in the amount of $269 million was recognized in the HEOP 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 HEOP as of April 1, 2017 and the fair value adjustments and amounts recorded by the Company in 2017 under the acquisition method of accounting: 
 
HEOP
Book Value
 
Fair Value
Adjustments
 
Fair
Value
ASSETS ACQUIRED
(dollars in thousands)
Cash and cash equivalents
$
78,728

 
$

 
$
78,728

Investment securities
447,520

 
(4,597
)
 
442,923

Loans, gross
1,387,949

 
(23,300
)
 
1,364,649

Allowance for loan losses
(17,200
)
 
17,200

 

Fixed assets
35,567

 
(665
)
 
34,902

Core deposit intangible

 
28,123

 
28,123

Deferred tax assets
17,850

 
(6,567
)
 
11,283

Other assets
55,223

 
(9
)
 
55,214

Total assets acquired
$
2,005,637

 
$
10,185

 
$
2,015,822

LIABILITIES ASSUMED
 

 
 

 
 

Deposits
$
1,668,079

 
$
1,471

 
$
1,669,550

Borrowings
141,996

 
(2,962
)
 
139,034

Other Liabilities
7,290

 
771

 
8,061

Total liabilities assumed
1,817,365

 
(720
)
 
1,816,645

Excess of assets acquired over liabilities assumed
$
188,272

 
$
10,905

 
199,177

Consideration paid
 

 
 

 
465,482

Capitalized merger-related expense
 
 
 
 
2,649

Goodwill recognized
 

 
 

 
$
268,954



The fair values are estimates and are subject to adjustment for up to one year after the merger date. In the third quarter of 2017, the Company made a $1.1 million adjustment to deferred tax assets and the deal consideration.

Security Bank Acquisition

On January 31, 2016, the Company completed its acquisition of SCAF whereby we acquired $714 million in total assets, $456 million in loans and $637 million in total deposits. Under the terms of the merger agreement, each share of SCAF common stock was converted into the right to receive 0.9629 shares of the Corporation’s common stock. The value of the total deal consideration was $120 million, which includes $788,000 of aggregate cash consideration to the holders of SCAF stock options and the issuance of 5,815,051 shares of the Corporation’s common stock, valued at $119.4 million based on a closing stock price of $20.53 per share on January 29, 2016.

SCAF was the holding company of Security Bank of California, a Riverside, California, based state-chartered bank with six branches located in Riverside County, San Bernardino County and Orange County.

Goodwill in the amount of $51.7 million was recognized in the SCAF 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 SCAF as of January 31, 2016 and the fair value adjustments and amounts recorded by the Company in 2016 under the acquisition method of accounting:
 
SCAF
Book Value
 
Fair Value
Adjustments
 
Fair
Value
 
(dollars in thousands)
ASSETS ACQUIRED
 
 
 
 
 
Cash and cash equivalents
$
40,947

 
$

 
$
40,947

Interest-bearing deposits with financial institutions
1,972

 

 
1,972

Investment securities
191,881

 
(1,627
)
 
190,254

Loans, gross
467,197

 
(11,039
)
 
456,158

Allowance for loan losses
(7,399
)
 
7,399

 

Fixed assets
5,335

 
(1,145
)
 
4,190

Core deposit intangible
493

 
3,826

 
4,319

Deferred tax assets
5,618

 
1,130

 
6,748

Other assets
10,589

 
(1,227
)
 
9,362

Total assets acquired
$
716,633

 
$
(2,683
)
 
$
713,950

LIABILITIES ASSUMED
 

 
 

 
 

Deposits
$
636,450

 
$
141

 
$
636,591

Borrowings

 

 

Deferred tax liability

 

 

Other Liabilities
9,063

 
(220
)
 
8,843

Total liabilities assumed
645,513

 
(79
)
 
645,434

Excess of assets acquired over liabilities assumed
$
71,120

 
$
(2,604
)
 
68,516

Consideration paid
 

 
 

 
120,174

Goodwill recognized
 

 
 

 
$
51,658



The Company accounted for these transactions under the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires purchased assets and liabilities assumed to be recorded at their respective fair values at the date of acquisition.

The loan portfolios of SCAF, HEOP and PLZZ were recorded at fair value at the date of each acquisition. A valuation of SCAF, HEOP and PLZZ's loan portfolio was performed as of the acquisition dates to assess the fair value of the loan portfolio. The loan portfolios were both segmented into two groups; loan with credit deterioration and loans without credit deterioration, and then split further by loan type. The fair value was calculated on an individual loan basis using a discounted cash flow analysis. The discount rate utilized was based on a weighted average cost of capital, considering the cost of equity and cost of debt. Also factored into the fair value estimates were loss rates, recovery period and prepayment rates based on industry standards.

The Company also determined the fair value of the core deposit intangible, securities and deposits with the assistance of third-party valuations as well as the fair value of OREO was based on recent appraisals of the properties.

The core deposit intangible on non-maturing deposit was determined by evaluating the underlying characteristics of the deposit relationships, including customer attrition, deposit interest rates, service charge income, overhead expense and costs of alternative funding. Since the fair value of intangible assets are calculated as if they were stand-alone assets, the presumption is that a hypothetical buyer of the intangible asset would be able to take advantage of potential tax benefits resulting from the asset purchase. The value of the benefit is the present value over the period of the tax benefit, using the discount rate applicable to the asset.

In determining the fair value of certificates of deposit, a discounted cash flow analysis was used, which involved present valuing the contractual payments over the remaining life of the certificates of deposit at market-based interest rates.

For loans acquired from SCAF, HEOP and PLZZ, 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
 
 
SCAF
 
HEOP
 
PLZZ
 
 
(dollars in thousands)
Contractual amounts due
 
$
539,806

 
$
1,717,230

 
$
1,703,246

Cash flows not expected to be collected
 
2,765

 
4,442

 
20,152

Expected cash flows
 
537,041

 
1,712,788

 
1,683,094

Interest component of expected cash flows
 
80,883

 
348,100

 
625,592

Fair value of acquired loans
 
$
456,158

 
$
1,364,688

 
$
1,057,502



In accordance with generally accepted accounting principles, there was no carryover of the allowance for loan losses that had been previously recorded by SCAF, HEOP and PLZZ.
 
The operating results of the Company for the twelve months ending December 31, 2017 include the operating results of SCAF, HEOP and PLZZ since their respective acquisition dates. The following table presents the net interest and other income, net income and earnings per share as if the merger with SCAF, HEOP and PLZZ were effective as of January 1, 2017, 2016 and 2015 for the respective year in which each acquisition was closed. The unaudited pro forma information in the following table is intended for informational purposes only and is not necessarily indicative of our future operating results or operating results that would have occurred had the mergers been completed at the beginning of each respective year. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions.

Unaudited pro forma net interest and other income, net income and earnings per share presented below:
 
Year Ended December 31,
 
2017
 
2016
 
2015
Net interest and other income
$
342,159

 
$
258,970

 
$
246,622

Net income
72,316

 
71,722

 
58,257

Basic earnings per share
1.58

 
1.58

 
1.30

Diluted earnings per share
1.55

 
1.56

 
1.29