2019 Banking Symposium - Briggs & Veselka Co. · 4 Spirit of Texas Bancshares, Inc. First Beeville Financial Corporation Beeville 11/27/18 49 63.7 1.85 1.89 13.8 8.9 412 8.4 1.27

2019 Banking Symposium

March 19, 2019

Maggiano’s Little Italy

Welcome

Regulatory Update

M&A in 2019

Break

A&A Update: CECL, Tax Update & Lease Accounting

Lunch: Economic Outlook

Hot Topics Hot Seat

Bank Compensation

M&A War Stories

Agenda

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Regulatory Update

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Bobby DavenportTexas Department of Banking

Marvin DaggFederal Reserve Bank of Dallas

Moderator: David MunnBriggs & Veselka Co.

TEXAS BANKING M&A2019 UPDATE

Presentation by:

Chet A. Fenimore

March 2019

5

2019 Outlook

• The “Risk of Complacency” is significant for smaller community banks. The market place is changing rapidly and community banks must stay current with technology and continually update strategic plans to remain relevant.

• While the “Regulatory War” on banks is over for now – a return to the pre-Dodd-Frank regulatory world is not likely. Hot button regulatory issues will continue to surface and banks need to continue to be vigilant about regulatory compliance and address examination related MRAs.

• The future of banking looks faster, more digital and more quantitative.

• Margin improvement is likely over. The “battle for bank deposits” has increased and is likely to continue as new competitors focus on deposit generation through digital channels.

6

2019 Outlook (cont.)

• Credit tailwinds will likely continue, but will come to an end at some point. Banks can’t be complacent about credit quality and the impact of CECL implementation.

• Expectations around “corporate and risk governance” for bank boards has never been higher from the regulators and bank investors.

• Cybersecurity risks remains elevated as a result of an ever increasing complex operating environment as rising threats continue to proliferate.

• Community banks continue to reduce branches and reallocate savings into digital delivery channels.

• Boards and management teams should start thinking about “downside scenario planning”.

7

M&A Themes and Trends

• 2018 proved to be a “dynamic” market with 10 year peak in pricing multiples – Question whether we have reached peaked pricing in this economic cycle

• Cash buyers continue to be disadvantaged compared to public buyer – However, the gap may be closing as a result of recent downturn in publicly trades bank stock prices

• Buyers are looking and paying up for “low cost” deposit rich franchises as funding becomes more challenging

• Bigger deals are more common as Senate Bill 2155 raised the $50 billion dollar SIFI threshold to $250 billion

• Scarcity of targets in larger metropolitan markets in Texas

• Scarcity of buyers for smaller rural franchises

• More “efficient” regulatory approval process helped reduce closing time for bank M&A transactions

• CRA protests continued but appears to be a newfound willingness by regulators to dismiss non-substantive protests; However, CRA compliance and redlining are still focal points in the regulatory review process

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M&A Volume and Pricing Trends

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Nationwide M&A Transactions

Source: SNL Financial

Number of Transactions Announced Aggregate Deal Value ($M)

Price / Tangible Book Value (x) Price / LTM Earnings (x)

226

284 276

238254 258

2013 2014 2015 2016 2017 2018

14,394

19,067

24,50926,800 26,439

29,508

2013 2014 2015 2016 2017 2018

1.22x

1.33x 1.37x1.31x

1.60x

1.70x

2013 2014 2015 2016 2017 2018

18.7x

21.6x22.7x

20.3x

21.9x

24.4x

2013 2014 2015 2016 2017 2018

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Texas M&A Transactions


Number of Transactions Announced Aggregate Deal Value ($M)

Price / Tangible Book Value (x) Price / LTM Earnings (x)

Texas

Nationwide

226 284 276 238 254 258

Nationwide

$14,394 $19,067 $24,509 $26,800 $26,439 $29,508

Nationwide

27 27

2017

1922

2013 2014 2015 2016 2017 2018

1,718

1,049

467

981

1,298

1,802

2013 2014 2015 2016 2017 2018

1.33x1.67x 1.68x 1.67x

1.99x 1.85x

1.22x 1.33x 1.37x 1.31x

1.60x 1.70x

2013 2014 2015 2016 2017 2018

17.8x21.5x 18.4x

20.3x18.6x

20.8x18.7x

21.6x 22.7x20.3x

21.9x24.4x

2013 2014 2015 2016 2017 2018

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2018 Texas Bank & Thrift M&A Transactions


Transaction Pricing Seller Financial Data

Price/ Price/ Price/ Core

Deal Tang. Adj. Tang. LTM Deposit Total TCE/ NPAs/

Annc. % Stock Value Book Book (8%) EPS Prem. Assets TA ROAA ROAE Assets

# Acquiror Seller City Date Consid. ($M) (x) (x) (x) (%) ($M) (%) (%) (%) (%)

Bank & Thrift Transactions

1 Relationship Bancshares, Inc. Capital Bank of Texas Carrizo Springs 12/22/18 - - - - - - 68 13.4 0.98 7.1 -

2 Bright Force Holding, LLC ABNA Holdings, Inc. Dallas 12/14/18 - - - - - - 55 9.3 0.55 6.1 0.1

3 Alliance Bancshares, Inc. Mount Vernon Bankshares, Inc. Mount Vernon 11/29/18 - - - - - - 189 11.4 0.93 8.9 0.1

4 Spirit of Texas Bancshares, Inc. First Beeville Financial Corporation Beeville 11/27/18 49 63.7 1.85 1.89 13.8 8.9 412 8.4 1.27 14.7 0.3

5 First Bancshares of Texas, Inc. Fidelity Bank Wichita Falls 11/14/18 - - - - - - 517 11.1 1.72 15.2 0.4

6 BancorpSouth Bank Casey Bancorp, Inc. Dallas 11/13/18 77 47.7 1.74 1.72 12.5 6.8 353 7.8 1.01 12.4 0.5

7 Amarillo National Bancorp, Inc. Commerce National Financial Serv ices, Inc. Lubbock 11/5/18 - - - - - - 1,058 8.1 0.49 6.3 0.1

