| Business Combinations |
8) Business Combinations On April 6, 2018, the Company completed its acquisition of Tri-Valley for a transaction value of $32,320,000. At closing the Company issued 1,889,613 shares of the Company’s common stock with an aggregate market value of $30,725,000 on the date of closing. The number of shares issued was based on a fixed exchange ratio of 0.0489 of a share of the Company’s common stock for each outstanding share of Tri-Valley common stock. In addition, at closing the Company paid cash to the holder of a stock warrant and holders of outstanding stock options and related fees and fractional shares totaling $1,595,000. Tri-Valley’s results of operations were included in the Company’s results of operations beginning April 7, 2018. On May 4, 2018, the Company completed its acquisition of United American for a transaction value of $56,417,000. At closing the Company issued 2,826,032 shares of the Company’s common stock with an aggregate market value of $47,280,000 on the date of closing. The number of shares issued was based on a fixed exchange ratio of 2.1644 of a share of the Company’s common stock for each outstanding share of United American common stock and each common stock equivalent underlying the United American Series D Preferred Stock and Series E Preferred Stock. The shareholders of the United American Series A Preferred Stock and Series B Preferred Stock received $1,000 cash for each share totaling $8,700,000 and $435,000, respectively. In addition, the Company paid $2,000 in cash for fractional shares, for total cash consideration of $9,137,000. United American’s results of operations were included in the Company’s results of operations beginning May 5, 2018. On October 11, 2019, the Company completed its merger with Presidio for an aggregate transaction value of $185,598,000. Shareholders of Presidio received a fixed exchange ratio at closing of 2.47 shares of the Company’s common stock for each share of Presidio common stock. Upon closing of the transaction, the Company issued 15,684,064 shares of the Company’s common stock to Presidio shareholders and holders of restricted stock units for a total value of $178,171,000 based on the Company’s closing stock price of $11.36 on the closing date of October 11, 2019. In addition, the consideration for Presidio stock options exchanged for the Company’s stock options totaled $7,426,000 and cash-in-lieu of fractional shares totaled $1,000 on October 11, 2019. The following table summarizes the consideration paid for Presidio: | | | | | | (Dollars in thousands) | Issuance of 15,684,064 shares of common stock | | | | to Presidio shareholders and holders of restricted stock | | | | (stock price = $11.36 on October 11, 2019) | | $ | 178,171 | Consideration for Presidio stock options exchanged for | | | | Heritage Commerce Corp stock options | | | 7,426 | Cash paid for fractional shares | | | 1 | Total consideration | | $ | 185,598 |
The following table summarizes the estimated fair values of the Presidio assets acquired and liabilities assumed at the date of the merger. | | | | | | | | | | | | | | As | | | | | | | As | | | Recorded | | Fair | | | | Recorded | | | by | | Value | | | | at | | | Presidio | | Adjustments | | | | Acquisition | | | | (Dollars in thousands) | | | | | | | | | | | | | Assets acquired: | | | | | | | | | | | | Cash and cash equivalents | | $ | 117,989 | | $ | (1) | | (a) | | $ | 117,988 | Securities available-for-sale | | | 44,647 | | | 422 | | (b) | | | 45,069 | Securities held-to-maturity | | | 463 | | | — | | | | | 463 | Loans | | | 698,493 | | | (12,529) | | (c) | | | 685,964 | Allowance for loan losses | | | (7,463) | | | 7,463 | | (d) | | | — | Premises and equipment, net | | | 1,756 | | | — | | | | | 1,756 | Other intangible assets | | | — | | | 11,147 | | (e) | | | 11,147 | Other assets, net | | | 43,539 | | | (1,378) | | (f) | | | 42,161 | Total assets acquired | | $ | 899,424 | | $ | 5,124 | | | | | 904,548 | | | | | | | | | | | | | Liabilities assumed: | | | | | | | | | | | | Deposits | | $ | 774,260 | | $ | (1) | | (g) | | | 774,259 | Subordinated Debt | | | 10,000 | | | — | | (h) | | | 10,000 | Other borrowings | | | 442 | | | — | | | | | 442 | Other liabilities | | | 17,916 | | | 211 | | (i) | | | 18,127 | Total liabilities assumed | | $ | 802,618 | | $ | 210 | | | | | 802,828 | Net assets acquired | | | | | | | | | | | 101,720 | Purchase price | | | | | | | | | | | 185,598 | Goodwill recorded in the merger | | | | | | | | | | $ | 83,878 |
Explanation of certain fair value related adjustments for the Presidio merger: | (a) | Represents cash paid for fractional shares in the transaction. |
| (b) | Represents the fair value adjustment on investment securities available-for-sale. |
