Final 424B3
Table of Contents

Filed Pursuant to Rule 424(b)(3)
Registration No. 333-222804

LOGO

MERGER PROPOSED—YOUR VOTE IS VERY IMPORTANT

 

 

You are invited to attend a special meeting of shareholders of Integrity Bancshares, Inc., or Integrity, on April 10, 2018, at 4:00 p.m., Central Time, at Integrity’s headquarters, 4040 Washington Avenue, Houston, Texas 77007. At this special meeting, holders of record of shares of Integrity common stock will be asked to vote on a proposal to approve a reorganization agreement, which provides for the acquisition of Integrity by Independent Bank Group, Inc., or Independent, through certain merger transactions. Holders of record of Integrity common stock will also be asked to vote on a proposal to adjourn the special meeting to a later date if the Integrity board of directors determines such an adjournment is in the Integrity shareholders’ best interest.

If the reorganization agreement and the merger contemplated thereby are approved by the holders of the Integrity common stock and the merger is completed, each outstanding share of Integrity common stock will be converted into a fraction of a share of Independent common stock, rounded to the nearest hundred-thousandth of a share, and a cash payment determined as follows:

 

    the fraction of a share of Independent common stock will be equal to 2,072,131, divided by the number of shares of Integrity common stock outstanding immediately prior to the effective time of the merger; and

 

    the cash payment will be equal to $31.6 million (less the amount paid to cash out stock options and warrants to acquire shares of Integrity common stock or collectively, Integrity stock options, and less the amount by which Integrity’s adjusted tangible equity is less than $84.0 million on the fifth business day prior to the closing date of the merger, or the tangible equity determination date), divided by the number of shares of Integrity common stock outstanding immediately prior to the effective time of the merger.

The number of shares of Integrity common stock outstanding is expected to increase as a result of the exercise of Integrity stock options prior to the effective time of the merger.

Integrity shareholders will receive only whole shares of Independent common stock. Cash will be paid for any fraction of a share of Independent common stock issuable in exchange for all of an Integrity shareholder’s shares of Integrity common stock.

Independent’s common stock is listed on the Nasdaq Global Select Market under the symbol “IBTX.”

Management of Integrity anticipates that outstanding Integrity stock options to acquire 163,523 shares of Integrity common stock will be exercised prior to the tangible equity determination date and that outstanding Integrity stock options to acquire 64,000 shares will remain unexercised at the tangible equity determination date. The Integrity stock options to acquire 64,000 shares of Integrity common stock outstanding and unexercised immediately prior to the effective time of the merger will be automatically cashed out and will be entitled to receive an amount in cash equal to the per option share price multiplied by the total number of option shares held by such nonexercising option holder. The per option share price will vary per option holder and will equal the per share transaction value minus the applicable exercise price per option share. See “The Merger—Treatment of Shares of Integrity Stock Options” beginning on page 50.

If the merger occurs, and outstanding Integrity stock options to acquire 163,523 shares of Integrity common stock are exercised (which would result in 5,046,952 shares of Integrity common stock being outstanding), there are Integrity stock options to acquire 64,000 shares of Integrity common stock that remain unexercised on the tangible equity exercise date, and the Integrity adjusted tangible equity equals or exceeds $84.0 million on the tangible equity determination date, then, each of the then outstanding shares of Integrity common stock would be converted into 0.4106 of a share of Independent common stock and $6.11 in cash, which, based on the foregoing assumptions and the assumption that the value of a share of Independent common stock is $72.60 (the closing price of Independent common stock on February 23, 2018), represents a value of $35.91 per share of Integrity common stock. Integrity will not resolicit proxies from holders of its common stock in the event that the Integrity adjusted tangible equity is below $76.0 million on the tangible equity determination date and the cash portion of the merger consideration is adjusted downward because Integrity has no right to do so under the reorganization agreement. Once the holders of Integrity common stock have approved the reorganization agreement and the merger, Independent can terminate the transaction or require Integrity to complete the merger even if Integrity adjusted tangible equity is below $76.0 million, in which case the cash portion of the consideration to be paid in conversion of the outstanding shares of Integrity common stock upon the consummation of the merger could be significantly reduced. For further explanation regarding the number of shares of Integrity common stock that will be issued and outstanding on the merger’s effective date, the impact of the exercise of outstanding Integrity stock options on the number of shares of Integrity common stock that will be outstanding, the treatment of any Integrity stock options that are not exercised, how Integrity’s adjusted tangible equity will be calculated, the effect on the merger consideration if such adjusted tangible equity is less than $84.0 million on the tangible equity determination date, and other estimates, see “The Merger,” beginning on page 49 of this proxy statement/prospectus.

The vote of every holder of Integrity common stock is very important. Whether you plan to attend the special meeting, if you hold shares of Integrity common stock, please vote by completing and mailing the enclosed proxy card in the return envelope provided to you. We cannot complete the merger unless holders of at least two-thirds of the issued and outstanding shares of Integrity common stock vote to approve the reorganization agreement and the merger. Based on our reasons for the merger described in the accompanying proxy statement/prospectus, our board of directors believes that the transaction is fair, from a financial point of view, to and in the best interests of, the Integrity shareholders. Accordingly, our board of directors unanimously recommends that you vote “FOR” approval of the reorganization agreement and, if necessary, adjournment of the Integrity special meeting.

Charles M. Neff, Jr.

President and Chief Executive Officer

Integrity Bancshares, Inc.

 

 

An investment in Independent common stock in connection with the merger involves risks. See “Risk Factors” beginning on page 35.

Neither the SEC nor any state securities commission has approved or disapproved of the securities to be issued under this proxy statement/prospectus or determined if this proxy statement/prospectus is accurate or adequate. Any representation to the contrary is a criminal offense. The securities that Independent is offering through this document are not savings or deposit accounts or other obligations of any bank or nonbank subsidiary of either of our companies, and they are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

This proxy statement/prospectus dated March 2, 2018, was first mailed to Integrity shareholders on March 6, 2018.


Table of Contents

HOW TO OBTAIN ADDITIONAL INFORMATION

Certain business and financial information about Independent included in documents filed with the SEC has not been included in or incorporated by reference in this document. This information is described on page 119 under “Where You Can Find More Information.” You can obtain free copies of this information by writing or calling:

Independent Bank Group, Inc.

1600 Redbud Boulevard, Suite 400

McKinney, Texas 75069-3257

Attention: Michelle S. Hickox

Executive Vice President and Chief Financial Officer

(972) 562-9004

To obtain timely delivery of the documents before the special meeting of shareholders of Integrity, you must request the information by March 31, 2018.

If Integrity shareholders have specific questions about the merger or the Integrity special meeting, need additional copies of this proxy statement/prospectus or need to obtain proxy cards or other information related to the proxy solicitation for the Integrity special meeting, they may contact James M. McElray, Integrity’s Executive Vice President and Chief Financial Officer, at the following address or by calling the following telephone number:

Integrity Bancshares, Inc.

4040 Washington Avenue,

Houston, Texas 77007

(713) 335-8700

Integrity does not have a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, is not subject to the reporting requirements of Section 13(a) or 15(d) of the Exchange Act and, accordingly, does not file documents or reports with the SEC.

PLEASE NOTE

We have not authorized anyone to provide you with any information other than the information included in this document and the documents to which we refer you. If someone provides you with other information, please do not rely on it as being authorized by us.

This proxy statement/prospectus has been prepared as of March 2, 2018. There may be changes in the affairs of Integrity or Independent after that date, that are not reflected in this document.


Table of Contents

LOGO

Integrity Bancshares, Inc.

4040 Washington Avenue

Houston, Texas 77007

(713) 335-8700

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

To the holders of Integrity common stock:

A special meeting of holders of Integrity common stock will be held on April 10, 2018, at 4:00 p.m., Central Time, at Integrity’s headquarters, 4040 Washington Avenue, Houston, Texas 77007, for the following purposes:

1. To consider and vote upon a proposal to approve the Agreement and Plan of Reorganization, or the reorganization agreement, dated as of November 28, 2017, by and between Independent Bank Group, Inc., or Independent, and Integrity Bancshares, Inc., or Integrity, pursuant to which Integrity will merge with and into Independent, all on and subject to the terms and conditions contained in the reorganization agreement, and the merger described therein; and

2. To consider and vote upon any proposal to adjourn the special meeting to a later date or dates if the board of directors of Integrity determines such an adjournment is necessary to permit solicitation of additional proxies if there are not sufficient votes at the time of the special meeting to constitute a quorum or to approve the reorganization agreement.

No other business may be conducted at the special meeting.

All holders of Integrity common stock of record as of 5:00 p.m. on February 23, 2018, will be entitled to notice of the Integrity special meeting and will be entitled to vote at the Integrity special meeting and any adjournments thereof. The special meeting may be adjourned from time to time upon approval of holders of Integrity common stock without any notice other than by announcement at the meeting of the adjournment thereof, and any and all business for which notice is hereby given may be transacted at such adjourned meeting.

Holders of Integrity common stock have the right to dissent from the merger and obtain payment in cash of the appraised fair value of their shares of Integrity common stock under applicable provisions of the Texas Business Organizations Code, or TBOC. In order for a holder of Integrity common stock to perfect his or her right to dissent, such holder must carefully follow the procedure set forth in the TBOC. A copy of the applicable statutory provisions of the TBOC is included as Appendix C to the accompanying proxy statement/prospectus and a summary of these provisions can be found under the caption “The Merger—Dissenters’ Rights of Integrity Shareholders,” beginning on page 93 of the proxy statement/prospectus. The merger may not be completed if the holders of more than 5% of the outstanding shares of Integrity common stock exercise dissenters’ rights.

If you have any questions concerning the merger or the proxy statement/prospectus, would like additional copies of the proxy statement/prospectus, need a proxy card or need help voting your shares of Integrity common stock, please contact James M. McElray, Integrity’s Executive Vice President and Chief Financial Officer, at (713) 335-8700.

By Order of the Board of Directors,

 

LOGO

Charles M. Neff, Jr.

President and Chief Executive Officer

Houston, Texas

March 2, 2018

The board of directors of Integrity unanimously recommends that holders of record of Integrity common stock entitled to vote at the Integrity special meeting vote “FOR” the proposals to approve the


Table of Contents

reorganization agreement and the merger and any adjournment of the Integrity special meeting if such adjournment is necessary to permit solicitation of additional proxies if there are not sufficient votes at the time of the Integrity special meeting to constitute a quorum or to approve the reorganization agreement.

Your Vote is Very Important

A proxy card is enclosed. Whether or not you plan to attend the Integrity special meeting, if you are a holder of shares of Integrity common stock please vote by completing, signing and dating the proxy card and promptly mailing it in the enclosed envelope. You may revoke your proxy in the manner described in the proxy statement/prospectus at any time before it is exercised. If you are a holder of shares of Integrity common stock and attend the Integrity special meeting, you may vote in person if you desire, even if you have previously returned your proxy card.


Table of Contents

TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING

     1  

SUMMARY

     10  

The Companies

     10  

Proposed Merger

     10  

Terms of the Merger

     11  

Treatment of Shares of Integrity Common Stock

     11  

Treatment of Integrity Stock Options

     11  

Estimated Number of Shares of Integrity Common Stock to be Issued and Outstanding on the Closing Date

     12  

Possible Downward Adjustment to the $31.6  million Cash Portion of the Merger Consideration

     12  

Value of Merger Consideration to be Received

     13  

Other Financial Aspects of the Merger

     15  

Material U.S. Federal Income Tax Consequences

     15  

Fairness Opinion of Financial Advisor to Integrity

     15  

Independent Plans to Continue Payment of Quarterly Dividends

     16  

Ownership of Independent After the Merger

     16  

Market Prices of Independent Common Stock

     16  

Integrity Special Meeting

     16  

Integrity Record Date Set at February 23, 2018; Two-Thirds Shareholder Vote Required to Approve the Reorganization Agreement and the Merger

     16  

Integrity’s Reasons for the Merger and Recommendation of Integrity’s Board of Directors

     17  

Certain Shareholders of Integrity are Expected to Vote Their Shares of Integrity Common Stock for Approval of the Reorganization Agreement

     17  

Effective Time of the Merger

     17  

Exchange of Integrity Stock Certificates

     18  

Conditions to Completion of the Merger

     18  

Regulatory Approvals Required for the Merger

     20  

Amendment or Waiver of the Reorganization Agreement

     20  

No Solicitation

     20  

Termination of the Reorganization Agreement

     21  

Termination Fee

     22  

Some of the Directors and Officers of Integrity Have Financial Interests in the Merger that Differ from Your Interests

     23  

Comparison of Rights of Shareholders of Integrity and Independent

     24  

Dissenters’ Rights of the Holders of Integrity Common Stock

     24  

CERTAIN FINANCIAL INFORMATION REGARDING INDEPENDENT AND INTEGRITY

     26  

Selected Financial Information of Independent

     26  

Reconciliations of Non-GAAP Financial Measures

     29  

Selected Financial Information of Integrity

     30  

Comparative Stock Prices

     33  

Dividends

     33  

RISK FACTORS

     35  

Risks Related to the Merger

     35  

Risks Related to Integrity Shareholders’ Interests if the Merger is Consummated

     37  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     40  

GENERAL INFORMATION

     43  

THE INTEGRITY SPECIAL MEETING

     44  


Table of Contents

PROPOSAL ONE—THE MERGER

     49  

THE MERGER

     49  

Terms of the Merger

     49  

Treatment of Shares of Integrity Common Stock

     49  

Treatment of Integrity Stock Options

     50  

Estimated Number of Shares of Integrity Common Stock to be Issued and Outstanding on the Closing Date

     50  

Possible Downward Adjustment to the $31.6  million Merger Consideration

     50  

Value of Merger Consideration to be Received

     53  

Cash in Lieu of Fractional Shares

     55  

Other Financial Aspects of the Merger

     55  

Treatment of Shares of Independent Common Stock

     55  

Background of the Merger

     55  

Recommendation of Integrity’s Board and Its Reasons for the Merger

     57  

Fairness Opinion of Financial Advisor to Integrity

     58  

Certain Unaudited Prospective Financial Information of Integrity

     69  

Exchange of Integrity Stock Certificates

     71  

Effective Time of the Merger

     72  

Conduct of Business Pending Effective Time

     72  

No Solicitation

     75  

Conditions to Completion of the Merger

     77  

Additional Agreements

     78  

Representations and Warranties of Integrity and Independent

     82  

Amendment or Waiver of the Reorganization Agreement

     84  

Termination of the Reorganization Agreement

     84  

Termination Fee

     85  

Financial Interests of Directors and Officers of Integrity in the Merger

     86  

Certain Compensation Related to the Transactions

     87  

Voting Agreement

     88  

Nasdaq Global Select Market Listing

     88  

Material U.S. Federal Income Tax Consequences of the Merger

     88  

Accounting Treatment

     92  

Restrictions on Resales of Independent Common Stock Received in the Merger

     93  

Regulatory Approvals Required for the Merger

     93  

Dissenters’ Rights of Integrity Shareholders

     93  

BENEFICIAL OWNERSHIP OF INDEPENDENT COMMON STOCK BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS OF INDEPENDENT

     97  

BENEFICIAL OWNERSHIP OF INTEGRITY COMMON STOCK BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS OF INTEGRITY

     100  

PROPOSAL TWO—ADJOURNMENT OF THE SPECIAL MEETING

     102  

BUSINESS OF INDEPENDENT

     103  

BUSINESS OF INTEGRITY

     104  

COMPARATIVE MARKET PRICES AND DIVIDEND DATA

     106  

Independent

     106  

Integrity

     106  

DESCRIPTION OF INDEPENDENT CAPITAL STOCK

     109  

General

     109  

Independent Common Stock

     109  

Independent Preferred Stock

     110  


Table of Contents

COMPARISON OF RIGHTS OF SHAREHOLDERS OF INTEGRITY AND INDEPENDENT

     113  

EXPERTS

     119  

LEGAL MATTERS

     119  

OTHER MATTERS

     119  

WHERE YOU CAN FIND MORE INFORMATION

     119  

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

     121  

APPENDIX A—AGREEMENT AND PLAN OF REORGANIZATION

     A-1  

APPENDIX B—FAIRNESS OPINION OF SANDLER O’NEILL  & PARTNERS, L.P.

     B-1  

APPENDIX C—RIGHTS OF DISSENTING OWNERS: Chapter 10, Subchapter H, of the Texas Business Organizations Code 

     C-1  


Table of Contents

QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING

The following are some questions that you may have regarding the Agreement and Plan of Reorganization, or the reorganization agreement, dated as of November 28, 2017, by and between Independent Bank Group, Inc., or Independent, and Integrity Bancshares, Inc., or Integrity, and the special meeting, and brief answers to those questions. Independent and Integrity advise you to read carefully the remainder of this proxy statement/prospectus because the information contained in this section does not provide all of the information that might be important to you with respect to the merger and the special meeting. Additional important information is also referred to under the caption “Where You Can Find More Information” beginning on page 119.

 

Q. Why am I receiving this proxy statement/prospectus?

 

A: Integrity is sending these materials to the holders of record of shares of Integrity common stock as of 5:00 p.m. on February 23, 2018 in accordance with the requirements of the Texas Business Organizations Code, the TBOC, and the federal securities law and to help the holders of record of shares of Integrity common stock decide how to vote their shares of Integrity common stock with respect to the proposal to approve the reorganization agreement and the merger and other matters to be considered at the Integrity special meeting, and to solicit their proxies in respect of the Integrity special meeting.

This document constitutes both a proxy statement of Integrity and a prospectus of Independent. It is a proxy statement because the board of directors of Integrity is soliciting proxies from Integrity’s shareholders using this document. It is a prospectus because Independent is offering shares of its common stock to Integrity shareholders as part of the merger consideration to be provided to holders of Integrity common stock in the merger.

 

Q: What are Integrity shareholders being asked to vote upon?

 

A: Integrity is proposing to be acquired by Independent through certain merger transactions. As part of the overall transaction, the holders of Integrity common stock are being asked to consider and vote on the following two proposals:

Proposal One: to approve the reorganization agreement, pursuant to which Integrity will merge with and into Independent, with Independent being the surviving entity following the merger, which transaction is referred to herein as the merger and is further described in the section entitled “The Merger” beginning on page 49; and

Proposal Two: to approve the adjournment of the Integrity special meeting to a later date or dates if the board of directors of Integrity determines it is necessary to permit solicitation of additional proxies if there are not sufficient votes at the time of the Integrity special meeting to constitute a quorum or to approve the reorganization agreement.

No other business may be conducted at the Integrity special meeting.

 

Q: What will happen in the merger?

 

A:

In the merger, Integrity will be merged with and into Independent, with Independent being the surviving entity. At the effective time of the merger, Integrity will cease to exist. Immediately following the merger, Integrity Bank will be merged with and into Independent Bank, with Independent Bank being the surviving bank. Integrity Bank will cease to exist after the bank merger occurs. Integrity Bank is a Texas state savings bank headquartered in Houston, Texas, and is a wholly owned subsidiary of Integrity. Independent Bank is a commercial bank headquartered in McKinney, Texas, and is a wholly owned subsidiary of Independent. Upon the merger of Integrity with and into Independent, the then outstanding shares of Integrity common



 

1


Table of Contents
  stock and the then outstanding and unexercised options and warrants to purchase shares of Integrity common stock, or collectively, Integrity stock options, will be converted into the right to receive the consideration described below. For ease of reference: (i) the merger of Integrity with and into Independent is referred to in this proxy statement/prospectus as the “merger” and (ii) the merger of Integrity Bank with and into Independent Bank is referred to in this proxy statement/prospectus as the “bank merger.”

 

Q: What is the aggregate amount of consideration that Independent will pay in the merger?

 

A: The aggregate merger consideration to be issued and paid in exchange for the shares of Integrity common stock outstanding immediately prior to the merger’s effective time will consist of:

 

    2,072,131 shares of Independent common stock; and

 

    $31.6 million in cash (less the amount paid to holders of unexercised Integrity stock options and less the amount by which Integrity’s adjusted tangible equity is less than $84.0 million on the tangible equity determination date).

The number of shares of Independent common stock to be issued and the amount of cash to be paid by Independent for each share of Integrity common stock will depend on the number of Integrity stock options that are exercised before closing and thus the total number of shares of Integrity common stock that are outstanding as of the closing. If, as anticipated, outstanding Integrity stock options to purchase 163,523 shares of Integrity common stock are exercised and, therefore, the number of shares of Integrity common stock was equal to 5,046,952 shares as of closing, there are Integrity stock options to purchase 64,000 shares of Integrity common stock that remain outstanding and unexercised on the tangible equity determination date and that the aggregate amount to be paid to cash out such unexercised Integrity stock options is $790,124, and Integrity’s tangible equity equaled or exceeded $84.0 million on the tangible equity determination date, each share of Integrity common stock would be exchanged for 0.4106 of a share of Independent common stock and $6.11 in cash. However, as a consequence of not knowing the exact fraction of a share of Independent common stock that will be exchanged for each share of Integrity common stock in connection with the merger and because the price per share of Independent common stock will fluctuate between now and the effective date of the merger, the holders of Integrity common stock will not know the exact value of the Independent common stock, and, therefore, the exact value of the per share merger consideration, that the holders of shares of Integrity common stock will receive for each such share in the merger until the merger’s effective date.

 

Q: How will the per share merger consideration be calculated?

 

A: Upon the merger becoming effective, each share of Integrity common stock will be converted into a fraction of a share of Independent common stock, rounded to the nearest hundred-thousandth of a share, and a cash payment determined as follows:

 

    the fraction of a share of Independent common stock will be equal to 2,072,131, divided by the number of shares of Integrity common stock outstanding immediately prior to the effective time of the merger; and

 

    the cash payment will be equal to $31.6 million (less the amount paid to cash out Integrity stock options and less the amount by which Integrity’s adjusted tangible equity is less than $84.0 million on the tangible equity determination date), divided by the number of shares of Integrity common stock outstanding immediately prior to the effective time of the merger.

The number of shares of Integrity common stock outstanding is expected to increase by 163,523 as a result of the exercise of Integrity stock options prior to the merger’s effective time.

As noted, the per share merger consideration is dependent in part upon the number of shares of Integrity common stock outstanding at the effective time of the merger. Integrity currently estimates that outstanding Integrity stock options to purchase 163,523 shares of Integrity common stock will be exercised, and that, as



 

2


Table of Contents

a result, 5,046,952 shares of Integrity common stock will be issued and outstanding and Integrity stock options to purchase 64,000 shares of Integrity common stock will remain outstanding and unexercised at the effective time of the merger. The reorganization agreement provides for the cashout of any Integrity stock options that are outstanding and unexercised in connection with the merger. For more detail on these estimates, please see “The Merger—Estimated Number of Shares of Integrity Common Stock to be Issued and Outstanding on the Closing Date” beginning on page 50.

 

Q: What is the value of the merger consideration that Integrity’s shareholders will receive as a result of the merger?

 

A: Assuming that the necessary shareholder and regulatory approvals are obtained and the merger is completed, there are 5,046,952 shares of Integrity common stock outstanding immediately prior to the merger (which is expected to be the case assuming that Integrity stock options to purchase 163,523 shares of Integrity common stock are exercised prior to the tangible equity determination date and that outstanding Integrity stock options to purchase 64,000 shares of Integrity common stock remain outstanding and unexercised resulting in a payment to cash out such unexercised Integrity stock options in the amount of $790,124, and the adjusted tangible equity of Integrity is at least $84.0 million at the tangible equity determination date, then each share of Integrity common stock then outstanding would be exchanged for 0.4106 of a share of Independent common stock and $6.11 per share in cash. Independent’s common stock is listed on the Nasdaq Global Select Market under the symbol “IBTX.”

Based on the assumptions set forth above and the closing price of Independent’s common stock as of February 23, 2018, of $72.60 per share, we estimate Integrity shareholders would receive merger consideration with a value of $35.91 for each share of Integrity common stock they hold immediately prior to the effective time of the merger and with an aggregate value to all holders of Integrity common stock of $181.3 million. The aggregate value of the shares of Independent common stock to be issued to the Integrity shareholders in connection with the merger and the value of the fraction of a share of Independent common stock to be issued in exchange for each share of Integrity common stock in connection with the merger will increase or decrease between the date hereof and the effective time of the merger depending on a number of factors, including fluctuations in the market price of Independent common stock and the number of shares Integrity common stock outstanding immediately prior to the merger’s effective time.

For further explanation of how the Integrity’s adjusted tangible equity will be calculated, the effect on the merger consideration to be paid if Integrity’s adjusted tangible equity is less than $84.0 million on the tangible equity determination date, the number of shares of Integrity common stock that will be issued and outstanding immediately prior to the merger’s effective time, and other estimates, please refer to “The Merger” beginning on page 49 of this proxy statement/prospectus.

 

Q: Under what circumstances would the cash portion of the merger consideration be adjusted?

 

A: The amount of aggregate cash consideration paid by Independent would be reduced if Integrity’s tangible equity, as calculated pursuant to the reorganization agreement, is less than $84.0 million on the tangible equity determination date. Under those circumstances, the aggregate cash consideration would be reduced by the difference between $84.0 million and the amount of Integrity’s tangible equity on that date. If the tangible equity of Integrity is less than $76.0 million on the closing date, Independent would not be obligated to consummate the transaction under the terms of the reorganization agreement.

As noted above, pursuant to the terms of the reorganization agreement, the amount of aggregate cash consideration paid by Independent to shareholders of Integrity will also be reduced by the aggregate amount of cash paid by Independent to the holders of Integrity stock options who do not exercise their Integrity stock options by the tangible equity determination date. Management estimates that Integrity stock options to acquire 64,000 shares of Integrity common stock will remain outstanding and unexercised on the tangible



 

3


Table of Contents

equity determination date. In this event, and based on the assumptions set forth above, the aggregate payment to cash out such unexercised Integrity stock options would be $790,124 and the cash portion of the merger consideration would be reduced from $31.6 million to approximately $30.8 million.

 

Q: What consideration will holders of outstanding Integrity stock options receive in the merger?

 

A: Management of Integrity anticipates that Integrity stock options to purchase 64,000 shares of Integrity common stock will remain outstanding and unexercised on the tangible equity determination date. The reorganization agreement provides that if any Integrity stock options remain unexercised prior to the tangible equity determination date, then Independent will pay to the holder of each Integrity stock option outstanding and unexercised at the effective time of the merger an amount of cash equal to the per option share price multiplied by the total number of option shares held by such nonexercising option holder. Based on the assumptions set forth above, the aggregate payment to cash out Integrity stock options to acquire 64,000 shares of Integrity common stock would be $790,124. See “The Merger—Treatment of Integrity Stock Options” beginning on page 50 for additional information regarding the cashout of the Integrity stock options and the calculation of the amount to be paid by Independent to cash out the unexercised Integrity stock options in connection with the merger.

 

Q: Are there other financial aspects of the merger?

 

A. Yes. If Integrity’s tangible equity is greater than $84.0 million on the tangible equity determination date, then on the day prior to the closing date, Integrity may distribute to its shareholders an amount equal to the difference between the actual amount of Integrity tangible equity on the tangible equity determination date minus $84.0 million.

 

Q: What is Integrity’s current tangible equity? Are there factors that could change the tangible equity prior to the closing date?

 

A: As of December 31, 2017, the tangible equity of Integrity (calculated in accordance with GAAP) was $85.8 million. Pursuant to the terms of the reorganization agreement, the adjusted tangible equity of Integrity as of the tangible equity determination date will be determined from Integrity’s financial statements prepared in accordance with generally accepted accounting principles, consistently applied, or GAAP, adjusted as provided for below. Any unrealized gains or losses in investment securities will be excluded from the calculation of adjusted tangible equity.

For purposes of determining the estimated tangible equity of Integrity, that amount of Integrity’s tangible equity will be increased by the amount of the consolidated net income of Integrity or decreased by the amount of the consolidated net loss of Integrity from January 1, 2018, through the tangible equity determination date and reduced by the amount of certain costs and expenses to be incurred by Integrity in connection with the merger. Integrity currently estimates that it will have consolidated net income of between $3.4 million and $3.6 million from January 1, 2018, through April 24, 2018, which would be the tangible equity determination date assuming that the closing date of the merger will be April 30, 2018, and the effective date of the merger will be May 1, 2018, which is the date that Independent and Integrity hope to complete the merger, although delays could occur. The tangible equity of Integrity will be increased by the proceeds received from the exercise of the Integrity stock options.



 

4


Table of Contents

The table set forth below shows the range of estimates for the amounts that will affect the calculation of Integrity’s adjusted tangible equity, assuming the closing of the merger occurs on April 30, 2018:

 

     Low Range      High Range  

Tangible equity of Integrity as of December 31, 2017

   $ 85.8      $ 85.8  

Estimated consolidated net income of Integrity for the period from January 1, 2018, through April 24, 2018

     3.4        3.6  

Capital from assumed exercise of Integrity stock options

     4.6        5.8  

Estimated costs and expenses of Integrity and Integrity Bank related to the merger and other agreed upon items, on an after tax equivalent basis

     (9.6)        (10.3)  
  

 

 

    

 

 

 

Estimated tangible equity of Integrity as of April 24, 2018

   $ 84.2      $ 84.9  
  

 

 

    

 

 

 

If Integrity achieves the estimates in the range set forth above, Integrity’s adjusted tangible equity as of the closing date would be greater than $84.0 million, and, thus, the cash portion of the merger consideration would not be adjusted downward for a shortfall in adjusted tangible equity. No upward adjustment of the merger consideration will be made as a result of Integrity adjusted tangible equity exceeding $84.0 million at the tangible equity determination date. However, if Integrity’s tangible equity is greater than $84.0 million on the tangible equity determination date, then on the day prior to the closing date, Integrity may distribute to its shareholders an amount equal to the difference between the actual amount of Integrity tangible equity on the tangible equity determination date less $84.0 million.

The amounts in the table above are only estimates and are based upon several assumptions, many of which are beyond the control of Integrity and Integrity Bank. Accordingly, the actual amount of Integrity’s adjusted tangible equity at the tangible equity determination date may vary from these estimated amounts. Integrity will not resolicit proxies from holders of its common stock in the event that Integrity adjusted tangible equity is below $76.0 million on the tangible equity determination date and the cash portion of the merger consideration is adjusted downward as Integrity has no right to do so under the reorganization agreement. For more information regarding how the Integrity adjusted tangible equity will be calculated and how Integrity has estimated what that amount will be on or about May 1, 2018, the date on which Independent and Integrity hope to complete the merger, please see “The Merger—Possible Downward Adjustment to the $31.6 million Merger Consideration” beginning on page 50.

 

Q: Will the holders of Integrity common stock know, at the time of or prior to the Integrity special meeting, the exact fraction of a share of Independent common stock, the value of such fraction of a share or the cash payment amount that they will receive for each share of Integrity common stock they hold?