8 Investar Holding Corporation Mainland Bank Texas City 10/10/18 100 19.7 1.55 1.67 13.1 6.5 131 9.7 0.85 8.8 1.4

9 Adam Bank Group, Inc. Andrews Holding Company Andrews 10/4/18 - - - - - - 639 10.8 1.68 14.5 2.6

10 Dominion Bancshares, Inc. Grapeland State Bank Grapeland 8/13/18 - - - - - - 36 6.1 0.49 4.2 0.6

11 Steele Holdings, Inc. Joaquin Bankshares, Inc. Huntington 7/31/18 - - - - - - 131 8.4 0.55 6.0 1.7

12 Veritex Holdings, Inc. Green Bancorp, Inc. Houston 7/24/18 100 1,000.0 2.50 2.74 25.1 NA 4,392 9.3 0.95 8.6 1.3

13 Spirit of Texas Bancshares, Inc. Comanche National Corporation Comanche 7/19/18 78 55.9 1.58 1.74 18.8 9.1 348 10.3 0.97 8.3 0.4

14 Keystone Acquisitions Inc. Ballinger National Bank Ballinger 7/13/18 - - - - - - 42 9.1 0.66 6.7 0.8

15 Vantage Bancorp Inc. Inter National Bank McAllen 7/9/18 - - - - - - 1,379 14.5 1.57 10.7 0.5

16 Rio Financial Serv ices, Inc. Elsa State Bank and Trust Company Elsa 5/17/18 - - - - - - 199 9.7 0.90 8.9 0.2

17 Allegiance Bancshares, Inc. Post Oak Bancshares, Inc. Houston 4/30/18 100 350.4 2.24 2.70 20.8 18.8 1,431 11.0 1.23 11.0 0.7

18 BancorpSouth Bank Icon Capital Corporation Houston 4/18/18 88 145.8 2.18 2.25 21.0 16.0 794 8.5 1.00 10.6 2.5

19 Charis Holdings, Inc. Justin State Bank Justin 2/24/18 - - - - - - 71 11.8 0.75 5.4 1.2

20 Hilltop Holdings Inc. Bank of River Oaks Houston 2/13/18 0 85.0 1.84 2.07 33.0 12.6 454 10.2 0.58 5.5 1.8

21 Guaranty Bancshares, Inc. Westbound Bank Katy 1/29/18 85 34.3 1.92 1.92 21.6 12.3 228 8.0 0.75 6.7 -

22 BOH Holdings, Inc. Dublin National Bank Dublin 1/10/18 - - - - - - 29 12.1 0.44 3.6 -

Median 85 63.7 1.85 1.92 20.8 10.7 288 9.7 0.92 8.4 0.5

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WHAT DRIVES VALUE?

Last 10 Years

Geography

Scale/Size

Credit Quality

EarningVolume of

Earning Assets

Deposit Cost and Mix

Strategic Significance

Going Forward

Franchise

Cost of Funds

Liquidity

Asset Sensitivity

Competitive Advantage

Management/ Staffing

Growth

Scarcity Value

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Getting to the Deal

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Preliminary Negotiations

+ Pre-acquisition planning is imperative

+ “Socialization” of the transaction is important

+ Marketing process and engagement of investment bankers

+ Limited marketing versus auction process

+ Internal confidentiality and deal team considerations

+ How and when to bring our employees “Over-the-Wall”?

+ Non-Disclosure/Confidentiality Agreements

+ Pros and cons of letters of intent and term sheets

+ Focus on key deal terms

+ Binding and non-binding provisions

+ Well-defined communication and public relations plan

+ Protecting key employees

+ Sellers – Assess need for special negotiating committee

“Good communication is essential to a successful M&A transaction for both buyers and sellers, but safeguarding talent is the key in a successful transaction”

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Due Diligence

+ Virtual data rooms and off-site due diligence

+ Accounting considerations

+ Asset quality

+ Interest rate risk in investment portfolio

+ Be careful about disclosing Confidential Supervisory Information (CSI)

+ Compliance and regulatory matters

+ Social and cultural matters

+ Pending litigation

+ Employee benefit plans

+ Cyber security and data breach risk

+ Material vendor and data processing contracts and termination fees (hidden costs and de-conversion fees)

+ Cost savings vs. business continuity risk of target

+ Subchapter S status

+ Disclosure schedules

+ Reverse due diligence by target

“The fragility of the S election and importance of compliance recordkeeping –particularly with Trust shareholders”

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Regulatory Approvals

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Regulatory Considerations

Applications are subject to heightened regulatory scrutiny+ Preview transaction with regulators in preliminary stages of

negotiations

+ Approval threshold is higher for deals

+ Provide detailed analysis of due diligence findings and conclusions

+ Robust pro forma financial projections (including purchase accounting adjustments and capital projections)

Continued focus on capital adequacy and asset concentrations+ Sources of funding

Address regulatory compliance issues – On both Buyer and Target

Avoid change in control “gun jumping” features in definitive agreements – Pre-Closing Covenants

+ Target board and committee observation rights

+ Low limits on loan approvals

Third-party protests and comments on applications

“Today, there is no such

thing as a routine regulatory

approval. The universe of

things that can trip up a

bank deal is expanding.”

22

Deal Terms Survey and Trends

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Deal Points Overview

Better structured/engineered transactions

Type of consideration+ All cash

+ Publicly-traded stock

+ Non-publicly traded stock

+ Cash and stock mix

Tax treatment+ Stock sale versus asset sale

+ Section 338 structure for Subchapter S targets

Financial provisions+ Purchase price adjustment based on

“Adjusted Shareholders’ Equity”

+ Market risk in investment portfolio

+ Minimum ALLL – fixed amount vs. floating percentage

Representations and warranties – Target+ Survival versus non-survival

+ Specific and detailed compliance with laws

+ R&W Insurance is available

“As the environment has changed, so have the rules of engagement.”

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Deal Points Overview (cont.)