| (c) | Represents the fair value adjustment to the net book value of loans includes an interest rate mark and credit mark adjustment. |
| (d) | Represents the elimination of Presidio’s allowance for loan losses. |
| (e) | Represents intangible assets recorded to reflect the fair value of core deposits and an above market lease. The core deposit asset was recorded as an identifiable intangible asset and is amortized on an accelerated basis over the estimated average life of the deposit base. The above market lease liability will be accreted |
| | on the straight line method over 60 months. |
| (f) | Represents an adjustment to net deferred tax assets resulting from the fair value adjustments related to the acquired assets, liabilities assumed and identifiable intangible assets recorded. |
| (g) | Represents the fair value adjustment on time deposits, which was amortized as interest expense. |
| (h) | The Company acquired $10,000,000 of subordinated debt from the Presidio transaction. The Presidio subordinated debt was redeemed on December 19, 2019. |
| (i) | Represents adjustments to accrued accounts payable. |
Presidio’s results of operations were included in the Company’s results of operations beginning October 12, 2019. The following table presents pro forma financial information as if the merger had occurred on January 1, 2018, which includes the pre-acquisition period for Presidio. The historical unaudited pro forma financial information has been adjusted to reflect supportable items that are directly attributable to the acquisition and expected to have a continuing impact on consolidated results of operations, as such, one-time acquisition costs are not included. The unaudited pro forma financial information is provided for informational purposes only. The unaudited pro forma financial information is not necessarily, and should not be assumed to be, an indication of the results that would have been achieved had the acquisition been completed as of the dates indicated or that may be achieved in the future. The preparation of the unaudited pro forma combined consolidated financial statements and related adjustments required management to make certain assumptions and estimates. | | | | | | | | | For the Year Ended | | | December 31, 2019 | | December 31, 2018 | | (Unaudited) | | (Dollars in thousands, except per share amounts) | Net interest income | | $ | 163,555 | | $ | 160,044 | Provision for loan losses | | | 870 | | | 7,694 | Noninterest income | | | 11,291 | | | 10,795 | Noninterest expense | | | 92,708 | | | 97,563 | Income before income taxes | | | 81,268 | | | 65,582 | Income tax expense | | | 23,730 | | | 17,549 | Net income | | $ | 57,538 | | $ | 48,033 | | | | | | | | Net income per share - basic | | $ | 0.98 | | $ | 0.84 | Net income per share - diluted | | $ | 0.96 | | $ | 0.83 |
The Company believes the mergers provide the opportunity to combine independent business banking franchises with similar philosophies and cultures into a combined over $4,000,000,000 business bank based in San Jose, California. The pooling of the four banks’ resources and knowledge enhance the Company’s capabilities, operational efficiencies, and community outreach. The Company also believes the combined bank will be much better positioned to meet the needs of the Company’s customers, shareholders and the community. The following table summarizes the pre-tax merger-related costs for the year ended December 31, 2020 for the Presidio merger, and the pre-tax merger-related costs for the years ended December 31, 2019 and 2018 for the Tri-Valley and United American acquisitions: | | | | | | | | | | | | | | | | | | | | | | For the Year Ended | | | December 31, | | December 31, | | December 31, | | | 2020 | | 2019 | | 2018 | | | | (Dollars in thousands) | Salaries and employee benefits | | $ | 356 | | $ | 6,580 | | $ | 3,569 | Other | | | 2,245 | | | 4,500 | | | 5,598 | Total merger-related costs | | $ | 2,601 | | $ | 11,080 | | $ | 9,167 |
Goodwill of $13,819,000 arising from the Tri-Valley acquisition, $24,271,000 from the United American acquisition and $83,878,000 from the Presidio merger is largely attributable to synergies and cost savings resulting from combining the operations of the companies. As these transactions were structured as tax-free exchanges, the goodwill will not be deductible for tax purposes. As of April 6, 2019, May 4, 2019, and October 11, 2020, the Company finalized its valuation of all assets acquired and liabilities assumed in its acquisition of Tri-Valley, United American, and Presidio respectively, resulting in no material changes to acquisition accounting adjustments.
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