 

A:

No. Because of a potential downward adjustment to the cash consideration and the possibility that not all of the Integrity stock options will be exercised and the attendant uncertainty in the number of shares of Integrity common stock that will be outstanding immediately prior to the effective time of the merger and the amount of cash to be paid to any such nonexercising option holders, Integrity shareholders will not know the exact fraction of a share of Independent common stock or the cash payment that Integrity shareholders will receive for each share of Integrity common stock (including the shares of Integrity common stock issued upon the exercise of outstanding Integrity stock options prior to closing) held by holders of Integrity common stock immediately prior to the effective time of the merger at the time that the Integrity shareholders vote on the reorganization agreement. As a consequence of not knowing the exact fraction of a share of Independent common stock and cash payment that will be exchanged for each share of Integrity common stock in connection with the merger and because the price per share of Independent common stock will fluctuate between now and the effective date of the merger, the holders of Integrity common stock will



 

5


Table of Contents
  not know, at the time of or prior to the Integrity special meeting, the exact value of the merger consideration they will receive in the merger.

 

Q: Do Integrity shareholders have a choice of the form of consideration that they will receive in the merger?

 

A: No. In accordance with the reorganization agreement, each share of Integrity common stock (including shares of Integrity common stock issued upon the exercise of outstanding options to purchase Integrity common stock prior to closing) will be exchanged for a fraction of a share of Independent common stock and a cash payment.

 

Q: When do you expect the merger to be completed?

 

A: We are working to complete the merger on May 1, 2018, although delays could occur.

 

Q: Are there any risks I should consider in deciding whether I will vote for the reorganization agreement and the merger?

 

A: Yes. Set forth under the heading of “Risk Factors,” beginning on page 35, are a number of risk factors that you should consider carefully.

 

Q: When and where will the special shareholders’ meeting be held?

 

A: The Integrity special shareholders’ meeting is scheduled to take place at 4:00 p.m., Central Time, on April 10, 2018, at Integrity’s headquarters, 4040 Washington Avenue, Houston, Texas 77007.

 

Q: Who is entitled to vote at the special meeting?

 

A: The holders of record of Integrity common stock, as of 5:00 p.m. on February 23, 2018, which is the date that Integrity’s board of directors has fixed as the record date for the Integrity special meeting, or the Integrity record date, are entitled to vote at the Integrity special meeting.

 

Q: What are my choices when voting?

 

A: With respect to each of the proposals, holders of common stock are entitled to vote may vote for, against or abstain from voting on the proposals in question presented at the Integrity special meeting.

 

Q: What votes are required for approval of the reorganization agreement and the merger?

 

A: Approval of the reorganization agreement and the merger by Integrity shareholders requires the affirmative vote of the holders of at least two-thirds of the issued and outstanding shares of Integrity common stock on the Integrity record date, or at least 3,271,897 shares of Integrity common stock.

 

Q: What votes are required to adjourn the special meeting?

 

A: Adjournment of the Integrity special meeting requires the approval of the holders of a majority of the shares of Integrity common stock present or represented by proxy at the Integrity special meeting.

 

Q: How does the board of directors of Integrity recommend that I vote at the special meeting?

 

A: The board of directors of Integrity unanimously recommends that Integrity shareholders vote their shares as follows:

Proposal One: FOR the approval of the reorganization agreement and the merger; and



 

6


Table of Contents

Proposal Two: FOR the adjournment of the Integrity special meeting to a later date or dates if the board of directors of Integrity determines it is necessary to permit solicitation of additional proxies if there are not sufficient votes at the time of the Integrity special meeting to constitute a quorum or to approve the reorganization agreement and the merger.

 

Q: Do I have any rights to avoid participating in the merger?

 

A: Each holder of Integrity common stock has the right to dissent from the merger and seek payment of the appraised fair value of his or her shares of Integrity common stock in cash. In order for a shareholder of Integrity to perfect his or her right to dissent, such shareholder must:

 

    deliver to Integrity a written objection to the merger prior to the Integrity special meeting that states that such shareholder will exercise his or her right to dissent if the reorganization agreement and the merger are approved and the merger is completed;

 

    vote his or her shares of Integrity common stock against approval of the reorganization agreement and the merger at the Integrity special meeting;

 

    not later than the 20th day after Independent sends such shareholder notice that the merger was completed, deliver to Independent a written demand for payment of the fair value of his or her shares of Integrity common stock that states the number of shares of Integrity common stock the shareholder owns (i.e., that states that he or she owns a particular number of the shares of Integrity common stock), his or her estimate of the fair value of such shares and an address to which a notice relating to the dissent and appraisal procedures may be sent; and

 

    not later than the 20th day after he or she makes that demand, submit to Independent the certificates representing his or her shares of Integrity common stock.

The steps that a holder of Integrity common stock must follow to perfect his or her right of dissent are described in greater detail under the caption “The Merger—Dissenters’ Rights of Integrity Shareholders” starting on page 93, and this discussion is qualified by that description and by the text of the provisions of the TBOC relating to rights of dissent set forth in Appendix C hereto. The appraised fair value of any number of shares of Integrity common stock may be more or less than the value of the shares of the Independent common stock and cash payment that would be issued in exchange for that number of shares of Integrity common stock in the merger. If the holders of more than 5% of the outstanding shares of Integrity common stock dissent from the merger, Independent has the right to terminate the reorganization agreement and to not consummate the merger.

 

Q: What happens if I transfer my shares after the record date for the special meeting?

 

A: The record date for the Integrity special meeting is earlier than the expected date of completion of the merger. Therefore, if you transfer your shares of Integrity common stock after the record date, but prior to the effective time of the merger, you will retain the right to vote at the Integrity special meeting, but the right to receive the merger consideration will transfer with the shares of Integrity common stock.

 

Q: What do I need to do now?

 

A: After you have thoroughly read and considered the information contained in this proxy statement/prospectus, you simply need to vote your shares of Integrity common stock at the Integrity special meeting. The process for voting your shares depends on how your shares are held. Generally you may hold shares as the “record holder” (that is, in your own name) or in “street name” (that is, through a nominee, such as a broker or custodian). If you hold shares in “street name,” you are considered the beneficial owner of those shares.


 

7


Table of Contents

If you are a record holder, you may vote by proxy or you may attend the Integrity special meeting and vote in person the shares of Integrity common stock you are entitled to vote at the Integrity special meeting. If you are a record holder on the record date for the Integrity special meeting and want to vote your shares of Integrity common stock by proxy, simply indicate on the proxy card(s) applicable to your shares of Integrity common stock how you want to vote and sign, date and mail your proxy card(s) in the enclosed envelope as soon as possible, but in any event no later than the time necessary for your proxy card to be actually received by Integrity prior to the vote at the Integrity special meeting.

Your proxy card must be received by Integrity by no later than the time the polls close for voting at the Integrity special meeting for your vote to be counted at the Integrity special meeting.

Voting your shares by proxy will enable your shares of Integrity common stock to be represented and voted at the Integrity special meeting if you do not attend the special meeting and vote your shares in person.

 

Q: If my shares of Integrity common stock are held in “street name” by my broker, will my broker vote my shares for me?

 

A: If your broker has not provided to you a proxy that allows you to vote your shares of Integrity common stock that it holds for you, your broker may vote your shares of common stock on the reorganization agreement and the merger proposal only if you provide instructions to your broker on how to vote. You should instruct your broker how to vote your shares of common stock, following the directions your broker provides. If you do not provide instructions to your broker, your shares will not be voted, which will have the same effect as a vote against the proposal to approve the reorganization agreement and the merger. If you receive a notice of special meeting and a proxy statement/prospectus directly from Integrity, you are deemed a holder of record.

 

Q: How will my shares be voted if I return a signed and dated proxy card, but don’t specify how my shares will be voted?

 

A: The shares to which such proxy card relates will be voted FOR approval of the reorganization agreement and the merger and FOR any adjournments of the meeting that the board of directors of Integrity deems necessary.

 

Q: Can I attend the special meeting and vote in person?

 

A: Yes. All Integrity shareholders are invited to attend the Integrity special meeting. However, only holders of record of Integrity common stock on the record date for the Integrity special meeting can vote, whether in person or by proxy, at the Integrity special meeting. If you receive a notice of special meeting and a proxy statement/prospectus directly from Integrity, you are deemed a holder of record.

If your shares of Integrity are held in “street name,” then you are not the shareholder of record. In order for you to vote the shares that you beneficially own and that are held in “street name” in person at the special meeting, you must bring a legal proxy from the broker, custodian or other nominee that was the record holder of your shares held in “street name” as of 5:00 p.m. on February 23, 2018, confirming that you were the beneficial owner of those shares as of 5:00 p.m. on February 23, 2018, stating the number of shares of which you were the beneficial owner that were held for your benefit at that time by that broker, custodian or other nominee and appointing you as the record holder’s proxy to vote the shares covered by that proxy at the special meeting.



 

8


Table of Contents
Q: May I change my vote after I have submitted my proxy card?

 

A: Yes. If an Integrity shareholder is a holder of record of shares of Integrity common stock, he or she may change his or her vote prior to such time that the proxy card for any such holder of Integrity common stock must be received by:

 

    delivering to Integrity prior to such time a written notice of revocation addressed to: James M. McElray, Executive Vice President and Chief Financial Officer, Integrity Bancshares, Inc., 4040 Washington Avenue, Houston, Texas 77007;

 

    completing, signing and returning to Mr. McElray at the address appearing above prior to such time a new proxy card dated with a later date than the date that your original proxy card was dated, in which case any earlier proxy will be revoked automatically; or

 

    attending the Integrity special meeting and voting in person by ballot, in which case any earlier proxy will be revoked. However, simply attending the Integrity special meeting without voting on a proposal by ballot will not revoke your proxy previously provided.

If your shares are held in “street name” and you desire to change any voting instructions you have previously given to the record holder of the shares of which you are the beneficial owner, you should contact the broker, custodian or other nominee holding your shares in “street name” in order to direct a change in the manner your shares will be voted.

 

Q: What happens if I abstain from voting or fail to instruct my broker to vote?

 

A: If you are a record holder of Integrity common stock and you abstain from voting or if you hold your shares of Integrity common stock in “street name” and you instruct your broker or custodian to abstain from voting such shares or fail to instruct your broker or custodian to vote your shares and the broker or custodian submits a proxy, referred to as a broker nonvote, then the abstention or broker nonvote of shares of Integrity common stock will be counted towards a quorum at the Integrity special meeting, but such shares will have the same effect as a vote against the proposal to approve the reorganization agreement and the merger and the proposal to adjourn the special meeting, if necessary.

 

Q: Should Integrity shareholders send in their stock certificates now?

 

A: No. As soon as practical after the effective time, with the intent for that to be no later than five business days after the effective time of the merger, Equiniti Trust Company, Independent’s exchange agent, will send the Integrity shareholders written instructions for exchanging their stock certificates. Integrity shareholders should not send their Integrity stock certificates with their proxy card.

 

Q: Who can help answer my questions?

 

A: If you have additional questions about the merger, you should contact James M. McElray, Executive Vice President and Chief Financial Officer, Integrity Bancshares, Inc., 4040 Washington Avenue, Houston, Texas 77007, telephone (713) 335-8700.

[The balance of this page intentionally left blank.]



 

9


Table of Contents

SUMMARY

This summary highlights selected information from this proxy statement/prospectus and may not contain all of the information that is important to you regarding the merger and related matters. Independent and Integrity urge you to carefully read this entire document and the other information that is referred to in this proxy statement/prospectus or contained in the reports and documents incorporated by reference in this proxy statement/prospectus. These documents will give you a more complete description of the items for consideration at the special meeting. For more information about Independent and Integrity, see “Where You Can Find More Information” on page 119. Independent has included page references in this summary to direct you to other places in this proxy statement/prospectus where you can find a more complete description of the topics that Independent has summarized.

The Companies

Independent Bank Group, Inc.

1600 Redbud Boulevard, Suite 400

McKinney, Texas 75069-3257

(972) 562-9004

www.ibtx.com

Independent, a Texas corporation, is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, or the BHC Act. Through Independent Bank, its wholly owned subsidiary bank, which is a Texas state bank, Independent provides a wide range of relationship driven, commercial banking products and services. Independent currently operates a total of 70 full-service banking centers in the Dallas/North Texas metropolitan area, including McKinney, Dallas, Fort Worth and Sherman/Denison, the greater Austin, Texas, area, including Austin and Waco, the Houston, Texas metropolitan area and the Colorado Front Range area, including Denver and Colorado Springs. As of December 31, 2017, on a consolidated basis, Independent had total assets of approximately $8.7 billion, total loans of approximately $6.5 billion, total deposits of approximately $6.6 billion and shareholders’ equity of approximately $1.3 billion.

Independent’s common stock is traded on the Nasdaq Global Select Market under the symbol “IBTX.”

Integrity Bancshares, Inc.

4040 Washington Avenue

Houston, Texas 77007

(713) 335-8700

Integrity Bancshares, Inc., a Texas corporation, is a bank holding company registered under the BHC Act. Integrity conducts its banking operations through its wholly owned subsidiary, Integrity Bank SSB, a Texas state savings bank, that operates four full service banking locations in the Houston, Texas metropolitan area. As of December 31, 2017, Integrity, on a consolidated basis, reported total assets of approximately $759 million, total loans of approximately $661 million, total deposits of approximately $637 million and total equity capital of approximately $86.0 million.

Proposed Merger

The reorganization agreement is attached to this proxy statement/prospectus as Appendix A. Please read the entire reorganization agreement. It is the legal document that governs the merger.



 

10


Table of Contents

Terms of the Merger (page 49)

The reorganization agreement provides for Independent to acquire all of the issued and outstanding securities of Integrity through the merger of Integrity with and into Independent, with Independent being the surviving corporation following the merger. If the shareholders of Integrity approve the reorganization agreement at the special meeting, and if the required regulatory approvals are obtained and the other conditions to the parties’ obligations to effect the merger are satisfied or are waived by the party entitled to do so, Independent and Integrity hope to complete the merger on May 1, 2018, although delays could occur.

Independent is the sole shareholder of Independent Bank, and Integrity is the sole shareholder of Integrity Bank. Upon the merger’s completion, both Independent Bank and Integrity Bank will be wholly owned subsidiaries of Independent. Pursuant to the reorganization agreement, immediately following the merger’s completion, Integrity Bank will merge with and into Independent Bank, with Independent Bank being the surviving bank following the bank merger.

The merger will be accounted for as an acquisition of Integrity and Integrity Bank by Independent and Independent Bank under the acquisition method of accounting in accordance with the Financial Accounting Standard Board’s Accounting Standard Codification Topic 805, “Business Combinations.”

Treatment of Shares of Integrity Common Stock (page 49)

As a result of the merger, holders of Integrity common stock will be entitled to receive whole shares of Independent common stock and a cash payment in exchange for their shares of Integrity common stock. Independent will pay cash in lieu of issuing fractional shares of Independent common stock. After the merger, the Integrity shareholders will no longer be owners of Integrity common stock. As a result of the merger, certificates of Integrity common stock will represent only the right to receive the merger consideration pursuant to the reorganization agreement. Integrity will cease to exist following the merger’s completion.

If the shareholders of Integrity approve the reorganization agreement and the merger, the necessary regulatory approvals of the merger are received, and the merger is completed, and assuming 5,046,952 shares of Integrity common stock are outstanding immediately prior to the merger (which assumes that outstanding Integrity stock options to acquire 163,523 shares of Integrity common stock are exercised prior to the tangible equity determination date), there are unexercised Integrity stock options to purchase 64,000 shares of Integrity common stock and that the aggregate amount to be paid to cash out such unexercised Integrity stock options is $790,124, Integrity has adjusted tangible equity of at least $84.0 million on the tangible equity determination date and the price of Independent common stock is $72.60 per share (the closing price of Independent common stock on February 23, 2018), then, each of the shares of Integrity common stock then outstanding would be exchanged for 0.4106 of a share of Independent common stock and a cash payment of $6.11 and all of those outstanding shares of Integrity common stock would be exchanged for an aggregate of 2,072,131 shares of Independent common stock and approximately $30.8 million in cash. For more detail on this estimate, please see “The Merger—Estimated Number of Shares of Integrity Common Stock to be Issued and Outstanding on the Closing Date” on page 50.

Treatment of Integrity Stock Options (page 50)

Pursuant to the terms of the reorganization agreement, each outstanding and unvested Integrity stock option that is not fully vested and immediately exercisable will become fully vested upon the approval of the reorganization agreement and the merger by the holders of Integrity common stock. Upon such approval, all of the outstanding Integrity stock options will then no longer be subject to forfeiture and will be immediately exercisable. Each such Integrity stock option that is not exercised prior to the effective time of the merger will be automatically cashed out under the terms of the reorganization agreement and an option cancellation agreement,



 

11


Table of Contents

and the holder of each cashed out Integrity stock option will have the right to receive a cash payment in an amount equal to the difference between (i) the per share transaction value, minus the applicable exercise price per option share, or the per option share price, multiplied by the total number of option shares held by such nonexercising option holder. Such amount will be paid to the option holders within five business days following the closing date of the merger. Any amount paid by Independent to cash out the Integrity stock options will reduce the cash portion of the merger consideration. Management of Integrity anticipates that Integrity stock options to purchase 64,000 shares of Integrity common stock will remain outstanding and unexercised prior to the tangible equity determination date, which, based on the assumptions set forth above, would result in an aggregate payment of $790,124 to cash out such unexercised Integrity stock options.

Estimated Number of Shares of Integrity Common Stock to be Issued and Outstanding on the Closing Date (page 50)

The number of shares of Independent common stock and cash payment amount to be received by the Integrity shareholders with respect to their shares of Integrity common stock is dependent, among other factors, upon the number of shares of Integrity common stock issued and outstanding immediately prior to the effective time of the merger. As of February 23, 2018, the record date for the Integrity special meeting, 5,046,952 shares of Integrity common stock were issued and outstanding, and Integrity stock options to purchase 64,000 shares of Integrity common stock were outstanding and unexercised. If Integrity stock outstanding options to purchase 163,523 shares of Integrity common stock are exercised, 5,046,952 shares of Integrity common stock would be issued and outstanding immediately prior to the effective time of the merger. For more detail on these estimates, please see “The Merger—Estimated Number of Shares of Integrity Common Stock to be Issued and Outstanding on the Closing Date” on page 50. Shares of Integrity common stock acquired upon the exercise of Integrity stock options will be exchanged for shares of Independent common stock and a cash payment in the merger on the same basis as all other shares of Integrity common stock outstanding immediately prior to the effective time of the merger.

Possible Downward Adjustment to the $31.6 million Merger Consideration (page 50)

The $31.6 million cash consideration will be reduced, on a dollar-for-dollar basis, if the adjusted tangible equity of Integrity is less than $84.0 million on the tangible equity determination date. Under those circumstances, the aggregate cash consideration would be reduced by the difference between $84.0 million and the amount Integrity’s tangible equity on the tangible equity determination date.

As noted above, the amount paid by Independent to cash out outstanding and unexercised Integrity stock options will reduce the aggregate cash portion of the merger consideration. Management of Integrity anticipates that Integrity stock options to purchase 64,000 shares of common stock will remain outstanding and unexercised, and that, based upon the closing price of Independent common stock of $72.60 on February 23, 2018, Independent would make an aggregate payment of approximately $790,124 to cash out such unexercised Integrity stock options. In this event, the aggregate cash portion of the merger consideration would be reduced by $790,124 from $31.6 million to approximately $30.8 million.

Pursuant to the terms of the reorganization agreement, the adjusted tangible equity of Integrity will be determined from Integrity’s financial statements prepared in accordance with generally accepted accounting principles, consistently applied, or GAAP, adjusted as provided for below. Any unrealized gains or losses in investment securities will also be excluded from the calculation of adjusted tangible equity.

As of December 31, 2017, the tangible equity of Integrity (calculated in accordance with GAAP) was $85.8 million. For purposes of determining the estimated tangible equity of Integrity, that amount of Integrity’s adjusted tangible equity will be increased by the amount of the consolidated net income of Integrity or decreased by the amount of the consolidated net loss of Integrity from January 1, 2018, through the tangible equity determination date and reduced by the amount of certain costs and expenses to be incurred by Integrity in connection with the merger. Integrity currently estimates that it will have consolidated net income of between



 

12


Table of Contents

$3.4 million and $3.6 million from January 1, 2018, through April 24, 2018, which would be the tangible equity determination date assuming that the closing date of the merger will be April 30, 2018, and the effective date of the merger will be May 1, 2018.

The table set forth below shows the range of estimates for the amounts that will affect the calculation of Integrity’s adjusted tangible equity, assuming the closing of the merger occurs on April 30, 2018:

 

     Low     High  

Tangible equity of Integrity as of December 31, 2017

   $ 85.8     $ 85.8  

Estimated consolidated net income of Integrity for the period from January 1, 2018, through April 24, 2018

     3.4       3.6  

Capital from assumed exercise of Integrity stock options

     4.6       5.8  

Estimated costs and expenses of Integrity and Integrity Bank related to the merger and other agreed upon items, on an after tax equivalent basis.

     (9.6     (10.3
  

 

 

   

 

 

 

Estimated tangible equity of Integrity as of April 24, 2018

   $ 84.2     $ 84.9  
  

 

 

   

 

 

 

If Integrity achieves the estimates in the range set forth above, Integrity’s adjusted tangible equity as of the closing date would be greater than $84.0 million, and, thus, the cash consideration would not be adjusted downward for a shortfall.

The amounts in the table above are only estimates and are based upon several assumptions, many of which are beyond the control of Integrity and Integrity Bank. Accordingly, the actual amount of Integrity’s adjusted tangible equity at the tangible equity determination date may vary from these estimated amounts. Integrity will not resolicit proxies from holders of its common stock in the event that Integrity adjusted tangible equity is below $84.0 million on the tangible equity determination date and the cash portion of the merger consideration is adjusted downward as Integrity has no right to do so under the reorganization agreement. For more information regarding how the Integrity adjusted tangible equity will be calculated and how Integrity has estimated what that amount will be on or about May 1, 2018, the date on which Independent and Integrity hope to complete the merger, please see “The Merger—Possible Downward Adjustment to the $31.6 million Cash Portion of the Merger Consideration” beginning on page 50.

Value of Merger Consideration to be Received (page 53)

If the necessary shareholder and regulatory approvals are obtained and the merger is completed, 5,046,952 shares of Integrity common stock are outstanding immediately prior to the merger (which is expected to be the case if Integrity stock options to purchase 163,523 shares of Integrity common stock are exercised after the date of this proxy statement/prospectus), there are Integrity stock options to purchase 64,000 shares of Integrity common stock that remain outstanding and unexercised and that the aggregate payment to cash out such unexercised Integrity stock options is $790,124, the adjusted tangible equity of Integrity is at least $84.0 million at the tangible equity determination date, each share of Integrity common stock then outstanding would be exchanged for 0.4106 of a share of Independent common stock and $6.11 per share in cash. Independent’s common stock is listed on the Nasdaq Global Select Market under the symbol “IBTX.”

Based on the assumptions set forth above and the closing price of Independent’s common stock as of February 23, 2018, of $72.60 per share, we estimate Integrity shareholders would receive merger consideration with a value of $35.91 for each share of Integrity common stock they hold immediately prior to the effective time of the merger and with an aggregate value to all holders of Integrity common stock of $181.3 million. The aggregate value of the shares of Independent common stock to be issued to the Integrity shareholders in



 

13


Table of Contents

connection with the merger and the value of the fraction of a share of Independent common stock to be issued in exchange for each share of Integrity common stock in connection with the merger will increase or decrease between the date hereof and the effective time of the merger depending on a number of factors, including fluctuations in the market price of Independent common stock.

The amounts in each of the tables below have been calculated based on a number of assumed stock prices and 5,046,952 outstanding shares of Integrity common stock assuming the exercise of outstanding Integrity stock options to purchase 163,523 shares of Integrity common stock and an aggregate payment of $790,124 to cash out unexercised Integrity stock options to purchase 64,000 shares of Integrity common stock. Table 1 assumes that Integrity will have adjusted tangible equity of $84.0 million (as calculated in accordance with the terms of the reorganization agreement) on the tangible equity determination date; Table II assumes that Integrity will have adjusted tangible equity of $76.0 million on the tangible equity determination date.

The actual price at which a share of Independent common stock is trading in the market at the effective time of the merger may be materially less or more than any of the assumed stock prices in each of the tables below and the price and may be materially less or more than the assumed stock prices used for determining the value of the merger consideration shown in each of the tables below. As a result, the actual amounts and values of the merger consideration received by the Integrity shareholders in the merger may differ materially from any of the amounts and values set forth in either or both of the following tables.

Table I

 

Assumed

Stock Price

   Aggregate Number
Independent

Shares to be Issued
as Merger
Consideration
     Value of
Aggregate Number
of Independent
Shares Issued as
Merger

Consideration(2)
     Aggregate Amount
of Cash Merger
Consideration(2)
     Value of
Aggregate
Merger
Consideration(2)
 
$72.60(1)      2,072,131      $ 150,436,711      $ 30,832,015      $ 181,268,726  
$70.00        2,072,131        145,049,170        30,738,000        175,787,170  
$65.00        2,072,131        134,688,515        30,891,680        165,580,195  
$60.00        2,072,131        124,327,860        31,046,000        155,373,860  
$55.00        2,072,131        113,967,205        31,199,480        145,166,685  
$50.00        2,072,131        103,606,550        31,353,760        134,960,310  

 

(1) The closing price of a share of Independent common stock on February 23, 2018.
(2) Determined as described under “The Merger—Treatment of Shares of Integrity Common Stock” beginning on page 49.

Table II

 

Assumed Stock

Price

   Aggregate Number
Independent

Shares to be Issued
as Merger
Consideration
     Value of
Aggregate Number
of Independent
Shares Issued as
Merger

Consideration(2)
     Aggregate Amount
of Cash Merger
Consideration(2)
     Value of
Aggregate
Merger
Consideration(2)
 
$72.60(1)      2,072,131      $ 150,436,711      $ 22,832,015      $ 173,268,726  
$70.00        2,072,131        145,049,170        22,738,000        167,787,170  
$65.00        2,072,131        134,688,515        22,891,680        157,580,195  
$60.00        2,072,131        124,327,860        23,046,000        147,373,860  
$55.00        2,072,131        113,967,205        23,199,480        137,166,685  
$50.00        2,072,131        103,606,550        23,353,760        126,960,310  


 

14


Table of Contents

 

(1) The closing price of a share of Independent common stock on February 23, 2018.
(2) Determined as described under “The Merger—Treatment of Shares of Integrity Common Stock” beginning on page 49.

Other Financial Aspects of the Merger (page 55)

If Integrity’s tangible equity is greater than $84.0 million on the tangible equity determination date, then on the closing date, Integrity may distribute to its shareholders an amount equal to the difference between the actual amount of tangible equity on the tangible equity determination date less $84.0 million.

Material U.S. Federal Income Tax Consequences (page 88)

The merger is intended to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code, as amended, or the Code, for U.S. federal income tax purposes, and the closing is conditioned upon the receipt by Independent of an opinion from Andrews Kurth Kenyon LLP, special counsel to Independent, and the receipt by Integrity of an opinion from Jackson Walker L.L.P., counsel to Integrity, to the effect that the merger so qualifies. This summary of U.S. federal income tax consequences assumes that the merger will be consummated as described in the reorganization agreement and this proxy statement/prospectus and that Independent and Integrity will not waive the opinion condition described in “The Merger—Material U.S. Federal Income Tax Consequences of the Merger—Tax Opinions.” If the merger qualifies as such a reorganization, the material U.S. federal income tax consequences of the merger to a U.S. holder of Integrity common stock will be as follows: holders of Integrity common stock generally will recognize gain (but not loss) with respect to their Integrity common stock. The gain a U.S. holder of Integrity common stock recognizes generally will be equal to the lesser of cash received (excluding any cash received in lieu of a fractional share of Independent common stock) or gain realized in the merger. The amount of gain realized will equal an amount by which the cash plus the fair market value of the Independent common stock, at the effective time of the merger, exceeds the adjusted tax basis in the Integrity common stock to be surrendered in exchange therefor.

For further information, please refer to “The Merger—Material U.S. Federal Income Tax Consequences of the Merger.” The U.S. federal income tax consequences described above may not apply to all holders of Integrity common stock. The tax consequences to a holder of Integrity common stock will depend on his or her individual situation. Accordingly, we strongly urge holders of Integrity common stock to consult their tax advisors for a full understanding of the particular tax consequences of the merger to them.

Fairness Opinion of Financial Advisor to Integrity (page 58)

Sandler O’Neill & Partners, L.P., or Sandler O’Neill, has delivered a written opinion, dated November 28, 2017, to the board of directors of Integrity to the effect that, as of the date of the opinion, based upon and subject to the procedures followed, assumptions made, matters considered and qualifications and limitations set forth in the opinion, the aggregate merger consideration was fair to the holders of Integrity common stock from a financial point of view. This opinion is attached to this proxy statement/prospectus as Appendix B. Integrity shareholders are urged to read the opinion carefully in its entirety. Sandler O’Neill’s opinion speaks only as of the date of the opinion and was necessarily based on financial, economic, market and other conditions as they existed on, and the information made available to Sandler O’Neill as of, the date of Sandler O’Neill’s opinion. The opinion of Sandler O’Neill is not a recommendation to any Integrity shareholder as to how to vote on the proposal to approve the reorganization agreement and the merger. You should read this opinion completely to understand the procedures followed, matters considered and limitations on the reviews undertaken by Sandler O’Neill in providing its opinion.



 

15


Table of Contents

Independent Plans to Continue Payment of Quarterly Dividends (page 33)

Independent paid a cash dividend of $0.10 per share to its shareholders in each of the four quarters of 2017 and paid a $0.12 per share dividend in the first quarter of 2018. Independent intends to continue paying quarterly cash dividends following the merger.

Ownership of Independent After the Merger

Based on 28,345,755 shares of Independent common stock outstanding as of February 23, 2018, and Independent issuing a total of 2,072,131 shares of Independent common stock to the shareholders of Integrity in connection with the merger, the former Integrity shareholders would own approximately 7% of the shares of Independent common stock that would be outstanding immediately after such shares are issued in connection with the merger. Such ownership percentage will be reduced by any future issuances of shares of Independent common stock.

Market Prices of Independent Common Stock (page 106)

Shares of Independent common stock are listed for trading on the Nasdaq Global Select Market under the symbol “IBTX.” On November 27, 2017, the last trading day before the merger was announced, Independent common stock closed at $64.05 per share. On February 23, 2018, Independent common stock closed at $72.60 per share. The market price of Independent common stock will fluctuate prior to the merger. You should obtain the most recent closing price for Independent common stock on the Nasdaq Global Select Market prior to deciding how to vote. Shares of Integrity common stock are not traded on any national securities exchange or on an established public trading market and no quotations of any market price exists for shares of Integrity common stock.

Integrity Special Meeting (page 44)

The special meeting of shareholders of Integrity will be held on April 10, 2018, at 4:00 p.m. Central Time, at Integrity’s headquarters, 4040 Washington Avenue, Houston, Texas 77007. At the Integrity special meeting, holders of shares of Integrity common stock will be asked to consider and vote on the following:

 

    a proposal to approve the reorganization agreement, which provides for Independent to acquire Integrity through the merger, and to approve the merger; and

 

    a proposal to adjourn the Integrity special meeting to a later date or dates if the board of directors of Integrity determines such adjournment is necessary to permit solicitation of additional proxies if there are not sufficient votes at the time of the Integrity special meeting to constitute a quorum or to approve the reorganization agreement and the merger.