Representations and warranties – Acquirer+ Regulatory condition and prospects for regulatory

approvals

+ Compliance with consumer laws and BSA/AML

Deal protection features+ Revlon duties – No one path or blueprint for target board

to fulfill its Revlon duties

+ Fairness opinions

+ No-shop and standstill agreements

+ Fiduciary duty out provisions

+ Break-up fees

+ Match rights

+ Go-Shop provisions

+ Material adverse change definition

+ Voting agreements and force the vote provisions

+ Reverse termination/break-up fees

Non-Competes and Employment Agreements+ Director support agreements

+ Stay pay and retention bonuses for key executives

“Break-up fees 3% to 5% -

No bright line test but

typically higher for smaller

deals – Courts look at

reasonableness.”

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5

Risk Mitigation Strategies

Asset quality and valuation issues

Other known or unknown contingencies

Common structures

+ Spin-outs

+ Earn-outs

+ Escrows

+ Private loss share agreements

+ Indemnification

+ Disappearing notes

Post-Closing D&O Insurance and Indemnification

+ All “claims made” policies

“Creativity is the key to

bridging the price gap

and risk mitigation/shift

strategies.”

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Sources of Funding

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Shifting Investor Sentiment

Former Catalysts

• Tax Reform

• Accelerating Growth

• Regulatory Recalibration

• Net Interest Margin Improvement

New Concerns

• Peak Profitability

• Deposit Competition

• Late Credit Cycle

• Non-Bank Competition

• Higher Rates and Flat Yield Curve

• Global Recessionary Fears

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Sources of Funding

Common Stock

+ Common Equity Tier 1 Capital (CET1)

+ Private placements

+ Rights offerings

+ Public offerings

Common Stock

Preferred Stock

Debt

Preferred Stock

+ Additional Tier 1

qualifying

+ Convertible

+ Non-dilutive

+ Not available for

subchapter S banks

Debt

+ Subordinated debt

offerings

+ Senior debt

+ Non-dilutive

Other

+ ESOP/KSOP

+ Retained earnings

+ Divestitures

+ Acquisition of over-

capitalized

institutions

“The power of dry powder …Capital is still king.”

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M&A Integration

Post-M&A IntegrationSystem Integration

+ Integrating data systems is a significant undertaking

Brand Integration

+ Brand integration is critical to maintaining, targeting and growing the customer base

Culture Integration

+ Integrating two different banking cultures requires compromise and effort

Investor Outreach

+ Reaching out to investors post announcement to explain the transaction and the go-forward plan is important especially as a public entity

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2

3

4

“PMI is a complex

process of combining and

rearranging businesses to

materialize potential

efficiencies and synergies

that usually motivate

mergers and

acquisitions.”

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1

KEY TIPS FOR A SUCCESSFUL DEAL

8 Steps for a Successful Deal

• Prepare management team

• Prepare your board of directors

• Prepare your significant shareholders

• Prepare your employees

• Prepare your key vendors

• Prepare your regulators

• Prepare your financial resources

• Prepare to walk away

Common Mistakes to Avoid

• No clear rational or “strategic fit”

• Under estimating the distraction of an acquisition

• Under estimating the importance of cultural compatibility

• Not accounting for “acquisition surprises”

• Over estimating cost savings

• Obtaining buy-in and locking up key executives of target bank

• Lack of understanding of purchase accounting rules

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Closing Thoughts and Observations

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2019 BANK M&A OUTLOOK

• Stock market slump has created uncertainty over bank consolidation in 2019. Public stock market volatility may slow down bigger stock transactions

• At the same time, the underlying reasons for bank M&A remain the same, including the need for cheap deposits, operating leverage and scale

• More acquisitions by smaller community banks (under $3 billion in total assets) with greater flexibility to finance deals with debt

• Low costs deposit franchises will continue to be prized targets

• Larger deals in metro markets, driven in part by the lifting of arbitrary regulatory asset thresholds in S. 2155 and the lack of smaller acquisition targets in major urban markets

• Acquisitions of smaller rural banks by investor groups and management teams seeking an alternative to de novo formation that provides a revenue stream from day one

SPEAKER INFORMATION

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Chet Fenimore

Mr. Fenimore is the co-founder and managing partner of one of the premiere

community banking specialty law firms in the United States, Fenimore, Kay,

Harrison & Ford, LLP. He brings more than 30 years of experience as a legal

advisor to financial institutions and as a former federal and state banking

regulator, Mr. Fenimore represents banks, thrifts and other financial

institutions, as well as their investors, directors and executive officers in a full

range of corporate, transactional, securities and regulatory matters

confronting the financial services industry. His extensive experience in the

fields of bank mergers and acquisitions, bank regulatory matters, securities

law and corporate governance provides a solid foundation for his

representation of financial institutions in a broad variety of transactions. Prior

to founding his own law firm, Mr. Fenimore was the Managing Partner of the

Austin office of a large international law firm.

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Disclaimer

This presentation is an educational tool that is general in nature and for purposes of illustration only. The materials in this presentation are not exhaustive, do not constitute legal advice and should not be considered a substitute for consulting with legal counsel. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Certain materials presented in this presentation were developed by other legal or industry publications, or obtained from research reports prepared for other purposes.

A&A Update: Tax Updates, CECL & Lease Accounting

Tax Cuts & Jobs ActUpdates

Michelle Mullen, CPA

Briggs & Veselka, Tax Shareholder

PURPOSE

• The Internal Revenue Code Sec. 1400Z-2 was written to encourage economic growth and investment in designated distressed communities (Qualified Opportunity Zones, “QOZ”) by providing Federal income tax benefits to taxpayers who invest in businesses located within these zones (Reg-115420-18).

LIST-Approximately 8,750 communities throughout all 50 states were designated as QOZ

• https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx (Access to interactive map)

• IRS Notice 2018-48, 2018-28 Internal Revenue Bulletin 9

BASIC STEPS

• Step 1: Qualified taxpayer incurs a capital gain

• Step 2: Taxpayer elects deferral treatment and reinvests the gain into a Qualified Opportunity Fund (QOF)

• Step 3: The QOF invests more than 90% of it’s assets in Qualified Opportunity Zone property (QOZP) which is located within a Qualified Opportunity Zone (QOZ).

