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Markets cheer Independent Bank-Texas Capital deal despite integration risk

Investors have pushed up stock prices following recent regional bank mergers of equals, and the latest deal is no exception despite a heightened level of integration risk.

After the Dec. 9 announcement that Independent Bank Group Inc. would buy Texas Capital Bancshares Inc. in a $3.1 billion deal, shares in both banks rallied. Independent's stock closed the day 4.0% higher while Texas Capital shares popped 9.7%. The SNL US Bank and Thrift index was relatively flat, down 0.3%. After the merger, Independent Bank will have $12.63 billion of deposits in Texas, making it No. 7 in deposit market share in the state. The ranking caps deposits at $1 billion per branch to better represent retail deposit market share.

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Equity analysts said the dramatically different business models for the two banks could complicate talent retention. Michael Rose, an analyst for Raymond James & Associates, downgraded Independent Bank to "market perform" from "outperform" in a Dec. 10 note. In addition to concerns about cultural and business line integration, Rose wrote that the pro forma bank's valuation offered a balanced risk-reward proposition.

"The deal appears to have come together in pretty short order. My take from the [deal] call is there is still a lot to be worked through," Rose said in an interview. "They're obviously very early in the process."

But investors appear to be more interested in financial metrics than integration risk, and the Independent-Texas Capital MOE ticked all the right boxes. The deal is immediately accretive to tangible book value and the banks project it will be 26% accretive to the first full year of earnings for Independent Bank and 14% to Texas Capital's earnings.

"There are a lot of unanswered questions," Rose said. "But the reason why both stocks are up is the numbers on a pro forma basis look pretty good. It passes the sniff test."

Independent Bank's stock was priced at 212% of tangible book at market close on Dec. 6, the last trading session before the deal announcement. With Texas Capital's stock at 113% of tangible book, the merger math was compelling to investors and analysts.

"This deal announcement was able to unlock some value and it appears that one plus one was more than two, and it was driven by the financial metrics," said John Rodis, an analyst for Janney Montgomery Scott.

In a Dec. 9 note, Rodis maintained his "neutral" rating on Texas Capital and raised his price target. He said in an interview that he was not overly concerned about integrating Texas Capital's national business lines into Independent Bank's regional-focused approach to banking.

"I think it all comes down to people," Rodis said. "If you have the right people in place and the right checks and balances, it should mitigate the risk. [Texas Capital has] always been fairly methodical about looking to invest in new businesses and being methodical in taking their approach and taking their time."

Other analysts expressed some concerns. In Rose's Dec. 10 downgrade note, the analyst team wrote that they have confidence in Independent Bank Chairman David Brooks, who will serve as chairman and CEO of the combined company. But they also wrote that even the best-planned deals do not always play out as expected, leaving the analysts "content for now to watch this transaction as it develops from the sidelines given questions we have around business line and cultural integration."

Analysts at Keefe Bruyette & Woods called potential attrition of Texas Capital bankers "one of the larger risks that this merger may face." Still, the analysts remained constructive on Independent Bank, reiterating an "outperform" rating with a target price of $63 per share. The analysts echoed Rodis and Rose in applauding the projected profitability targets and other deal metrics.

"While we don't have a [2022 estimate] in place yet, it appears there will be continued operating leverage pushing profitability levels higher over time," the KBW analysts wrote.