Acquisitions

6 Months Ended

Jun. 30, 2019

Grandpoint Capital, Inc. Acquisition

Effective as of July 1, 2018, the Company completed the acquisition of Grandpoint Capital, Inc. (“Grandpoint”), the holding company of Grandpoint Bank, a California-chartered bank, with $3.1 billion in total assets, $2.4 billion in gross loans and $2.5 billion in total deposits at June 30, 2018.

Pursuant to the terms of the merger agreement, each outstanding share of Grandpoint voting common stock and Grandpoint non-voting common stock was converted into the right to receive 0.4750 shares of the Corporation’s common stock. The final value of the total transaction consideration was approximately $602.2 million, after approximately $28.1 million in aggregate cash consideration payable to holders of Grandpoint share-based compensation awards by Grandpoint. The transaction consideration represented the issuance of 15,758,089 shares of the Corporation’s common stock, valued at $38.15 per share, which was the closing price of the Corporation’s common stock on June 29, 2018, the last trading day prior to the consummation of the Merger.

Goodwill in the amount of $312.6 million was recognized in the Grandpoint 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 Grandpoint as of July 1, 2018 and the fair value adjustments and amounts recorded by the Company in 2018 under the acquisition method of accounting:



	Grandpoint Book Value			Fair Value Adjustments			Fair Value
ASSETS ACQUIRED	(dollars in thousands)
Cash and cash equivalents	$	147,551		$	—		$	147,551
Investment securities	395,905			(3,047		)	392,858
Loans, gross	2,404,042			(51,325		)	2,352,717
Allowance for loan losses	(18,665		)	18,665			—
Fixed assets	6,015			3,107			9,122
Core deposit intangible	5,093			66,850			71,943
Deferred tax assets	14,185			(9,157		)	5,028
Other assets	97,441			(436		)	97,005
Total assets acquired	$	3,051,567		$	24,657		$	3,076,224
LIABILITIES ASSUMED
Deposits	$	2,506,663		$	266		$	2,506,929
Borrowings	255,155			(232		)	254,923
Other liabilities	23,687			1,172			24,859
Total liabilities assumed	2,785,505			1,206			2,786,711
Excess of assets acquired over liabilities assumed	$	266,062		$	23,451		289,513
Consideration paid							602,152
Goodwill recognized							$	312,639

Such fair values are preliminary estimates and subject to refinement for up to one year after the closing date of acquisition as additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. Since the acquisition, the Company has made a net adjustment of $580,000 related to loans, deferred tax assets and other assets. During the second quarter of 2019, the Company finalized its fair values with this acquisition.

The Company accounted for this transaction 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 Grandpoint was recorded at fair value at the date of each acquisition. A valuation of Grandpoint’s loan portfolio was performed by a third party as of the acquisition dates to assess the fair value of the loan portfolio. The loan portfolio was 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 periods and prepayment rates, all of which were based on industry standards.

The Company also determined the fair value of the core deposit intangible, securities, real property, leases, deposits and long-term borrowings with the assistance of third-party valuations. The fair value of other real estate owned (“OREO”) was based on recent appraisals of the properties less estimated costs to sell.

The core deposit intangible on non-maturing deposits 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 Grandpoint, the contractual amounts due, expected cash flows to be collected, interest component and fair value as of acquisition date was as follows:



	Grandpoint Acquired Loans
	(dollars in thousands)
Contractual amounts due	$	3,496,905
Cash flows not expected to be collected	39,071
Expected cash flows	3,457,834
Interest component of expected cash flows	1,105,117
Fair value of acquired loans	$	2,352,717

In accordance with U.S. GAAP, there was no carryover of the allowance for loan losses that had been previously recorded by Grandpoint.

The operating results of the Company for the three and six months ended June 30, 2019 include the operating results of Grandpoint. The following table presents the unaudited pro forma information for the net interest and other income, net income and earnings per share as if the acquisition was effective as of January 1, 2018 for the periods indicated and includes certain nonrecurring adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods.



	June 30, 2018
	Three Months Ended		Six Months Ended
	(dollars in thousands, except share data)
Net interest and other income	$	122,800	$	244,565
Net income	54,031		92,007
Basic earnings per share	0.87		1.49
Diluted earnings per share	0.87		1.47