Opportunity Zones

39

1. Potential 8 Year Deferral of Capital Gain

Tax on the initial capital gain is deferred until the EARLIER of:

1. The date the interest in the QOF is sold; or

2. December 31, 2026

Tax-basis in QOF investment = zero.

2. Permanent Exclusion of up to 15% of the Deferred Capital Gain

If the QOF investment is held for 5 years, the basis in QOF investment is stepped-up by 10% of the amount of the initially deferred gain.

If the QOF investment is held for 7 years, the basis in the QOF investment is stepped-up by an additional 5% of the amount of the initially deferred gain.

Remember, gain recognition on the deferred gain occurs on December 31, 2026 at the latest. Must be invested by 12/31/19 to enjoy maximum benefits. Timing is Everything!

3. Permanent Exclusion of 100% of the Gain to be Recognized from the Qualified Investment

If the QOF investment is held for 10 years, at the time of sale, the basis of the QOF investment receives the elective step-up to fair market value – no gain on sale.

The ability to receive the 100% step-up to FMV expires at Dec. 31, 2047

Tax Benefits Explained

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• Tax Cut & Jobs Act Amended Code §274 (for-profit) & §512 (non-profit) Provides that no deduction is allowed for the expense of any qualified transportation fringe benefit (QTF) as

provided by the taxpayers to their employees. QTFs are defined as transportation in a commuter highway vehicle, any transit pass, and qualified parking.

• Qualified Parking is parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work.

• QTF can be excluded from employee gross income up to $260/mo. for 2018.

• What counts as employee parking expense? Based on Employer Cost; not the FMV of the benefit to employee

• Excludes Depreciation

Amounts paid for items outside of the parking facility

• Includes Rent or lease payments

Insurance

Property Taxes

Utilities

Repairs & Maintenance, cleaning, removal of snow/leaves/trash

Parking lot attendant/security expenses.

Parking Fringe Benefits

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IRS Safe Harbor (Notice 2018-99) for Calculating Cost of Employer paid Qualified Parking

Step 1: Calculate Non-deductible cost for reserved employee spots

Note: until 3/31/19, employers can eliminate these retroactive to 1/1/18

Step 2: Determine primary use of remaining spots

If more than 50% available to public, don’t include those costs in

If less than 50% available to public, go to Step 3

Step 3: Calculate any reserved nonemployee spots

Determine % of such spots in relation to the remaining total # of spots

Step 4: Determine remaining use and allocable expenses

Allocate expenses based on reasonable determination of employee usage of parking during typical business day

Parking-Safe Harbor Computation

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New Meals & Entertainment Summary

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DescriptionNon-

Deductible50%

Deductible80%

Deductible100%

Deductible

Meals with client X

Meals with coworkers X

Office Meals X

Employer-Provided Snacks and Other Food Products X

Subject to Department of Transportation (DOT) "hours limits" X

Meals while traveling X

Celebratory meals: X

Holiday Parties X

Birthday and Anniversary Celebrations X

Company Picnics X

Entertainment: X

Sporting events, country clubs, golf and athletic clubs X

Hunting, fishing, vacation, similar trips X

Membership dues/fees X

Sponsorship events

FMV of Entertainment (green fees) X

FMV of Meals (lunch/drinks) X

Remainder Sponsorship (hole sponsorship) X

Michelle Mullen

[email protected]

713.366.8560

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mailto:[email protected]

CECL Update

Dan St.Clair, CPA

Briggs & Veselka, Audit Director

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ASU 2016-13 – Financial Instruments –Credit Losses (Topic 326)

•Measurement of Credit Losses on Financial Instruments

•Current Expected Credit Loss (CECL)

47

ASU 2016-13 Summary

• Effective dates:

• For Public entities (SEC filers) beginning after December 15, 2019, including interim periods

• For other public business entities (PBE) beginning after December 15, 2020, including interim periods

• For all other entities beginning after December 15, 2020 and interim periods within fiscal periods beginning after December 15, 2021

• Early adoption permitted after December 15, 2018

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Current generally accepted accounting principles (GAAP) require an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. Both financial institutions and users of their financial statements expressed concern that current GAAP restricts the ability to record credit losses that are expected, but do not yet meet the “probable” threshold.

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• To achieve this objective, the amendments in this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

50

ASU 2016-13 Summary

•Moves away from an Incurred Loss approach and to an Expected Loss approach.

•OLD: Incurred loss approach required booking potential losses when they became “probable”.

•NEW: Expected loss (CECL) requires booking the full amount of all projected losses over the life of the financial asset up front upon origination.

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ASU 2016-13 Summary

Overall Premise:

CECL matches what most smaller community banks are currently doing for ALLL better than the old guidance.

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• The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances.

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ASU 2016-13 Summary

Key components –

Common Risk Characteristics

54

ASU 2016-13 Summary

Key differences –

Forward looking aspect

Budgets

Projections

55

ASU 2016-13 Summary

Biggest addition –

Supportable Documentation

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Questions?

Conclusion

Dan St.Clair

[email protected]

713.353.1974


Accounting UpdateLease Accounting Changes & Financial Covenant Impacts

Kevin Stewart, CPA

Briggs & Veselka, Audit Senior Manager

With You Today

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Kevin Stewart, CPAB&V Senior Manager

• 18 years experience

• 9 years industry & 9 years public accounting

• Technical Accounting, Project Management,

Process Improvement

• Lease Accounting Standard Overview

Financial Statement Impact

Risk of Embedded Leases

Practical Expedients

Loan / Debt Covenant Impacts

Disclosure impacts› Pre-adoption

› Post-adoption

Example

Agenda

59

• FASB initiated a joint project with the IASB in 2006. Finalized in February 2016

• ASC 2016-2 (Topic 842) changes the rules related to accounting for leases Improves transparency & comparability

Recognizes leases as an asset and liability on the BalanceSheet

More information in financial statement disclosures

Lease Accounting Overview

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Excluded Leases

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Intangible assets

Exploration for non-regenerative natural resources

Biological assets

Inventory

Assets under construction

• Public companies – Annual periods after 12/15/18. Calendar periods after 1/1/19

•Other entities – Annual periods after 12/15/19. Calendar periods after 1/1/20

Overview

62

OthersPublic

• Accounting for Leases

Lessor – Sales-type, Direct Financing or Operating (relatively unchanged)

Lessee – Operating or Finance› 75% of useful life and 90% of asset FV test replaced with

“major part” and “substantially all”

› Term capital lease changed to financing lease

› Revised criteria established

Overview

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Operating or Finance Lease?

