The acquisitive Texas-based Independent Bank Group Inc. is going big in Colorado with its largest bank acquisition plan to date, and the seventh-largest U.S. bank deal announced since 2017.
Investors initially balked at the company's $1 billion play for Denver-based Guaranty Bancorp and its nearly $4 billion in assets. Shares of Independent fell more than 5% in morning trading May 23, the first regular market session after the all-stock deal was announced.
The price tag is nearly twice that of any previous deal for Independent. The deal value, at 319% of tangible book value on a per-share basis, is well above the 186.29% average in the Southwest region between May 22, 2017, and May 22, 2018, according to S&P Global Market Intelligence data.
Raymond James analyst Michael Rose said that, while investors sold off shares because of the pricing figures, the strategic merits of the deal are compelling. It offers a substantial gain in market share and overall heft in Greater Denver, and a vibrant market ripe for long-term loan growth.
There are few bank targets of size left in Denver, giving Guaranty scarcity value and explaining why Independent needed to pay up, Rose, who covers Independent, said in an interview. He said Guaranty is the largest Denver-based bank operating exclusively in Colorado.
Rose said expected cost savings, earnings accretion and a short period needed to earn back tangible book value dilution are all favorable. What is more, the strong footprint and lending operation Independent gets with Guaranty makes the deal attractive, Rose said. Guaranty operates 32 branches along Colorado's Front Range — the state's most populated region — including 14 in the Denver area.

"They see Denver as a very good market, and I definitely agree," Rose said of Independent executives. He said the buyer needed scale to be competitive long term in Colorado, and it had signaled that it viewed Denver and the surrounding region as key.
"I think this was the deal they had to do," Rose said. "I think it was viewed as the crown jewel."
Analyst John Rodis of FIG Partners, who covers the target, said Independent stands to acquire Guaranty's proven wealth management operation, which it could expand to Texas. He also said loan growth opportunities in Colorado range from construction to residential mortgage to energy.
Independent executives said that, after the deal closes, they would shoot for long-term annualized loan growth of 10% to 12% across the pro forma company's footprint.
"I don't think Independent is stretching there," Rodis said in an interview. "Denver will be a big contributor."
Independent said it expects cost savings on the deal of 37.5% of the target's base. Executives said on a May 23 conference call that savings would come in large part from reducing redundant staff and closing overlapping branches. Independent Chairman and CEO David Brooks said that roughly 20% to 25% of the two companies' branches are within a few miles of each other.
Independent expects that about 80% of the savings will be realized in 2019 and 100% the following year. The deal is slated to close in the fourth quarter.
The buyer anticipates EPS accretion of 5.1% in 2019 and 6.5% in 2020. Brooks said Independent expects to earn back TBV of 4.7% in about 3.1 years. Investors typically favor earn-back periods shorter than four years.
Brooks said that, with Guaranty's $3.0 billion in deposits, Independent would climb from No. 32 to No. 7 in deposit market share in Colorado. "This puts us in a terrific position," he said.
Further, with Guaranty's $3.7 billion in assets and anticipated organic growth this year, Brooks said Independent would surge past the important $10 billion-asset threshold and approach $14 billion in assets by the end of this year. The added heft will help it spread costs over a larger base and offset an expected annual interchange revenue loss of $5 million. When banks eclipse $10 billion in assets, regulations require them to curb interchange charges.
But, as Brooks noted, the timing of Independent's move past $10 billion is positive. Congress this week passed legislation that rolls back several financial regulations, including a requirement for most regional banks to submit to special regulatory stress testing. President Donald Trump is widely expected to sign the legislation into law this year. The annual exams are costly to prepare for, and until now represented a big hurdle for banks over $10 billion in assets.
Brooks said the legislation would cut its estimated cost of $2 million to prep for the exams by 2020 in half. Independent anticipates that another $500,000 to $1 million in ongoing costs it had braced for in growing over $10 billion would decline by 50%.