Integrity Record Date Set at February 23, 2018; Two-Thirds Shareholder Vote Required to Approve the Reorganization Agreement and the Merger (page 46-47)

You may vote on the proposals to come before special meeting of Integrity shareholders if you owned shares of Integrity common stock of record as of 5:00 p.m. on February 23, 2018. You can cast one vote for each share of Integrity common stock that you owned of record at that time. As of February 23, 2018, there were 4,883,429 shares of Integrity common stock outstanding.

Approval of the reorganization agreement and the merger requires the affirmative vote of the holders of at least two-thirds of the shares of Integrity common stock outstanding and entitled to vote as of 5:00 p.m. on the record date. If a holder of Integrity common stock fails to vote, it will have the effect of a vote against the



 

16


Table of Contents

reorganization agreement and the merger. The affirmative vote of a majority of the shares of Integrity common stock that are present in person or by proxy at the Integrity special meeting is required to approve the adjournment of the Integrity special meeting.

A holder of Integrity common stock may vote his or her shares of Integrity common stock by attending the special meeting and voting in person or by completing and mailing the enclosed proxy card. If you are the record holder of such shares, you can revoke your proxy at any time before the vote is taken at the Integrity special meeting by sending a written notice revoking the proxy or submitting a later-dated proxy to James M. McElray, Executive Vice President and Chief Financial Officer of Integrity, which notice or later dated proxy must be received no later than immediately prior to the vote at the Integrity special meeting. You may also revoke your proxy by voting in person at the Integrity special meeting. If you receive a notice of special meeting and a proxy statement/prospectus directly from Integrity, you are deemed a holder of record. If your shares of Integrity common stock are held in “street name” and you desire to change any voting instructions you have previously given to the record holder of such shares of Integrity common stock of which you are the beneficial owner, you should contact the broker, custodian or other nominee holding such shares in “street name” in order to direct a change in the manner your shares of Integrity common stock will be voted. See “The Integrity Special Meeting—Voting of Proxies by Holders of Record,” “—Attending the Meeting; Voting in Person” and “—Revocation of Proxies.”

Integrity’s Reasons for the Merger and Recommendation of Integrity’s Board of Directors (page 57)

Based on the reasons discussed elsewhere in this proxy statement/prospectus, the board of directors of Integrity believes that the merger is fair, from a financial point of view to, and in the best interests of, the shareholders of Integrity and unanimously recommends that you vote FOR the proposal to approve the reorganization agreement and the merger. For a discussion of the circumstances surrounding the merger and the factors considered by Integrity’s board of directors in approving the reorganization agreement, see pages 59 and 60.

Certain Shareholders of Integrity are Expected to Vote Their Shares of Integrity Common Stock for Approval of the Reorganization Agreement (page 45)

The directors of Integrity and certain entities that they represent have entered into an agreement to vote the shares of Integrity common stock that they control in favor of approval of the reorganization agreement and the merger and in the manner most favorable to the consummation of the merger and the transactions contemplated by the reorganization agreement; provided, however, that the Integrity shareholders who entered into the voting agreement would be permitted to vote to accept a superior proposal to acquire Integrity (as “superior proposal” is defined in the reorganization agreement). As of the Integrity record date, 1,130,526 shares of Integrity common stock, or 23% of the 4,883,429 shares of Integrity common stock then outstanding and entitled to vote at the Integrity special meeting, were bound by the voting agreement.

Effective Time of the Merger (page 72)

The merger will become effective at the date and time specified in the certificate of merger to be filed with the Texas Secretary of State. If Integrity shareholders approve the reorganization agreement and the merger at the special meeting, and if all necessary regulatory approvals are obtained and the other conditions to the parties’ respective obligations to effect the merger are satisfied or are waived by the party entitled to do so, Independent and Integrity hope to complete the merger on May 1, 2018, although delays in the completion of the merger could occur.

Integrity and Independent cannot assure you that the necessary shareholder and regulatory approvals will be obtained or that the other conditions to completion of the merger can or will be satisfied. See “Risk Factors—Risks Related to the Merger—The merger of Independent and Integrity may not be completed.”



 

17


Table of Contents

Exchange of Integrity Stock Certificates (page 71)

After the effective time of the merger, the Integrity shareholders will receive a form of letter of transmittal and instructions from Equiniti Trust Company, acting as Independent’s exchange and transfer agent, or the exchange agent, describing the procedures for surrendering their stock certificates representing shares of Integrity common stock in exchange for shares of Independent common stock and a cash payment. The shares of Independent common stock issuable in exchange for the shares of Integrity common stock will be issued solely in uncertificated book-entry form and a holder’s shares of Independent common stock will be reflected in the shareholder’s account established in the Direct Registration System by Independent’s stock transfer agent. Please do not send Integrity or Independent any of your Integrity stock certificates until you receive these instructions.

Conditions to Completion of the Merger (page 77)

The completion of the merger depends on a number of conditions being satisfied. These include, among others:

 

    approval by holders of the Integrity common stock of the reorganization agreement and the transactions contemplated thereby by the requisite vote under the Integrity certificate of formation and applicable law;

 

    receipt of all approvals and consents required by applicable law from all applicable governmental authorities in connection with the reorganization agreement, any other agreement contemplated thereby and the consummation of the transactions contemplated by the reorganization agreement and such other agreements and all applicable waiting periods will have expired as to Independent only, which approvals and consents do not impose any material requirement upon Independent or its subsidiaries that are reasonably unacceptable to Independent;

 

    the registration statement of which this proxy statement/prospectus forms a part has become effective and no stop order suspending its effectiveness is in effect and no proceedings for that purpose have been initiated and continuing or threatened by the SEC, and all necessary approvals under federal or applicable state securities laws relating to the issuance or trading of the Independent common stock to be issued have been received;

 

    the shares of Independent common stock to be issued to Integrity shareholders being authorized for listing on the Nasdaq Global Select Market and such approval is not withdrawn or revoked;

 

    no action shall have been taken, and no statute, rule, regulation or order shall have been promulgated, enacted, entered, enforced or deemed applicable to the reorganization agreement, or the transactions contemplated hereby, by any governmental authority, including by means of the entry of a preliminary or permanent injunction, that would (i) make the reorganization agreement or any other agreement contemplated thereby, or the transactions contemplated thereby, illegal, invalid or unenforceable, (ii) as to Independent only, require the divestiture of a material portion of the assets of Integrity, (iii) impose material limits on the ability of any party to consummate the transactions contemplated by the reorganization agreement, (iv) as to Independent only, otherwise result in a material adverse change to Integrity, Integrity Bank, Independent or Independent Bank or (v) could reasonably be expected to subject Independent, Integrity or any of their respective subsidiaries, or any of their respective officers, directors, shareholders or employees, to criminal or civil liability upon the consummation of the reorganization agreement or any other agreement contemplated thereby, or the transactions contemplated thereby;

 

    the other party’s representations and warranties contained in the reorganization agreement being true and correct in all material respects as of the date of the reorganization agreement as of the date of the closing;


 

18


Table of Contents
    the performance or compliance in all material respects by each party with its respective covenants and obligations required by the reorganization agreement to be performed or complied with, before or at the closing of the merger; and

 

    receipt by each party of all documents required to be delivered by the other party on or before the closing date, all in form and substance reasonably satisfactory to the receiving party.

In addition to the conditions listed above, Integrity’s obligations to complete the merger is subject to the satisfaction of the following conditions:

 

    Independent’s delivery of the merger consideration to Equiniti Trust Company, as exchange agent;

 

    no material adverse change (as defined in the reorganization agreement) shall have occurred as to Independent since June 30, 2017; and

 

    the receipt by Integrity of an opinion from Jackson Walker L.L.P. to the effect that for U.S. federal income tax purposes (i) the merger will be treated as a reorganization within the meaning of Section 368(a) of the Code, and (ii) each of Independent and Integrity will be a party to such reorganization within the meaning of Section 368(b) of the Code.

In addition to the conditions listed above, Independent’s obligation to complete the merger is subject to the satisfaction of the following conditions:

 

    the adjusted tangible equity of Integrity, as of the closing date of the merger must not be less than $76.0 million;

 

    Integrity Bank’s allowance for loan and lease losses as of the closing date must be at a level necessary to fully reserve for loss on its loans and other real estate owned consistent with Integrity Bank’s historical methodology and in compliance with GAAP and regulatory accounting principles (“RAP”) and, if certain identified loans have not been resolved prior to the tangible equity determination date, then Integrity shall have made agreed upon provisions for loan loss to reserve for such loans;

 

    no material adverse change (as defined in the reorganization agreement) shall have occurred as to Integrity or Integrity Bank since June 30, 2017;

 

    all Integrity employee plans must be terminated in accordance with their respective terms and all applicable laws and regulations, the affected participants must have been notified of such terminations, and Integrity shall have delivered certain acknowledgements signed by certain directors and officers of Integrity and Integrity Bank;

 

    all nonexercising holders of Integrity stock options have signed and delivered option cancellation agreements to Independent prior to the tangible equity determination date;

 

    holders of no more than 5% of the Integrity common stock shall have demanded or exercised their statutory dissenters’ rights under the TBOC;

 

    all material consents and approvals from all nongovernmental third parties that are required to be obtained under the terms of any contract, agreement or instrument to which Integrity is a party shall have been obtained;

 

   

the receipt by Independent of an opinion from Andrews Kurth Kenyon LLP to the effect that, for U.S. federal income tax purposes, (i) the merger will be treated as a reorganization within the meaning of Section 368(a) of the Code, and (ii) each of Independent and Integrity will be a party to such reorganization within the meaning of Section 368(b) of the Code; and with respect to the bank merger, that (i) the bank merger will be treated as a reorganization within the meaning of Section 368(a) of the



 

19


Table of Contents
 

Code, and (ii) each of Independent Bank and Integrity Bank will be a party to such reorganization within the meaning of Section 368(b) of the Code; and

 

    Integrity shall have terminated and dissolved its subsidiary, IBI Liquidating Corporation.

Additionally, the completion of the merger depends on the effectiveness of the following agreements, which agreements will not become effective until the effective time of the merger:

 

    employment agreements among Independent, Independent Bank and each of Hazem A. Ahmed, Raymond H. Marshall and Charles B. Phillips.

 

    support agreements from each of the nonofficer directors of Integrity and Integrity Bank, agreeing to support, and not compete with, the business of Independent Bank following the closing of the merger;

 

    addendums to deferred compensation agreements with Messrs. Neff and McElray clarifying the payment of benefits provided for in the deferred compensation agreements upon a change in control; and

 

    director long-term care agreements with each of the directors of Integrity providing for the payment of premiums for long-term care insurance benefits.

Any condition to the completion of the merger other than the required shareholder and regulatory approval and the absence of an order prohibiting the merger, may be waived in writing by the party to the reorganization agreement entitled to the benefit of such condition. A party to the reorganization agreement could choose to complete the merger even though a condition has not been satisfied, as long as permitted by applicable law. Neither Independent nor Integrity can be certain when or if the conditions to the merger will be satisfied or waived, or that the merger will be completed.

Regulatory Approvals Required for the Merger (page 93)

The acquisition of Integrity by Independent requires the approval of the Board of Governors of the Federal Reserve System, or Federal Reserve. In addition, the bank merger requires the approval of the Federal Deposit Insurance Corporation, or the FDIC, and the Texas Department of Banking, or TDB. On January 12, 2018, Independent, Independent Bank and Integrity Bank filed applications with the Federal Reserve, the FDIC and the TDB to obtain approval of the merger and the bank merger. Independent expects to obtain all necessary regulatory approvals, although Independent cannot be certain if or when Independent will obtain them.

Amendment or Waiver of the Reorganization Agreement (page 84)

Independent and Integrity may amend the reorganization agreement and each party may waive its right to require the other party to adhere to any term or satisfy any condition of the reorganization agreement in accordance with the terms of the reorganization agreement. However, the merger consideration to be received by the shareholders of Integrity pursuant to the terms of the reorganization agreement may not be decreased after shareholder approval of the reorganization agreement without the further approval of the Integrity shareholders.

No Solicitation (page 75)

Pursuant to the reorganization agreement, Integrity agreed that it will not, and that it will cause Integrity Bank and its employees, directors, officers, financial advisors or agents of Integrity and Integrity Bank not to, propose to, solicit, knowingly encourage, initiate or participate in any negotiations or discussions with any third party with respect to any proposal that could reasonably be expected to lead to an acquisition proposal as described in the reorganization agreement, disclose to any third party any information concerning the business,



 

20


Table of Contents

properties, books or records of it in connection with any acquisition proposal, or cooperate with any third party to make any acquisition proposal. Promptly upon receipt of any unsolicited offer, Integrity will communicate to Independent the terms of any proposal or request for information and the identity of the parties involved.

Provided that Integrity has complied with the foregoing restrictions, if after the date of the reorganization agreement but prior to the closing of the merger, Integrity receives a bona fide, unsolicited written acquisition proposal, it may engage in negotiations and discussions with, and furnish any information and other access to, any person making such acquisition proposal if, and only if, Integrity’s board of directors determines in good faith, after consultation with outside legal and financial advisors, that such acquisition proposal is, or is reasonably, capable of becoming more favorable to Integrity’s shareholders from a financial point of view than the merger with Independent and the failure of Integrity’s board of directors to furnish such information or access or enter into such discussions or negotiations would be materially inconsistent with its fiduciary duties to the shareholders of Integrity and Integrity obtains an appropriately executed confidentiality agreement from such third party.

Termination of the Reorganization Agreement (page 84)

Independent and Integrity can mutually agree at any time to terminate the reorganization agreement without completing the merger. In addition, either Independent or Integrity may decide, without the consent of the other, to terminate the reorganization agreement if:

 

    the conditions to each party’s obligations to close have not been satisfied on or before June 30, 2018, provided that if the conditions precedent have not been satisfied because approval of the reorganization agreement or any other agreement contemplated by it from any regulatory agency whose approval is required has not been received and such delay in the receipt of regulatory approval is not the result of a public comment or protest made in connection with an application for regulatory approval, then either Integrity or Independent can unilaterally extend the June 30, 2018, deadline by up to 30 days by providing written notice, and further provided that, if regulatory approval has not been received and such delay in the receipt of regulatory approval is the result of a protest, then the closing date deadline shall automatically be extended to December 31, 2018, without action by either party;

 

    the required regulatory approvals have not been obtained; or

 

    the merger is not approved by the shareholders of Integrity at its special meeting or the adjournment thereof.

Integrity may terminate the reorganization agreement, without the consent of Independent, if:

 

    Independent breaches or fails to perform in any material respect any of its representations, warranties, covenants or other agreements contained in the reorganization agreement or any other agreement contemplated by the reorganization agreement, and such failure has not been cured within a period of 30 calendar days after written notice from Integrity;

 

    at any time prior to the closing date in order to enter concurrently with such termination into an acquisition agreement or similar agreement with respect to a superior proposal that has been received and considered by Integrity and the Integrity board in accordance with all of the requirements of the reorganization agreement; or

 

    there has been any material adverse change, since June 30, 2017, in the assets, properties, liabilities, reserves, business, or financial condition or results of operation of Independent.

In addition, Independent may terminate the reorganization agreement, without the consent of Integrity, if:

 

   

Integrity breaches or fails to perform in any material respect any of its representations, warranties, covenants or other agreements contained in the reorganization agreement or any other agreement



 

21


Table of Contents
 

contemplated by the reorganization agreement, and such failure has not been cured within a period of 30 calendar days after written notice from Independent;

 

    the Integrity board has (i) recommended to the holders of Integrity common stock that they tender their shares in a tender or exchange offer commenced by an unaffiliated third party for more than 15% of the outstanding Integrity common stock, (ii) effected a change in the board’s recommendation with respect to the merger or recommended to the Integrity shareholders acceptance or approval of any alternative acquisition proposal or (iii) notified Independent in writing that Integrity intends to accept a superior proposal;

 

    any of the following have occurred with respect to environmental matters regarding Integrity within 90 days of the date of the reorganization agreement: (i) the factual substance of any representations and warranties of Integrity in the reorganization agreement is not materially true and accurate, (ii) the results of any environmental inspection or other environmental survey by Independent are disapproved by Independent because such inspection or survey identifies a material or violation of applicable environmental laws that would result in a material adverse change to Integrity or Integrity Bank, (iii) Integrity refuses to allow such inspection or survey in a manner that Independent reasonably considers necessary, (iv) such inspection or survey identifies an event, condition or circumstance that would require a material remedial or cleanup action or result in a material adverse change in the assets, properties, business or financial condition of Integrity, (v) such inspection or survey reveals the presence of any underground or above ground storage tank in, on or under any real property owned or leased by Integrity or Integrity Bank that is not shown to be in material compliance with all applicable environmental laws, or that has had a release of petroleum or some other hazardous material that has not been cleaned up to the satisfaction of the relevant governmental authority or any other party with a right to compel such cleanup or (vi) such inspection or survey identifies the presence of any asbestos-containing material in, on or under any real property owned or leased by Integrity or Integrity Bank, the removal of which would result in a material adverse change in the assets, properties, business or financial condition of Integrity, subject, in the case of each of the foregoing, to notice and the right of Integrity to satisfactorily correct any such matter; or

 

    there has been any material adverse change, since June 30, 2017, in the assets, properties, liabilities, reserves, business, financial condition or results of operation of Integrity or Integrity Bank.

Termination Fee (page 85)

To compensate Independent for entering into the reorganization agreement, taking actions to consummate the transactions contemplated by the reorganization agreement and incurring the related costs and expenses and other losses and expense, including foregoing the pursuit of other opportunities, the reorganization agreement provides that Integrity will pay to Independent a termination fee of $4,650,000 if the reorganization agreement is terminated:

 

    by Integrity because it receives an alternative acquisition proposal and, under certain terms and conditions, determines that it is a superior proposal to that of the reorganization agreement, taking into account any adjustment made by Independent to the merger consideration, provided that Independent is not in material breach of the reorganization agreement;

 

    by either Independent or Integrity if the Integrity shareholders do not approve the reorganization agreement and the merger by the requisite vote at the Integrity special meeting or any adjournment thereof and either (i) at the time of such disapproval, there exists an acquisition proposal with respect to Integrity other than that of Independent that has not been withdrawn prior to the special meeting or (ii) within 12 months of the termination of the reorganization agreement, Integrity enters into a definitive agreement with any third party with respect to any acquisition proposal; or


 

22


Table of Contents
    by Independent if the Integrity board has (i) recommended to the Integrity shareholders that they tender their shares in a tender or exchange offer commenced by an unaffiliated third party for more than 15% of the outstanding Integrity common stock, (ii) effected a change in the board’s recommendation with respect to the merger or recommended to the Integrity shareholders acceptance or approval of any alternative acquisition proposal or (iii) notified Independent in writing that Integrity intends to accept a superior proposal.

Except with respect to termination fees and expenses, as discussed above, in the event of the termination of the reorganization agreement without breach by any party, the reorganization agreement will be void and have no effect, without liability on the part of any party or the directors, officers or shareholders of any party, except as specifically contemplated in the reorganization agreement.

Some of the Directors and Officers of Integrity Have Financial Interests in the Merger that Differ from Your Interests (page 86)

Some of the directors and officers of Integrity have interests in the merger that differ from, or are in addition to, their interests as shareholders of Integrity. These interests include:

 

    Employment Agreements with Independent Bank. Independent and Independent Bank have entered into employment agreements with each of Messrs. Ahmed, Marshall and Phillips, who are currently executive officers and employees of Integrity Bank, to be effective, if at all, upon completion of the merger, that include noncompetition and nonsolicitation obligations to Independent Bank. Pursuant to these agreements, these individuals will become officers and employees of Independent Bank and will be entitled to receive completion bonuses in the range of $40,000 to $100,000, annual salaries in the range of $200,000 to $275,000, annual incentive bonuses based upon attainment of pre-established performance goals of Independent Bank or upon the profitability of Independent Bank’s mortgage operations, grants of restricted shares of Independent common stock in the range of 3,000 to 7,000 shares of Independent common stock, and certain additional incidental benefits from Independent Bank during the term of such person’s employment with Independent Bank.

 

    Support Agreements. Independent has entered into separate support agreements with each of the directors of Integrity and Integrity Bank, specifically, Carol S. Chiu, Kyle A. Frazier, Robert L. Gerry, III, George J. Kacal, William J. Kacal, Fred C. Leonard, III, James M. McElray, Charles M. Neff, Jr., Albert L. Reese, Jr., Dewey A. Stringer, III, Jeffrey K. Van Wart and Gary R. Wooley, to be effective, if at all, upon completion of the merger. Each of those agreements provides, among other things, that such director agrees to use reasonable efforts to refrain from harming the goodwill and customer and client relationships of Independent Bank, as well as limited confidentiality, noncompetition and nonsolicitation obligations following the closing date.

 

    Indemnification. The directors and officers of Integrity will receive indemnification from Independent for a period of four years after completion of the merger to the same extent and subject to the conditions set forth in the certificate of formation and bylaws of Integrity and continued director and officer liability coverage for a period of four years after completion of the merger. Any amounts paid by Integrity Bank to purchase continued director and officer liability coverage will reduce Integrity’s adjusted tangible equity for purposes of calculating the merger consideration payable to Integrity shareholders. See “—Possible Downward Adjustment to the $31.6 million Cash Portion of the Merger Consideration.”

 

   

Cashout of Certain Outstanding Stock Options. Certain directors and executive officers of Integrity and Integrity Bank hold Integrity stock options to purchase an aggregate of 112,523 shares of Integrity common stock. All such directors and executive officers are expected to exercise their respective Integrity stock options prior to the tangible equity determination date. However, to the extent one or



 

23


Table of Contents
 

more of those persons do not exercise those options prior to the merger’s effective time, they will receive cash in connection with the cashout of those stock options that are outstanding and unexercised at the merger’s effective time. Any such payments made to those persons in respect of their options to purchase Integrity common stock will reduce the cash portion of the merger consideration received by the Integrity shareholders in the merger.

 

    Addendums to Deferred Compensation Agreements. Independent has entered into addendums to the deferred compensation agreements with Messrs. Neff and McElray clarifying the payment of certain benefits provided for in the deferred compensation agreements upon a change in control.

 

    Director Long-Term Care Agreements. Independent has entered into director long-term care agreements with each of the directors of Integrity providing for the payment of premiums for certain long-term care insurance benefits.

Comparison of Rights of Shareholders of Integrity and Independent (page 113)

Integrity is a Texas corporation that is a registered bank holding company, and the rights of shareholders of Integrity are governed by Texas law and Integrity’s certificate of formation and bylaws. Independent is a Texas corporation that is a registered bank holding company, and the rights of Independent’s shareholders are governed by Texas law and Independent’s certificate of formation and bylaws. Upon completion of the merger, all of the then shareholders of Integrity common stock will become shareholders of Independent and their rights as shareholders of Independent will be governed by Independent’s certificate of formation and bylaws, in addition to Texas law. Independent’s certificate of formation and bylaws will not be amended in the merger, but could be later restated, amended or, with respect to the bylaws, repealed.

Dissenters’ Rights of the Holders of Integrity Common Stock (page 93)

The holders of Integrity common stock have the right under Texas law to dissent from the merger and have the appraised fair value of their shares of Integrity common stock as of the date immediately preceding the effective date of the merger paid to them in cash. The appraised fair value of any particular number of shares of Integrity common stock as of such date may be more or less than the value of the merger consideration stock that a holder of that particular number of shares of Integrity common stock would be entitled to receive pursuant to the merger.

Persons having beneficial interests in Integrity common stock held of record in the name of another person, such as a broker, custodian or other nominee, must act promptly to cause the record holder to take the actions required under Texas law to exercise their dissenter’s rights.

In order to dissent, the holder of Integrity common stock must carefully follow the requirements of the TBOC, including providing Integrity, prior to the Integrity special meeting, with a written objection to the merger that states that he or she will exercise his or her right to dissent with respect to his or her shares of Integrity common stock if the holders of the Integrity common stock approve the reorganization agreement and the merger, and the merger is completed. These steps for perfecting the right of dissent are summarized under the caption “—Dissenters’ Rights of Integrity Shareholders” on page 93. The provisions of the TBOC pertaining to dissenters’ rights are attached to this proxy statement/prospectus as Appendix C and the summaries of those provisions in this proxy statement/prospectus should be read in conjunction with, and are qualified in their entirety by, those provisions of the TBOC.

If you intend to exercise dissenters’ rights as to shares of Integrity common stock that you hold, you should read the provisions of the TBOC governing dissenters’ rights carefully and consult with your own legal counsel. Each holder of Integrity common stock should also remember that if he or she returns a signed proxy card, but fails to provide instructions on that proxy card that his or her shares of Integrity common stock are to be voted



 

24


Table of Contents

against the approval of the reorganization agreement and the merger, such Integrity shareholder’s shares of Integrity common stock will be considered to have voted in favor of the reorganization agreement and the merger. In that event, such Integrity shareholder will not be able to assert dissenters’ rights as to his or her shares of Integrity common stock.

If the Integrity shareholders approve the reorganization agreement, a holder of Integrity common stock who (i) delivers to the president and the secretary of Integrity a written objection to the merger prior to the Integrity special meeting that states that such holder will exercise his or her right to dissent if the reorganization agreement and the merger are approved and the merger is completed and includes an address for notice of the effectiveness of the merger, (ii) votes his or her shares of Integrity common stock against approval of the reorganization agreement and the merger at the Integrity special meeting, (iii) not later than the 20th day after Independent sends such holder notice that the merger was completed, delivers to the president and secretary of Independent a written demand for payment of the fair value of his or her shares of Integrity common stock, which demand states that he or she holds shares of Integrity common stock and states the number of shares of Integrity common stock such holder owns, his or her estimate of the fair value of such shares and an address to which a notice relating to the dissent and appraisal procedures may be sent, and (iv) not later than the 20th day after he or she makes that demand for payment, submits to Independent the certificates representing his or her shares of Integrity common stock, will be entitled under the TBOC to receive the appraised fair value of his or her shares of Integrity common stock as of the date immediately prior to the effective time of the merger.



 

25


Table of Contents

CERTAIN FINANCIAL INFORMATION REGARDING INDEPENDENT AND INTEGRITY

Selected Financial Information of Independent

The following selected consolidated financial information of Independent as of and for the years ended December 31, 2017, 2016 and 2015, has been derived from Independent’s audited consolidated financial statements incorporated by reference in this proxy statement/prospectus, and the selected consolidated financial information as of and for the years ended December 31, 2014 and 2013, has been derived from Independent’s audited consolidated financial statements not appearing or incorporated by reference in this proxy statement/prospectus.

You should read the following financial information relating to Independent in conjunction with other information contained in this proxy statement/prospectus, including consolidated financial statements of Independent and related accompanying notes appearing in Independent’s Annual Report on Form 10-K most recently filed with the SEC and in the Quarterly Reports on Form 10-Q of Independent filed with the SEC after that Annual Report on Form 10-K was filed, if any, and in any Current Report on Form 8-K of Independent containing consolidated financial statements of Independent that was filed with the SEC after such Annual Report on Form 10-K, each of which reports is incorporated by reference in this proxy statement/prospectus. Independent’s historical results for any prior period are not necessarily indicative of results to be expected in any future period. Independent has consummated several acquisitions in recent fiscal periods. The results and other financial information of those acquired operations are not included in the table below for the periods or dates prior to their respective acquisition dates and, therefore, the results for these prior periods are not comparable in all respects and may not be predictive of Independent’s future results. In addition, the selected financial information in the table immediately below does not include, on any basis, the results or financial condition of Integrity for any period or as of any date.