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Asset is so specialized it is

expected to have no

alternative use to the lessor

Present value of lease

payments is substantially all of the assets

fair value

Term is for a major part of the asset’s remaining

economic life

Grants lessee a purchase

option reasonably

certain of being exercised

Transfers ownership of the asset to

lessee

If any of the criteria are met; the lease is a

finance lease

If none of the criteria are met; the lease is an

operating lease

Financial Statement impactAt a glance

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Embedded leases exist if there is an explicit or implicit asset in the contract and the customer controls the use of the asset

Examples include supply contracts, data center agreements and outsourcing agreements:

Risk - Embedded Leases

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O&G drilling contracts may specify the use of equipment or

pipeline

Power purchase agreements may include the use of a specific plant

Call center agreement may

include computers, printers, copiers and

phone systems

• Lease Classification – grandfathered

• Any expired or existing contract containing leases

• Only applies if there are no errors with the population

• No re-evaluation of embedded leases

• Lease classification for any expired or existing lease

• Still need to evaluate service / outsourcing agreements

Practical Expedients

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An artist is a man of action, whether he creates a personality, invents an expedient, or finds the issue of a complicated situation.

Joseph Conrad

• No need to reassess initial direct cost (IDCs)• Combining of lease and non-lease components

• Do not have to perform analysis to determine allocation methodology• Simple PV calculation of fixed payment• Combining of lease and non-lease components

• Short-term leases Not required to capitalize Still required to disclose along with their value

• Cumulative effect adjustment as of adoption No restatement of prior year financials required Apply the new guidance as of the effective date with the impact being

recorded to equity

• Discount rates for Private Companies Private companies can use their risk-free interest rate rather than IBR Reduces complexity, but risk-free rates tend to be higher thus

increasing liability

Practical Expedients (cont’d)

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“Operating lease” liabilities could be considered debt for purposes of the calculation and would impact leverage ratios, such as:

Debt-equity Debt service coverage Basic fixed-charge coverage Current ratio

Ratios are weakened due to increase in defined debt.

Covenant Ratios Debt Based Ratio Impact

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Covenant ratios driven by asset values could see significant impact as well.

Return on assets = Net Income / Total Assets

Return on Capital Employed Return = EBIT / (Assets – Current Liabilities)

Asset Turnover = Sales / Average Total Assets

Newly recorded “right of use” assets will increase total assets which will in turn dilute or decrease these ratios.

Asset Ratios - dilution

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Pro-actively engage clients

Re-evaluate the impacted covenants

Negotiate updates

Consider adding language excluding the impact of the accounting change such as follows:

“covenant calculations will not change based on accounting standard changes driven by governing bodies” or

“right of use assets and associated liabilities are excluded from the definition of “assets” and “debt””

Covenant / Debt Amendment

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Case Study: Lease Presentation

Company A leases two helicopters from Company B for $35,000 a month• 7 year lease• Company B uses the helicopters for other clients, but ensures Company A

that a helicopter will be available with 24 hour notice• Company A houses the helicopters on their premises• The pilots are provided by company B, however, company A can use their

own pilots at will• Company B provides maintenance • The helicopters were 3 years old when the lease was initiated

Should the helicopters be presented on Company A’s balance sheet?

Other challenging presentation decisions?

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Key Takeaways

• The existence of an substantive substitution rights may result in the determination that a specific asset has not been identified.

• Substantive only if both conditions are met – Supplier has practical ability to substitute alternative assets

throughout the period of use Supplier will benefit economically from the exercise of its right to

substitute the asset

Questions?

Kevin [email protected]

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2019 Banking Symposium

March 19, 2019

Maggiano’s Little Italy

Houston Economic OutlookPrepared by Josh Pherigo

Manager, Research

12-Month Running Totals

-20

0

20

40

60

80

100

120

140

'14 Apr Jul Oct '15 Apr Jul Oct '16 Apr Jul Oct '17 Apr Jul Oct '18 Apr July Oct '19

Job

s (

00

0s)

Source: Texas Workforce Commission

Payroll Employment

77

30

35

40

45

50

55

60

65

70

'08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Source: Institute for Supply Management - Houston

Houston Purchasing Managers Index

78

What’s driving Houston’s Economy?

79

The energy business

is profitable again.

Energy

80

81

Average response = $52.01

Feb 1, 2016, $28.14

Oct 1, 2018, $75.13

$52.01

20

30

40

50

60

70

80

90

100

110

120

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19

$ P

er

Ba

rre

l

Source: U.S Energy Information Administration

WTI Spot Price, Weekly Average

82

Lost Money Earned a Profit

Financial Performance in Q3/16

83

Financial Performance in Q4/18

Lost Money Earned a Profit

84

U.S. Economy

Strongest GDP

growth since

Q3/14.

85

1.5

3.7

3.0

2.0

-1.0

2.9

-0.1

4.7

3.2

1.7

0.50.5

3.6

0.5

3.23.2

-1.0

5.14.9

1.9

3.33.3

1.0

0.4

1.5

2.31.91.81.8

3.02.8

2.32.2

4.2

3.4

'10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Source: U.S. Bureau of Economic Analysis

Growth Rate, % Change from Previous Quarter

U.S. Real Gross Domestic Product

86

Houston exports

at a record high.

