ACQUISITION

12 Months Ended

Dec. 31, 2019

ACQUISITION

On November 30, 2017, we acquired 100% of the outstanding stock of Diboll State Bancshares, Inc. and its wholly-owned subsidiary First Bank & Trust East Texas (collectively, “Diboll”) headquartered in Diboll, Texas. The total purchase price included the issuance of 5.5 million shares of our common stock and $23.9 million in cash for all outstanding shares of Diboll State Bancshares, Inc. The total merger consideration for the Diboll merger was $224.3 million. The operations of Diboll were merged into the Company as of the date of the acquisition.

The Diboll acquisition was accounted for using the acquisition method of accounting and accordingly, purchased assets, including identifiable intangible assets and assumed liabilities were recorded at their respective acquisition date fair values. The purchase price allocation as reported at December 31, 2017 was preliminary and was subject to final determination and valuation of the fair value of assets acquired and liabilities assumed. As of December 31, 2018, the fair value of assets acquired, adjusted for subsequent measurement period adjustments, excluding goodwill, totaled $1.03 billion, including total loans of $621.3 million and total investment securities of $234.4 million and the total fair value of the liabilities assumed totaled $910.7 million, including deposits of $899.3 million.

Goodwill represents consideration transferred in excess of the fair value of the net assets acquired. In 2017, the Company recognized initial goodwill of $109.7 million. As of December 31, 2018, total goodwill related to the Diboll acquisition was $109.6 million, after recording, within the measurement period, an immaterial adjustment to goodwill based on the filing of the short-period U.S. federal income tax return for Diboll. Goodwill is not expected to be deductible for tax purposes.

The following table reflects the changes in the carrying amount of our goodwill for the years ended December 31, 2019 and 2018. (in thousands):



	For the Year Ended December 31,
	2019		2018
Beginning balance	$	201,116	$	201,246
Less: measurement period adjustments	—		(130		)
Ending balance	$	201,116	$	201,116

We recognized a core deposit intangible of $14.7 million and a trust relationship intangible of $5.4 million which are amortized using an accelerated method over a 9- and 13-year weighted average amortization period, respectively, consistent with expected future cash flows.

The Company incurred pre-tax acquisition related expenses for the years ended December 31, 2018 and 2017 of approximately$2.4 million and $4.4 million, respectively. For the year ended December 31, 2018, the Diboll related acquisition expense consisted primarily of change in control payment accruals, severance payments and professional fees. For the year ended December 31, 2017, the acquisition expense consisted primarily of professional fees and software expenses due to canceling of contracts. These expenses were recognized in the consolidated statements of income in acquisition expense. There were no additional acquisition related expenses incurred during 2019.

We incurred costs of $277,000 directly related to the issuance of the shares related to the acquisition which were offset against paid-in-capital in the consolidated statements of changes in shareholders’ equity. We also recorded non-solicitation agreements for $240,000 that are amortized using the straight-line method over three years in connection with the acquisition.

Loans acquired with Diboll were measured at fair value at the acquisition date with no carryover of any allowance for loan losses. Loans were segregated into those loans considered to be performing and those considered purchased credit impaired (“PCI”). PCI loans are loans acquired with evidence of deteriorated credit quality for which it was probable, at acquisition, that all contractually required cash flows would not be collected.

The table below details the PCI loan portfolio at the Diboll acquisition date (in thousands):



	Purchased Credit Impaired Loans at Acquisition Date
Contractually required principal and interest payments	$	59,286
Nonaccretable difference	4,560
Cash flows expected to be collected	54,726
Accretable difference	15,389
Fair value of loans acquired with a deterioration of credit quality	$	39,337

Acquired loans that were considered performing at the Diboll acquisition date and therefore not subject to ASC 310-30 are shown below (in thousands):



	Fair Value at Acquisition Date		Contractual Amounts Receivable		Cash Flows Not Expected to be Collected at Acquisition Date ⁽¹⁾
Real estate loans:
Construction	$	40,122	$	56,905	$	330
1-4 family residential	82,654		130,167		26,894
Commercial	319,623		484,529		97,431
Commercial loans	82,083		87,688		1,226
Municipal loans	7,848		9,998		28
Loans to individuals	49,651		54,687		1,490
Total loans	$	581,981	$	823,974	$	127,399

(1)

Cash flows not expected to be collected relate to estimated credit losses and expected prepayments.