Merger scuttled, Texas bank charts new course

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Independent Bank Group in McKinney, Texas, is counting on a retooling of its loan book to spur growth after shelving its merger agreement with Texas Capital this spring.

The $16.9 billion-asset company plans to expand its retail banking operation — including auto loans, mortgages and credit cards — across its home state, executives said on a call with analysts this week. It aims to duplicate the successes of a similar effort it began in Colorado three years ago. At the same time, Independent will exit the once-lucrative business of financing equipment deals for businesses and scale back the origination of Small Business Administration loans to focus on bigger, middle-market companies.

The new strategy is meant to complement the company’s commercial and industrial and commercial real estate specialties, which account for about three-fourths of its lending business. The challenge is how to balance such an expansion at a time when much of the economy remains shuttered to ward off the spread of the coronavirus.

Michael Young, an analyst at SunTrust Robinson Humphrey, said the retail banking thrust would give Independent a chance to take more market share in the suburbs where other smaller banks have been able to siphon customers away from bigger rivals.

“It’ll be hit or miss,” Young said. “It’s just about being careful. These are pretty old-school conservative bankers, and I don’t think they’re going to press into something just to juice earnings growth.”

Executives said the shift will occur over the rest of the year and would be a way to invest in the types of business lines the company expected to get in the M&A deal, which was called off two months ago.

“Following the announcement of the termination of the Texas Capital merger, we began a strategic realignment initiative with regard to our overall organizational design and infrastructure,” Independent CEO David Brooks said on the July 28 conference call. “We intend to focus on this process over the remainder of the year to position the company for continued high performance and future growth.”

Independent and Texas Capital terminated their proposed $3 billion merger “due to the unprecedented impact of the COVID-19 pandemic,” Texas Capital Chairman Larry Helm said in a statement at the end of May. Independent logged about $15.6 million in merger-related costs during the second quarter tied to the breakup.

Independent’s second-quarter net income fell by 22% from a year earlier to $38.6 million because of the M&A costs, a higher loan-loss provision and other factors tied to the current economic crisis.

Chief Banking Officer Michael Hobbs is moving from Colorado to lead the strategic shift in Texas, Brooks said. There are also plans to announce new hires in coming weeks.

Hobbs had led the retail expansion in Colorado that began with the 2017 acquisition of Carlile Bancshares.

Independent in early 2019 bought Guaranty Bancorp, adding 32 branches from Denver to Fort Collins. Over the course of the next year, the company began rebalancing its retail footprint by consolidating branches in Texas and Colorado, eliminating 11 of them. Colorado now accounts for about a quarter of Independent’s loans — the kind of growth the company is hoping to see in its home state.

Hobbs would have become the executive overseeing the traditional community banking operation and some other “aspects” had the deal with Texas Capital gone through, Brooks said.

Hobbs "has been intricately involved in those discussions around all this integration,” Brooks said. “And so he really had a look at what we were doing and a deep dive at what Texas Capital was doing.”

Independent moved into the equipment finance business several years ago as a way to avoid too much concentration in C&I and CRE, Young said. But the business hasn’t panned out as executives had hoped and could prove challenging for the rest of the industry that remains in it.

“That segment tends to have higher credit losses,” Young said. “In a pandemic, that might not be an area where you want to grow as much.”

As for Independent’s SBA lending, the company made more than $823 million in Paycheck Protection Program loans during the second quarter but is planning to treat it as a side business.

“We think we're very good in SBA overall, but we are now viewing it more as a support line to all of our community banking across Colorado and Texas as opposed to a separate line of business,” Brooks said.

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Consumer banking Community banking Commercial banking Small business lending Growth strategies Texas Coronavirus M&A
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