 

    As of and for the Year Ended December 31,  
    2017     2016     2015     2014     2013  
(dollars in thousands except per share)                              

Selected Income Statement Data

         

Interest income

    $    307,914     $ 210,049     $ 174,027     $ 140,132     $ 87,214  

Interest expense

    42,436       26,243       19,929       15,987       12,281  

Net interest income

    265,478       183,806       154,098       124,145       74,933  

Provision for loan losses

    8,265       9,440       9,231       5,359       3,822  

Net interest income after provision for loan losses

    257,213       174,366       144,867       118,786       71,111  

Noninterest income

    41,287       19,555       16,128       13,624       11,021  

Noninterest expense

    176,813       113,790       103,198       88,512       57,671  

Income tax expense

    45,175       26,591       19,011       14,920       4,661  

Net income

    76,152       53,540       38,786       28,978       19,800  

Preferred stock dividends

    —         8       240       169       —    

Net income available to common shareholders

    76,152       53,532       38,546       28,809       19,800  

Pro forma net income(1) (unaudited)

    n/a       n/a       n/a       n/a       16,174  

Per Share Data (Common Stock)

         

Earnings:

         

Basic

  $ 2.98     $ 2.89     $ 2.23     $ 1.86     $ 1.78  

Diluted(2)

    2.97       2.88       2.21       1.85       1.77  

Pro forma earnings:(1) (unaudited)

         

Basic

    n/a       n/a       n/a       n/a       1.45  

Diluted(2)

    n/a       n/a       n/a       n/a       1.44  

Dividends(3)

    0.40       0.34       0.32       0.24       0.77  

Book value(4)

    47.28       35.63       32.79       30.35       18.96  

Tangible book value per common share(5)

    23.76       21.19       17.85       16.15       15.89  


 

26


Table of Contents
    As of and for the Year Ended December 31,  
    2017     2016     2015     2014     2013  
(dollars in thousands except per share)                              

Selected Period End Balance Sheet Data

         

Total assets

  $ 8,684,463     $ 5,852,801     $ 5,055,000     $ 4,132,639     $ 2,163,984  

Cash and cash equivalents

    431,102       505,027       293,279       324,047       93,054  

Securities available for sale

    763,002       316,435       273,463       206,062       194,038  

Total loans (gross)

    6,513,445       4,582,566       4,001,704       3,205,537       1,726,543  

Allowance for loan losses

    39,402       31,591       27,043       18,552       13,960  

Goodwill and core deposit intangible

    664,702       272,496       275,000       241,912       37,852  

Other real estate owned

    7,126       1,972       2,168       4,763       3,322  

Noninterest-bearing deposits

    1,907,770       1,117,927       1,071,656       818,022       302,756  

Interest-bearing deposits

    4,725,052       3,459,182       2,956,623       2,431,576       1,407,563  

Borrowings (other than junior subordinated debentures)

    667,578       568,045       371,283       306,147       195,214  

Junior subordinated debentures(6)

    27,654       18,147       18,147       18,147       18,147  

Series A preferred stock

    —         —         23,938       23,938       —    

Total stockholders’ equity

    1,336,018       672,365       603,371       540,851       233,722  

Selected Performance Metrics

         

Return on average assets(7)

    0.96     0.98     0.88     0.87     1.04

Return on average common equity(7)

    6.71       8.42       7.13       6.89       9.90  

Return on average equity(7)

    6.71       8.42       6.83       6.65       9.90  

Pro forma return on average assets(1)(7) (unaudited)

    n/a       n/a       n/a       n/a       0.85  

Pro forma return on average equity(1)(7) (unaudited)

    n/a       n/a       n/a       n/a       8.09  

Net interest margin(8)

    3.84       3.81       4.05       4.19       4.30  

Efficiency ratio(9)

    56.13       54.99       59.71       63.32       66.28  

Dividend payout ratio(10)

    13.42       11.76       14.35       12.90       14.20  

Credit Quality Ratios

         

Nonperforming assets to total assets

    0.26     0.34     0.36     0.36     0.58

Nonperforming loans to total loans held for investment(11)(15)

    0.24       0.39       0.37       0.32       0.53  

Allowance for loan losses to nonperforming loans(11)

    255.62       177.06       181.99       183.43       152.93  

Allowance for loan losses to total loans held for investment(15)

    0.62       0.69       0.68       0.58       0.81  

Net charge-offs to average loans outstanding (unaudited)

    0.01       0.12       0.02       0.03       0.09  

Capital Ratios

         

Common equity Tier 1 Capital to risk-weighted assets(12)

    9.61     8.20     7.94     n/a       n/a  

Tier 1 capital to average assets

    8.92       7.82       8.28       8.15     10.71

Tier 1 capital to risk-weighted assets(12)

    10.05       8.55       8.92       9.83       12.64  

Total capital to risk-weighted assets(12)

    12.56       11.38       11.14       12.59       13.83  

Total common equity to total assets(13)

    15.38       11.49       11.94       12.51       10.80  

Total stockholders’ equity to total assets

    15.38       11.49       11.94       13.09       10.80  

Tangible common equity to tangible assets(14)

    8.37       7.17       6.87       7.07       9.21  

 

(1) Prior to April 1, 2013, Independent elected to be taxed for federal income tax purposes as an S corporation under the provisions of Sections 1361 through 1379 of the Internal Revenue Code of 1986, as amended, and, as a result, Independent did not pay U.S. federal income taxes and has not been required to make any provision or recognize any liability for federal income tax in its consolidated financial statements for any period ending on or before March 31, 2013. As of April 1, 2013, Independent terminated its S corporation election and commenced being subject to federal income taxation as a C corporation. Independent has calculated its pro forma net income, pro forma earnings per share on a basic and diluted basis, pro forma return on average assets and pro forma return on average equity for each period presented by calculating a pro forma provision for federal income taxes using an assumed annual effective federal income tax rate of 33.9% for the year ended December 31, 2013, and adjusting its historical net income for 2013 to give effect to the pro forma provision for federal income taxes for such period.
(2) Independent calculates its diluted earnings per share for each period shown as its net income divided by the weighted-average number of its common shares outstanding during the relevant period adjusted for the dilutive effect of its outstanding warrants to purchase shares of common stock. Earnings per share on a basic and diluted basis and pro forma earnings per share on a basic and diluted basis were calculated using the following outstanding share amounts, which includes participating shares (those shares with dividend rights):

 

    For the Year Ended December 31,  
    2017     2016     2015     2014     2013  

Weighted average shares outstanding—basic

    25,636,292       18,501,663       17,321,513       15,208,544       10,921,777  

Weighted average shares outstanding—diluted

    25,742,362       18,588,309       17,406,108       15,306,998       10,990,245  


 

27


Table of Contents
(3) Dividends declared for the year ended December 31, 2013, include quarterly cash distributions paid to its shareholders as to the three months ended March 31, 2013, to provide them with funds to pay their federal income tax liabilities incurred as a result of the pass-through of its net taxable income for such periods to its shareholders as holders of shares in an S corporation for federal income tax purposes. The aggregate amounts of such cash distributions relating to the payment of tax liabilities were $0.52 per share for the year ended December 31, 2013.
(4) Book value per share equals its total common stockholders’ equity (excludes preferred stock) as of the date presented divided by the number of shares of its common stock outstanding as of the date presented. The number of shares of its common stock outstanding as of December 31, 2017, 2016, 2015, 2014 and 2013 was 28,254,893, 18,870,312 shares, 18,399,194 shares, 17,032,669 shares and 12,330,158 shares, respectively.
(5) Independent calculates tangible book value per share as of the end of a period as total common stockholders’ equity (excluding preferred stock) less goodwill and other intangible assets at the end of the relevant period divided by the outstanding number of shares of its common stock at the end of that period. Tangible book value per common share is a non-GAAP financial measure, and, as Independent calculates tangible book value per common share, the most directly comparable GAAP financial measure is book value per common share. Independent believes that the presentation of tangible book value per common share provides useful information to investors regarding its financial condition because, as do its management, banking regulators, many financial analysts and other investors, you can use the tangible book value in conjunction with more traditional bank capital ratios to assess its capital adequacy without the effect of its goodwill and other intangible assets and compare its capital adequacy with the capital adequacy of other banking organizations with significant amounts of goodwill and/or other intangible assets, which typically stem from the use of the purchase accounting method of accounting for mergers and acquisition. A reconciliation of tangible book value to total stockholders’ equity is presented below.
(6) Each of seven wholly owned, but nonconsolidated, subsidiaries of Independent Bank Group holds a series of its junior subordinated debentures purchased by the subsidiary in connection with, and paid for with the proceeds of, the issuance of trust preferred securities by that subsidiary. Independent has guaranteed the payment of the amounts payable under each of those issues of trust preferred securities. During 2017, Independent assumed two trusts with the Carlile acquisition.
(7) Independent has calculated its return on average assets and return on average equity for a period by dividing net income for that period by its average assets and average equity, as the case may be, for that period. Independent has calculated its pro forma return on average assets and pro forma return on average equity for a period by calculating its pro forma net income for that period as described in note (1) above and dividing that by its average assets and average equity, as the case may be, for that period. Independent calculates its average assets and average equity for a period by dividing the sum of its total asset balance or total stockholders’ equity balance, as the case may be, as of the close of business on each day in the relevant period and dividing by the number of days in the period. Independent calculates its return on average common equity by excluding the preferred stock dividends to derive its net income available to common stockholders and excluding the average balance of its Series A preferred stock from the total average equity to derive its common average equity. Independent calculates its return on average common equity by excluding the preferred stock dividends to derive its net income available to common stockholders and excluding the average balance of its Series A preferred stock from the total average equity to derive its common average equity.
(8) Net interest margin for a period represents net interest income for that period divided by average interest-earning assets for that period.
(9) Efficiency ratio for a period represents noninterest expenses, excluding the amortization of core deposit intangibles, for that period divided by the sum of net interest income and noninterest income for that period.
(10) Independent calculates dividend payout ratio for each period presented as the dividends paid per share for such period (excluding cash distributions made to shareholders in connection with tax liabilities as described in note (3) above) divided by its basic earnings per share for such period.
(11) Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest, and accruing loans modified under troubled debt restructurings.
(12) Prior to 2015, Independent calculated its risk-weighted assets using the standardized method of the Basel II Framework, as implemented by the Federal Reserve and the FDIC. Beginning January 1, 2015, Independent calculated its risk-weighted assets using the Basel III Framework. The common equity tier 1 capital to risk-weighted assets ratio was a new ratio required under the Basel III Framework, effective January 1, 2015. This ratio is not applicable for periods prior to January 1, 2015.
(13) Independent calculates common equity as of the end of the period as total stockholders’ equity less the preferred stock at period end.
(14) Independent calculates tangible common equity as of the end of a period as total common equity (excluding preferred stock) less goodwill and other intangible assets as of the end of the period and calculate tangible assets as of the end of a period as total assets less goodwill and other intangible assets as of the end of the period. Tangible common equity to tangible assets is a non-GAAP financial measure, and as Independent calculates tangible common equity to tangible assets, the most directly comparable GAAP financial measure is total common equity to total assets. Independent believes that the presentation of tangible common equity to tangible assets provides useful information to investors regarding its financial condition because, as do its management, banking regulators, many financial analysts and other investors, you can use the tangible common equity in conjunction with more traditional bank capital ratios to assess its capital adequacy without the effect of its goodwill and core deposit intangibles and compare its capital adequacy with the capital adequacy of other banking organizations with significant amounts of goodwill and/or core deposit intangibles. A reconciliation of the ratios of tangible common equity to tangible assets to the ratios of total common equity to total assets is presented below.
(15) Excludes mortgage warehouse purchase loans.


 

28


Table of Contents

Reconciliations of Non-GAAP Financial Measures

The following information reconciles: (i) Independent’s tangible book value per common share, a non-GAAP financial measure, as of the dates presented to Independent’s book value per common share, a financial measure calculated and presented in accordance with GAAP, as of the dates presented; and (ii) its ratio of tangible common equity to tangible assets, a non-GAAP financial measure, as of the dates presented to Independent’s ratios of total common equity to total assets, a financial measure calculated and presented in accordance with GAAP, as of the dates presented.

 

    December 31  
    2017     2016     2015     2014     2013  
                               
(dollars in thousands except per share)                              

Tangible Common Equity

         

Total common stockholders’ equity

  $ 1,336,018     $ 672,365     $ 603,371     $ 516,913     $ 233,772  

Adjustments:

         

Goodwill

    (621,458     (258,319     (258,643     (229,457     (34,704

Core deposit intangibles, net

    (43,244     (14,177     (16,357     (12,455     (3,148
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible Common Equity

  $ 671,316     $ 399,869     $ 328,371     $ 275,001     $ 195,920  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common shares outstanding

    28,254,893       18,870,312       18,399,194       17,032,669       12,330,158  

Book value per common share

  $ 47.28     $ 35.63     $ 32.79     $ 30.35     $ 18.96  

Tangible book value per common share

  $ 23.76     $ 21.19     $ 17.85     $ 16.15     $ 15.89  

Tangible Assets

         

Total assets—GAAP

  $ 8,684,463     $ 5,852,801     $ 5,055,000     $ 4,132,639     $ 2,163,984  

Adjustments:

         

Goodwill

    (621,458     (258,319     (258,643     (229,457     (34,704

Core deposit intangibles

    (43,244     (14,177     (16,357     (12,455     (3,148
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible Assets

  $ 8,019,761     $ 5,508,305     $ 4,780,000     $ 3,890,727     $ 2,126,132  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total common equity to total assets

    15.38     11.49     11.94     12.51     10.80

Tangible common equity to tangible assets

    8.37       7.17       6.87       7.07       9.21  


 

29


Table of Contents

Selected Financial Information of Integrity

The following selected historical consolidated financial information of Integrity as of and for each of the five years ended December 31, 2017, has been derived from Integrity’s unaudited financial statements (2017), Integrity’s audited financial statements (2013-2016), regulatory filings made by Integrity, and from other information provided by Integrity. You should read the following selected financial information relating to Integrity in conjunction with other information appearing elsewhere in this prospectus.

 

     As of and for the Year Ended December 31,  
     2017     2016     2015     2014     2013  
(dollars in thousands except per share)                               

Selected Income Statement Data

          

Interest income

   $ 36,504     $ 30,598     $ 27,641     $ 25,552     $ 20,789  

Interest expense

     4,853       4,158       3,558       3,480       3,084  

Net interest income

     31,651       26,440       24,083       22,072       17,705  

Provision for loan losses

     635       5,212       2,313       747       1,116  

Net interest income after provision for loan losses

     31,016       21,227       21,770       21,324       16,589  

Noninterest income

     1,656       3,448       2,709       2,792       2,453  

Noninterest expense

     19,104       16,586       14,999       13,737       11,809  

Income tax expense

     6,076       2,831       3,386       3,651       2,329  

Net income

     7,491       5,288       6,093       6,727       4,903  

Per Share Data (Common Stock)

          

Earnings:

          

Basic

   $ 1.60     $ 1.17     $ 1.35     $ 1.49     $ 1.08  

Diluted(1)

     1.52       1.07       1.24       1.38       1.00  

Dividends

     n/a       n/a       n/a       n/a       n/a  

Book value(2)

     18.29     $ 16.82     $ 15.62     $ 14.27     $ 12.68  

Tangible book value(2)

     18.16       16.60       15.43       14.09       12.51  

Selected Period End Balance Sheet Data

          

Total assets

   $ 759,245     $ 703,978     $ 656,272     $ 583,059     $ 510,621  

Cash and cash equivalents

     57,218       63,331       108,625       36,532       55,903  

Securities available for sale

     22,236       17,656       30,844       33,515       45,860  

Total loans (gross)

     661,182       603,280       496,106       493,538       389,626  

Allowance for loan losses

     (7,980     (7,305     (4,430     (4,802     (4,220

Noninterest-bearing deposits

     222,792       186,003       182,666       160,064       139,790  

Interest-bearing deposits

     413,910       398,544       385,044       335,482       311,251  

Borrowings

     30,000       40,000       15,000       20,250       —    

Total stockholders’ equity

     85,823       76,080       70,471       64,534       57,299  

Selected Performance Metrics(3)

          

Return on average assets(4)

     .97     .77     .98     1.22     1.06

Return on average equity(4)

     9.15       7.27       9.34       11.95       10.50  

Net interest margin(5)

     4.30       4.08       4.08       4.23       4.16  

Efficiency ratio(6)

     55.25       52.36       54.92       54.75       57.14  

Credit Quality Ratios

          

Nonperforming assets to total assets

     .38     0.00     .94     .16     .41

Nonperforming loans to total loans(7)

     .43       0.00       1.24       .19       .18  

Allowance for loan losses to nonperforming loans(7)

     278.92       —         70.95       524.81       614.26  

Allowance for loan losses to total loans

     1.21       1.23       .88       .97       1.08  

Net charge-offs to average loans outstanding (unaudited)

     .01       .39       .55       .04       .13  

Capital Ratios

          

Common equity Tier 1 Capital to risk-weighted assets(8)

     12.70     11.84     13.21     12.75     13.04

Tier 1 capital to average assets

     11.10       10.33       10.51       10.04       10.08  

Tier 1 capital to risk-weighted assets(8)

     12.70       11.84       13.21       12.75       13.04  

Total capital to risk-weighted assets(8)

     13.89       13.03       14.09       13.80       14.13  

Total stockholders’ equity to total assets

     11.30       10.81       10.74       11.07       11.22  

Tangible common equity to tangible assets

     11.24       10.68       10.62       10.94       11.09  


 

30


Table of Contents

 

(1) Integrity calculates its diluted earnings per share for each period shown as its net income divided by the weighted-average number of its common shares outstanding during the relevant period adjusted for the dilutive effect of outstanding options to purchase shares of its common stock. Earnings per share on a basic and diluted basis were calculated using the following outstanding share amounts:

 

     For the Year Ended December 31,  
     2017      2016      2015      2014      2013  

Weighted average shares outstanding—basic

     4,586,068        4,514,793        4,520,512        4,520,851        4,515,978  

Weighted average shares outstanding—diluted

     4,914,868        4,956,343        4,925,762        4,879,301        4,838,728  

 

(2) Book value per share equals Integrity’s total shareholders’ equity as of the date presented divided by the number of Integrity common shares outstanding as of the date presented. The number of Integrity common shares outstanding as of December 31, 2017, 2016, 2015, 2014 and 2013 was 4,693,552 shares, 4,522,102 shares, 4,511,902 shares, 4,521,002 shares and 4,520,402 shares, respectively.
(3) Integrity calculates tangible book value per share as of the end of any period as total shareholders’ equity less goodwill and other intangible assets (net of any related deferred tax assets and liabilities) as of the end of the relevant period divided by the outstanding number of shares of its common stock at the end of that period. Tangible book value is a non-GAAP financial measure, and, as Integrity calculates tangible book value, the most directly comparable GAAP financial measure is total shareholders’ equity. Integrity calculates tangible assets as of the end of any period as total assets less goodwill and other intangible assets (net of any related deferred tax assets and liabilities) as of the end of the relevant period. Tangible assets is a non-GAAP financial measure, and, as Integrity calculates tangible assets, the most directly comparable GAAP financial measure is tangible assets. Integrity calculates tangible common equity as of the end of any period as total shareholders’ equity less goodwill and other intangible assets (net of any related deferred tax assets and liabilities) as of the end of the relevant period divided by total assets less good will and other intangible assets (net of any related deferred tax assets and liabilities) at the end of that period. The ratio of tangible common equity to tangible assets is a non-GAAP financial measure, and, as Integrity calculates this ratio, the most directly comparable GAAP financial measure is total shareholders’ equity to total assets. Integrity’s management believes that these non-GAAP financial measures are important information to be provided to you because, as do its management, banking regulators, many financial analysts and other investors, you can use the tangible book value per common share and the ratio of tangible common equity to tangible assets in conjunction with more traditional bank capital ratios to assess Integrity’s capital adequacy without the effect of its goodwill and other intangible assets (net of any related deferred tax assets and liabilities) and compare its capital adequacy with the capital adequacy of other banking organizations with significant amounts of goodwill and/or other intangible assets, which typically stem from the use of the purchase accounting method of accounting for mergers and acquisitions.


 

31


Table of Contents

The following table presents, as of the dates set forth below, Integrity’s total assets, tangible assets, total common equity, total shareholders’ equity and tangible common equity and presents reconciliations of Integrity’s tangible book value per common share to its book value per common share and of its ratio of tangible common equity to tangible assets to its ratio of total shareholders’ equity to total assets:

 

     December 31,  
     2017     2016     2015     2014     2013  
(dollars in thousands except per share)                               

Tangible Common Equity

          

Total common equity

   $ 85,823     $ 76,080     $ 70,471     $ 64,534     $ 57,299  

Adjustments:

          

Servicing Rights

     585       1,035       837       850       758  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible Common Equity

   $ 85,238     $ 75,045     $ 69,634     $ 63,684     $ 56,541  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common shares outstanding

     4,693,552       4,522,102       4,511,902       4,521,002       4,520,402  

Book value per common share

   $ 18.29     $ 16.82     $ 15.62     $ 14.27     $ 12.68  

Tangible book value per common share

     18.16       16.60       15.43       14.09       12.51  

Tangible Assets

          

Total assets—GAAP

   $ 759,245     $ 703,978     $ 656,272     $ 583,059     $ 510,621  

Adjustments:

          

Servicing Rights

     585       1,035       837       850       758  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible Assets

   $ 758,660     $ 702,943     $ 655,435     $ 582,209     $ 509,863  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total common equity to total assets

     11.30     10.81     10.74     11.07     11.22

Tangible common equity to tangible assets

     11.24       10.68       10.62       10.94       11.09  

 

(4) Integrity has calculated its return on average assets and return on average equity for a period by dividing net income for that period by its average assets and average equity, as the case may be, for that period. Integrity calculates its average assets and average equity for a period by dividing the sum of its total asset balance or total shareholder’s equity balance, as the case may be, as of the close of business on each day in the relevant period and dividing by the number of days in the period.
(5) Net interest margin for a period represents net interest income for that period divided by average interest-earning assets for that period.
(6) Efficiency ratio for a period represents noninterest expenses for that period divided by the sum of net interest income and noninterest income for that period, excluding realized gains or losses from sales of investment securities for that period.
(7) Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest, and accruing loans modified under troubled debt restructurings.
(8) Integrity calculates its risk-weighted assets using the standardized method of the Basel III Framework, as implemented by the FDIC.


 

32


Table of Contents

Comparative Stock Prices

The following table shows (1) the market values of Independent common stock at the close of business on November 27, 2017, the business day prior to the announcement of the proposed merger, and as of the most recent date practicable preceding the date of this proxy statement/prospectus and (2) the equivalent pro forma value of a share of Integrity common stock at such dates based on the value of the consideration to be received in the merger with respect to each share. Historical market value information regarding Integrity common stock is not provided because there is no active trading market for Integrity common stock.

 

     Independent
Common Stock(1)
     Equivalent Pro Forma
Per Share of Integrity
Common Stock(2)
 

November 27, 2017

   $ 64.05      $ 32.58  

February 23, 2018

     72.60        35.91  

 

(1) Represents the closing price of Independent common stock on the Nasdaq Global Select Market on the date indicated.
(2) Equivalent pro forma market value per share of Integrity common stock represents the historical market value per share of Independent common stock multiplied by, as to November 27, 2017, an assumed exchange ratio of 0.4106 of a share of Independent Common stock for each share of Integrity common stock (which ratio is based on 5,046,952 shares of Integrity common stock, which are anticipated to be outstanding on the tangible equity determination date) for each share of Integrity common stock and adding the assumed per share cash consideration of $6.11 at November 27, 2017, and February 23, 2018. Both examples assume an adjusted tangible equity of Integrity (calculated in accordance with the reorganization agreement) of at least $84.0 million. Such assumed ratio was calculated based on the additional assumption that $30.8 million in the aggregate was paid to Integrity shareholders and an aggregate payment of $790,124 to cash out unexercised Integrity stock options.

For an explanation of how the Integrity adjusted tangible equity will be calculated, the effect on the purchase price if adjusted tangible equity is less than $84.0 million on the effective date, the calculation of the number of shares of Integrity common stock that will be issued and outstanding on the effective date, and other estimates, please refer to “The Merger,” beginning on page 49  of this proxy statement/prospectus.

Dividends

Dividend Payments

As approved by Independent’s board of directors, Independent declared and paid a $0.08 per share dividend to holders of Independent common stock in the first three quarters of 2016 and a $0.10 per share dividend paid in the fourth fiscal quarter of 2016 and each of its four fiscal quarters of 2017 and a $0.12 per share dividend paid in the first fiscal quarter of 2018. Independent intends to continue to pay regularly quarterly cash dividends on its common stock following the merger, when, as and if declared by Independent’s board of directors out of funds legally available for that purpose and subject to regulatory restrictions. No dividends payable in the future have been declared by Independent’s board of directors.

Independent’s dividend policy may change with respect to the payment of dividends as a return on investment, and Independent’s board of directors may change or eliminate the payment of future dividends at its discretion, without notice to Independent’s shareholders. There can be no assurance that Independent will continue to pay dividends in the future. Future dividends on Independent common stock will depend upon its earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, Independent’s ability to service any equity or debt obligations senior to the common stock and other factors deemed relevant by the board of directors of Independent.



 

33


Table of Contents

Dividend Restrictions; Source of Strength

Under the terms of its junior subordinated debentures issued in connection with the issuance of trust preferred securities by subsidiaries of Independent, Independent is not permitted to pay any dividends on its common stock if it is in default on any payments required to be made on the junior subordinated debentures.

Independent is regarded as a legal entity separate and distinct from Independent Bank. The principal source of Independent’s revenues is dividends received from Independent Bank. Texas state law places limitations on the amount that state banks may pay in dividends, which Independent Bank must adhere to when paying dividends to Independent. The Federal Reserve has issued a policy statement that provides that a bank holding company should not pay dividends unless (a) its net income over the last four quarters (net of dividends paid) has been sufficient to fully fund the dividends, (b) the prospective rate of earnings retention appears to be consistent with the capital needs, asset quality and overall financial condition of the bank holding company and its subsidiaries and (c) the bank holding company will continue to meet minimum required capital adequacy ratios. Accordingly, Independent should not pay cash dividends that exceed its net income in any year or that can only be funded in ways that weaken its financial strength, including by borrowing money to pay dividends. Regulatory authorities could impose administratively stricter limitations on the ability of Independent Bank to pay dividends to Independent if such limits were deemed appropriate to preserve certain capital adequacy requirements.

Under Federal Reserve policy, bank holding companies have historically been required to act as a source of financial and managerial strength to each of its banking subsidiaries, and the Dodd-Frank Wall Street Reform and Consumer Protection Act codified this policy as a statutory requirement. Under this requirement, Independent is expected to commit resources to support Independent Bank, including at times when Independent may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. A bank holding company, in certain circumstances, could be required to guarantee the capital restoration plan of an undercapitalized banking subsidiary.

Dividends paid by Independent Bank have provided a substantial part of Independent’s operating funds, and for the foreseeable future, it is anticipated that dividends paid by Independent Bank to Independent will continue to be Independent’s principal source of operating funds. However, capital adequacy requirements serve to limit the amount of dividends that may be paid by Independent Bank. Under federal law, Independent Bank cannot pay a dividend if, after paying the dividend, it would be undercapitalized. The FDIC may declare a dividend payment to be unsafe and unsound even though Independent Bank would continue to meet its capital requirements after payment of the dividend.

Additionally, under the credit agreement between Independent and U.S. Bank National Association, or U.S. Bank, Independent cannot make any dividend payments without the prior written consent of U.S. Bank; provided, however, that, so long as no default under the credit agreement has occurred and is continuing, or will occur as a result of any such dividend, Independent may pay dividends and distributions to its shareholders as permitted by applicable governmental laws and regulations.



 

34


Table of Contents

RISK FACTORS

An investment by Integrity’s shareholders in Independent common stock as a result of the exchange of shares of Independent common stock for shares of Integrity common stock in the merger involves certain risks. Certain material risks and uncertainties connected with the merger and ownership of Independent common stock are discussed below. In addition, Independent discusses certain other material risks connected with the ownership of Independent common stock and with Independent’s business under the caption “Risk Factors” appearing in Independent’s Annual Report on Form 10-K most recently filed with the SEC and may include additional or updated disclosures of such material risks in its Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that it files with the Commission after the date of this proxy statement/prospectus, each of which reports is or will be incorporated by reference in this proxy statement/prospectus.

Holders of Integrity common stock should carefully read and consider all of these risks and all other information contained in this proxy statement/prospectus, including the discussions of risk factors included in the documents incorporated by reference in this proxy statement/prospectus, in deciding whether to vote for approval of the various proposals for which they may vote at the special meeting of the Integrity shareholders described herein. If any of the risks described in this proxy statement/prospectus or those documents incorporated by reference herein result in effects on Independent or Independent Bank, the value of Independent common stock that you, as an existing Integrity shareholder, would hold upon consummation of the merger could decline significantly, and the current holders of Integrity common stock could lose all or part of their respective investments in the Independent common stock.

Risks Related to the Merger

The merger of Independent and Integrity may not be completed.

Completion of the merger of Independent and Integrity is subject to regulatory approval, which approval may not be obtained. If Independent is not successful in obtaining the required regulatory approval, the merger will not be completed. Even if such regulatory approval is received, the timing of that regulatory approval and any conditions imposed by the regulatory approval could result in certain closing conditions of the merger not being satisfied.

The shareholders of Integrity should bear in mind that regulatory approval reflects only the view that the merger does not contravene applicable competitive standards imposed by law, and that the merger is consistent with regulatory policies relating to safety and soundness. Further, regulatory approval is not an opinion that the proposed merger is favorable to the shareholders of either party to the merger from a financial point of view or that the regulatory authority granting such approval has considered the adequacy of the terms of the merger. Regulatory approval is not an endorsement or recommendation of the merger.

The consummation of the merger is also subject to other conditions precedent as set forth in the reorganization agreement. Those conditions precedent include the approval of the merger by the holders of Integrity’s common stock, Integrity having minimum adjusted tangible equity capital (as calculated in accordance with the reorganization agreement) of $76.0 million, Integrity Bank maintaining an adequate allowance for loan losses and establishing additional reserves under certain circumstances as required by the reorganization agreement, there being no material adverse change in the condition of Integrity or Integrity Bank, on the one hand, or Independent, on the other hand, and the holders of not more than 5% of the outstanding shares of Integrity’s common stock exercising their statutory dissenters’ rights with respect to the merger. If a condition to either party’s obligation to consummate the merger is not satisfied, that party may be able to terminate the reorganization agreement and, in such case, the transaction would not be consummated.

 

35


Table of Contents

Integrity and Integrity Bank will be subject to business uncertainties and contractual restrictions while the merger is pending.

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on Integrity and Integrity Bank and, consequently, on Independent and Independent Bank. Uncertainties surrounding the merger may impair the ability of one or more of Independent, Independent Bank, Integrity and Integrity Bank to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with either of the banks to seek to change their existing business relationships with such bank. In addition, the reorganization agreement restricts Integrity and Integrity Bank from taking other specified actions until the merger occurs without Independent’s consent. These restrictions may prevent Integrity or Integrity Bank from pursuing attractive business opportunities that may arise prior to the merger’s completion.

Integrating Integrity Bank into Independent Bank’s operations may be more difficult, costly or time-consuming than Independent expects.

Independent Bank and Integrity Bank have operated and, until the merger is completed, will continue to operate, independently. Accordingly, the process of integrating Integrity Bank’s operations into Independent Bank’s operations could result in the disruption of operations, the loss of Integrity Bank customers and employees and make it more difficult to achieve the intended benefits of the merger. Inconsistencies between the standards, controls, procedures and policies of Independent Bank and those of Integrity Bank could adversely affect Independent Bank’s ability to maintain relationships with current customers and employees of Integrity Bank if and when the merger is completed.

As with any merger of banking institutions, business disruptions may occur that may cause Independent Bank to lose customers or may cause Integrity Bank’s customers to withdraw their deposits from Integrity Bank prior to the merger’s consummation and from Independent Bank thereafter. The realization of the anticipated benefits of the merger may depend in large part on Independent’s ability to integrate Integrity Bank’s operations into Independent Bank’s operations, and to address differences in business models and cultures. If Independent is unable to integrate the operations of Integrity and Integrity Bank into Independent’s and Independent Bank’s operations successfully and on a timely basis, some or all of the expected benefits of the merger may not be realized. Difficulties encountered with respect to such matters could result in an adverse effect on the financial condition, results of operations, capital, liquidity or cash flows of Independent Bank and Independent.

Independent may fail to realize the cost savings anticipated from the merger.

Although Independent anticipates that it would realize certain cost savings as to the operations of Integrity and Integrity Bank and otherwise from the merger if and when the operations of Integrity and Integrity Bank are fully integrated into Independent’s and Independent Bank’s operations, it is possible that Independent may not realize all of the cost savings that Independent has estimated it can realize from the merger. For example, for a variety of reasons, Independent may be required to continue to operate or maintain some facilities or support functions that are currently expected to be combined or reduced as a result of the merger. Independent’s realization of the estimated cost savings also will depend on Independent’s ability to combine the operations of Independent and Independent Bank with the operations of Integrity and Integrity Bank in a manner that permits those costs savings to be realized. If Independent is not able to integrate the operations of Integrity and Integrity Bank into Independent’s and Independent Bank’s operations successfully and to reduce the combined costs of conducting the integration operations of the two banks, the anticipated cost savings may not be fully realized, if at all, or may take longer to realize than expected. Independent’s failure to realize those cost savings could materially adversely affect Independent’s financial condition, results of operations, capital, liquidity or cash flows.

 

36


Table of Contents

The fairness opinion obtained by the board of directors of Integrity from its financial advisor in connection with Integrity’s entry into the reorganization agreement will not reflect changes in circumstances subsequent to the date of the fairness opinion.

