Appearances matter when it comes to commercial real estate concentrations.

In the case of Independent Bank Group in McKinney, Texas, such a view contributed to the decision to buy Carlile Bancshares in Fort Worth, Texas. While management wasn't feeling pressure from regulators to shrink their bank's CRE book, they realized that buying a bank with less exposure would look better to examiners.

Having a lower ratio of CRE to total risk-based capital "looks and feels better to our regulators and board," David Brooks, the $5.4 billion-asset Independent's chairman and chief executive, said during a conference call Tuesday to discuss the $434 million acquisition. He noted, however, that Independent felt "comfortable" with its current exposure.

CRE loans are equal to 415% of Independent's total risk-based capital, while such credits make up 53% of total loans. After Independent buys the $2.3 billion-asset Carlile, the ratio should fall to 365%, while CRE will make up just under half of its loan portfolio.

Regulators will likely continue to focus on CRE exposure next year, even at banks that have strong underwriting procedures, industry experts said.

"I think CRE concentrations are going to remain a prominent issue," said Michael Rose, an analyst at Raymond James. "Regulators are trying to get ahead of it. I think the banks are showing they're taking it seriously, by either limiting their growth in that concentration or raising opportunistic capital."

Given current regulatory pressure, Independent likely would have "looked more cautiously" at buying a bank with a high CRE concentration, said Brady Gailey, an analyst at Keefe, Bruyette & Woods. Regulators are asking for some heavily concentrated CRE banks to provide more metrics or raise capital, he said.

Improving CRE metrics isn't the only reason for the deal, Brooks said.

Carlile will introduce Independent to several attractive markets, including Tarrant County, Texas, which is home to Fort Worth, and will provide a much larger presence in Denton County, Texas, which is northwest of Dallas. Those counties have high median household incomes and are projected to have stronger population growth than Texas and the nation, the company noted in its presentation.

Independent, which had been looking to gain traction in Fort Worth for more than three years, had all but given up on expanding in Denton on its own, Brooks said. The company sold a branch in Denton earlier this year because it "couldn't compete there" against Carlile's Northstar Bank.

"It's a cultural difference," Brooks said. "Many of my friends have [gone] over to Fort Worth, opened a location and hired a banker and put [their] flag out. It is tough ... to build anything of significance over there."

The all-stock deal, which values Carlile at more than 210% of its tangible book value, will also serve as Independent's first foray outside of Texas. Carlile has 18 branches and roughly $600 million in assets in Colorado, mostly around Denver and Colorado Springs. Independent, which had once indicated that expanding beyond Texas wasn't a goal, would have likely avoided buying a small Colorado bank on its own, Brooks said.

Still, these markets are intriguing, Brooks said. While there are many similarities in certain Colorado and Texas markets — and several Texas banks have entered the more northern state in recent years — the economy in Colorado is far less dependent on energy. Independent has been reducing its exposure to energy credits, which make up less than 3% of total loans, Rose said.

Independent's management is still deciding whether it wants to expand in Colorado organically or by pursuing more acquisitions. "We have some work to do between now and next spring to determine what that book of business looks like and what the opportunities are to grow it," Brooks said.

"We are a Texas franchise," Brooks added. "We intend to continue to focus … the vast majority of our efforts in Texas. However, Colorado, and especially the I-25 corridor, is … one of the more attractive markets in the western United States."

More acquisitions could be on the table, though it's likely Brooks would continue to focus on high-quality banks in the Lone Star State, where he has good relationships with many executive teams, Gailey said. Independent is known as "one of the buyers that you want to partner with in Texas," he added.

Independent will have roughly $8 billion of assets after buying Carlile, and management has already started discussing plans to cross $10 billion, which will trigger additional regulatory stress testing and caps on interchange fees.

Brooks, who is committed to pursuing more deals, said he no longer believes a bank on the cusp of crossing the threshold must complete a big deal to make the jump. Still, he said Independent could lose roughly $1.8 million in interchange fees and add up to $4 million in costs preparing for stress testing.

"It's not as big of a hurdle as we thought a few years ago," Brooks said. "Our view is — given the economy, the optimism in the economy and the strength of all bank stocks across the country right now — that this is a time where we're going to be an acquirer."

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