Over the last three decades, David Brooks was the buyer in 20-plus deals, building Independent Bank Group from a $50 million-asset institution into one with $19 billion of assets and business across Texas and Colorado.
But this week, he flipped the script,
Brooks, Independent's chairman and CEO, said in an interview that he didn't see a chance for Independent to purchase another bank while staying on the growth path he envisioned. He pointed to a challenging interest rate environment and heightened regulatory scrutiny, and also said the deal would allow Independent to beef up its technology and solidify a succession plan.
"Our company has always been focused on how to create scale, and do it in a way that creates a lot of shareholder value that we can't get on our own," Brooks said. "If I could have done it with my platform, I would have done it. But we didn't see the right opportunities."
When Brooks and SouthState CEO John Corbett both happened to be in New York at the same time in December, a coffee catch-up between old friends turned into the first conversations in earnest about what would become the largest acquisition announced so far in 2024.
The $45 billion-asset SouthState plans to generate earnings-per-share accretion of 27%, cutting Independent's annual noninterest expenses by 25%. If approved, the transaction is slated to close in the first quarter of next year, and to earn back tangible book value dilution of 9.6% within two years.
"It does everything that we were looking for," Brooks said. "For five years they've been my number-one choice if we were ever going to do an upstream deal, where we were going to give up control of our company."
The combined entity will also have $65 billion of assets, crossing the $50-billion threshold that typically triggers enhanced regulatory scrutiny.
Matt Olney, a Stephens analyst who covers Independent, said he was encouraged to see the agreement, describing SouthState as "a strong regional lender."
"There's definitely a need and desire for buyers to get bigger, and for sellers to find a partner, whether from board fatigue or management succession issues," Olney said. "There seems like a fundamental willingness to get together. But financially, with all the volatility in rates the last few years, it's really tough to get these deals to work."
Independent, based in a Dallas-area town called McKinney, is a
But the pandemic accelerated the need for enhanced technology to increase scale and meet compliance standards, Brooks said. Independent didn't have the infrastructure to grow its assets to $50 billion, or someday $100 billion, like SouthState has worked to build.
Over the last four years, the Florida bank has increased its annual spending by $68 million to invest in risk management and technology, replacing 20 systems to prepare for heightened regulatory standards, Corbett said on an investor call Monday.
Chris Marinac, an analyst at Janney Montgomery Scott who covers SouthState, said the economics of the deal are fair. His hangup about the transaction is the current regulatory situation, which he called a "wild card." In the election year, "it's very up in the air where the regulatory environment is going to be six months from now," he added.
"I think they are underestimating [how difficult it will be to win approval]," Marinac said. "Either that or they don't care, and they feel like they're good enough that they can get it approved."
Marinac added that he would be especially cautious with the Office of the Comptroller of the Currency, which is SouthState's primary regulator. He pointed to the
SouthState did not respond to requests for comment regarding concerns about the deal's timeline.
SouthState and Independent began talking with the OCC and the Federal Reserve early in the year, the banks' leaders said, pitching the combination as two high-quality companies with no branch overlap, clear management plans and plenty of capital and liquidity.
Corbett said Monday on the call with investors that the banks were having ongoing positive conversations with regulators, and he expressed confidence in light of the feedback they've received.
Brooks said that the opportunity to strike a deal with beneficial terms made the timing right. He said he isn't concerned about securing approval or getting stalled in regulatory limbo because of effective communication with regulators.
"Big deals are hard to do," Brooks said. "You've got to find the right timing. The stocks have to be in the right relationship to each other. You've got to have your boards both interested in doing something at the same time. John I agreed … if this is the right time, we ought to figure it out."
If the all-stock transaction falls through, depending on the circumstances, it's possible Independent will pay a termination fee of $186 million to SouthState. Or SouthState could pay a fee of $60.9 million to Independent.
Independent hasn't closed a deal since its acquisition of Denver-based Guaranty Bancorp in 2019. Later that year, the bank
The two Texas banks cited the pandemic as the primary stake in the coffin. But Brooks said that he also realized along the way that the cultures of the two companies weren't going to mesh.
Since the deal's failure, Texas Capital has
"It really made me aware that the culture fit — how we run our businesses, how we think about our employees … those things are paramount to being able to integrate the companies well," Brooks said.
Independent had to dust itself off after the Texas Capital deal failed, Olney said, and has been looking for a major transaction.
SouthState's road map mirrors Independent's, Brooks said. Both started as community banks focusing on similar businesses, charging ahead as serial acquirers in growth regions.
Brooks' trust in Corbett also helped solve a succession planning question that had cropped up at Independent. Brooks, 65, said Corbett, 55, has at least 10 more years of runway to serve as CEO. (Their ages are as of the banks' spring 2024 proxy statements.)
Brooks will stay on as a director for at least two years, helping fold Independent into SouthState and assisting with future M&A plans in Texas, as the bank considers inorganic growth in its new geography. Under the deal's terms, Brooks will receive $12.8 million in cash as part of his severance agreement with Independent, in addition to a $5 million cash bonus.
Marinac said that he thinks leapfrogging to Texas is an operating risk for SouthState. Although the state has strong business opportunities, going in as an outsider is difficult, and SouthState could instead pursue continued growth in the Southeast, he said.
"Why Texas?," Corbett said on the Monday call. "The answer is not complicated. We believe it's wise to allocate capital to markets where the state governments encourage business growth and they don't penalize it with tax and regulatory burdens. We also believe it's wise to allocate capital where people are moving to, not where they're leaving from."
Independent will, from the perspective of its clients, continue business as usual, Brooks said.
Dan Strodel, chief banking officer at Independent, will continue to oversee the customer-facing businesses in Texas and Colorado under the new ownership. Brooks' brother, Daniel Brooks, who currently serves as vice chairman of Independent and has overseen credit risk for decades, will join SouthState for the credit integration piece.
Executives from both companies hope that Independent will be a growth engine for SouthState as the Florida bank makes a play for Texas.
"This company is going to have unlimited possibilities," Brooks said. "There's no company in the United States of America that has the footprint and the growth and the demographics that we have to work with."