Sandler O’Neill, Integrity’s financial advisor in connection with the proposed merger, delivered to Integrity’s board of directors its opinion, dated November 28, 2017, to the effect that, as of the date of the opinion, based upon and subject to the procedures followed, assumptions made, matters considered and qualifications and limitations set forth in the opinion, the aggregate merger consideration was fair to the holders of Integrity common stock from a financial point of view. The opinion of Integrity’s financial advisor speaks only as of such date and is necessarily based on economic, market, regulatory and other conditions as in effect on, and the information made available to the financial advisor, as of the date of the opinion. Events occurring after the date of the opinion could materially affect the factors used in preparing the opinion and result in actual results differing materially from such assumptions. As a result, a conclusion similar to that of the opinion might not be reached considering the subsequent events. Any such events, or other factors on which the opinions are based, may materially alter or affect the relative values of Independent and Integrity.

Risks Related to Integrity Shareholders’ Interests if the Merger is Consummated

The adjusted tangible equity of Integrity could be an amount that results in a reduction in the cash portion of the merger consideration paid to Integrity shareholders and that could affect Independent’s obligation to consummate the merger.

The $36.1 million aggregate cash consideration will be reduced if Integrity’s adjusted tangible equity, as calculated pursuant to the reorganization agreement, is less than $84.0 million as of the tangible equity determination date. If on the tangible equity determination date, Integrity’s adjusted tangible equity is less than $84.0 million, the $31.6 million aggregate cash consideration will be reduced dollar for dollar by the difference between (x) $84.0 million minus (y) Integrity’s adjusted tangible equity as of the tangible equity determination date. Moreover, Independent’s obligation to consummate the merger is conditioned upon Integrity having adjusted tangible equity, as calculated pursuant to the reorganization agreement and as described herein, of at least $76.0 million as of the closing date. For a more detailed explanation of how the adjusted tangible equity of Integrity will be calculated, please see “The Merger—Possible Downward Adjustment to the $31.6 million Merger Consideration,” beginning on page 50.

Independent could elect to complete the merger transaction even if the Integrity adjusted tangible equity is less than $76.0 million on the tangible equity determination date.

In the event that Integrity does not have adjusted tangible equity equal to or greater than $76.0 million on the tangible equity determination date, Independent has the right to elect either to terminate the transaction without completing the merger or completing the merger regardless of Integrity’s adjusted tangible equity at that time. Integrity does not have the right to terminate the merger in the event the amount of its adjusted tangible equity is below $76.0 million under the terms of the reorganization agreement at that time. The result is that once the holders of Integrity common stock have approved the reorganization agreement and the merger, Independent can require Integrity to complete the merger even if Integrity adjusted tangible equity is below $76.0 million, in which case the cash portion of the consideration to be paid in conversion of the outstanding shares of Integrity common stock upon the consummation of the merger could be significantly reduced.

Integrity does not intend to resolicit proxies from its shareholders in the event that Integrity’s adjusted tangible equity is less than $76.0 million on the closing date.

If the Integrity adjusted tangible equity is below $76.0 million, Independent’s board of directors intends to exercise its independent judgment in determining whether to complete the merger or to terminate the reorganization agreement.

 

37


Table of Contents

Integrity does not have a corresponding contractual right to choose not to complete the merger should its adjusted tangible equity fall below $76.0 million, even though such an event will result in the reduction in the cash portion of the consideration for which the outstanding shares of Integrity common stock will be exchanged in the merger which reduction could be substantial. In such event, the decision whether to complete the merger will rest solely with Independent. Without the right to decline to complete the merger, there would be no practical advantage for Integrity to resolicit proxies from its shareholders under these circumstances. In determining whether to approve the reorganization agreement and the merger, the holders of Integrity common stock should consider that each of their shares of Integrity common stock will be converted into a smaller cash payment of merger consideration in the merger if the Integrity adjusted tangible equity is less than $84.0 million at the time of the closing of the merger.

Integrity shareholders will not know the exact fraction of a share of Independent common stock or the exact cash payment they will receive for each share of Integrity common stock they own when they vote on approving the reorganization agreement and the merger.

For reasons discussed above and because the fraction of a share of Independent common stock for which a share of Integrity common stock will be exchanged at the closing of the merger will depend on the number of Integrity stock options that have been exercised prior to closing and because the cash portion of the merger consideration could be reduced if adjusted tangible equity falls below $84.0 million on the tangible equity determination date, when the Integrity shareholders vote on approving the reorganization agreement and the merger of Integrity with and into Independent, they will not know the exact fraction of a share of Independent common stock or the exact cash payment for which each of their outstanding shares of Integrity common stock will be exchanged in the merger and the exact number of shares of Independent common stock or the exact cash payment they will receive in the merger as consideration for their shares of Integrity common stock and must make their decision regarding how to vote with respect to the approval of the reorganization agreement and the merger without that information.

The value of the shares of Independent common stock to be received by the Integrity shareholders in the merger is dependent upon the market price of Independent’s common stock, which is subject to fluctuation and may decline over time thus reducing the economic benefits to be received by holders of Integrity common stock upon completion of the merger.

In instances in this proxy statement/prospectus, Independent has valued the Independent common stock to be issued in the merger to the holders of Integrity common stock based on the closing price of Independent’s common stock as of February 23, 2018, which was $72.60 a share. However, the value of each share of Independent common stock is subject to fluctuations in the marketplace, resulting in the possibility that its value could decrease between the date of this proxy statement/prospectus and the date of the Integrity special meeting when holders of Integrity common stock will be asked to approve the reorganization agreement and the merger, as well as between the date of that special meeting and the date of the closing of the merger. If the reorganization agreement and the merger are approved at the Integrity special meeting, there is the possibility that the value of the Independent common stock could decline materially prior to the issuance of the Independent common stock to the holders of Integrity common stock upon the completion of the merger and thereafter.

Integrity shareholders will have a reduced ownership and voting interest in Independent after the merger than they now have in Integrity and will exercise less influence over Independent’s management than they now exercise over Integrity’s management.

Integrity’s shareholders currently have the right to vote in the election of the board of directors of Integrity and on other matters affecting Integrity. The merger will transfer control of the operations of Integrity to Independent and to the shareholders of Independent. When the merger occurs, each Integrity shareholder will become a shareholder of Independent with a percentage ownership of Independent much smaller than such shareholder’s percentage ownership of Integrity immediately prior to the merger. Because of this occurrence,

 

38


Table of Contents

Integrity shareholders will have less influence on the management and policies of Independent than they now have on the management and policies of Integrity.

The shares of Independent common stock to be received by Integrity shareholders as a result of the merger will have different rights than the shares of Integrity common stock and in some cases may be less favorable.

The rights associated with Integrity common stock are different from the rights associated with Independent common stock. In some cases, the rights associated with the Independent common stock may be less favorable to shareholders than those associated with the Integrity common stock. See “Comparison of Rights of Shareholders of Integrity and Independent” on page 113 for a more detailed description of the shareholder rights of each of Independent and Integrity.

The dissenters’ rights appraisal process relating to shares of the Integrity common stock is uncertain.

Holders of Integrity common stock may or may not be entitled to receive more than the amount provided for in the reorganization agreement for their shares of Integrity common stock if they elect to exercise their right to dissent from the proposed merger, depending on the appraisal of the fair value of the Integrity common stock pursuant to the dissenting shareholder procedures under the TBOC. See “The Merger—Dissenters’ Rights of Integrity Shareholders” on page 93 and Appendix C. For this reason, the amount of cash that such shareholders might be entitled to receive should they elect to exercise their right to dissent to the merger may be more or less than the value of the merger consideration to be paid pursuant to the reorganization agreement. In addition, it is a condition in the reorganization agreement that the holders of not more than 5% of the outstanding shares of Integrity common stock shall have exercised their statutory dissenters’ rights under the TBOC. The number of shares of Integrity common stock for which holders will exercise dissenters’ rights under the TBOC is not known and therefore there is no assurance of this closing condition being satisfied.

The holders of a significant number of shares of Integrity common stock have agreed to vote to approve the reorganization agreement.

The directors of Integrity and certain entities they represent have entered into a voting agreement with Independent pursuant to which they have agreed to vote the shares of Integrity common stock they own to approve the reorganization agreement. Those persons own an aggregate of 1,130,526 shares of Integrity common stock, or 23% of the 4,883,429 shares of Integrity common stock that were outstanding at the close of business on the record date for the Integrity special meeting. If no other shares of Integrity common stock were to be outstanding on the record date for the Integrity special meeting, the holders of an additional 2,141,371 shares or 44% of the Integrity common stock would have to vote to approve the reorganization agreement in order for the merger of Integrity with and into Independent to be approved by the Integrity shareholders.

Some of the directors and officers of Integrity may have interests and arrangements that may have influenced their decisions to support or recommend that you approve the reorganization agreement.

The interests of some of the directors and officers of Integrity may be different from those of Integrity shareholders. The directors and certain officers of Integrity are or will be participants in arrangements relating to, or that are affected by the merger that are different from, or in addition to, those of Integrity shareholders. These interests are described in more detail in the section of this proxy statement/prospectus entitled “The Merger—Financial Interests of Directors and Officers of Integrity in the Merger” beginning on page 86. Further, as noted in the preceding risk factor, directors of Integrity and certain entities they represent have entered into an agreement to vote the shares of Integrity common stock that they control in favor of approval of the reorganization agreement and the merger and in the manner most favorable to the consummation of the merger and the transactions contemplated by the reorganization agreement, or voting agreement; provided, however, that the Integrity shareholders who entered into the voting agreement would be permitted to vote to accept a superior proposal to acquire Integrity (as “superior proposal” is defined in the reorganization agreement).

 

39


Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this proxy statement/prospectus that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties and are made pursuant to the safe harbor provisions of Section 27A of the Securities Act. These forward-looking statements include information about possible or assumed future results of operations of Independent after the merger is completed as well as information about the merger, including Independent’s future revenues, income, expenses, provision for taxes, effective tax rate, earnings per share and cash flows, Independent’s future capital expenditures and dividends, Independent’s future financial condition and changes therein, including changes in Independent’s loan portfolio and allowance for loan losses, Independent’s future capital structure or changes therein, the plan and objectives of management for future operations, Independent’s future or proposed acquisitions, the future or expected effect of acquisitions on Independent’s operations, results of operations and financial condition, Independent’s future economic performance and the statements of the assumptions underlying any such statement. Such statements are typically, but not exclusively, identified by the use in the statements of words or phrases such as “aim,” “anticipate,” “estimate,” “expect,” “goal,” “guidance,” “intend,” “is anticipated,” “is estimated,” “is expected,” “is intended,” “objective,” “plan,” “projected,” “projection,” “will affect,” “will be,” “will continue,” “will decrease,” “will grow,” “will impact,” “will increase,” “will incur,” “will reduce,” “will remain,” “will result,” “would be,” variations of such words or phrases (including where the word “could,” “may” or “would” is used rather than the word “will” in a phrase) and similar words and phrases indicating that the statement addresses some future result, occurrence, plan or objective. The forward-looking statements that Independent make are based on Independent’s current expectations and assumptions regarding its business, the economy, and other future conditions. Because forward-looking statements relate to future results and occurrences, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. Many possible events or factors could affect the future financial results and performance of each of Independent and Integrity before the merger or Independent after the merger, and could cause those results or performance to differ materially from those expressed in the forward-looking statements. These possible events or factors include, but are not limited to:

 

    Independent’s ability to sustain its current internal growth rate and total growth rate;

 

    changes in geopolitical, business and economic events, occurrences and conditions, including changes in rates of inflation or deflation, nationally, regionally and in Independent’s target markets, particularly in Texas and Colorado;

 

    worsening business and economic conditions nationally, regionally and in Independent’s target markets, particularly in Texas and Colorado, and the geographic areas in those states in which Independent operates;

 

    Independent’s ability to consummate its proposed acquisition of Integrity;

 

    Independent’s actual cost savings resulting from the acquisition of Integrity are less than expected, it is unable to realize those cost savings as soon as expected or it incurs additional or unexpected costs;

 

    Independent’s revenues after the Integrity acquisitions are less than expected;

 

    Independent’s dependence on its management team and its ability to attract, motivate and retain qualified personnel;

 

    the concentration of Independent’s business within its geographic areas of operation in Texas and Colorado;

 

    changes in asset quality, including increases in default rates and loans and higher levels of nonperforming loans and loan charge-offs;

 

    concentration of the loan portfolio of Independent Bank, before and after the completion of acquisitions of financial institutions, in commercial and residential real estate loans and changes in the prices, values and sales volumes of commercial and residential real estate, values and dales volumes of commercial and residential real estate;

 

40


Table of Contents
    the ability of Independent Bank to make loans with acceptable net interest margins and levels of risk of repayment and to otherwise invest in assets at acceptable yields and presenting acceptable investment risks;

 

    inaccuracy of the assumptions and estimates that the managements of Independent and the financial institutions that it acquires make in establishing reserves for probable loan losses and other estimates;

 

    lack of liquidity, including as a result of a reduction in the amount of sources of liquidity, that Independent currently has;

 

    material increases or decreases in the amount of deposits held by Independent Bank or other financial institutions that Independent acquires and the cost of those deposits;

 

    Independent’s access to the debt and equity markets and the overall cost of funding its operations;

 

    regulatory requirements to maintain minimum capital levels or maintenance of capital at levels sufficient to support Independent’s anticipated growth;

 

    changes in market interest rates that affect the pricing of the loans and deposits of each of Independent Bank and the financial institutions that Independent acquires and the net interest income of each of Independent Bank and the financial institutions that Independent acquires;

 

    fluctuations in the market value and liquidity of the securities Independent holds for sale, including as a result of changes in market interest rates;

 

    effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;

 

    changes in economic and market conditions that affect the amount and value of the assets of Independent Bank and of financial institutions that Independent acquires;

 

    the institution and outcome of, and costs associated with, litigation and other legal proceedings against one of more of Independent, Independent Bank and financial institutions that Independent acquires or to which any of such entities is subject;

 

    the occurrence of market conditions adversely affecting the financial industry generally;

 

    the impact of recent and future legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by Independent’s regulators, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, specifically the Dodd-Frank Act stress testing requirements as Independent approaches $10 billion in total assets, and changes in federal government policies;

 

    changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the SEC and the Public Company Accounting Oversight Board, or PCAOB, as the case may be;

 

    governmental monetary and fiscal policies;

 

    changes in the scope and cost of FDIC insurance and other coverage;

 

    the effects of war or other conflicts, acts of terrorism (including cyber attacks) or other catastrophic events, including storms, droughts, tornadoes, hurricanes and flooding, that may affect general economic conditions;

 

    Independent’s actual cost savings resulting from previous or future acquisitions are less than expected, it is unable to realize those cost savings as soon as expected, or it incurs additional or unexpected costs;

 

    Independent’s revenues after previous or future acquisitions are less than expected;

 

    the liquidity of, and changes in the amounts and sources of liquidity available to, us, before and after the acquisition of any financial institutions that Independent acquires;

 

41


Table of Contents
    deposit attrition, operating costs, customer loss and business disruption before and after Independent’s completed acquisitions, including, without limitation, difficulties in maintaining relationships with employees, may be greater than Independent expected;

 

    the effects of the combination of the operations of financial institutions that Independent acquired in the recent past or may acquire in the future with Independent’s operations and the operations of Independent Bank, the effects of the integration of such operations being unsuccessful, and the effects of such integration being more difficult, time-consuming or costly than expected or not yielding the cost savings that Independent expects;

 

    the impact of investments that Independent or Independent Bank may have made or may make and the changes in the value of those investments;

 

    the quality of the assets of financial institutions and companies that Independent has acquired in the recent past or may acquire in the future being different than Independent determined or determine in its due diligence investigation in connection with the acquisition of such financial institutions and any inadequacy of loan loss reserves relating to, and exposure to unrecoverable losses on, loans acquired;

 

    Independent’s ability to continue to identify acquisition targets and successfully acquire desirable financial institutions to sustain its growth, to expand its presence in its markets and to enter new markets;

 

    general business and economic conditions in Independent’s markets change or are less favorable than expected;

 

    changes occur in business conditions and inflation;

 

    an increase in the rate of personal or commercial customers’ bankruptcies;

 

    technology-related changes are harder to make or are more expensive than expected;

 

    attacks on the security of, and breaches of, Independent or Independent Bank’s digital information systems, the costs Independent or Independent Bank incur to provide security against such attacks and any costs and liability Independent or Independent Bank incurs in connection with any breach of those systems; and

 

    the potential impact of technology and “FinTech” entities on the banking industry generally.

For other factors, risks and uncertainties that could cause actual results to differ materially from estimates contained in forward-looking statements, please read the “Risk Factors” section of this proxy statement/prospectus.

Independent and Integrity urge you to consider all of these risks, uncertainties and other factors carefully in evaluating all such forward-looking statements made in this proxy statement/prospectus. As a result of these and other matters, including changes in facts, assumptions not being realized or other factors, the actual results relating to the subject matter of any forward-looking statement may differ materially from the anticipated results expressed or implied in that forward-looking statement. Any forward-looking statement made in this proxy statement/prospectus or made by Independent in any report, filing, document or information incorporated by reference in this proxy statement/prospectus, speaks only as of the date on which it is made. Neither Independent nor Integrity undertakes any obligation to update any such forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that these assumptions or bases have been chosen in good faith and that they are reasonable. However, we caution you that assumptions as to future occurrences or results almost always vary from actual future occurrences or results, and the differences between assumptions and actual occurrences and results can be material. Therefore, we caution you not to place undue reliance on the forward-looking statements contained in this proxy statement/prospectus or incorporated by reference herein.

 

42


Table of Contents

GENERAL INFORMATION

This document constitutes a proxy statement/prospectus of Integrity and Independent and is being furnished to all record holders of Integrity common stock on the record date in connection with the solicitation of proxies by the boards of directors of Integrity to be used at the special meeting of shareholders of Integrity to be held on April 10, 2018.

One of the purposes of the special meeting is to consider and vote to approve the reorganization agreement, which provides for, among other things, the merger of Integrity with and into Independent, with Independent being the surviving entity, followed by the merger of Integrity Bank with and into Independent Bank, with Independent Bank being the surviving bank. This document also constitutes a prospectus relating to the offer and sale of Independent common stock to be issued in connection with the merger to holders of Integrity common stock (including holders of stock options to purchase Integrity common stock that are exercised prior to the consummation of the merger).

Independent has supplied all of the information contained herein relating to Independent and Independent Bank, and Integrity has supplied all of the information contained herein relating to Integrity and Integrity Bank.

 

43


Table of Contents

THE INTEGRITY SPECIAL MEETING

This document constitutes a proxy statement/prospectus and is being provided to the record holders of Integrity common stock as part of a solicitation of proxies by the Integrity board of directors for use at the Integrity special meeting, which is to be held at the time and place specified below and at any properly convened meeting following an adjournment thereof. The purpose of the special meeting is to consider and vote to approve the Agreement and Plan of Reorganization, or reorganization agreement, which provides for, among other things, the merger of Integrity with and into Independent, with Independent being the surviving corporation.

This document also constitutes a proxy statement/prospectus relating to the offer and sale of the Independent common stock that is to be issued to record holders of Integrity common stock upon the consummation of the merger contemplated by the reorganization agreement.

This proxy statement/prospectus provides the holders of Integrity common stock with information they need to know to be able to vote or instruct their vote to be cast at the Integrity special meeting.

Date, Time and Place

The special meeting of holders of Integrity common stock will be held at Integrity’s headquarters, 4040 Washington Avenue, Houston, Texas 77007, on April 10, 2018, at 4:00 p.m. Central Time.

Purpose of the Integrity Special Meeting

At the Integrity special meeting, the holders of shares of Integrity common stock will be asked to consider and vote on the following:

Integrity Proposal One: to approve the reorganization agreement, dated as of November 28, 2017, by and between Independent and Integrity and the merger contemplated thereby; and

Integrity Proposal Two: to approve the adjournment of the Integrity special meeting to a later date or dates, if the board of directors of Integrity determines it is necessary permit solicitation of additional proxies if there are not sufficient votes at the time of the Integrity special meeting to approve the first proposal listed above.

The consummation of the merger by and between Integrity and Independent is conditioned on, among other things, the approval of the reorganization agreement, the merger and the other transactions contemplated by the reorganization agreement.

Recommendation of the Integrity Board of Directors

On November 27, 2017, the Integrity board of directors unanimously determined that the merger and the other transactions contemplated by the reorganization agreement are in the best interests of Integrity and its shareholders and it approved the reorganization agreement, the merger and the other transactions contemplated by the reorganization agreement.

Accordingly, the Integrity board of directors unanimously recommends that Integrity shareholders vote as follows:

FOR” Integrity Proposal One approving the reorganization agreement and the merger contemplated thereby; and

FOR” Integrity Proposal Two approving the adjournment of the Integrity special meeting if necessary to permit solicitation of additional proxies or for any other reason that the board of directors of Integrity determines is necessary.

 

44


Table of Contents

Holders of Integrity common stock should carefully read this proxy statement/prospectus, including any documents incorporated by reference, and the Appendices in their entirety for more detailed information concerning the merger and the transactions contemplated by the reorganization agreement.

Integrity Record Date; Shareholders Entitled to Vote

The record date for the Integrity special meeting is February 23, 2018, or the Integrity record date. Only record holders of shares of Integrity common stock at 5:00 p.m. Central Time, or the close of business, on the Integrity record date are entitled to notice of the Integrity special meeting. At the close of business on the Integrity record date, the only outstanding securities of Integrity with a right to vote on the proposals were shares of Integrity common stock, with 4,883,429 shares of Integrity common stock being issued and outstanding at that time. Each share of Integrity common stock outstanding on the Integrity record date is entitled to one vote on each proposal. Holders of at least two-thirds of the outstanding shares of Integrity common stock must vote in favor of the reorganization agreement and the merger in order to permit consummation of the merger and other transactions contemplated thereby.

Voting by Integrity’s Directors and Executive Officers; Voting Agreement

At the close of business on the record date for the Integrity special meeting, Integrity directors and executive officers and their affiliates were entitled to vote 1,243,553 shares of Integrity common stock, or 25% of the shares of Integrity common stock outstanding on that date. Integrity currently expects that its directors and executive officers and their affiliates will vote their shares of Integrity common stock in favor of both of the Integrity proposals. In addition, directors and certain officers of Integrity have entered into an agreement to vote the shares of Integrity common stock that they control in favor of approval of the reorganization agreement and the merger. However, Integrity shareholders who entered into a voting agreement would be permitted to vote to accept any superior proposal to acquire Integrity (as “superior proposal” is defined in the reorganization agreement). As of the record date for the Integrity special meeting, 1,130,526 shares of Integrity common stock, or 23% of the 4,883,429 shares of Integrity common stock then outstanding and entitled to vote at the Integrity special meeting, are bound by the voting agreement.

Quorum and Adjournment

No business may be transacted at the Integrity special meeting unless a quorum is present. Shareholders who hold shares representing at least a majority of each class of the shares entitled to vote at the Integrity special meeting must be present in person or represented by proxy to constitute a quorum, but the holders of at least two-thirds of the shares of Integrity common stock entitled to vote at the Integrity special meeting must be present, in person or by proxy, at the Integrity special meeting in order for the necessary vote to be able to take action on the merger proposal. The affirmative vote of the holders of at least two-thirds of the outstanding Integrity common stock is required to approve the reorganization agreement and the merger. As a result, if shares representing at least two-thirds of the shares of Integrity common stock outstanding on the close of business on the Integrity record date are not present at the Integrity special meeting, then the presence of a quorum will still not permit the merger to be approved at the Integrity special meeting.

If a quorum is not present, or if fewer shares than are required to approve the reorganization agreement and the merger are voted in favor of the proposal to approve the reorganization agreement and the merger, then the Integrity special meeting may be adjourned to allow for the solicitation of additional proxies provided that such proposal to adjourn the Integrity special meeting is approved by the holders of a majority of the shares of Integrity common stock who are entitled to vote at the Integrity special meeting and are present or represented by proxy at the Integrity special meeting.

No notice of an adjourned Integrity special meeting need be given unless, after the adjournment, a new record date is fixed for the adjourned Integrity special meeting, in which case a notice of the adjourned Integrity

 

45


Table of Contents

special meeting shall be given to each Integrity shareholder of record entitled to vote at the Integrity special meeting. At any adjourned Integrity special meeting, all proxies will be voted in the same manner as they would have been voted at the original convening of the Integrity special meeting, except for any proxies that have been effectively revoked or withdrawn prior to the adjourned Integrity special meeting.

All shares of Integrity common stock represented at the Integrity special meeting, including shares of Integrity common stock that are represented but that vote to abstain and broker nonvotes, will be treated as present for purposes of determining the presence or absence of a quorum.

Required Vote

The required votes to approve the Integrity proposals are as follows:

Integrity Proposal One: approving the reorganization agreement and the merger requires the affirmative vote of at least two-thirds of the issued and outstanding shares of Integrity common stock entitled to vote at the Integrity special meeting. Failures to vote, broker nonvotes and abstentions will have the same effect as a vote against this proposal. Please note that only the shares of Integrity common stock are entitled to be voted at the Integrity special meeting.

Integrity Proposal Two: approving the adjournment of the Integrity special meeting to allow, if necessary, for the solicitation of additional proxies or for any other reason that the board of directors of Integrity determines is necessary will require the affirmative vote of at least a majority of the issued and outstanding shares of Integrity common stock and present or represented by proxy at the Integrity special meeting, regardless of whether there is a quorum present at the Integrity special meeting. Failures to vote, broker nonvotes and abstentions will have the same effect as a vote against the proposal. Please note that only the shares of Integrity common stock are entitled to be voted at the Integrity special meeting.

Voting of Proxies by Holders of Record of Integrity Common Stock

If you were a record holder of Integrity common stock at the close of business on the Integrity record date, a proxy card is enclosed for your use. Integrity requests that you vote your shares as promptly as possible by submitting your Integrity proxy card by mail using the enclosed return envelope. When the accompanying proxy card is properly executed, dated and returned, the shares of Integrity common stock represented by it will be voted at the Integrity special meeting or any adjournment thereof in accordance with the instructions contained in the proxy card.

If a proxy card is returned without an indication as to how the shares of Integrity common stock represented by it are to be voted with regard to a particular proposal, the shares of Integrity common stock represented by the proxy will be voted in accordance with the recommendation of the Integrity board of directors and, therefore, such shares will be voted:

FOR” Integrity Proposal One approving the reorganization agreement and the merger; and

FOR” Integrity Proposal Two approving the adjournment of the Integrity special meeting if necessary to permit solicitation of additional proxies or for any other reason that the board of directors determines is necessary.

At the date hereof, the Integrity board of directors has no knowledge of any business that will be presented for consideration at the Integrity special meeting and that would be required to be set forth in this proxy statement/prospectus or the related proxy card other than the matters set forth in the Integrity Notice of Special Meeting of Shareholders.

No other matter can be brought up or voted upon at the Integrity special meeting.

 

46


Table of Contents

Your vote is important. Accordingly, if you were a record holder of Integrity common stock on the record date of the Integrity special meeting, please sign and return the enclosed proxy card whether or not you plan to attend the Integrity special meeting in person.

Attending the Meeting; Voting in Person

Only record holders of Integrity common stock on the record date, the persons duly appointed as proxies to vote shares of Integrity common stock, and invited guests may attend the Integrity special meeting. Only the holders of record of shares of the Integrity common stock as of the record date for the Integrity special meeting will be entitled to vote at the meeting. All attendees must present government-issued photo identification (such as a driver’s license or passport) for admittance. The additional items, if any, that attendees must bring to gain admittance to the Integrity special meeting depend on whether they are shareholders of record or proxy holders. If you receive a notice of special meeting and a proxy statement/prospectus directly from Integrity, you are deemed a holder of record.

A shareholder who holds shares in “street name” through a broker, custodian, trustee or other nominee (referred to in this proxy statement/prospectus as a “beneficial owner”) who desires to attend the Integrity special meeting in person must bring proof of beneficial ownership as of the record date, such as a letter from the broker, custodian, trustee or other nominee that is the record owner of such beneficial owner’s shares, a brokerage account statement or the voting instruction form provided by the broker.

A person who holds a validly executed proxy entitling such person to vote on behalf of a record owner of shares of Integrity common stock who desires to attend the Integrity special meeting in person must bring the validly executed proxy naming such person as the proxy holder, signed by the Integrity shareholder of record, and proof of the signing shareholder’s record ownership of shares of Integrity common stock as of the record date.

No cameras, recording equipment or other electronic devices will be allowed in the meeting room. Failure to provide the requested documents at the door or failure to comply with the procedures for the Integrity special meeting may prevent Integrity shareholders from being admitted to the Integrity special meeting.

Revocation of Proxies

An Integrity shareholder entitled to vote at the Integrity special meeting may revoke a previously provided proxy at any time before such time that the proxy card for any such holders of Integrity common stock must be received at the Integrity special meeting by taking any of the following three actions:

 

    delivering written notice of revocation to James M. McElray, Executive Vice President and Chief Financial Officer, Integrity Bancshares, Inc., 4040 Washington Avenue, Houston, Texas 77007;

 

    delivering a proxy card bearing a later date than the date of the proxy that such shareholder desires to revoke; or

 

    attending the Integrity special meeting and voting in person.

Merely attending the Integrity special meeting will not, by itself, revoke your proxy; a holder of Integrity common stock must cast a subsequent vote at the Integrity special meeting using a ballot provided at the Integrity special meeting for that purpose. The last valid vote that Integrity receives before or at the Integrity special meeting is the vote that will be counted.

If you hold your shares in “street name” through a custodian or broker, you must contact such broker or custodian if you desire to revoke your proxy.

 

47


Table of Contents

Tabulation of Votes

Integrity has appointed James M. McElray to serve as the Inspector of Election for the Integrity special meeting. The Inspector of Election will independently tabulate affirmative votes, negative votes and abstentions.

Solicitation of Proxies

The Integrity board of directors is soliciting proxies for the Integrity special meeting from holders of shares of Integrity common stock entitled to vote at such special meeting. In accordance with the reorganization agreement, Integrity will pay its own cost of soliciting proxies from its shareholders, including the cost of mailing this proxy statement/prospectus. In addition to solicitation of proxies by mail, proxies may be solicited by Integrity’s officers, directors and regular employees, without additional remuneration, by personal interview, telephone or other means of communication.

Integrity will make arrangements with brokerage houses, custodians, nominees and fiduciaries to forward proxy solicitation materials to beneficial owners of Integrity common stock. Integrity may reimburse these brokerage houses, custodians, nominees and fiduciaries for their reasonable expenses incurred in forwarding the proxy materials.

Abstentions and shares of Integrity common stock held of record by a broker or nominee that are voted on any matter are included in determining whether a quorum exists at the Integrity special meeting. Brokers that are members of the NYSE or Nasdaq Global Select Market, as holders of record, are permitted to vote on certain routine matters in their discretion, but not on nonroutine matters. The proposal to approve the reorganization agreement and the merger is a nonroutine matter. Accordingly, if a holder of shares of Integrity common stock holds such shares in “street name” and does not provide voting instructions to his or her bank, broker or nominee that is a member of NYSE or Nasdaq Global Select Market, those shares will not be voted on the proposal to approve the reorganization agreement and the merger at the Integrity special meeting unless you receive a proxy from that broker that will allow you to vote the shares you beneficially own and that are held by that broker.

