Liquidity concerns drove LegacyTexas to sell
Increasing worries about liquidity and credit risk spurred LegacyTexas Financial Group in Plano to seek a buyer.
The $9.9 billion-asset Legacy agreed in mid-June to be sold to Prosperity Bancshares in Houston for $2.1 billion. It is the fourth-biggest bank deal announced in 2019.
But Legacy’s internal discussions about liquidity, including deposit-gathering challenges and a flattening yield curve, and about credit concerns dated back to at least the summer of 2017, according to a recent regulatory filing tied to its pending agreement with the $22.4 billion-asset Prosperity.
At that time, Legacy and its investment bank created three “baskets,” consisting of potential banks to buy, possible acquirers and candidates for a merger of equals. Kevin Hanigan, Legacy’s president and CEO, was authorized to have discussions with leaders of banks in each basket.
Hanigan in August 2017 informally discussed a possible sale with a pair of banks, but the talks went nowhere. An effort to buy another bank, along with a conversation about an MOE, also stalled.
Hanigan’s initial discussion with David Zalman, Prosperity’s chairman and CEO, took place on Oct. 2, 2017, but each executive quickly dismissed the possibility of a deal, the filing said. No reasons were given.
Hanigan and Zalman reconnected on Feb. 27, 2018, agreeing that a merger would benefit Prosperity’s investors and address Legacy’s need for deposits. The executives discussed potential terms, governance matters, executive duties and board representation.
But Legacy’s board decided in late March 2018 to end communications “due to the lack of clarity on the transaction, the premium that Prosperity would pay … and post-transaction matters relating to executive leadership and strategy,” the filing said.
Nearly a year would pass before Hanigan and Zalman would revisit a deal.
Hanigan called Zalman on Feb. 7 — the day BB&T announced an agreement to buy SunTrust Banks — to restart discussions. While the filing does not mention the megamerger, it stated that Hanigan was motivated by “merger and acquisition developments in the financial services industry.”
Legacy’s board discussed the possibility of selling to Prosperity during a Feb. 25 meeting. At that time, the board decided that it was important for Hanigan and other executives to join Prosperity as part of a deal.
Hanigan warned Legacy’s board during a March meeting that, while the bank continued to operate from a position of relative financial and operational strength, its liquidity and credit risks “were increasing and were expected to continue to increase during the second quarter,” the filing said. The directors also determined that, other than Prosperity, “there existed no other likely alternative transaction at that time.”
Legacy's loan-to-deposit ratio was 112.7% in the first quarter and 114.3% in the second quarter. Banks around its size had an average ratio of 94.7% in the first quarter, according to the most recent data compiled by the Federal Deposit Insurance Corp.
Meanwhile, the company's loan-loss provision rose by 64% from the first quarter to the second quarter, to $16.1 million, primarily due to increased specific reserves for a corporate health care finance relationship and impaired energy loans. Legacy had $19.9 million in impaired energy loans on its books on June 30.
Zalman presented his first offer on March 20, pitching a 10% fixed exchange ratio premium and two board seats. Hanigan would become Prosperity’s president and chief operating officer, and J. Mays Davenport, Legacy’s chief financial officer, would be considered for an executive post.
A day later, Legacy’s directors pressed Hanigan and the company’s investment bank to push for a higher premium, more board seats and more assurances on hiring Legacy executives. Still, the directors had accepted that Prosperity was “the only transaction alternative presently available.”
Prosperity and Legacy signed a nondisclosure agreement on March 25, facilitating the exchange of confidential information. That began a period of due diligence that lasted until the deal was announced.
During a May 6 meeting, Legacy’s board discussed the “increasing liquidity and credit risk” associated with remaining independent, and Hanigan “emphasized the need for Legacy to add liquidity,” the filing said. Two weeks later, Hanigan was instructed to develop contingency plans to address credit and liquidity risk in case talks with Prosperity fell through.
Prosperity revised its offer on May 28, valuing Legacy at roughly $2 billion. The offer included 80% stock consideration and proposed senior management posts for Legacy executives. Three Legacy directors would be added to Prosperity’s board.
When pressed by Legacy for 90% stock consideration, Zalman “expressed concern” that his board would balk at the request. He said Prosperity’s directors wanted to use a “sizable portion” of excess capital to make the deal happen, adding that 10% cash was “much lower” than what the board had discussed.
The sides would compromise on a deal with an 85% stock consideration.
Prosperity met with its federal and state regulators on June 10 to review the deal’s general terms.
During separate June 14 meetings, the boards of Prosperity and Legacy, with Hanigan recusing himself, unanimously voted in favor of the deal. It was finalized on June 16 and announced the next day.
The agreement, which is expected to close in the fourth quarter, priced LegacyTexas at 216% of its tangible book value. The deal will make Prosperity the second-biggest bank based in Texas, behind Comerica.
Prosperity expects the deal to be 6.6% accretive to its 2020 earnings per share. The company plans to cut about a quarter of Legacy’s annual noninterest expenses.
Prosperity expects to incur $60 million in merger-related charges. It should take less than five years for Prosperity to earn back any dilution to its tangible book value.
"Our increased scale better positions us to invest in future opportunities and serve our customers,” Zalman said in a press release announcing the deal. “We believe that our banks are complementary and provide many opportunities for continued growth.
Several Legacy executives will have roles at Prosperity, including Davenport, who will become director of corporate strategy. Scott Almy, Legacy’s chief operating officer, chief risk officer and general counsel, will join Prosperity as executive vice president of operations.
Charles Eikenberg, Legacy’s executive vice president of community banking, will have the same title after the deal closes. Thomas Swiley, currently chief lending officer at Legacy, will serve as an executive vice president of lending at Prosperity’s bank.
Hanigan will receive a nearly $1.3 million signing bonus, a $971,000 annual base salary and an annual bonus of up to $1.7 million based on Prosperity’s financial performance, the filing said.
The other Legacy executives will receive annual salaries ranging from $381,000 to $415,000. Davenport will receive a $225,000 signing bonus and be eligible for an annual bonus of up to $415,000. The other three executives are also eligible for annual bonuses.