Foreign Trade

87

Sep-14, 136.1

Dec-18, 140.5

60

70

80

90

100

110

120

130

140

150

160

Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18

$ B

illio

ns

Source: WISERTrade

12-Month Moving Total

Exports Imports

Houston Customs District Traffic

88

Houston Customs District Traffic

130.5109.2

91.6109.1

140.5

121.9

86.2

69.8

83.0

92.7

0

50

100

150

200

250

300

2014 2015 2016 2017 2018

$ B

illio

ns

Source: WiserTrade

Exports Imports

89

8.9%

17.3%

'03 '17

Source: The Brookings Institution

Exports Share of Houston GDP

Exports and GDP

90

Houston Exports by Product Type

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Source: WiserTrade

All other exports

Industrial Machinery

Organic Chemicals & Plastics

Mineral Fuel

14.7% Machinery 7.2%

29.5% (’12) Everything else 21.5% (’18)

18.6% Petrochemicals 16.9%

37.2% Oil Products 54.4%

91

Corporate Expansions

Companies continue

to move to Houston.

92

Significant Relocations and Expansions

93

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=2ahUKEwj6gvz36f7eAhVLM6wKHZbiDlAQjRx6BAgBEAU&url=https://www.ineos.com/&psig=AOvVaw1uJN7_qh6WbVdWU6jxhdaC&ust=1543760439861593

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=2ahUKEwj6gvz36f7eAhVLM6wKHZbiDlAQjRx6BAgBEAU&url=https://www.ineos.com/&psig=AOvVaw1uJN7_qh6WbVdWU6jxhdaC&ust=1543760439861593

Expansions and Relocations

396

244

223

272

374

0

50

100

150

200

250

300

350

400

450

2014 2015 2016 2017 2018

Source: Greater Houston Partnership Research

Announcements in Houston

94

Houston’s 2019 Economic Outlook

95

Energy

U.S. Expansion

Global Growth

Net Migration

Corporate Expansion

All align in Houston’s favor

96

+ Health Care + Wholesale

+ Construction + Oil and Gas

+ Administrative Support + Real Estate

+ Professional Services + Other Services

+ Manufacturing + Educational Services

+ Restaurants + Finance and Insurance

+ Retail + Arts & Entertainment

+ Government + Hotels

+ Transportation + Information

Employment Forecast for ’19

97

71,000 Jobs


98

59.7

1.3

-1.7-11.6

39.3

91.1

106.9

91.0

21.3

-110.5

50.3

83.1

118.8

90.0

116.7

-2.5 -2.2

62.9

104.4

71.0

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18* '19**

Source: U.S. Bureau Labor Statistics * Though November ‘18 ** Partnership forecast

Houston Job Growth, 000s

99

9.0 8.9

7.67.2

6.36.0

5.65.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Health care Construction Administrative

Support

Professional

Services

Manufacturing Restaurants Retail Government

Source: Greater Houston Partnership Forecast

Jobs Added (000s)


100

2.6 2.41.9 1.8 1.8

1.5 1.41.0

0.70.2

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Source: Greater Houston Partnership Forecast

Jobs Added (000s)


101

What could slow us down?

102

Is a recession

coming?

U.S. Economic Slowdown

103

When will the U.S. enter recession?

9.9%

41.6%

24.8%

10.9%12.8%

2019 2020 2021 Later Than 2021 Don't know

Source: National Association for Business Economics

% of Survey Respondents

104

105

-20

0

20

40

60

80

100

'91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17

Re

sid

en

ts (

00

0s)

Source: U.S. Census Bureau ‘06 data distorted due to Hurricane Katrina evacuees

International Domestic

Houston Region Net In-migration

106

338,650 261,350

Source: Partnership calculations based on U.S. Census Bureau data

Native-Born Foreign-Born

Approx. 600,000 residents joined local workforce (’06 – ’16)

Houston Workforce Growth

107

What could speed us up?

108

109

Venture Capital Deals by U.S. Metro

39

39

48

57

58

68

70

71

76

78

95

95

99

109

123

165

206

215

215

225

254

302

551

573

987

1,962

St. LouisCleveland

Nashville, TNBaltimore

IndianapolisHouston

PittsburghPhoenix

Portland, ORMinneapolis

Raleigh-Durham, NCDallas

Salt Lake City AreaMiami

AtlantaPhiladelphia

Washington D.C.Chicago

Austin, TXSan Diego

Denver AreaSeattle

Los AngelesBoston

New YorkSF Bay Area

Source: Pitchbook data analyzed by National Venture Capital Association, 2017

110

111

Houston PE and VC Investment Activity

Data provided by:

310297

273279

322

0

50

100

150

200

250

300

350

2014 2015 2016 2017 2018

Houston Private Placement Deals (yearly)

112

Houston Investment Activity by Sector

Data provided by:

84

34 34

9 8

15 1418 18

66

42 42

16 14 14 13 12 12

0

10

20

30

40

50

60

70

80

90

Houston Private Placement Deals by Sector – 2014 v. 2018

2014 2018

113

Data provided by:

Health Care

Top Deals in Houston (Jan ’14 – Feb ’19)

114

Data provided by:

Information Technology

Top Deals in Houston (Jan ’14 – Feb ’19)

Houston Economic OutlookPrepared by Josh Pherigo

Manager, Research

[email protected]

Hot Topics Hot Seat

116

Jim CutronaBriggs & Veselka Co.

David MunnBriggs & Veselka Co.

Moderator: Terry SherrillBriggs & Veselka Co.

Attracting QualityDeveloping Loyalty

Embracing Leadership

1255 West 15th Street, Suite 830; Plano, TX 75075 / www.bcc-usa.com

Recruiting, Retaining, and Rewarding

in an Era of Entitlement

Jason Varnell

Senior Consultant

214.551.6025

[email protected]

About Us

Offering compensation programs that are competitive is imperative forattracting, retaining, and rewarding key talent. Bank Compensation Consulting(BCC) specializes in assisting banks with the evaluation of their compensationprograms.

BCC can identify deficiencies in a bank’s current programs and createcustomized plans to fill these gaps. Our team of consultants and servicepersonnel collectively have over 250 years of experience, working with morethan 600 banks in 44 states. We assist our clients with achieving their financialgoals and enhancing shareholder value.