Adjournments

Any adjournment of the Integrity special meeting may be made from time to time if the proposal to adjourn the meeting is approved by the affirmative vote of at least a majority of the issued and outstanding shares of Integrity common stock entitled to vote and present or represented by proxy at the Integrity special meeting, whether or not a quorum exists at the Integrity special meeting. Such adjournment may be made without further notice other than by an announcement made at the Integrity special meeting, unless a new record date for the adjourned special meeting is fixed. If a quorum is not present at the Integrity special meeting or if a quorum is present at the Integrity special meeting but there are not sufficient votes at the time of the Integrity special meeting to approve the proposals, then Integrity shareholders may be asked to vote on a proposal to adjourn the Integrity special meeting so as to permit solicitation of additional proxies. A proposal to adjourn the meeting may also be made for any reason the board of directors of Integrity determines is necessary.

 

48


Table of Contents

PROPOSAL ONE—THE MERGER

The shareholders of Integrity will be voting upon a proposal to approve the reorganization agreement and the merger. Information about the merger and the reorganization agreement is presented below under “The Merger” and elsewhere in this proxy statement/prospectus

THE MERGER

The following information describes the material aspects of the merger. A copy of the reorganization agreement is included as Appendix A to this proxy statement/prospectus and is incorporated herein by reference. The description of the material aspects of the merger appearing below is qualified in its entirety by the terms of the reorganization agreement. You are urged to read each of the Appendices to this proxy statement/prospectus in its entirety.

Terms of the Merger

The reorganization agreement provides for Independent to acquire all of the issued and outstanding equity securities of Integrity through a merger of Integrity with and into Independent, with Independent being the surviving corporation following the merger. If the shareholders of Integrity approve the reorganization agreement at the special meeting, and if the required regulatory approvals are obtained and the other conditions to the parties’ obligations to effect the merger are satisfied or are waived by the party entitled to do so, Independent and Integrity hope to complete the merger on May 1, 2018, although delays in the completion of the merger could occur.

Independent is the sole shareholder of Independent Bank, a Texas banking association, and Integrity is the sole shareholder of Integrity Bank, a Texas state savings bank. Upon the effectiveness of the merger, both Independent Bank and Integrity Bank will be wholly owned subsidiaries of Independent. Pursuant to the reorganization agreement, immediately following the effectiveness of the merger, Integrity Bank will merge with and into Independent Bank, with Independent Bank being the surviving bank following the bank merger.

Treatment of Shares of Integrity Common Stock

As a result of the merger, holders of Integrity common stock will be entitled to receive whole shares of Independent common stock and a cash payment in exchange for their shares of Integrity common stock. Independent will pay cash in lieu of issuing fractional shares of Independent common stock. After the merger, the Integrity shareholders will no longer be owners of Integrity common stock. As a result of the merger, certificates of Integrity common stock will represent only the right to receive the merger consideration pursuant to the reorganization agreement. Integrity will cease to exist following the merger’s completion.

If the shareholders of Integrity approve the reorganization agreement and the merger, the necessary regulatory approvals of the merger are received, and the merger is completed, and assuming 5,046,952 shares of Integrity common stock are outstanding immediately prior to the merger (which assumes that outstanding Integrity stock options to acquire 163,523 Integrity common stock are exercised prior to the tangible equity determination date), there are 64,000 unexercised Integrity stock options to purchase 64,000 shares of Integrity common stock and that the aggregate amount to be paid to cash out such unexercised Integrity stock options is $790,124, Integrity has adjusted tangible equity of at least $84.0 million on the tangible equity determination date and the price of Independent common stock is $72.60 per share (the closing price of Independent common stock on February 23, 2018), then, each of the shares of Integrity common stock then outstanding would be exchanged for 0.4106 of a share of Independent common stock and a cash payment of $6.11 and all of the outstanding shares of Integrity common stock would be exchanged for an aggregate of 2,072,131 shares of Independent common stock and approximately $30.1 million in cash. For more detail on this estimate, please see “The Merger—Estimated Number of Shares of Integrity Common Stock to be Issued and Outstanding on the Closing Date” on page 50.

 

49


Table of Contents

Treatment of Integrity Stock Options

Pursuant to the terms of the reorganization agreement, each outstanding and unvested option to acquire shares of Integrity common stock that is not fully vested and immediately exercisable will become fully vested upon the approval of the reorganization agreement and the merger by the holders of Integrity common stock. Upon such approval, all of the outstanding options to acquire shares of Integrity common stock will then no longer be subject to forfeiture and will be immediately exercisable. Each such option that is not exercised prior to the effective time of the merger will be automatically cashed out under the terms of the reorganization agreement and an option cancellation agreement, and the holder of each cashed out Integrity stock option will have the right to receive a cash payment in an amount equal to the per option share price multiplied by the total number of option shares held by such nonexercising option holder. Such amount will be paid to the option holders within five business days following the closing date of the merger. Any amount paid by Independent to cash out the Integrity stock options will reduce the cash portion of the merger consideration. Management of Integrity anticipates that Integrity stock options to purchase 64,000 shares of Integrity common stock will remain outstanding and unexercised on the tangible equity determination date, which, based on the assumptions set forth above, would result in an aggregate payment of $790,124 to cash out such unexercised Integrity stock options.

Estimated Number of Shares of Integrity Common Stock to be Issued and Outstanding on the Closing Date

The number of shares of Independent common stock and cash payment amount to be received by the Integrity shareholders with respect to their shares of Integrity common stock is dependent, among other factors, upon the number of shares of Integrity common stock issued and outstanding immediately prior to the effective time of the merger. As of February 23, 2018, the record date for the Integrity special meeting, 4,883,429 shares of Integrity common stock were issued and outstanding, and Integrity stock options to purchase 227,523 shares of Integrity common stock were outstanding and unexercised. If outstanding Integrity stock options to purchase 163,523 shares of Integrity common stock are exercised, 5,046,952 shares of Integrity common stock would be issued and outstanding immediately prior to the effective time of the merger. Shares of Integrity common stock acquired upon the exercise of Integrity stock options will be exchanged for shares of Independent common stock and a cash payment in the merger on the same basis as all other shares of Integrity common stock outstanding immediately prior to the effective time of the merger.

Possible Downward Adjustment to the $31.6 million Merger Consideration

The $31.6 million cash consideration will be reduced, on a dollar-for-dollar basis, if the adjusted tangible equity of Integrity is less than $84.0 million on the tangible equity determination date. Under those circumstances, the aggregate cash consideration would be reduced by the difference between $84.0 million and the amount Integrity’s tangible equity on the tangible equity determination date.

As noted above, the amount paid by Independent to cash out outstanding and unexercised Integrity stock options will reduce the aggregate cash portion of the merger consideration. Management of Integrity anticipates that Integrity stock options to purchase 64,000 shares of Integrity common stock will remain outstanding and unexercised, and that, based upon the closing price of Independent common stock of $72.60 on February 23, 2018, Independent would make an aggregate payment of approximately $790,124 to cash out such unexercised Integrity stock options. In this event, the aggregate cash portion of the merger consideration would be reduced by $790,124 from $31.6 million to approximately $30.8 million.

Pursuant to the terms of the reorganization agreement, the adjusted tangible equity of Integrity will be determined from Integrity’s financial statements prepared in accordance with generally accepted accounting principles, consistently applied, or GAAP, adjusted as provided for below. Any unrealized gains or losses in investment securities will also be excluded from the calculation of adjusted tangible equity.

 

50


Table of Contents

The calculation of Integrity’s adjusted tangible equity for purposes of determining whether there is a downward adjustment to the $31.6 million cash consideration to be received by the Integrity shareholders in the merger will include a deduction for the costs and expenses of Integrity and Integrity Bank listed below, on an after tax basis, which are currently estimated to range, in the aggregate, between approximately $9.3 million and $9.5 million:

 

    all professional fees incurred by Integrity and Integrity Bank in connection with transactions contemplated by the reorganization agreement, which would include any investment banking fees, legal fees and accounting fees and similar costs and expenses;

 

    any costs or fees (including forfeited prepaid expenses) associated with the termination and de-conversion of material contracts of Integrity and Integrity Bank, including their respective data processing and other information technology contracts and as otherwise scheduled in the reorganization agreement;

 

    all payments made or owed under the employment agreements, change-in control agreements, salary arrangements, continuation arrangements, deferred compensation arrangements, severance plans, or similar arrangements by Integrity or Integrity Bank and all other payments, if any, made to directors, director long-term care agreements, officers and employees of Integrity or Integrity Bank related to the consummation of the merger;

 

    the premium for four (4) years of director and officer insurance tail coverage required by the reorganization agreement;

 

    the portion of the payroll and income tax owed by Integrity or Integrity Bank resulting from the cashout of the Integrity stock options, if any, or from any distribution made by Integrity if Integrity’s adjusted tangible equity is more than $84.0 million on the tangible equity termination date; and

 

    Any provision expense incurred to fully reserve for certain identified loans that are not resolved prior to the tangible equity determination date.

 

51


Table of Contents

The tangible equity of Integrity (calculated in accordance with GAAP and the terms of the reorganization agreement) as of December 31, 2017, was $85.8 million. The amount of tangible equity will be increased by the amount of the consolidated net income of Integrity or decreased by the amount of the consolidated net loss of Integrity through the fifth business day prior to the tangible equity determination date. Management of Integrity estimates that Integrity will have net income of between $3.4 million and $3.6 million from January 1, 2018, through April 24, 2018. The table set forth below shows the range of Integrity’s estimates for the amounts that will affect the calculation of the Integrity adjusted tangible equity, assuming the closing of the merger occurs on April 30, 2018, and the merger has an effective date of May 1, 2018:

 

     Low Range      High Range  

Tangible equity of Integrity as of December 31, 2017 prior to deductions required by reorganization agreement

   $ 85,823      $ 85,823  

Estimated consolidated net income of Integrity for the period from January 1, 2018, through April 24, 2018

     3,400        3,600  

Estimated additional equity from the purchase of stock options

     4,600        5,839  

Estimated professional fees the transactions contemplated by the reorganization agreement, including investment banking, legal and accounting fees and similar costs and expenses

     1,501        1,501  

Estimated costs and fees associated with termination and de-conversion of material contracts

     1,300        1,500  

Estimated payments owed under employment contracts and other payments to be made to directors, officers and employees of Integrity and Integrity Bank relating to the consummation of the merger

     2,600        2,700  

Estimated premiums for director and officer insurance tail coverage (for 4 year period)

     41        41  

Estimated payroll and income tax to be owed by Integrity resulting from the cashout of the Integrity stock options

     100        100  

Estimated provision expense for identified loans

     3,850        3,500  
  

 

 

    

 

 

 

Estimated total costs and expenses

     9,492        9,342  
  

 

 

    

 

 

 

Estimated adjusted tangible equity of Integrity as of April 24, 2018

   $ 84,431      $ 86,020  
  

 

 

    

 

 

 

If Integrity achieves the estimates in the range set forth above, Integrity’s adjusted tangible equity as of the closing date would be greater than $84.0 million, and, thus, the $31.6 million cash consideration would not be adjusted downward for a shortfall.

The amounts shown in the table above are only estimates and are based upon several assumptions, many of which are beyond the control of Integrity and Integrity Bank. Accordingly, the actual amount of Integrity’s adjusted tangible equity at closing of the merger (which Independent and Integrity hope will occur on May 1, 2018, although delays could occur) may vary from these estimated amounts shown in the table above. Integrity will not resolicit proxies from holders of its common stock in the event that Integrity adjusted tangible equity is below $84.0 million on the tangible equity determination date and the cash consideration is adjusted downward as Integrity has no right to do so under the reorganization agreement. Please refer to the risk factor, “Integrity does not intend to resolicit proxies from its shareholders in the event that Integrity’s adjusted tangible equity is less than $76.0 million on the closing date,” on page 37.

Integrity will provide Independent with a preliminary calculation of adjusted tangible equity at least three business days before the closing date. If Independent disagrees with such calculation of adjusted tangible equity, Integrity and Independent will meet to resolve any such disagreement. If the parties cannot resolve any such disagreement, then an independent accounting firm mutually agreed to by Integrity and Independent will resolve any such disagreement, which resolution will be final and binding upon both parties.

 

52


Table of Contents

If Integrity has consolidated net income for the period from January 1, 2018, through April 24, 2018, and the actual costs and expenses of the type described in the table above are within the range set forth in the table above and the closing date of the merger occurs on May 1, 2018, Integrity’s adjusted tangible equity as of the closing date would be greater than $84.0 million, and, thus, there would be no deduction from the cash consideration.

Should the adjusted tangible equity be $76.0 million, then the $31.6 million cash consideration would be reduced by $8 million (the difference between $84.0 million and $76.0 million) to $23.6 million. That reduction would reduce the cash consideration for a share to be exchanged for a share of Integrity common stock in the merger.

No upward adjustment of the $31.6 million cash consideration amount will be made if the adjusted tangible equity of Integrity exceeds $84.0 million on the tangible equity determination date. As a result, the per share consideration and the aggregate consideration to be received by the Integrity shareholders in the merger will not be increased as a consequence of the adjusted tangible equity of Integrity being in excess of $84.0 million on the determination date. However, if Integrity’s tangible equity is greater than $84.0 million on the tangible equity determination date, then on the day prior to the closing date, Integrity may distribute to its shareholders an amount equal to the difference between the actual amount of tangible equity on the tangible equity determination date less $84.0 million.

Independent’s obligation to consummate the merger is conditioned upon Integrity having an adjusted tangible equity (calculated pursuant to the reorganization agreement and after the deductions described above) of at least $76.0 million as of the closing date. Should the Integrity adjusted tangible equity be less than $76.0 million, then Independent may, in its sole discretion refuse to close the transactions and consummate the merger, or Independent may elect to proceed with the transactions and consummate the merger, in which case the $31.6 million cash consideration would be subject to a deduction equal to $84.0 million minus the calculated adjusted tangible equity of Integrity at the tangible equity determination date. If the Integrity adjusted tangible equity is below $76.0 million at the tangible equity determination date, Independent’s board of directors intends to exercise its independent judgment in determining whether to complete the merger or to terminate the reorganization agreement. In making this determination, the Independent board of directors will exercise its fiduciary duties, including fulfilling its duty to review the reasons why the Integrity adjusted tangible equity was lower than $76.0 million, whether that lower valuation negatively impacts the benefits that Independent hoped to achieve as a result of the merger, whether the corresponding reduced amount of cash consideration to be paid to cash out the Integrity stock options in such event off-sets any potential negative consequences of moving ahead with the merger, and the Independent board of directors will consult with its legal and financial advisors in evaluating whether it would be in the best interest of the Independent shareholders to complete the merger in light of all the relevant facts and circumstances surrounding the lower adjusted tangible equity of Integrity.

Value of Merger Consideration to be Received

If the necessary shareholder and regulatory approvals are obtained and the merger is completed, 5,046,952 shares of Integrity common stock are outstanding immediately prior to the merger (which is expected to be the case if Integrity stock options to purchase 163,523 shares of Integrity common stock are exercised after the date of this proxy statement/prospectus), there are Integrity stock options to purchase 64,000 shares of Integrity common stock that remain outstanding and unexercised resulting in an aggregate payment of $790,124 to cash out such unexercised Integrity stock options, and the adjusted tangible equity of Integrity is at least $84.0 million at the tangible equity determination date, each share of Integrity common stock then outstanding would be exchanged for 0.4106 of a share of Independent common stock and $6.11 per share in cash. Independent’s common stock is listed on the Nasdaq Global Select Market under the symbol “IBTX.”

Based on the assumptions set forth above and the closing price of Independent’s common stock as of February 23, 2018, of $72.60 per share, we estimate Integrity shareholders would receive merger consideration with a value of $35.91 for each share of Integrity common stock they hold immediately prior to the effective time

 

53


Table of Contents

of the merger and with an aggregate value to all holders of Integrity common stock of $181.3 million. The aggregate value of the shares of Independent common stock to be issued to the Integrity shareholders in connection with the merger and the value of the fraction of a share of Independent common stock to be issued in exchange for each share of Integrity common stock in connection with the merger will increase or decrease between the date hereof and the effective time of the merger depending on a number of factors, including fluctuations in the market price of Independent common stock.

If any Integrity stock options remain outstanding at the effective date of the merger, such Integrity stock options will be automatically cashed out pursuant to the reorganization agreement and an option cancellation agreement, and the holder of each cashed out Integrity stock option will have the right to receive a cash payment in an amount equal to the per option share price multiplied by the total number of option shares held by such nonexercising option holder. Such amount will be paid to the option holders within five business days following the closing date of the merger. Any amount paid by Independent to cash out the Integrity stock options will reduce the cash portion of the merger consideration. Management of Integrity anticipates that Integrity stock options to purchase 163,523 shares of Integrity common stock will be exercised prior to the tangible equity determination date and that outstanding Integrity stock options to purchase 64,000 shares of Integrity common stock will remain unexercised at the tangible equity determination date. See “The Merger—Treatment of Integrity Stock Options” beginning on page 50 for additional information regarding the cashout of the Integrity stock options and the calculation of the amount to be paid by Independent to cash out the Integrity stock options, if any, in connection with the merger.

The amounts in each of the tables below have been calculated based on a number of assumed stock prices and 5,046,952 outstanding shares of Integrity common stock assuming the exercise of outstanding Integrity stock options to purchase 163,523 shares of Integrity common stock and an aggregate payment of $790,124 to cash out unexercised Integrity stock options to purchase 64,000 shares of Integrity common stock. Table 1 assumes that Integrity will have adjusted tangible equity of $84.0 million (as calculated in accordance with the terms of the reorganization agreement) on the tangible equity determination date; Table II assumes that Integrity will have adjusted tangible equity of $76.0 million on the tangible equity determination date.

The actual price at which a share of Independent common stock is trading in the market at the effective time of the merger may be materially less or more than any of the assumed stock prices in each of the tables below and the price and may be materially less or more than the assumed stock prices used for determining the value of the merger consideration shown in each of the tables below. As a result, the actual amounts and values of the merger consideration received by the Integrity shareholders in the merger may differ materially from any of the amounts and values set forth in either or both of the following tables.

Table I

 

Assumed

Stock Price

   Aggregate Number
Independent

Shares to be Issued
as Merger
Consideration
     Value of
Aggregate Number
of Independent
Shares Issued as
Merger
Consideration(2)
     Aggregate Amount
of Cash Merger
Consideration(2)
     Value of
Aggregate
Merger
Consideration(2)
 
$72.60(1)      2,072,131      $ 150,436,711      $ 30,832,015      $ 181,268,726  
$70.00        2,072,131        145,049,170        30,738,000        175,787,170  
$65.00        2,072,131        134,688,515        30,891,680        165,580,195  
$60.00        2,072,131        124,327,860        31,046,000        155,373,860  
$55.00        2,072,131        113,967,205        31,199,480        145,166,685  
$50.00        2,072,131        103,606,550        31,353,760        134,960,310  

 

(1) The closing price of a share of Independent common stock on February 23, 2018.
(2) Determined as described under “The Merger—Treatment of Shares of Integrity Common Stock” beginning on page 49.

 

54


Table of Contents

Table II

 

Assumed

Stock Price

   Aggregate Number
Independent

Shares to be Issued
as Merger
Consideration
     Value of
Aggregate Number
of Independent
Shares Issued as
Merger

Consideration(2)
     Aggregate Amount
of Cash Merger
Consideration(2)
     Value of
Aggregate
Merger
Consideration(2)
 
$72.60(1)      2,072,131      $ 150,436,711      $ 22,832,015      $ 173,268,726  
$70.00        2,072,131        145,049,170        22,738,000        167,787,170  
$65.00        2,072,131        134,688,515        22,891,680        157,580,195  
$60.00        2,072,131        124,327,860        23,046,000        147,373,860  
$55.00        2,072,131        113,967,205        23,199,480        137,166,685  
$50.00        2,072,131        103,606,550        23,353,760        126,960,310  

 

(1) The closing price of a share of Independent common stock on February 23, 2018.
(2) Determined as described under “The Merger—Treatment of Shares of Integrity Common Stock” beginning on page 49.

Cash in Lieu of Fractional Shares

No fractional shares of Independent common stock will be issued in the merger. Rather, if a Integrity shareholder would be entitled to receive in exchange for his or her shares of Integrity common stock a total number of shares of Independent common stock including a fraction of such a share, Independent will pay that Integrity shareholder cash in lieu of issuing that fractional share of Independent common stock. Such payment will be in an amount equal to the product of the fraction a share of Independent common stock that would otherwise be issuable to each Integrity shareholder multiplied by the market price at market close of one share of Independent’s common stock on the date the merger is consummated and will not accrue interest. The market price of shares of Independent common stock will fluctuate from the date of this proxy statement/prospectus to the date of completion of the merger, and any such fluctuations will impact the amount of cash paid for fractional shares.

Other Financial Aspects of the Merger

If Integrity’s tangible equity is greater than $84.0 million on the tangible equity determination date, then on the day prior to the closing date, Integrity may distribute to its shareholders an amount equal to the difference between the actual amount of tangible equity on the tangible equity determination date less $84.0 million.

Treatment of Shares of Independent Common Stock

Each share of Independent common stock outstanding immediately prior to the effective time of the merger shall remain issued and outstanding as one share of Independent common stock as Independent is the corporation surviving the merger.

Background of the Merger

In connection with its ongoing consideration and evaluation of its long term strategic alternatives, the Integrity board of directors and its executive management team have regularly reviewed Integrity’s strategic direction and business objectives as part of its continuing efforts to enhance shareholder value. This effort has included an evaluation of the merits and drawbacks of (i) continuing to operate as an independent institution, (ii) expansion through the strategic acquisition of other institutions and branch offices, and (iii) entering into a strategic merger with another financial institution. These considerations have focused on, among other things, prospects and developments in the regulatory environment, in the economy generally and in financial markets for financial institutions generally and Integrity, in particular, as well as conditions and ongoing consolidation in the financial services industry. From time to time, Integrity’s executive management has received inquiries about the possibility of a sale of Integrity to another bank or bank holding company.

 

55


Table of Contents

In 2015, the management of Integrity began discussions with a bank holding company about the acquisition of Integrity. Those discussions were followed up with a written proposal in November 2015 for Bank Holding Company A to acquire Integrity for a cash price of $141.5 million contingent upon Integrity having a consolidated shareholders’ equity of $65 million at the time the transaction would be consummated. The proposal from Bank Holding Company A did not result in a signed definitive agreement.

During 2016 and early 2017, informal discussions with various potential acquirers occurred, but those discussions did not become formal acquisition proposals. In furtherance with Integrity’s interest in pursuing an acquisition, on April 3, 2017, the board of directors of Integrity engaged Sandler O’Neill to assist Integrity in identifying and evaluating strategic merger partners.

During May and June 2017, Sandler O’Neill contacted 14 parties to gauge their interest in a potential strategic transaction with Integrity. These parties were selected in consultation with Integrity based upon their size, capacity to pay and strategic interest in Integrity or banks in the Texas marketplace. Three of the parties executed nondisclosure agreements and were given access to preliminary diligence materials. Integrity received three written nonbinding expressions of interest and one indication of interest from Independent, which was provided orally to Sandler O’Neill and later withdrawn prior to Integrity’s board meeting. The four offers ranged from $140.0 million in aggregate consideration to $163.6 million. Bank Holding Company B, which had put forth the highest value in its expression of interest, did not execute a nondisclosure agreement and was not given access to preliminary diligence materials prior to submitting its proposal. After reviewing the indications at Integrity’s meeting of the Board of Directors, and following conversations between Sandler O’Neill and Bank Holding Company B, the nonbinding expression of interest from Bank Holding Company B regarding a proposed acquisition of Integrity was increased to an aggregate purchase price of approximately $165.0 million consisting of a mix of cash and common stock in Bank Holding Company B. The proposal from Bank Holding Company B did not result in a signed definitive agreement.

On October 16, 2017, Integrity received a nonbinding written expression of interest letter from Independent proposing an acquisition of Integrity for 2,072,131 shares of common stock of Independent and $31.6 million in cash, reflecting aggregate consideration of approximately $158.0 million, based upon a value of $61.00 per share of Independent common stock, which was the approximate market price of a share of Independent common stock at that time.

On October 18, 2017, Integrity received a nonbinding written letter of intent from Bank Holding Company C (which had provided a nonbinding written expression of interest in June), that reflected a proposed acquisition of Integrity for aggregate consideration of $160.0 million, of which 30% would be paid in cash and 70% would be paid in shares of Bank Holding Company C’s common stock. At the time, Bank Holding Company C was not publicly traded.

Integrity’s board of directors met on October 18, 2017, with representatives from Sandler O’Neill and Integrity’s counsel, Jackson Walker L.L.P., to discuss and evaluate the two acquisition alternatives. Among other things, the directors discussed the financial aspects of the alternatives and the differences in the two suitors and the possible impact of those differences on long term shareholder return and deal certainty. After careful consideration of both, the board of directors of Integrity concluded that the terms included in the expression of interest from Independent would provide the most favorable overall shareholder value. The board voted to pursue the expression of interest from Independent. Integrity executive management signed a binding standstill agreement and agreed to negotiate exclusively with Independent on a definitive agreement to structure and effect the transaction. Upon execution of the standstill agreement, Independent began due diligence on Integrity, Integrity Bank and their business, which due diligence extended through late November.

Independent provided a draft of the reorganization agreement on November 1, 2017. During the next few weeks, Jackson Walker L.L.P. discussed and negotiated various provisions of the reorganization agreement with counsel for Independent, and at a special meeting of the Integrity board of directors on November 27, 2017,

 

56


Table of Contents

Integrity’s counsel provided a thorough review of the proposed agreement and all of the ancillary agreements associated with the reorganization agreement. Representatives of Sandler O’Neill discussed the financial aspects of the proposed transaction and rendered its oral opinion, which was subsequently confirmed to the Integrity board in writing, to the effect that, as of such date, the aggregate merger consideration to be received by holders of Integrity common shares was fair from a financial point of view. On November 28, 2017, Integrity executed the proposed reorganization agreement and related transaction documents. On the same day, Independent’s board of directors met and approved the reorganization agreement. Independent signed the reorganization agreement and, then, announced the transaction.

Recommendation of Integrity’s Board and Its Reasons for the Merger

Integrity’s board of directors has unanimously approved the reorganization agreement and unanimously recommends that the Integrity shareholders vote “FOR” approval of the reorganization agreement and the merger.

Integrity’s board of directors has determined that the merger is fair to, and in the best interests of, Integrity’s shareholders. In approving the reorganization agreement, Integrity’s board of directors consulted with Sandler O’Neill with respect to the financial aspects of the merger and with its outside legal counsel as to its legal duties and the terms of the reorganization agreement. In arriving at its determination, Integrity’s board also considered a number of factors, including the following:

 

    Integrity’s board of directors’ familiarity with and review of information concerning the business, results of operations, financial condition, competitive position and future prospects of Integrity;

 

    the current and prospective environment in which Integrity operates, including national, regional and local economic conditions, the competitive environment for banks, thrifts and other financial institutions generally and the increased regulatory burdens on financial institutions generally and the trend toward consolidation in the banking industry and in the financial services industry;

 

    the results that Integrity could expect to obtain if it continued to operate independently, and the likely benefits to shareholders of that course of action, as compared with the value of the merger consideration offered by Independent;

 

    that shareholders of Integrity will receive the merger consideration in shares of Independent common stock, which is publicly traded on the Nasdaq Global Select Market;

 

    the financial presentation of Sandler O’Neill and the opinion of Sandler O’Neill, dated November 28, 2017, to the effect that, as of the date of such opinion, and subject to the assumptions, limitations and qualifications set forth in the opinion, the aggregate merger consideration to be received by the holders of Integrity common stock was fair to such holders from a financial point of view (see “Merger—Fairness Opinion of Financial Advisor to Integrity,” beginning on page 58);

 

    the treatment of the merger as a “reorganization” within the meaning of Section 368(a) of the Code with respect to Integrity stock exchanged for Independent stock;

 

    the ability of Independent to pay the aggregate merger consideration without a financing contingency and without the need to obtain financing to close the transaction;

 

    the ability of Independent to receive the requisite regulatory approvals in a timely manner;

 

    the terms and conditions of the reorganization agreement, including the parties’ respective representations, warranties, covenants and other agreements, the conditions to closing, including a provision that permits Integrity’s board of directors, in the exercise of its fiduciary duties, under certain conditions, to furnish information to a third party that has submitted an unsolicited proposal to acquire Integrity;

 

57


Table of Contents
    that under the reorganization agreement Integrity could not solicit competing proposals for the acquisition of Integrity;

 

    the merger with a larger holding company would provide the opportunity to realize economies of scale, increase efficiencies of operations and enhance the development of new products and services;

 

    the agreement of Independent to honor certain existing employee benefits;

 

    that some of Integrity’s directors and executive officers have other financial interests in the merger in addition to their interests as Integrity shareholders, including financial interests that are the result of existing compensation arrangements with Integrity and/or prospective compensation arrangements with Independent and the manner in which such interests would be affected by the merger;

 

    the Integrity stock options will be cashed out pursuant to the Integrity 2007 Stock Option Plan and as contemplated by the reorganization agreement; and

 

    the requirement that Integrity conduct its business in the ordinary course and other restrictions on the conduct of Integrity’s business before completion of the merger, which may delay or prevent Integrity from undertaking business opportunities that may arise before completion of the merger.

The reasons set out above for the merger are not intended to be exhaustive but do include all material factors considered by Integrity’s board of directors in approving the merger. In reaching its determination, the Integrity board of directors did not assign any relative or specific weights to different factors, and individual directors may have given different weights to different factors. Based on the reasons stated, the board believed that the merger was in the best interest of Integrity’s shareholders, and therefore the board of directors of Integrity unanimously approved the reorganization agreement and the merger. In addition, all members of Integrity’s board of directors have entered into a voting agreement requiring them to vote the shares of Integrity common stock over which they have voting authority in favor of the reorganization agreement.

INTEGRITY’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT HOLDERS OF INTEGRITY COMMON STOCK VOTE FOR THE REORGANIZATION AGREEMENT AND THE MERGER.

Fairness Opinion of Financial Advisor to Integrity

Integrity retained Sandler O’Neill to act as financial advisor to Integrity’s board of directors in connection with Integrity’s consideration of a possible business combination. Sandler O’Neill is a nationally recognized investment banking firm whose principal business specialty is financial institutions. In the ordinary course of its investment banking business, Sandler O’Neill is regularly engaged in the valuation of financial institutions and their securities in connection with mergers and acquisitions and other corporate transactions.

Sandler O’Neill acted as financial advisor in connection with the proposed transaction and participated in certain of the negotiations leading to the execution of the merger agreement. At the November 27, 2017 meeting at which Integrity’s board of directors considered and discussed the terms of the merger agreement and the merger, Sandler O’Neill delivered to Integrity’s board of directors its oral opinion, which was subsequently confirmed in writing on November 27, 2017, to the effect that, as of such date, the aggregate merger consideration to be received by holders of Integrity common shares in the merger was fair to the holders of Integrity common shares, from a financial point of view. The full text of Sandler O’Neill’s opinion is attached as Appendix C to this proxy statement/prospectus. The opinion outlines the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by Sandler O’Neill in rendering its opinion. The description of the opinion set forth below is qualified in its entirety by reference to the full text of the opinion. Holders of Integrity common shares are urged to read the entire opinion carefully in connection with their consideration of the proposed merger.

