Assignment 3 – M&A in Banks

Hope Bank Transaction: Parties Involved, Consideration and Structure

When two firms merge, as mentioned there needs to be an acquirer and acquiree firm stated. The
Acquirer firm is the company that is usually purchasing another company and the acquiree is the target
company that is being acquired, in most cases it is the larger company which is the acquirer and the
smaller being the acquiree. In this case BBCN was the acquiring firm as overall it was the larger
company, with assets of $7.6bn, when compared to Wiltshire, with assets of $4.7bn.

A reverse transaction is when a private company acquires a listed public company and in doing so
becomes a public traded entity itself. For a transaction to be considered a reverse acquisition the
company whose equity interests are being acquired needs to be the acquirer for accounting purposes.
In this case both companies were listed, and the transaction would not be considered as a reverse
merger.

The consideration for the deal is 100% stock and is based on 1 share of Wilshire being converted to
0.7034 shares of BBCN as the acquirer. Since it is a stock transaction, the value of the consideration
fluctuations with the stock prices of both acquirer and target as they converge on the transaction’s
market value.

31-Dec-15 31-Mar-16 29-Jul-16

Wilshire
Share Outstanding 78,643,353 78,857,248 78,893,554
Spot Price 11.55 10.30 10.74

BBCN
Share Outstanding 79,566,356 79,597,106 79,606,821
Spot Price 17.22 15.19 15.37

Exchange ratio 0.7034 0.7034 0.7034

New shares issued 55,317,735 55,468,188 55,493,726

Consolidated using BBCN Price 952,571,388 842,561,779 852,938,567

Consolidated using Wilshire Price 908,330,727 812,229,654 847,316,770

The completed transaction would result in combined new entity called the Bank of Hope. Because the
deal was a 100% stock for stock deal there was no tax to pay for the transfer and no step up in the fair
value of the acquired assets. The outstanding shares of BBCN at end of July 2016 was 79,606,821 and
the shares for Wiltshire was 78,893,554. Wiltshire shareholders received 55,493,725 shares of the
surviving company, bringing the total number of shares to 135,100,546 for the combined entity, with
41% held by the former Wilshire shareholders and the remaining 58.9% being held by the former BBCN
shareholders.

Page 1 of 5
Bank of Hope had 16 board members at completion, 9 designated by BBCN with 56.25% deciding
power and 7 from Wiltshire with 43.75% deciding power.

Goodwill

Goodwill = Consideration + Fair value of previously held holdings (step acquisition) + NCI (either way)
- Fair Value of Net Assets Acquired

Consideration $852,938,567
Fair value of previously held holdings (not applicable) -
NCI (not applicable) -
Fair value of net assts acquired 498,715,000
Goodwill $354,223,567

Our calculation of goodwill is $354.2m. Our calculation is based on the below assumption:

a) As BBCN is the acquiring entity, we assume consideration will be based on the share price of
BBCN on day of merger (i.e., 29th July 2016),
b) We assume BBCN has no previous holding of Wilshire shares,
c) The acquisition is for 100% of Wilshire.

Outline of Adjustments

The purchase method requires all assets and liabilities of the target company be measured at fair
market value when consolidating into the balance sheet of the acquirer.

The balance sheet of Wilshire will be updated to include the $18.1m new intangibles, fair value
adjustments and deferred tax adjustments prior to consolidating into the balance sheet of Bank of
Hope. The US GAAP for business acquisition states transaction cost should be expensed immediately,
therefore the $45m transaction cost will be recognised in the income statement of Bank of Hope
immediately after the merger takes place on 29th July 2016.

Projections and Pro Forma Balance Sheet

Outlined in the below table is the calculation for an acquisition of 66% of Wilshire based on the BBCN
stock price. The full method calculates non-controlling interests and goodwill including the goodwill
owned by the non-controlling interest. Both goodwill and non-controlling interest balances are higher
in this method compared to the partial method. The partial method only includes goodwill owned by
the acquirer. The formulas used include:

/)01-*&23'-)0
!"## %&'ℎ)* +))*,-## = − !8 9&' :11&'1 ;*&0'-<-&*
% 5"26ℎ31&*

Page 2 of 5
!"## %&'ℎ)* 9)0 6)0'2)##-0= -0'&2&1'1 = (1 − % 5"26ℎ31&*)(!8 9&' :11&'1 ;*&0'-<-&* + +))*,-##)