BCC understands the regulatory complexity of designing and administeringcompensation plans. In order to provide “stress free” guidance to our clients,BCC has developed strategic relationships with highly-rated insurance carriersand national accounting and law firms that specialize in nonqualified benefitsand BOLI for banks.

About Us




About Us




About Us




Our Capabilities Include…

Compensation Consulting

Executive & Director Benefits Plans

Succession Planning

Benefit Expense Offset/BOLI

Long-Term Care & Disability Income Planning

Administrative Services

Baby Boomers

Born from the mid 1940s to mid 1960s; post-World War II baby boom

Early years had good economic opportunities; largely optimistic about their potential; received peak levels of income

Later years became less optimistic and had economic struggles; however, Baby Boomers control over 80% of personal financial assets and more than half of all consumer spending

Of the almost 75 million Baby Boomers who have reached retirement age, many are unprepared financially and plan to keep working, at least part time, past the age of 65 to supplement their retirement incomes.

Baby Boomers





Baby Boomers





Generation X (aka: Gen Xers)

Born from the late 1960s to late 1970s

Grew up in a computer-free world; yet are self-reliant, intelligent, quick learners, and consequently savvy in the tech sphere, knowing how to use social media with ease (to reach their Millennial kids)

Relatively smaller demographic (61.5 million) sandwiched between two larger ones of Baby Boomers and Millennials

Although fewer in numbers, they have found their way to positions of power, taking management roles and mentoring younger coworkers; they’re moving mountains but just not always broadcasting it.



Grew up in a primarily computer-free world; yet are self-reliant, intelligent, quick learners, and consequently savvy in the tech sphere, knowing how to use social media (to reach their Millennial kids)


Although fewer in numbers, they have found their way to positions of authority, taking management roles and mentoring younger coworkers; they’re moving mountains but just not always broadcasting it.











Generation Y (aka: Millennials)

Born from the 1980s to the late 1990s

Now outnumber Baby Boomers at 75.4 million

On tract to be the most “educated” generation in American history

More incented by current compensation or short-term deferrals than long-term retention plans




On track to be the most “educated” generation in American history












Millennials

According to an article in American Banker dated Feb. 2, 2017 by Colleen Johnston of TD Bank:

Millennials will be the future leaders of our industry

More likely to save and invest greater % of income with a premium on financial security

While demanding apps and simplified transactions, they still want a human connection

According to an Ipsos study:

• - Two-thirds of Millennials do their banking online

• - 50% tend to bank at the same institution as their parents

Millennials








Millennials








4

Millennials








Millennials








The Millennial Exodus

In the Deloitte Millennial Survey of 2016 66% of Millennials expect to leave their employer

within 5 years (44% within 2 years)

63% believe their “leadership skills are not being fully developed”

For those who are planning on staying at least another 5 years, 82% believe their personal values are shared by the organizations they work for.











Growth is a processthat happens over a period of time

Loss of Key Talent is an event that happens nowwith the potential to impact the growth you have achieved

None

None

An Effective Compensation Plan

Recruiting Tool

Incentive-Based Motivation

Method to Retain

Balance Risk & Financial Results

Controls & Risk Management

Active Oversight by Board of Directors

Regulatory Changes & New Compensation Rules

Components of Compensation

Compensation Motivators by Generation

MILLENNIALS:

• Emphasize current pay

• Incentives being paid out in short time frames

• The ability to financially handle big ticket purchases is rewarding

GEN X:

• In addition to current compensation & incentives, the opportunity to accumulate wealth that pays while still in mid-career is attractive

• Cash is King

• Planning for delivery of deferred compensation around the time children will enter college

BOOMERS:

• Compensation that addresses post-retirement needs becomes more critical and attractive

• Caring for parents as well as children is a challenging dynamic

Employment/CIC Agreements

Long-Term Compensation

Mid-Term Deferred Incentives

Equity-Based Plans

Short-Term Deferred Incentives

Annual Cash Incentive

Standard Benefits


Attractive to Millennials

Different Components of Compensation are Used to Achieve Different Objectives




Equity-Based Plans



Standard Benefits


Attractive to Gen-Xers





Equity-Based Plans



Standard Benefits


Attractive to Boomers


Annual Cash Incentive Plan (ACIP)

Plan Highlights

Employees selected by bank

Scorecards to measure performance – preferred over discretionary bank wide branch wide department wide individual

Simple and affordable plan design

Two Levels of ACIP Design Consideration

Drives the performance goals

of the bank

Valued by employees focusingon their effort and

performance

An essential element of ACIP Design is to model the impact on both the individual and the bank

Incentive payments to participants must be: Affordable for the bank Inline with the bank’s strategic plan Consistent with safe and sound banking practices

Keys to Effective Annual Cash Incentives

SAMPLE SCORECARDS

SAMPLE SCORECARDS

Deferred Cash Incentive Plan (DCIP)

Plan Highlights


Deferral period at bank’s discretion

Bonus compensation often percentage of salary

Performance targets with scorecards or discretionary

Interest set by bank

Benefit forfeited upon early termination

DCIP Accounting Detail - First Year

Formula defers money into the DCIP

Deferred money earns at ROE of the

bank

Payout following year five

Participant

Plan Completion Age: 65

3% Year 1 to Year 5 Years 1-5

Inflated 10%* 8%**

Year Age Salary Deferral Interest Balance Benefit

1 41 110,000 11,000 0 11,000 0

2 42 113,300 0 880 11,880 0

3 43 116,699 0 950 12,830 0

4 44 120,200 0 1,026 13,856 0

5 45 123,806 0 1,109 14,965 0

6 46 127,520 0 0 14,965 14,965

*10% Deferral made at end of the plan year

**Interest credited at 8% at the end of the plan year

DCIP – The Deferral Period

3% Years Yr 2 to Yr 6 Yr 2-6 Yr 3 to Yr 7 Yr 3-7 Yr 4 to Yr 8 Yr 4-8

Inflated 1-5 10% 8% 10% 8% 10% 8%

Year Age Salary Benefit Deferral Int Balance Benefit Deferral Int Balance Benefit Deferral Int Balance Benefit