 

58


Table of Contents

Sandler O’Neill’s opinion speaks only as of the date of the opinion. The opinion was directed to Integrity’s board of directors in connection with its consideration of the merger agreement and the merger and does not constitute a recommendation to any shareholder of Integrity as to how any such shareholder should vote at any meeting of shareholders called to consider and vote upon the approval of the merger agreement and the merger. Sandler O’Neill’s opinion was directed only to the fairness, from a financial point of view, of the aggregate merger consideration to the holders of Integrity common shares and does not address the underlying business decision of Integrity to engage in the merger, the form or structure of the merger or any other transactions contemplated in the merger agreement (including any adjustments to the consideration in the merger pursuant to the merger agreement), the relative merits of the merger as compared to any other alternative transactions or business strategies that might exist for Integrity or the effect of any other transaction in which Integrity might engage. Sandler O’Neill did not express any opinion as to the fairness of the amount or nature of the compensation to be received in the merger by any officer, director or employee of Integrity or Independent, or any class of such persons, if any, relative to the compensation to be received in the merger by any other shareholder. Sandler O’Neill’s opinion was approved by its fairness opinion committee.

In connection with its opinion, Sandler O’Neill reviewed and considered, among other things:

 

    a draft of the merger agreement, dated November 22, 2017;

 

    certain publicly available financial statements and other historical financial information of Integrity and Integrity Bank SSB, a wholly owned subsidiary of Integrity, that Sandler O’Neill deemed relevant;

 

    certain publicly available financial statements and other historical financial information of Independent that Sandler O’Neill deemed relevant;

 

    certain internal financial projections for Integrity for the years ending December 31, 2017 and December 31, 2018 as well as estimated annual long-term balance sheet and earnings growth rates and dividend assumptions for Integrity for the years thereafter, as provided by the senior management of Integrity;

 

    publicly available consensus mean analyst earnings per share estimates for Independent for the quarter ending December 31, 2017 and the years ending December 31, 2018 and December 31, 2019, as well as an estimated annual long-term earnings per share growth rate and dividend assumptions for Independent for the years thereafter, as provided by the senior management of Independent;

 

    the pro forma financial impact of the merger on Independent based on certain assumptions relating to purchase accounting adjustments, cost savings and transaction expenses, as well as assumptions relating to Integrity tangible equity at the time of closing of the merger, anticipated regulatory costs and the offering of an estimated amount of securities by Independent in connection with the merger, as provided by the senior management of Independent;

 

    the publicly reported historical price and trading activity for Independent common stock, including a comparison of certain stock market information for Independent common stock and certain stock indices as well as publicly available information for certain other similar companies, the securities of which are publicly traded;

 

    a comparison of certain financial information for Integrity and Independent with similar institutions for which information is publicly available;

 

    the financial terms of certain recent business combinations in the bank and thrift industry (on a statewide and nationwide basis), to the extent publicly available;

 

    the current market environment generally and the banking environment in particular; and

 

    such other information, financial studies, analyses and investigations and financial, economic and market criteria as Sandler O’Neill considered relevant.

 

59


Table of Contents

Sandler O’Neill also discussed with certain members of the senior management of Integrity the business, financial condition, results of operations and prospects of Integrity and held similar discussions with certain members of the senior management of Independent and its representatives regarding the business, financial condition, results of operations and prospects of Independent.

In performing its review, Sandler O’Neill relied upon the accuracy and completeness of all of the financial and other information that was available to and reviewed by Sandler O’Neill from public sources, that was provided to Sandler O’Neill by Integrity or Independent or their respective representatives or that was otherwise reviewed by Sandler O’Neill, and Sandler O’Neill assumed such accuracy and completeness for purposes of rendering its opinion without any independent verification or investigation. Sandler O’Neill relied on the assurances of the respective managements of Integrity and Independent that they were not aware of any facts or circumstances that would make any of such information inaccurate or misleading. Sandler O’Neill was not asked to and did not undertake an independent verification of any of such information and Sandler O’Neill did not assume any responsibility or liability for the accuracy or completeness thereof. Sandler O’Neill did not make an independent evaluation or perform an appraisal of the specific assets, the collateral securing assets or the liabilities (contingent or otherwise) of Integrity or Independent or any of their respective subsidiaries, nor was Sandler O’Neill furnished with any such evaluations or appraisals. Sandler O’Neill rendered no opinion or evaluation on the collectability of any assets or the future performance of any loans of Integrity or Independent. Sandler O’Neill did not make an independent evaluation of the adequacy of the allowance for loan losses of Integrity or Independent, or of the combined entity after the merger, and Sandler O’Neill did not review any individual credit files relating to Integrity or Independent. Sandler O’Neill assumed, with Integrity’s consent, that the respective allowances for loan losses for both Integrity and Independent were adequate to cover such losses and will be adequate on a pro forma basis for the combined entity.

In preparing its analyses, Sandler O’Neill used certain internal financial projections for Integrity for the years ending December 31, 2017, and December 31, 2018, as well as estimated annual long-term balance sheet and earnings growth rates and dividend assumptions for Integrity for the years thereafter, as provided by the senior management of Integrity. In addition, Sandler O’Neill used publicly available consensus mean analyst earnings per share estimates for Independent for the quarter ending December 31, 2017, and the years ending December 31, 2018, and December 31, 2019, as well as an estimated annual long-term earnings per share growth rate and dividend assumptions for Independent for the years thereafter, as provided by the senior management of Independent. Sandler O’Neill also received and used in its pro forma analyses certain assumptions relating to purchase accounting adjustments, cost savings and transaction expenses, as well as assumptions relating to Integrity tangible equity at the time of closing of the merger, anticipated regulatory costs and the offering of an estimated amount of securities by Independent in connection with the merger, as provided by the senior management of Independent. With respect to the foregoing information, the respective senior managements of Integrity and Independent confirmed to Sandler O’Neill that such information reflected (or, in the case of the publicly available consensus mean analyst estimates referred to above, were consistent with) the best currently available projections, estimates and judgments of those respective senior managements as to the future financial performance of Integrity and Independent, respectively, and the other matters covered thereby, and Sandler O’Neill assumed that the future financial performance reflected in such information would be achieved. Sandler O’Neill expressed no opinion as to such information, or the assumptions on which such information was based. Sandler O’Neill also assumed that there had been no material change in the respective assets, financial condition, results of operations, business or prospects of Integrity or Independent since the date of the most recent financial statements made available to Sandler O’Neill. Sandler O’Neill assumed in all respects material to its analysis that Integrity and Independent would remain as going concerns for all periods relevant to its analysis.

Sandler O’Neill assumed, with Integrity’s consent, that (i) each of the parties to the merger agreement would comply in all material respects with all material terms and conditions of the merger agreement and all related agreements, that all of the representations and warranties contained in such agreements were true and correct in all material respects, that each of the parties to such agreements would perform in all material respects all of the covenants and other obligations required to be performed by such party under such agreements and that

 

60


Table of Contents

the conditions precedent in such agreements were not and would not be waived, (ii) in the course of obtaining the necessary regulatory or third party approvals, consents and releases with respect to the merger, no delay, limitation, restriction or condition would be imposed that would have an adverse effect on Integrity, Independent or the merger or any related transaction, (iii) the merger and any related transactions would be consummated in accordance with the terms of the merger agreement without any waiver, modification or amendment of any material term, condition or agreement thereof and in compliance with all applicable laws and other requirements, and (iv) the merger would qualify as a tax-free reorganization for federal income tax purposes. Finally, with Integrity’s consent, Sandler O’Neill relied upon the advice that Integrity received from its legal, accounting and tax advisors as to all legal, accounting and tax matters relating to the merger and the other transactions contemplated by the merger agreement. Sandler O’Neill expressed no opinion as to any such matters.

Sandler O’Neill’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to Sandler O’Neill as of, the date of the opinion. Events occurring after the date thereof could materially affect Sandler O’Neill’s opinion. Sandler O’Neill has not undertaken to update, revise, reaffirm or withdraw its opinion or otherwise comment upon events occurring after the date thereof. Sandler O’Neill expressed no opinion as to the trading value of Independent common stock at any time or what the value of Independent common stock will be once it is actually received by the holders of Integrity shares.

In rendering its opinion, Sandler O’Neill performed a variety of financial analyses. The summary below is not a complete description of the analyses underlying Sandler O’Neill’s opinion or the presentation made by Sandler O’Neill to Integrity’s board of directors, but is a summary of all material analyses performed and presented by Sandler O’Neill. The summary includes information presented in tabular format. In order to fully understand the financial analyses, these tables must be read together with the accompanying text. The tables alone do not constitute a complete description of the financial analyses. The preparation of a fairness opinion is a complex process involving subjective judgments as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. The process, therefore, is not necessarily susceptible to a partial analysis or summary description. Sandler O’Neill believes that its analyses must be considered as a whole and that selecting portions of the factors and analyses to be considered without considering all factors and analyses, or attempting to ascribe relative weights to some or all such factors and analyses, could create an incomplete view of the evaluation process underlying its opinion. Also, no company included in Sandler O’Neill’s comparative analyses described below is identical to Integrity or Independent and no transaction is identical to the merger. Accordingly, an analysis of comparable companies or transactions involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies and other factors that could affect the public trading values or merger transaction values, as the case may be, of Integrity and Independent and the companies to which they are being compared. In arriving at its opinion, Sandler O’Neill did not attribute any particular weight to any analysis or factor that it considered. Rather, Sandler O’Neill made qualitative judgments as to the significance and relevance of each analysis and factor. Sandler O’Neill did not form an opinion as to whether any individual analysis or factor (positive or negative) considered in isolation supported or failed to support its opinion, rather, Sandler O’Neill made its determination as to the fairness of the aggregate merger consideration on the basis of its experience and professional judgment after considering the results of all its analyses taken as a whole.

In performing its analyses, Sandler O’Neill also made numerous assumptions with respect to industry performance, business and economic conditions and various other matters, many of which are beyond the control of Integrity, Independent and Sandler O’Neill. The analyses performed by Sandler O’Neill are not necessarily indicative of actual values or future results, both of which may be significantly more or less favorable than suggested by such analyses. Sandler O’Neill prepared its analyses solely for purposes of rendering its opinion and provided such analyses to Integrity’s board of directors at its November 27, 2017 meeting. Estimates on the values of companies do not purport to be appraisals or necessarily reflect the prices at which companies or their securities may actually be sold. Such estimates are inherently subject to uncertainty and actual values may be materially different. Accordingly, Sandler O’Neill’s analyses do not necessarily reflect the value of Integrity

 

61


Table of Contents

common shares or the prices at which Integrity common shares or Independent shares may be sold at any time. The analyses of Sandler O’Neill and its opinion were among a number of factors taken into consideration by Integrity’s board of directors in making its determination to approve the merger agreement and should not be viewed as determinative of the aggregate merger consideration or the decision of Integrity’s board of directors or management with respect to the fairness of the merger. The type and amount of consideration payable in the merger were determined through negotiation between Integrity and Independent.

Summary of Aggregate Merger Consideration and Implied Transaction Metrics. Sandler O’Neill reviewed the financial terms of the proposed merger. Assuming that all of the common shares of Integrity outstanding immediately before the effective time are converted into the right to receive (i) an aggregate of $31,600,000 in cash, net of the aggregate nonexercising option holder payment, and (ii) an aggregate of 2,072,131 Independent shares (, subject to certain adjustments as set forth in the merger agreement (as to which Sandler O’Neill expresses no opinion), and based on the closing price of Independent common stock on November 24, 2017 of $63.85 per share, Sandler O’Neill calculated an aggregate implied transaction value of $164 million. Based upon historical financial information for Integrity as or for the last twelve months (“LTM”) ended September 30, 2017 and internal financial projections for the years ending December 31, 2017 and December 31, 2018, as provided by the senior management of Integrity, Sandler O’Neill calculated the following implied transaction metrics:

 

Transaction Value / Integrity Last Twelve Months Earnings:

     17.9

Transaction Value / Integrity 2017E Earnings:

     17.8  

Transaction Value / Integrity 2018E Earnings:

     14.7  

Transaction Value / Integrity September 30, 2017 Book Value:

     195

Transaction Value / Integrity September 30, 2017 Tangible Book:

     195  

Tangible Book Premium(1) / Core Deposits(2):

     13.4  

Tangible Book Premium(1) / Core Deposits(3):

     12.2  

 

(1) Defined as aggregate merger consideration less Integrity reported tangible common equity at September 30, 2017.
(2) Core deposits defined as total deposits less time deposits greater than $100,000.
(3) Core deposits defined as total deposits less time deposits greater than $250,000.

Stock Trading History. Sandler O’Neill reviewed the historical stock price performance of Independent common stock for the one-year period ended and the three-year period ended November 24, 2017. Sandler O’Neill then compared the relationship between the stock price performance of Independent’s shares to movements in the Independent Peer Group (as described below) as well as certain stock indices.

Independent One-Year Stock Price Performance

 

     November 24, 2016   November 24, 2017

Independent

   100%   106.4%

Independent Peer Group

   100   105.6

Nasdaq Bank Index

   100   106.8

S&P 500 Index

   100   118.0

Independent Three-Year Stock Price Performance

 

     November 24, 2014   November 24, 2017

Independent

   100%   145.1%

Independent Peer Group

   100   160.9

Nasdaq Bank Index

   100   146.7

S&P 500 Index

   100   125.8

 

62


Table of Contents

Comparable Company Analyses. Sandler O’Neill used publicly available information to compare selected financial information for Integrity with a group of financial institutions selected by Sandler O’Neill (the “Integrity Peer Group”). The Integrity Peer Group consisted of major exchange traded banks and thrifts headquartered in the Southwest with total assets between $300 million and $2.5 billion, excluding announced merger targets. The Integrity Peer Group consisted of the following companies:

 

Veritex Holdings, Inc.    MidSouth Bancorp, Inc.
Guaranty Bancshares, Inc.    People’s Utah Bancorp
First Guaranty Bancshares, Inc.    Home Bancorp, Inc.
Investar Holding Corporation    Home Federal Bancorp, Inc. of LA
Bancorp 34, Inc.   

The analysis compared financial information for Integrity as of or for the twelve months ended September 30, 2017 with the corresponding publicly available data for the Integrity Peer Group as of or for the twelve months ended September 30, 2017, with pricing data as of November 24, 2017. The table below sets forth the data for Integrity and the high, low, median and mean data for the Integrity Peer Group.

Integrity Comparable Company Analysis

 

     Integrity(1)      Integrity Peer
Group Median
     Integrity
Peer Group
Mean
     Integrity Peer
Group High
     Integrity
Peer Group
Low
 

Total Assets ($MM)

     805        1,691        1,521        2,495        363  

Loans / Deposits (%)

     97.4        93.0        90.4        112.1        74.3  

Nonperforming Assets(2) / Total Assets (%)

     0.21        0.81        1.11        2.83        0.13  

Tangible Common Equity / Tangible Assets (%)

     10.46        11.09        11.12        14.24        8.04  

Tier 1 Leverage Ratio(3) (%)

     10.30        11.58        11.71        15.26        8.05  

Total Risk-Based Capital Ratio(3) (%)

     13.11        16.30        16.11        20.35        12.25  

CRE / Total Risk-Based Capital Ratio(4) (%)

     303.9        216.7        233.5        403.7        96.8  

LTM Return on Average Assets (%)

     1.19        0.88        0.92        1.54        0.05  

LTM Return on Average Equity (%)

     11.59        8.99        7.78        11.10        0.40  

LTM Net Interest Margin (%)

     4.23        3.69        3.86        4.71        3.30  

LTM Efficiency Ratio (%)

     52.8        63.6        64.8        88.9        53.6  

Price / Tangible Book Value (%)

     —          159        156        223        96  

Price / LTM Earnings per Share (x)

     —          18.0        18.7        27.8        9.3  

Price / 2017E(5) Earnings per Share(6) (x)

     —          21.1        20.6        25.0        16.4  

Price / 2018E(5) Earnings per Share(6) (x)

     —          17.0        17.0        21.4        14.4  

Current Dividend Yield (%)

     —          1.2        1.0        2.4        0.0  

Market Value ($MM)

     —          216        281        599        50  

 

(1) Bank level financial data used for: Nonperforming Assets / Total Assets; Tier 1 Leverage Ratio; Total Risk-Based Capital Ratio; CRE / Total Risk-Based Capital Ratio; LTM Net Interest Margin; LTM Efficiency Ratio.
(2) Nonperforming assets defined as nonaccrual loans and leases, renegotiated loans and leases and real estate owned.
(3) Bank level financial data used for Bancorp 34, Inc.
(4) Bank level financial data used for Home Federal Bancorp, Inc. of LA and Bancorp 34, Inc.
(5) Price / forward earnings multiples based on analyst consensus mean estimates from SNL CapIQ.
(6) Excludes multiples of financial institutions which were either negative or greater than 40x.

 

63


Table of Contents

Sandler O’Neill used publicly available information to perform a similar analysis for Independent and a group of financial institutions selected by Sandler O’Neill (the “Independent Peer Group”). The Independent Peer Group consisted of major exchange traded banks and thrifts headquartered in the Southeast and Southwest with total assets between $5 billion and $12 billion, excluding announced merger targets. The Independent Peer Group consisted of the following companies.

 

South State Corporation    United Community Banks, Inc.
Cadence Bancorporation    Renasant Corporation
FCB Financial Holdings, Inc.    WesBanco, Inc.
Simmons First National Corporation    LegacyTexas Financial Group, Inc.
Union Bankshares Corporation    TowneBank
Ameris Bancorp    BancFirst Corporation
First Financial Bankshares, Inc.    CenterState Bank Corporation
ServisFirst Bancshares, Inc.    Southside Bancshares, Inc.
Seacoast Banking Corporation of Florida    State Bank Financial Corporation

The analysis compared publicly available financial information for Independent provided by Independent as of or for the twelve months ended September 30, 2017 with the corresponding publicly available data for the Independent Peer Group as of or for the twelve months ended September 30, 2017, with pricing data as of November 24, 2017. The table below sets forth the data for Independent and the high, low, median and mean data for the Independent Peer Group.

Independent Comparable Company Analysis

 

    Independent     Independent
Peer
Group Median
    Independent
Peer Group
Mean
    Independent
Peer
Group High
    Independent
Peer Group
Low
 

Total Assets ($MM)

    8,891       8,822       8,379       11,169       5,148  

Loans / Deposits (%)

    92.6       90.0       88.4       114.7       60.9  

Nonperforming Assets(1) / Total Assets(2) (%)

    0.28       0.50       0.64       1.40       0.17  

Tangible Common Equity / Tangible Assets (%)

    7.62       9.24       9.41       11.14       8.34  

Tier 1 Leverage Ratio (%)

    8.30       10.18       10.25       13.37       8.91  

Total Risk-Based Capital Ratio (%)

    11.72       13.38       14.27       20.28       11.51  

CRE / Total Risk-Based Capital Ratio(2) (%)

    380.5       215.3       214.0       305.7       91.1  

LTM Return on Average Assets (%)

    1.00       1.18       1.17       1.61       0.83  

LTM Return on Average Equity (%)

    7.48       9.56       10.01       17.12       7.39  

LTM Net Interest Margin (%)

    3.75       3.68       3.75       4.60       3.05  

LTM Efficiency Ratio (%)

    51.0       56.6       54.4       64.2       36.5  

Price / Tangible Book Value (%)

    283       229       245       389       192  

Price / LTM Earnings per Share (x)

    20.6       20.0       20.2       26.9       16.3  

Price / 2017E(3) Earnings per Share(4) (x)

    18.2       18.5       18.9       26.3       16.7  

Price / 2018E(3) Earnings per Share(4) (x)

    15.1       15.7       16.5       24.5       13.9  

Current Dividend Yield (%)

    0.6       1.6       1.4       3.3       0.0  

LTM Dividend Ratio (%)

    12.9       30.4       27.4       57.2       0.0  

Market Value ($MM)

    1,775       1,934       1,898       2,974       1,011  

 

(1) Nonperforming assets defined as nonaccrual loans and leases, renegotiated loans and leases and real estate owned.
(2) Bank level financial data used for Cadence Bancorporation.

 

64


Table of Contents
(3) Price / forward earnings multiples based on analyst consensus mean estimates from SNL CapIQ.
(4) Excludes multiples of financial institutions which were either negative or greater than 40x.

Analysis of Selected Merger Transactions. Sandler O’Neill reviewed a group of recent merger and acquisition transactions consisting of bank transactions where targets were headquartered in Texas and announced between January 1, 2016 and November 24, 2017 with announced deal values and involving targets with assets at announcement less than $2 billion, excluding merger-of-equals transactions (the “Statewide Precedent Transactions”). Sandler O’Neill also reviewed a national group of recent merger and acquisition transactions consisting of bank transactions announced between January 1, 2016 and November 24, 2017 with announced deal values and involving targets with assets at announcement between $600 million and $1 billion and Nonperforming Assets / Total Assets less than 2.00%, excluding merger-of-equals transactions (the “Nationwide Precedent Transactions”).

The Statewide Precedent Transactions group was composed of the following nine transactions:

 

Buyer

  

Target

First Financial Bankshares, Inc.    Commercial Bancshares, Inc.
Veritex Holdings, Inc.    Liberty Bancshares, Inc.
Southside Bancshares, Inc.    Diboll State Bancshares, Inc.
First Guaranty Bancshares, Inc.    Premier Bancshares, Inc.
Veritex Holdings, Inc.    Sovereign Bancshares, Inc.
Texas State Bankshares, Inc.    Blanco National Holdings, Inc.
T Acquisition, Inc.    T Bancshares, Inc.
Collins Family Trust    Inter National Bank
Access Bancorp, Inc.    Preston National Bank

Using the latest publicly available information prior to the announcement of the relevant transaction, Sandler O’Neill reviewed the following transaction metrics: transaction price to last twelve months earnings, transaction price to book value, transaction price to tangible book value and core deposit premium. Sandler O’Neill compared the indicated transaction multiples for the merger to the high, low, mean and median multiples of the Statewide Precedent Transactions group.

 

    Integrity/Independent   Statewide
Precedent
Transactions
Median
  Statewide
Precedent
Transactions
Mean
  Statewide
Precedent
Transactions
High
  Statewide
Precedent
Transactions
Low

Transaction Price / LTM Earnings:

  17.9x   18.0x   17.3x   21.6x   11.3x

Transaction Price / Book Value:

  195%   160%   155%   224%   56%

Transaction Price / Tangible Book Value:

  195%   174%   171%   241%   103%

Core Deposit Premium(1):

  13.4%(1)/ 12.2%(2)   11.7%   10.9%   17.2%   1.0%

 

(1) Core deposits defined as total deposits less time deposits greater than $100,000, unless otherwise noted; Core deposits defined as total deposits less time deposits greater than $250,000 for Veritex Holdings Inc. / Sovereign Bancshares, Inc. transaction.
(2) Core deposits defined as total deposits less time deposits greater than $250,000.

 

65


Table of Contents

The Nationwide Precedent Transactions group was composed of the following twelve transactions:

 

Buyer

  

Target

CenterState Bank Corporation    Sunshine Bancorp, Inc.
United Community Banks, Inc.    Four Oaks Fincorp, Inc.
State Bank Financial Corporation    AloStar Bank of Commerce
First Bancorp    ASB Bancorp, Inc.
First Busey Corporation    Mid Illinois Bancorp, Inc.
Bryn Mawr Bank Corporation    Royal Bancshares of Pennsylvania, Inc.
Midland States Bancorp, Inc.    Centrue Financial Corporation
CenterState Banks, Inc.    Gateway Financial Holdings of Florida, Inc.
First Mid-Illinois Bancshares, Inc.    First Clover Leaf Financial Corp.
Westfield Financial, Inc.    Chicopee Bancorp, Inc.
Guaranty Bancorp    Home State Bancorp
Midland Financial Co.    1st Century Bancshares, Inc.

Using the latest publicly available information prior to the announcement of the relevant transaction, Sandler O’Neill reviewed the following transaction metrics: transaction price to last twelve months earnings, transaction price to book value, transaction price to tangible book value and core deposit premium. Sandler O’Neill compared the indicated transaction multiples for the merger to the high, low, mean and median multiples of the Nationwide Precedent Transactions group.

 

    Integrity/Independent   Nationwide
Precedent
Transactions
Median
  Nationwide
Precedent
Transactions
Mean
  Nationwide
Precedent
Transactions
High
  Nationwide
Precedent
Transactions
Low

Transaction Price / LTM Earnings:

  17.9x   19.6x   21.1x   30.2x   13.5x

Transaction Price / Book Value:

  195%   165%   157%   241%   101%

Transaction Price / Tangible Book Value:

  195%   166%   161%   241%   101%

Core Deposit Premium(1)(2):

  13.4%(1) / 12.2%(2)   9.0%   8.9%   14.5%   0.6%

 

(1) Core deposits defined as total deposits less time deposits greater than $100,000, unless otherwise noted; Core deposits defined as total deposits less time deposits greater than $250,000 for CenterState Banks, Inc. / Gateway Financial Holdings of Florida, Inc. transaction.
(2) Core deposits defined as total deposits less time deposits greater than $250,000.

Net Present Value Analyses. Sandler O’Neill performed an analysis that estimated the aggregate net present value of Integrity common stock assuming Integrity performed in accordance with internal financial projections for the years ending December 31, 2017 and December 31, 2018 and estimated annual long-term balance sheet and earnings growth rates and dividend assumptions for Integrity for the years thereafter, as provided by the senior management of Integrity. To approximate the aggregate terminal value of Integrity common stock at December 31, 2021, Sandler O’Neill applied price to 2021 aggregate earnings multiples ranging from 14.0x to 21.5x and price to December 31, 2021 aggregate tangible book value multiples ranging from 125% to 200%. The terminal values were then discounted to present values using different discount rates ranging from 11.0% to 15.0% which were chosen to reflect different assumptions regarding required rates of return of holders or prospective buyers of Integrity common stock. As illustrated in the following tables, the analysis indicated an imputed range of values of Integrity common stock in the aggregate of $119,520,000 to $208,342,000 when applying multiples of earnings and $94,649,000 to $170,471,000 when applying multiples of tangible book value.

 

66


Table of Contents

Aggregate Earnings Multiples

 

Discount Rate

   14.0x      15.5x      17.0x      18.5x      20.0x      21.5x  
11.0%    $ 138,476      $ 152,449      $ 166,422      $ 180,396      $ 194,369      $ 208,342  
12.0      133,404        146,854        160,305        173,755        187,206        200,656  
13.0      128,561        141,513        154,465        167,417        180,369        193,321  
14.0      123,937        136,413        148,889        161,365        173,841        186,317  
15.0      119,520        131,541        143,562        155,584        167,605        179,626  

Note: Dollar amounts in thousands.

Aggregate Tangible Book Value Multiples

 

Discount Rate

   125%      140%      155%      170%      185%      200%  
11.0%    $ 109,567      $ 121,748      $ 133,928      $ 146,109      $ 158,290      $ 170,471  
12.0      105,575        117,301        129,026        140,751        152,476        164,201  
13.0      101,765        113,056        124,346        135,637        146,927        158,218  
14.0      98,126        109,001        119,877        130,752        141,628        152,504  
15.0      94,649        105,128        115,607        126,087        136,566        147,045  

Note: Dollar amounts in thousands.

Sandler O’Neill also considered and discussed with the Integrity board of directors how this analysis would be affected by changes in the underlying assumptions, including variations with respect to net income. To illustrate this impact, Sandler O’Neill performed a similar analysis assuming Integrity’s net income varied from 15% above projections to 15% below projections. This analysis resulted in the following range of values for Integrity common stock in the aggregate, applying the price to 2021 aggregate earnings multiples range of 14.0x to 21.5x referred to above and a discount rate of 12.96%.

Aggregate Earnings Multiples

 

Annual Budget
Variance

   14.0x      15.5x      17.0x      18.5x      20.0x      21.5x  
(15.0%)    $ 110,591      $ 121,617      $ 132,642      $ 143,668      $ 154,694      $ 165,719  
(10.0)      116,644        128,318        139,993        151,667        163,341        175,015  
  (5.0)      122,698        135,020        147,343        159,666        171,989        184,312  
   0.0      128,751        141,722        154,694        167,665        180,636        193,608  
   5.0      134,804        148,424        162,044        175,664        189,284        202,904  
 10.0      140,857        155,126        169,394        183,663        197,931        212,200  
 15.0      146,911        161,828        176,745        191,662        206,579        221,496  

Note: Dollar amounts in thousands.

Sandler O’Neill also performed an analysis that estimated the net present value per share of Independent stock assuming that Independent performed in accordance with publicly available consensus mean analyst estimates for Independent for the quarter ending December 31, 2017 and the years ending December 31, 2018 and December 31, 2019, as well as an estimated long-term annual earnings per share growth rate and dividend assumptions, as provided by the senior management of Independent. To approximate the terminal value of a share of Independent stock at December 31, 2021, Sandler O’Neill applied price to 2021 earnings per share multiples ranging from 17.0x to 22.0x and price to December 31, 2021 tangible book value per share multiples ranging from 180% to 280%. The terminal values were then discounted to present values using different discount

 

67


Table of Contents

rates ranging from 9.0% to 13.0% chosen to reflect different assumptions regarding required rates of return of holders or prospective buyers of Independent stock. As illustrated in the following tables, the analysis indicated an imputed range of values per share of Independent stock of $59.46 to $88.97 when applying multiples of earnings per share and $47.09 to $84.10 when applying multiples of tangible book value per share.

Earnings Per Share Multiples

 

Discount Rate

    17.0x      18.0x      19.0x      20.0x      21.0x      22.0x  
  9.0   $ 69.19      $ 73.15      $ 77.10      $ 81.06      $ 85.01      $ 88.97  
  10.0       66.58        70.39        74.19        78.00        81.80        85.61  
  11.0       64.10        67.76        71.42        75.08        78.74        82.40  
  12.0       61.73        65.25        68.77        72.30        75.82        79.35  
  13.0       59.46        62.86        66.25        69.64        73.04        76.43  

Tangible Book Value Per Share Multiples

 

Discount Rate

    180%      200%      220%      240%      260%      280%  
  9.0   $ 54.77      $ 60.63      $ 66.50      $ 72.37      $ 78.23      $ 84.10  
  10.0       52.71        58.35        64.00        69.64        75.28        80.92  
  11.0       50.75        56.18        61.61        67.04        72.47        77.90  
  12.0       48.88        54.10        59.33        64.56        69.78        75.01  
  13.0       47.09        52.12        57.16        62.19        67.22        72.25  

Sandler O’Neill also considered and discussed with the Independent board of directors how this analysis would be affected by changes in the underlying assumptions, including variations with respect to net income. To illustrate this impact, Sandler O’Neill performed a similar analysis assuming Independent’s net income varied from 15% above estimates to 15% below estimates. This analysis resulted in the following range of per share values for Independent shares, applying the price to 2021 earnings per share multiples range of 17.0x to 22.0x referred to above and a discount rate of 10.32%.