B32'-3# %&'ℎ)* +))*,-## = /)01-*&23'-)0 − !8 9&' :11&'1 ;*&0'-<-&* ∗ % 5"26ℎ31&*

B32'-3# %&'ℎ)* 9)0 6)0'2)##-0= -0'&2&1'1 = (1 − % 5"26ℎ31&*)(!8 9&' :11&'1 ;*&0'-<-&*)

Acquire 66% of Wilshire

DR CR
Book Value of Net Assets 560,614
FV Adjustments 9,404
Other Adjustments 0 52,495
FV of Net Assets Identified 498,715
Full Method:
FV of Net Assets Identified 498,715
66% of stock value (BBCN) 562,939
Full method NCI 289,999
Full method Goodwill 354,224 0
852,939 852,939
Partial Method:
FV of Net Assets Identified 498,715
66% of stock value (BBCN) 562,939
Partial method NCI 169,563
Partial method Goodwill 233,788 0
732,503 732,503

As of 30 June 2016, the pro forma Hope Bank’s balance sheet is laid out below using the BBCN stock
price to calculate the consideration. The following two pages outline the starting combined
company’s balance sheet plus fair value adjustments, other adjustments, goodwill, eliminations and
the stock issuance related to the consideration of the merger. The accounts used are based on BBCN
as the acquirer’s account titles. Fair value adjustments bring net assets to fair value where they
were not already held at fair value and new assets identified; other adjustments include transactions
at the time of the merger; goodwill is the difference between net assets identified and the
consideration; eliminations in this case only included the equity accounts of the target; and the stock
issuance relates to the stock consideration of the merger.

Page 3 of 5
 Hope Bank
Balances as of 30 June 2016 BBCN Wilshire Combined FV Adj. Other Adj. Goodwill Eliminations Stock Issues pro forma
Assets
Cash 96,814 301,239 398,053 (201,112) 196,941
Investments 189,359 490,592 679,951 (11,636) (18) 668,297
Other investments 44,465 44,465 44,465
Available for sale, at fair value 1,099,944 1,099,944 1,099,944
Loans held for sale 14,323 24,154 38,477 (24,154) 14,323
Loans receivable, net 6,507,812 3,798,746 10,306,558 2,061 10,308,619
Real Estate 16,392 10,844 27,236 4,022 31,258
Federal Home Loan Bank stock 18,964 16,539 35,503 35,503
Premises & equipment 37,663 15,077 52,740 1,735 54,475
Accrued interest received 15,787 8,882 24,669 (8,882) 15,787
Deferred tax assets 51,494 17,803 69,297 (345) 68,952
Customer liabilities on acceptances 1,854 8,900 10,754 (8,900) 1,854
Bank owned life insurance 47,562 25,317 72,879 (77) 72,802
Affordable housing partnerships 24,029 45,627 69,656 1,484 71,140
Servicing assets 0 0 0 (3,016) 19,219 16,203
Goodwill 105,401 67,473 172,874 (67,473) 354,224 459,625
Intangible assets 2,395 2,395 18,138 20,533
Other assets 62,568 55,592 118,160 (1,509) 22,735 139,386
Total Assets 8,336,826 4,886,785 13,223,611 (7,281) (250,447) 354,224 0 0 13,320,107

Page 4 of 5
Liability
Total deposits 6,637,522 4,010,319 10,647,841 (197,952) 10,449,889
FHLB advances 610,398 200,000 810,398 6,282 816,680
Subordinated debentures 42,415 72,139 114,554 (15,197) 99,357
Accrued interest payables 7,164 2,417 9,581 9,581
Acceptances outstanding 1,854 8,900 10,754 10,754
Other liabilities 65,733 32,396 98,129 11,038 0 0 109,167
Total liabilities 7,365,086 4,326,171 11,691,257 2,123 (197,952) 0 0 0 11,495,428

Equity
Common stock 80 234,917 234,997 (234,917) 55 135
Additional paid-in capital 541,688 541,688 852,883 1,394,571
Retained earnings 418,998 317,393 736,391 (317,393) 418,998
Accumulated OCI 10,974 8,304 19,278 0 0 (8,304) 0 10,974
Total shareholder's equity 971,740 560,614 1,532,354 0 0 0 (560,614) 852,939 1,824,679
Total liabilities and equity 8,336,826 4,886,785 13,223,611 2,123 (197,952) 0 (560,614) 852,939 13,320,107
Balance check 0 0 0 0

Page 5 of 5