1 41 110,000 0 0 0 0 0 0 0 0 0 0 0 0 0

2 42 113,300 0 11,330 11,330 0 0 0 0 0 0 0 0 0

3 43 116,699 0 0 906 12,236 0 11,670 0 11,670 0 0 0 0 0

4 44 120,200 0 0 979 13,215 0 0 934 12,603 0 12,020 0 12,020 0

5 45 123,806 0 0 1,057 14,273 0 0 1,008 13,612 0 0 962 12,982 0

6 46 127,520 14,965 0 1,142 15,414 0 0 1,089 14,701 0 0 1,039 14,020 0

7 47 131,346 0 0 0 0 15,414 0 1,176 15,877 0 0 1,122 15,142 0

8 48 135,286 0 0 0 0 0 0 0 0 15,877 0 1,211 16,353 0

9 49 139,345 0 0 0 0 0 0 0 0 0 0 0 0 16,353

10 50 143,525 0 0 0 0 0 0 0 0 0 0 0 0 0

62,610

♦ $62,610 at risk if participant leaves the bank♦ Cliff vesting, 100% at risk until paid

previous slide

Long-Term WealthAccumulation

Plan Highlights


Supplemental retirement income

Formula driven

Offsets caps on qualified plans

Vesting schedules (“golden handcuffs”)

Plan provisions at bank’s discretion

Covered by ERISA Top-Hat rules

Equity Plans

Plan Highlights

Restricted Stock real equity – actual certificates

Stock options ISO – Incentive/Statutory Options NSO – Nonqualified/Non-Statutory Options

Stock Appreciation Rights (SARP) – future appreciation

Performance Stock Units (PSU) – current & future appreciation synthetic equity – no certificates more generous & costly

Synthetic Equity

Phantom Stock

Plans provide both current grant value & future appreciation to participants

Stock Appreciation Rights

Plans provide only future appreciation to participants

Phantom stock plans are more generous and more costly than stock appreciation rights plans

Future

Appreciation

Current

Equity Value

Future

Appreciation

No Current

Equity Value

Stock

Appreciation RightsPhantom Stock

Stock Appreciation Rights Accounting DetailPresident

Cumulative BOY EOY Annual Total SAR Forecast

SAR Book Book Increase in Annual Cumulative Annual

Age Allocation Value Value Bk Value SAR Gain Benefit

Duration EOY Year End per Share per Share per Share Gain EOY Payment

1 54 600 49.10 53.73 4.63 2,777 2,777 0

2 55 1,200 53.73 58.89 5.16 6,196 8,973 0

3 56 1,800 58.89 64.55 5.66 10,187 19,161 0

4 57 2,400 64.55 70.75 6.20 14,873 34,034 0

5 58 3,000 70.75 77.55 6.80 20,397 54,431 0

6 59 3,600 77.55 85.01 7.46 26,857 81,288 0

7 60 4,200 85.01 93.18 8.17 34,312 115,599 0

8 61 4,800 93.18 102.13 8.95 42,982 158,581 0

9 62 5,400 102.13 111.95 9.82 53,001 211,582 0

10 63 6,000 111.95 122.70 10.75 64,482 276,064 0

11 64 6,600 122.70 134.50 11.80 77,902 353,966 0

12 65 340,135 37,958

13 66 325,295 37,958

14 67 309,382 37,958

26 79 0 37,958

353,966 569,370

Rows15-25hidden

Key Provisions

Term (length of contract)

Duties, responsibilities and reporting lines

Compensation elements

Severance triggers

Severance payments

Change in control related provisions

Non-compete

Non-solicitation

Post-employment obligations

Employment & Change in Control Agreements

Various forms of compensation and benefits for directors:

Cash Compensation

Monthly Board Fees

Annual Retainer

Committee Fees

Traditional Fee Deferral Plans

Fee Continuation Plans

Phantom Stock/Stock Appreciation Rights Plans

Stock Options

Long-Term Care Benefits

Bank-Owned Life Insurance

Estate Planning

Compensation for Directors

Pay out of current earnings

Use BOLI as a source of incremental

earnings to cover the costs

The Two Most Common Ways to Cover Employee Benefit Plan Costs

Cost Recovery Is Possible

Most banks take advantage of the opportunity to use Bank Owned Life Insurance to Recover Executive Compensation Expenses.

Regulator Approved – Tried and Tested

Attractive Compliment to Bank’s Security Portfolio

High Credit Quality

Competitive, Non-Taxable Yields

62.5%


Tax Results of Alternative Assets vs BOLI

(1) (2) (3)

Asset Placement: $2,750,000 Alternative First Year Gain/Loss

Asset BOLI Due to BOLI

Income IncomeFirst Year

2.00% 3.80%

Gross Income 55,000 104,500 49,500

Load / Surrender Charges 0 0 0

Income Tax 21% 11,550 0 11,550

Net Earnings Impact 43,450 104,500 61,050

Common Misconceptions

“BOLI is an illiquid asset.”

“Our municipal portfolio can outperform BOLI.”

“We pay our people enough.”

“It just doesn’t fit our bank.”

“We do not want to profit from the death of an executive or director.”

QUESTIONS?

Thank You!

Jason Varnell

Senior Consultant

[email protected]

214.551.6025 (cell)

972.781.2020 (office)


M&A War Stories

Charles “Mack” Neff

Former Integrity Bank President & CEO

Chet Fenimore

Fenimore Kay Harrison Ford

Thank you! Don’t forget:

- CPE Evaluation Sheet- Event Evaluation Sheet- Sign In/Out CPE at Registration

172

Documents

2019 Banking Symposium - Briggs & Veselka Co. · 4 Spirit of Texas Bancshares, Inc. First Beeville Financial Corporation Beeville 11/27/18 49 63.7 1.85 1.89 13.8 8.9 412 8.4 1.27