Business Combinations

3 Months Ended

Mar. 31, 2019

Note 2—Business Combinations

Merger with FNB Bancorp

On July 6, 2018, the Company completed the acquisition of FNB Bancorp (“FNBB”) for an aggregate transaction value of $291,132,000. FNBB was merged into the Company, and the Company issued 7,405,277 shares of common stock to the former shareholders of FNBB. FNBB’s subsidiary, First National Bank of Northern California, merged into the Bank on the same day. The Company also paid $6.7 million to settle and retire all FNBB stock options outstanding as of the acquisition date. Upon the consummation of the merger, the Company added 12 branches within San Mateo, San Francisco, and Santa Clara counties.

In accordance with accounting for business combinations, the Company recorded $156,661,000 of goodwill and $27,605,000 of core deposit intangibles on the acquisition date. The core deposit intangibles will be amortized over the weighted average remaining life of 6.2 years with no significant residual value. For tax purposes, purchase prices accounting adjustments including goodwill are all non-taxable and /or non-deductible. Acquisition related costs of $476,000 are included in the consolidated statements of income for the three months ended March 31, 2018. There have been no acquisition costs incurred during the three months ended March 31, 2019.

The acquisition was consistent with the Company’s strategy to expand into the Bay Area market. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded region. Goodwill arising from the acquisition consisted largely of the estimated cost savings resulting from the combined operations.

The following table summarizes the consideration paid for FNBB and the amounts of assets acquired and liabilities assumed that were recorded at the acquisition date (in thousands).

	FNB Bancorp
	July 6, 2018
Fair value of consideration transferred:
Fair value of shares issued	$	284,437
Cash consideration		6,695
Total fair value of consideration transferred		291,132
Assets acquired:
Cash and cash equivalents		37,308
Securities available for sale		335,667
Restricted equity securities		7,723
Loans		834,683
Premises and equipment		30,522
Cash value of life insurance		16,817
Core deposit intangible		27,605
Other assets		16,214
Total assets acquired		1,306,539
Liabilities assumed:
Deposits		991,935
Other liabilities		15,133
Short-term borrowings—Federal Home Loan Bank		165,000
Total liabilities assumed		1,172,068
Total net assets acquired		134,471
Goodwill recognized	$	156,661

A summary of the estimated fair value adjustments resulting in the goodwill recorded in the FNB Bancorp acquisition are presented below (in thousands):

	FNB Bancorp
	July 6, 2018
Value of stock consideration paid to FNB Bancorp Shareholders	$	284,437
Cash consideration		6,695
Less:
Cost basis net assets acquired		114,030
Fair value adjustments:
Investments		(1,081	)
Loans		(22,390	)
Premises and Equipment		21,590
Core deposit intangible		27,327
Deferred income taxes		(6,394	)
Other		1,389
Goodwill	$	156,661

The fair value of net assets acquired includes fair value adjustments to certain loans that were not considered impaired (PNCI loans) as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. As such, these loans were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans (PCI loans), which have shown evidence of credit deterioration since origination. The gross contractual amounts receivable and fair value for PNCI loans as of the acquisition date was $866,189,000 and $833,381,000, respectively. The gross contractual amounts receivable and fair value for PCI loans as of the acquisition date was $1,683,000 and $1,302,000, respectively. At the acquisition date, the Company was unable to estimate the expected contractual cash flows to be collected from the purchased credit impaired loans.