Business Combinations

12 Months Ended

Dec. 31, 2023

Acquisition of Happy Bancshares, Inc.

On April 1, 2022, the Company completed the acquisition of Happy Bancshares, Inc. (“Happy”), and merged Happy State Bank into Centennial Bank. The Company issued approximately 42.4 million shares of its common stock valued at approximately $958.8 million as of April 1, 2022. In addition, the holders of certain Happy stock-based awards received approximately $3.7 million in cash in cancellation of such awards, for a total transaction value of approximately $962.5 million. The acquisition added new markets for expansion and brought complementary businesses together to drive synergies and growth.

Including the effects of the known purchase accounting adjustments, as of the acquisition date, Happy had approximately $6.69 billion in total assets, $3.65 billion in loans and $5.86 billion in customer deposits. Happy formerly operated its banking business from 62 locations in Texas.

The Company has determined that the acquisition of the net assets of Happy constitutes a business combination as defined by ASC Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed are presented at their fair values as required. Fair values were determined based on the requirements of ASC Topic 820, Fair Value Measurements. In many cases, the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature. The following schedule is a breakdown of the assets acquired and liabilities assumed as of the acquisition date:


	Happy Bancshares, Inc.
	Acquired from Happy		Fair Value Adjustments		As Recorded by HBI
	(Dollars in thousands)
Assets
Cash and due from banks	$	112,999	$	(446)	$	112,553
Interest-bearing deposits with other banks	746,031		—		746,031
Cash and cash equivalents	859,030		(446)		858,584
Investment securities - available-for-sale, net of allowance for credit losses	1,773,540		8,485		1,782,025

Total investment securities	1,773,540		8,485		1,782,025
Loans receivable	3,657,009		(4,389)		3,652,620
Allowance for credit losses	(42,224)		25,408		(16,816)
Loans receivable, net	3,614,785		21,019		3,635,804
Bank premises and equipment, net	153,642		(12,270)		141,372
Foreclosed assets held for sale	193		(77)		116
Cash value of life insurance	105,049		3		105,052
Accrued interest receivable	31,575		—		31,575
Deferred tax asset, net	32,908		(1,092)		31,816
Goodwill	130,428		(130,428)		—
Core deposit intangible	10,672		31,591		42,263
Other assets	43,330		15,567		58,897
Total assets acquired	$	6,755,152	$	(67,648)	$	6,687,504
Liabilities
Deposits
Demand and non-interest-bearing	$	1,932,756	$	67	$	1,932,823
Savings and interest-bearing transaction accounts	3,519,652		—		3,519,652
Time deposits	401,899		903		402,802
Total deposits	5,854,307		970		5,855,277

FHLB and other borrowed funds	74,212		4,118		78,330
Accrued interest payable and other liabilities	50,889		(1,892)		48,997
Subordinated debentures	159,965		7,625		167,590
Total liabilities assumed	6,139,373		10,821		6,150,194
Equity
Total equity assumed	615,779		(615,779)		—
Total liabilities and equity assumed	$	6,755,152	$	(604,958)	$	6,150,194
Net assets acquired					537,310
Purchase price					962,538
Goodwill					$	425,228

The following is a description of the methods used to determine the fair values of significant assets and liabilities presented above:

Cash and due from banks, interest-bearing deposits with other banks and federal funds sold – The carrying amount of these assets was deemed a reasonable estimate of fair value based on the short-term nature of these assets.

Investment securities – Investment securities were acquired from Happy with an approximately $8.5 million adjustment to fair value based upon quoted market prices. Otherwise the book value was deemed to approximate fair value.

Loans – Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan, whether or not the loan was amortizing and current discount rates. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns. The discount rate does not include a factor for credit losses as that has been included in the estimated cash flows. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. See Note 5 to the Condensed Notes to Consolidated Financial Statements, for additional information related to purchased financial assets with credit deterioration.

Bank premises and equipment – Bank premises and equipment were acquired from Happy with a $12.3 million adjustment to fair value. This represents the difference between current appraisals completed in connection with the acquisition and book value acquired.

Foreclosed assets held for sale – These assets are presented at the estimated fair values that management expects to receive when the properties are sold, net of related costs of disposal.

Cash value of life insurance – Bank owned life insurance is carried at its current cash surrender value, which is the most reasonable estimate of fair value.

Accrued interest receivable – The carrying amount of these assets was deemed a reasonable estimate of the fair value.

Core deposit intangible – This core deposit intangible asset represents the value of the relationships that Happy had with its deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base, and the net maintenance cost attributable to customer deposits.

Deposits – The fair values used for the demand and savings deposits that comprise the transaction accounts acquired, by definition, equal the amount payable on demand at the acquisition date. The $903,000 fair value adjustment applied for time deposits was because the weighted-average interest rate of Happy’s certificates of deposits were estimated to be above the current market rates.

FHLB borrowed funds – The fair value of FHLB borrowed funds is estimated based on borrowing rates currently available to the Company for borrowings with similar terms and maturities.

Accrued interest payable and other liabilities – The fair value adjustment results from certain liabilities whose value was estimated to be more or less than book value, such as certain accounts payable and other miscellaneous liabilities. The carrying amount of accrued interest and the remainder of other liabilities was deemed to be a reasonable estimate of fair value.

Subordinated debentures – The fair value of subordinated debentures is estimated based on borrowing rates currently available to the Company for borrowings with similar terms and maturities.

The unaudited pro-forma combined consolidated financial information presents how the combined financial information of HBI and Happy might have appeared had the businesses actually been combined. The following schedule represents the unaudited pro forma combined financial information as of the years ended December 31, 2022 and 2021, assuming the acquisition was completed as of January 1, 2022 and 2021, respectively:


	December 31,
	2022		2021
	(In thousands, except per share data)
Total interest income	$	935,168	$	839,407
Total non-interest income	188,012		190,550
Net income available to all shareholders	406,949		317,190

Basic earnings per common share	$	1.98	$	1.53
Diluted earnings per common share	1.98		1.53

The unaudited pro-forma consolidated financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined at the beginning of the period presented and had the impact of possible significant revenue enhancements and expense efficiencies from in-market cost savings, among other factors, been considered and, accordingly, does not attempt to predict or suggest future results. Pro-forma results include Happy merger expenses of $49.6 million, provision for credit losses on acquired loans of $45.2 million, provision for credit losses on acquired unfunded commitments of $11.4 million and provision for credit losses on acquired investment securities of $2.0 million for the years ended December 31, 2022 and 2021, respectively. The pro-forma financial information also does not necessarily reflect what the historical results of the combined company would have been had the companies been combined during this period.

Purchased loans that reflect a more-than-insignificant deterioration of credit from origination are considered PCD. For PCD loans, the initial estimate of expected credit losses is recognized in the allowance for credit losses on the date of acquisition using the same methodology as other loans held-for-investment. The following table provides a summary of loans purchased as part of the Happy acquisition with credit deterioration at acquisition:


	April 1, 2022
	(In thousands)
Purchased Loans with Credit Deterioration:
Par value	$	165,028
Allowance for credit losses at acquisition	(16,816)
Premium on acquired loans	684
Purchase price	$	148,896