Rumblings of Texas M&A wave after high-profile deal

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Large mergers are reshaping banking in Texas.

The proposed combination of Texas Capital Bancshares in Dallas and Independent Bank Group in McKinney is expected to create a $48 billion-asset company with greater technological capabilities and substantial scale in multiple high-growth markets.

The $3.1 billion deal should help each bank diversify operations, reduce concentration risk and add financial flexibility for the future, executives said during Monday interviews to discuss the merger.

"This is an ideal opportunity to create a high-performing super-regional in some of the best markets in the country,” said David Brooks, the $15 billion-asset Independent’s chairman and CEO. "That makes this [deal] very compelling."

“We decided jointly that it was time to seize the day,” added Keith Cargill, president and CEO of the $33 billion-asset Texas Capital.

The merger is the second major bank deal in Texas in recent months.

Prosperity Bancshares agreed in June to buy LegacyTexas Financial Group in Plano for $2.1 billion. Tha deal would create a $33 billion-asset regional bank.

Those deals will likely pressure smaller banks to consider mergers to gain heft, improve efficiency and free up the resources necessary to make investments in emerging technology, industry observers said.

“This does change the landscape,” said Jacob Thompson, a managing director of investment banking at SAMCO Capital Markets in Dallas. “I am starting to hear more conversations about at least the idea of big-bank M&A in Texas. The more we see of this, here and in other states, the more it could push other banks to do the same.”

The Texas Capital-Independent deal will create a bank with scale in Texas markets such as Dallas, Houston, Austin and San Antonio, along with Denver. Independent, which entered Colorado after a small bank deal in 2017, significantly increased its branch network when it bought Guaranty Bancorp last year.

“These really are some of the best markets in the U.S.,” said Curtis Carpenter, head of investment banking for Sheshunoff & Co. in Austin. “And there are a lot of efficiencies to be driven by this merger.”

While Independent has been an aggressive acquirer, Texas Capital had largely eschewed M&A, choosing instead to grow by hiring lending teams in high-growth markets.

The merger gives the combined bank an opportunity to cut roughly $100 million in annual noninterest expenses. While nearly 40% of the cuts will involve IT and systems, executives noted that nearly three-fourths of the companies’ branches are within five miles of each other.

The deal, expected to close in mid-2020, would blend Texas Capital’s corporate banking, capital markets and mortgage finance businesses with Independent's small-business lending and branch network. Independent also has considerable dealings in health care and commercial real estate.

Both banks also operate in energy, private wealth management and middle-market lending.

The deal required some compromise.

The holding company will take the Independent name. The bank will use the Texas Capital moniker, with the exception of branches in Colorado, which will continue to operate under the Independent brand.

Brooks will serve as chairman, president and CEO, while Cargill will become a special adviser after the deal closes.

Independent is the legal acquirer; its valuation of 210% of tangible book value is nearly double that Texas Capital, industry observers noted. Texas Capital is the acquirer for accounting purposes; its shareholders will own 55% of the combined company.

“The structure of the transaction, both mechanically and organizationally, demonstrates the extensive collaboration” by both companies, Cargill said during a call with analysts.

While the initial focus will involve integration, Brooks said Independent could become an active buyer again. At some point — "way down the road" — the bank could expand beyond Texas and Colorado to markets such as Phoenix; Atlanta; and Nashville, Tenn., he said.

Still, Brooks said, there are plenty of opportunities in Independent's existing footprint.

"The vibrancy and population growth and in-migration of jobs continue to underpin the strength of our economies," he said.

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