Earnings Per Share Multiples

 

Annual Budget
Variance

   17.0x      18.0x      19.0x      20.0x      21.0x      22.0x  
(15.0%)    $ 56.19      $ 59.38      $ 62.58      $ 65.77      $ 68.97      $ 72.16  
(10.0)      59.38        62.77        66.15        69.53        72.91        76.29  
(5.0)      62.58        66.15        69.72        73.29        76.86        80.43  
0.0       65.77        69.53        73.29        77.04        80.80        84.56  
5.0       68.97        72.91        76.86        80.80        84.75        88.69  
10.0       72.16        76.29        80.43        84.56        88.69        92.83  
15.0       75.35        79.67        84.00        88.32        92.64        96.96  

Sandler O’Neill noted that the net present value analysis is a widely used valuation methodology, but the results of such methodology are highly dependent upon the numerous assumptions that must be made, and the results thereof are not necessarily indicative of actual values or future results.

Pro Forma Merger Analysis. Sandler O’Neill analyzed certain potential pro forma effects of the merger, assuming the merger closes at the end of the second calendar quarter of 2018. In performing this analysis, Sandler O’Neill utilized the following information: (i) internal financial projections for Integrity for the years ending December 31, 2017 and December 31, 2018, as well as estimated annual long-term balance sheet and earnings growth rates and dividend assumptions, as provided by the senior management of Integrity; (ii) publicly

 

68


Table of Contents

available consensus mean analyst earnings per share estimates for Independent for the quarter ending December 31, 2017 and the years ending December 31, 2018 and December 31, 2019, as well as an estimated annual long-term earnings per share growth rate and dividend assumptions, as provided by the senior management of Independent; and (iii) certain assumptions relating to purchase accounting adjustments, cost savings and transaction expenses, as well as assumptions relating to Integrity tangible equity at the time of closing of the merger, anticipated regulatory costs and the offering of an estimated amount of securities by Independent in connection with the merger, as provided by the senior management of Independent. The analysis indicated that the merger could be accretive to Independent’s estimated earnings per share (excluding one-time transaction costs and expenses) in the years ending December 31, 2018, December 31, 2019 and December 31, 2020, accretive to Independent’s estimated tangible book value per share at closing and accretive to Independent’s estimated tangible book value per share at December 31, 2018, December 31, 2019 and December 31, 2020.

In connection with this analysis, Sandler O’Neill considered and discussed with the Integrity board of directors how the analysis would be affected by changes in the underlying assumptions, including the impact of final purchase accounting adjustments determined at the closing of the transaction, and noted that the actual results achieved by the combined company may vary from projected results and the variations may be material.

Sandler O’Neill’s Relationship. Sandler O’Neill has acted as financial advisor to Integrity in connection with the merger. Integrity has agreed to pay Sandler O’Neill a transaction fee in an amount equal to (i) 1.00% of the aggregate merger consideration, up to $165 million, plus (ii) 2.00% of the amount by which the aggregate merger consideration exceeds $165 million, plus (iii) 5.00% of the amount by which the aggregate merger consideration exceeds $200 million, if any, which fee at the time of announcement was approximately $1.6 million and is contingent upon the closing of the merger. Sandler O’Neill also received a $200,000 fee upon rendering its fairness opinion to the Integrity board of directors, which opinion fee will be credited in full towards the transaction fee that will become payable to Sandler O’Neill on the day of closing of the merger. Integrity has also agreed to indemnify Sandler O’Neill against certain claims and liabilities arising out of its engagement and to reimburse Sandler O’Neill for certain of its out-of-pocket expenses incurred in connection with its engagement.

Sandler O’Neill has not provided any other investment banking services to Integrity in the two years preceding the date of its opinion. In the two years preceding the date of its opinion, Sandler O’Neill has provided certain investment banking services to Independent and received fees for such services. Sandler O’Neill was engaged to provide financial advisory services to Independent in 2015, and Sandler O’Neill acted as a book-running manager for Independent in connection with an offering of subordinated notes and an offering of Independent stock in 2016. In addition, as Sandler O’Neill previously disclosed to Integrity, Sandler O’Neill acted as a co-manager in connection with the offer and sale of common stock by Independent, which was announced concurrently with the announcement of the merger and completed on November 29, 2017. In the ordinary course of Sandler O’Neill’s business as a broker-dealer, Sandler O’Neill may purchase securities from and sell securities to Independent and its affiliates. Sandler O’Neill may also actively trade the equity and debt securities of Independent and its affiliates for its own account and for the accounts of its customers.

Certain Unaudited Prospective Financial Information of Integrity

Integrity does not as a matter of course make public projections as to future performance, revenues, earnings or other financial results due to, among other reasons, the inherent uncertainty of the assumptions and estimates underlying such projections. However, Integrity is including in this document certain unaudited prospective financial information that was made available to Integrity’s financial advisor in connection with the merger. The inclusion of this information should not be regarded as an indication that any of Independent, Integrity or Sandler O’Neill or any of their respective representatives considered, or now considers, the information to be necessarily predictive of actual future results.

 

69


Table of Contents

This information, which was prepared by management of Integrity, was prepared solely for internal use and is subjective in many respects. The unaudited prospective financial information reflects numerous estimates and assumptions made with respect to business, economic, market, competition, regulatory and financial conditions and matters specific to the business of Integrity, all of which are difficult to predict and many of which are beyond the control of Integrity. The unaudited prospective financial information reflects assumptions as to certain business decisions that are subject to change and, in many respects, subjective judgment, and thus is susceptible to multiple interpretations and periodic revisions based on actual experience and business developments. Integrity can give no assurance that the unaudited prospective financial information and the underlying estimates and assumptions will be realized. In addition, because the unaudited prospective financial information covers multiple years, the information by its nature becomes less predictive with each successive year. Actual results may differ materially from those set forth below, and important factors that may affect actual results and cause the unaudited prospective financial information to be inaccurate include, but are not limited to, risks and uncertainties relating to the business of Integrity, industry performance, general business and economic conditions, customer requirements, competition and adverse changes in applicable laws, regulations or policies. For other categories of factors that could cause actual results to differ from those projected results disclosed below, please see the section entitled “Cautionary Note Regarding Forward-Looking Statements” beginning on page 40 of this proxy statement/prospectus.

The unaudited prospective financial information was not prepared with a view toward public disclosure, nor was it prepared with a view toward compliance with GAAP, published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. In addition, the unaudited prospective financial information requires significant estimates and assumptions that make it inherently less comparable to the similarly titled GAAP measures in the historical GAAP financial statements of Integrity. Neither Integrity’s independent accountants, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the unaudited prospective financial information shown below, nor have they expressed any opinion or any other form of assurance on such information or its achievability.

Furthermore, the unaudited prospective financial information does not take into account any circumstances or events occurring after the date it was prepared. Integrity can give no assurance that, had the unaudited prospective financial information been prepared as of the date of this proxy statement/prospectus, similar estimates and assumptions would be used. Integrity does not intend to, and disclaims any obligation to, make publicly available any update or other revision to the unaudited prospective financial information to reflect circumstances existing since their preparation or to reflect the occurrence of unanticipated events, even in the event that any or all of the underlying assumptions are shown to be in error, or to reflect changes in general economic or industry conditions. The unaudited prospective financial information does not take into account the possible financial and other effects on either Independent or Integrity, as applicable, of the merger and does not attempt to predict or suggest future results of the combined company. The unaudited prospective financial information does not give effect to the impact of negotiating or executing the reorganization agreement, the expenses that may be incurred in connection with the merger, the effect of any business or strategic decision or action that has been or will be taken as a result of the reorganization agreement having been executed, or the effect on Integrity of any business or strategic decisions or actions that would likely have been taken if the reorganization agreement had not been executed, but which were instead altered, accelerated, postponed or not taken in anticipation of the merger. Further, the unaudited prospective financial information does not take into account the effect on Integrity of any possible failure of the merger to occur. None of Independent, Integrity or Sandler O’Neill or their respective affiliates, officers, directors, advisors or other representatives has made, makes or is authorized in the future to make any representation to any shareholder of Integrity or Independent, or any other person, regarding Integrity’s actual performance compared to the information contained in the unaudited prospective financial information or that the projected results will be achieved. The inclusion of the unaudited prospective financial information should not be deemed an admission or representation by Integrity or Independent that it is viewed as material information of Integrity, particularly in light of the inherent risks and uncertainties associated with such unaudited prospective financial information of Integrity, which represents

 

70


Table of Contents

forecasts. The summary of the unaudited prospective financial information included below is not being included to influence your decision whether to vote for the merger and the transactions contemplated in connection with the merger, but is being provided solely because it was made available to Independent’s financial advisor in connection with the merger.

In light of the foregoing, and considering that the special meeting of shareholders of Integrity will be held several months after the unaudited prospective financial information was prepared, as well as the uncertainties inherent in any forecasted information, shareholders of Integrity are cautioned not to place unwarranted reliance on such information in connection with their consideration of the merger.

The following table presents selected unaudited actual and prospective financial data of Integrity for the years ended and ending December 31, 2017 and 2018, respectively.

 

(Dollar values in thousands)

   Actual for
Year Ended
    Projections for
Year Ending
 
   December 31,
2017
    December 31,
2018
 

Balance Sheet highlights

    

Total assets

   $ 759,245     $ 879,415  

Annual growth rate

     (0.2 )%      15.8

Gross loans

   $ 661,182     $ 727,007  

Total deposits

     636,702       753,226  

Income Statement highlights

    

Net income

   $ 7,491     $ 11,162  

Effective tax rate

     44.79     34.55

Growth rate

     —         21.40  

Per share data

    

Common shares outstanding

     4,693,552       4,654,452  

Dividends paid per share

     —       $ 0.50  

Exchange of Integrity Stock Certificates

If you are a holder of Integrity common stock, as soon as practicable, with the intent to be within five business days after the effective time of the merger, Independent’s transfer and exchange agent, Equiniti Trust Company, will mail a form of letter of transmittal and instructions to you for use in surrendering your Integrity stock certificates. When you properly surrender your Integrity stock certificates or provide other satisfactory evidence of ownership, and return the letter of transmittal duly executed and completed in accordance with its instructions, Equiniti Trust Company will promptly cancel the surrendered stock certificates and deliver to you a notice specifying, among other things, the number of shares of Independent common stock, which shall be solely in uncertificated book-entry form credited to the account of the holder of record as established in the Direct Registration System, and cash for the cash portion of the merger consideration and for fractional shares, if any, to which you are entitled under the reorganization agreement. No Independent stock certificates will be issued with respect to the Independent common stock to be issued under the reorganization agreement.

You should not send in your certificates until you receive the letter of transmittal and instructions.

At the effective time of the merger, and until surrendered as described above, other than shares of Integrity common stock subject to the exercise of dissenters’ rights, each outstanding Integrity stock certificate will be deemed for all purposes to represent only the right to receive the merger consideration to be paid pursuant to the reorganization agreement, without interest thereon. With respect to any Integrity stock certificate that has been lost, stolen or destroyed, Independent will pay the merger consideration attributable to such Integrity stock certificates, upon receipt of a surety bond or other adequate indemnity, as required in accordance with Independent’s standard policy, and receipt of evidence reasonably satisfactory to Independent of ownership of

 

71


Table of Contents

the shares in question. After the effective time of the merger, Integrity’s transfer books will be closed and no transfer of the shares of Integrity stock outstanding immediately prior to the effective time of the merger will be permitted on Independent’s stock transfer books.

To the extent permitted by law, you will be entitled to vote after the effective time of the merger, at any meeting of Independent’s shareholders that has a record date after the effective time of the merger, the number of whole shares of Independent common stock into which your shares of Integrity common stock are converted as a result of the merger, regardless of whether you have surrendered your Integrity stock certificates to the exchange agent. Whenever Independent declares a dividend or other distribution on Independent common stock which has a record date after the effective time of the merger, the declaration will include dividends or other distributions on all shares of Independent common stock issued pursuant to the reorganization agreement. However, no dividend or other distribution payable to the holders of record of Independent common stock will be delivered to you until you surrender your Integrity stock certificates.

Effective Time of the Merger

The merger will become effective at the date and time specified in the certificate of merger to be filed with the Secretary of State of Texas regarding the merger of Integrity and Independent. It is anticipated that the bank merger will be completed on the same day. If the shareholders of Integrity approve the reorganization agreement at the special meeting, and if all required regulatory approvals are obtained and the other conditions to the parties’ obligations to effect the merger are satisfied or waived by the party entitled to do so, Independent and Integrity hope to complete the merger on May 1, 2018, although delays could occur.

Independent cannot assure you that the necessary shareholder and regulatory approvals will be obtained or that the other conditions to completion of the merger can or will be satisfied.

Conduct of Business Pending Effective Time

From the date of the reorganization agreement to and including the closing date, Integrity has agreed to and has agreed to cause the Integrity Bank to:

 

    maintain its corporate existence in good standing;

 

    maintain the general character of its business and conduct its business in its ordinary and usual manner;

 

    extend credit only in accordance with existing lending policies and practices;

 

    use commercially reasonable efforts to preserve its business organization intact; retain the services of its present employees, officers, directors and agents; retain its present customers, depositors, suppliers and correspondent banks; and preserve its goodwill and the goodwill of its suppliers, customers and others having business relationships with it;

 

    maintain all offices, machinery, equipment, materials, supplies, inventories, vehicles and other properties owned, leased or used by it (whether under its control or the control of others) in good operating repair and condition, ordinary wear and tear excepted;

 

    comply in all material respects with all laws, regulations, ordinances, codes, orders, licenses and permits applicable to its properties and operations, where such noncompliance could be reasonably expected to cause a material adverse change;

 

    timely file all tax returns required to be filed by it and promptly pay all taxes, assessments, governmental charges, duties, penalties, interest and fines that become due and payable, except those being contested in good faith by appropriate proceedings;

 

    withhold from each payment made to each of its employees the amount of all taxes (including federal income taxes, FICA taxes and state and local income and wage taxes) required to be withheld therefrom and pay the same to the proper governmental authority;

 

72


Table of Contents
    continue to follow and implement policies, procedures and practices regarding the identification, monitoring, classification and treatment of all assets in substantially the same manner as it has in the past;

 

    account for all transactions in accordance with generally accepted accounting principles (unless otherwise instructed by regulatory accounting principles, in which instance account for such transaction in accordance with regulatory accounting principles) specifically, without limitation, paying or accruing for by the tangible equity determination date all liabilities, obligations, costs and expenses owed or incurred by Integrity or Integrity Bank on or before the closing date;

 

    perform all of its material obligations under contracts, leases and documents relating to or affecting its assets, properties and business, except such obligations as it may in good faith reasonably dispute;

 

    maintain and keep in full force and effect, in all material respects, presently existing insurance coverage and give all notices and present all claims under all insurance policies in due and timely fashion; or

 

    timely file all reports required to be filed with governmental authorities and observe and conform, in all material respects, to all applicable laws, rules, regulations, ordinances, codes, orders, licenses and permits, except those being contested in good faith by appropriate proceedings.

From the date of the reorganization agreement through the earlier of the effective time of the merger or the termination of the reorganization agreement, Integrity has agreed not to, and has agreed to cause the Integrity Bank not to, without the prior written consent of Independent:

 

    introduce any new material method of management or operation;

 

    intentionally take any action that could reasonably be anticipated to result in a material adverse change to its financial condition, assets, properties, liabilities, reserves, business or results of operations;

 

    take or fail to take any action that could reasonably be expected to cause its representations and warranties made in the reorganization agreement (other than the representations related to making any capital expenditures or capital additions or betterments in excess of an aggregate of $100,000 or altering any of the material terms of any loan to any single borrower and his related interests in excess of the principal amount of $2,000,000, each since June 30, 2017) to be inaccurate in any material respect at the effective time of the merger or preclude Integrity from making such representations and warranties at the effective time of the merger;

 

    declare, set aside or pay any dividend or other distribution with respect to its capital stock other than the payment of dividends from Integrity Bank to Integrity and the payment of distributions by Integrity to the Integrity shareholders in an amount equal to the difference between the Integrity adjusted tangible equity on the tangible equity determination date less $84.0 million;

 

    enter into, alter, amend, renew or extend any material contract or commitment that would result in an obligation of Integrity to make payments in excess of $100,000, except for loans and extensions of credit in the ordinary course of business;

 

    mortgage, pledge or subject to lien, charge, security interest or any other encumbrance or restriction any of its properties, business or assets, tangible or intangible, except in the ordinary course of business and consistent with past practices;

 

    cause or allow the loss of insurance coverage, unless replaced with coverage that is substantially similar (in amount and insurer) to that in effect as of the date of the reorganization agreement;

 

    incur any indebtedness, obligation or liability, whether absolute or contingent, other than the receipt of deposits and trade debt or except in the ordinary course of business and consistent with prudent banking practices or in connection with the transactions contemplated by the reorganization agreement or any of the agreements or documents contemplated therein;

 

73


Table of Contents
    discharge or satisfy any lien or pay any obligation or liability, whether absolute or contingent, due or to become due, except in the ordinary course of business and consistent with past practices;

 

    issue, reserve for issuance, grant, sell or authorize the issuance of any shares of its capital stock or other securities or subscriptions, options, warrants, calls, rights or commitments of any kind relating to the issuance thereto, except to the extent any commitment to do so is outstanding as of the date of the reorganization agreement or issue a replacement of any certificate representing shares of Integrity or Integrity Bank common stock;

 

    amend or otherwise change its articles of association or bylaws;

 

    sell, transfer, lease to others or otherwise dispose of any material amount of its assets or properties, discount or arrange for a payoff of a charged off or deficiency credit, cancel or compromise any material debt or claim, or waive or release any right or claim other than in the ordinary course of business and consistent with past practices, provided that any such transaction involving amounts in excess of $250,000 shall be deemed to not be in the ordinary course of business;

 

    enter into any material transaction other than in the ordinary course of business except as contemplated by the reorganization agreement;

 

    except with respect to the collection of checks and other negotiable instruments or otherwise in the ordinary course of the business and consistent with past practices, enter into or give any promise, assurance or guarantee of the payment, discharge or fulfillment of any undertaking or promise made by any other third person, firm or corporation;

 

    sell or knowingly dispose of, or otherwise divest itself of the ownership, possession, custody or control, of any corporate books or records of any nature that, in accordance with sound business practice, normally are retained for a period of time after their use, creation or receipt, except at the end of the normal retention period;

 

    except for salary increases and the accrual for annual bonuses in the ordinary course of business and consistent with past practices, and the payment of employee bonuses in connection with the completion of the merger (all of which shall be included as a deduction in the calculation of adjusted tangible equity) (i) make any material change in the rate of compensation, commission, bonus or other direct or indirect remuneration payable, (ii) pay, agree to, or orally promise to pay, conditionally or otherwise, any additional bonus or extra compensation, pension, severance or vacation pay, to or for the benefit of any of its shareholders, directors, officers or employees or (iii) enter into any employment or consulting contract (other than as contemplated by the reorganization agreement) or other agreement with any director, officer or employee or adopt, amend in any material respect or terminate (other than termination of any employee benefit plans contemplated by the reorganization agreement) any pension, employee welfare, retirement, stock purchase, stock option, stock appreciation rights, termination, severance, income protection, golden parachute, savings or profit-sharing plan (including trust agreements and insurance contracts embodying such plans), any deferred compensation or collective bargaining agreement, any group insurance contract (except as contemplated by the reorganization agreement) or any other incentive, welfare or employee benefit plan or agreement maintained by it for the benefit of its directors, employees or former employees;

 

    engage in any transaction with any of its affiliates, except in the ordinary course of business and consistent with past practices;

 

    acquire any capital stock or other equity securities or acquire any equity or ownership interest in any bank, corporation, partnership or other entity, except (i) through settlement of indebtedness, foreclosure or the exercise of creditors’ remedies or (ii) in a fiduciary capacity, the ownership of which does not expose it to any liability from the business, operations or liabilities of such person;

 

   

except as contemplated by the reorganization agreement, terminate, cancel or surrender any contract, lease or other agreement, or unreasonably permit any damage, destruction or loss which, in any case or

 

74


Table of Contents
 

in the aggregate, may reasonably be expected to result in a material adverse change to its financial condition, assets, properties, liabilities, reserves, business or results of operations;

 

    dispose of, permit to lapse, transfer or grant any rights under, or knowingly breach or infringe upon, any United States or foreign license or proprietary right or materially modify any existing rights with respect thereto, except in the ordinary course of business and consistent with past practices;

 

    make any capital expenditures, capital additions or betterments except in the ordinary course of business consistent with past practices;

 

    hire or employ any new officer or hire or employ any new nonofficer employee, other than to replace nonofficer employees;

 

    make any, or acquiesce with any, change in accounting methods, principles or material practices, except as required by generally accepted accounting principles or regulatory accounting principles, including, without limitation, making any “reverse provision for loan losses” or other similar entry or accounting method that would reduce the allowance for loan and lease losses of Integrity;

 

    pay a rate on deposits at Integrity materially higher than is consistent with the ordinary course of business and consistent with past practices;

 

    make any new loan except in compliance with Integrity’s existing policies and procedures and consistent with past practices;

 

    renew, extend the maturity of, or alter the material terms of, any loan except in compliance with Integrity’s existing policies and procedures and consistent with past practices;

 

    renew, extend the maturity of, or alter any of, the material terms of any loan classified as “substandard” and “doubtful”;

 

    sell (provided, however, that payment at maturity or prepayment is not deemed a sale) investment securities or purchase investment securities, other than U.S. Treasuries with a maturity of two years or less; or

 

    redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock.

For a complete description of such restrictions on the conduct of the business of Integrity and the Integrity Bank, Independent refers you to the reorganization agreement, which is attached as Appendix A to this proxy statement/prospectus.

From the date of the reorganization agreement through the effective time of the merger, Independent has agreed to and has agreed to cause Independent Bank to:

 

    maintain its corporate existence in good standing;

 

    maintain the general character of its business and conduct its business in its ordinary and usual manner;

 

    extend credit only in accordance with existing lending policies and practices; and

 

    use commercially reasonable efforts to preserve its business organization intact; retain the services of its present employees, officers, directors and agents; retain its present customers, depositors, suppliers and correspondent banks; and preserve its goodwill and the goodwill of its suppliers, customers and others having business relationships with it.

No Solicitation

Integrity agreed that it will not, and that it will cause Integrity Bank and its employees, directors, officers, financial advisors and agents not to:

 

    solicit, knowingly encourage, initiate or participate in any negotiations or discussions with any third party with respect to any proposal that could reasonably be expected to lead to an acquisition proposal, whether by acquisition, business combination, purchase of securities or assets or otherwise;

 

75


Table of Contents
    disclose to any third party any information concerning the business, properties, books or records of Integrity or Integrity Bank in connection with any acquisition proposal, other than as provided in the reorganization agreement or as required by applicable law; or

 

    cooperate with any third party to make any acquisition proposal, other than the sale by Integrity or Integrity Bank of assets in the ordinary course of business consistent with past practices.

Promptly upon receipt of any unsolicited offer, Integrity will communicate to Independent the terms of any proposal or request for information and the identity of the parties involved.

Provided that Integrity has complied with the restrictions set forth above, if, after the date of the reorganization agreement and before the closing date, Integrity receives a bona fide, unsolicited written acquisition proposal, it may engage in negotiations and discussions with, and furnish any information and other access to, any person making such acquisition proposal if, and only if, the board of directors of Integrity determines in good faith, after consultation with outside legal and financial advisors, that (i) such acquisition proposal is or is reasonably capable of becoming a superior proposal and (ii) the failure of the Integrity board of directors to furnish such information or access or enter into such discussions or negotiations would reasonably be materially inconsistent with its fiduciary duties to the shareholders of Integrity; but before furnishing any material nonpublic information, Integrity must receive from the person making such acquisition proposal an executed confidentiality agreement with terms at least as restrictive in all material respects on such person as the nondisclosure agreement entered into with Independent. In such case, Integrity is required to:

 

    within two business days, notify Independent of the receipt of such acquisition proposal or any request for nonpublic information relating to Integrity or for access to its properties, books or records by any person that has made, or may be considering making, an acquisition proposal;

 

    communicate the material terms of such acquisition proposal to Independent, including as they may change upon any modification or amendment to the terms thereof; and

 

    keep Independent reasonably apprised of the status of and other matters relating to any such acquisition proposal on a timely basis.

An “acquisition proposal” means a written offer or proposal from a party other than Independent that contains a fixed price per share or a mathematically ascertainable formula for calculating a price per share for the Integrity common stock, regarding any of the following (other than transactions contemplated by the reorganization agreement) involving Integrity: (i) any merger, reorganization, consolidation, share exchange, recapitalization, business combination, liquidation, dissolution or other similar transaction involving any sale, lease, exchange, mortgage, pledge, transfer or other disposition of all or substantially all of the assets or equity securities or deposits of Integrity, in a single transaction or series of related transactions, which could reasonably be expected to impede, interfere with, prevent or materially delay the completion of the merger; or (ii) any tender offer or exchange offer for 50% or more of the outstanding shares of Integrity common stock or the filing of a registration statement in connection therewith. A “superior proposal” means a bona fide acquisition proposal made by a party other than Independent that the Integrity board determines in its good faith judgment, after consultation with its outside counsel and its independent financial advisor (i) is or would result in a transaction that if consummated would be more favorable to Integrity’s shareholders from a financial point of view than the merger, taking into account all of the terms and conditions of such proposal and of the reorganization agreement (including any proposal by Independent to amend the terms of the reorganization agreement) and (ii) is capable of being, and is reasonably likely to be, consummated on the terms so proposed taking into account all financial, regulatory, legal and other aspects of such proposal.

 

76


Table of Contents

Conditions to Completion of the Merger

The reorganization agreement contains a number of conditions to the obligations of Independent and Integrity to complete the merger that must be satisfied as of the closing date, including, but not limited to, the following:

 

    approval by holders of the Integrity common stock of the reorganization agreement and the transactions contemplated thereby by the requisite vote under the Integrity certificate of formation and applicable law;

 

    receipt of all approvals and consents required by applicable law from all applicable governmental authorities in connection with the reorganization agreement, any other agreement contemplated thereby and the consummation of the transactions contemplated by the reorganization agreement and such other agreements and all applicable waiting periods will have expired which approvals and consents do not impose any material requirement upon Independent or its subsidiaries that are reasonably unacceptable to Independent;

 

    the registration statement of which this proxy statement/prospectus forms a part has become effective and no stop order suspending its effectiveness is in effect and no proceedings for that purpose have been initiated and continuing or threatened by the SEC, and all necessary approvals under federal or applicable state securities laws relating to the issuance or trading of the Independent common stock to be issued have been received;

 

    the shares of Independent common stock to be issued to Integrity shareholders being authorized for listing on the Nasdaq Global Select Market and such approval is not withdrawn or revoked;

 

    no action shall have been taken, and no statute, rule, regulation or order shall have been promulgated, enacted, entered, enforced or deemed applicable to the reorganization agreement, or the transactions contemplated hereby, by any governmental authority, including by means of the entry of a preliminary or permanent injunction, that would (i) make the reorganization agreement or any other agreement contemplated thereby, or the transactions contemplated thereby, illegal, invalid or unenforceable, (ii) as to Independent only, require the divestiture of a material portion of the assets of Integrity, (iii) impose material limits on the ability of any party to consummate the transactions contemplated by the reorganization agreement, (iv) as to Independent only, otherwise result in a material adverse change to Integrity, Integrity Bank, Independent or Independent Bank or (v) could reasonably be expected to subject Independent, Integrity, or any of their respective subsidiaries, or any of their respective officers, directors, shareholders or employees, to criminal or civil liability upon the consummation of the reorganization agreement or any other agreement contemplated thereby, or the transactions contemplated thereby;

 

    the other party’s representations and warranties contained in the reorganization agreement being true and correct in all material respects as of the date of the reorganization agreement and as of the date of the closing;

 

    the performance or compliance in all material respects by each party with its respective covenants and obligations required by the reorganization agreement to be performed or complied with before or at the closing of the merger; and

 

    receipt by each party of all documents required to be delivered by the other party on or before the closing date, all in form and substance reasonably satisfactory to the receiving party.

In addition to the conditions listed above, Integrity’s obligations to complete the merger is subject to the satisfaction of the following conditions:

 

    Independent’s delivery of the merger consideration to Equiniti Trust Company, as exchange agent;

 

    no material adverse change (as defined in the reorganization agreement) shall have occurred as to Independent since June 30, 2017; and

 

77


Table of Contents
    the receipt by Integrity of an opinion from Jackson Walker L.L.P. to the effect that for U.S. federal income tax purposes (i) the merger will be treated as a reorganization within the meaning of Section 368(a) of the Code, and (ii) each of Independent and Integrity will be a party to such reorganization within the meaning of Section 368(b) of the Code.

In addition to the conditions listed above, Independent’s obligation to complete the merger is subject to the satisfaction of the following conditions:

 

    the adjusted tangible equity of Integrity, as of the closing date of the merger, must not be less than $76.0 million;

 

    Integrity Bank’s allowance for loan and lease losses as of the closing date must be at a level necessary to fully reserve for loss on its loans and other real estate owned consistent with Integrity Bank’s historical methodology and in compliance with GAAP and RAP, and if certain identified loans have not been resolved prior to the tangible equity determination date, then Integrity shall have made agreed upon provisions for loan loss to reserve for such loans;

 

    no material adverse change (as defined in the reorganization agreement) shall have occurred as to Integrity or Integrity Bank since June 30, 2017;

 

    all Integrity employee plans must be terminated in accordance with their respective terms and all applicable laws and regulations, the affected participants must have been notified of such terminations and Integrity shall have delivered certain acknowledgements signed by certain directors and officers of Integrity and Integrity Bank;

 

    All Integrity option holders that have not exercised such options shall have executed and delivered option cancellation agreements to Independent prior to the tangible equity determination date;

 

    all material consents and approvals from all nongovernmental third parties that are required to be obtained under the terms of any contract, agreement or instrument to which Integrity is a party shall have been obtained;

 

    the receipt by Independent of an opinion from Andrews Kurth Kenyon LLP to the effect that, for U.S. federal income tax purposes, (i) the merger will be treated as a reorganization within the meaning of Section 368(a) of the Code, and (ii) each of Independent and Integrity will be a party to such reorganization within the meaning of Section 368(b) of the Code; and with respect to the bank merger, that (i) the bank merger will be treated as a reorganization within the meaning of Section 368(a) of the Code, and (ii) each of Independent Bank and Integrity Bank will be a party to such reorganization within the meaning of Section 368(b) of the Code; and

 

    Integrity shall have terminated and dissolved its subsidiary, IBI Liquidating Corporation.

Any condition to the completion of the merger, except the required shareholder and regulatory or governmental approvals, and the absence of an order or ruling prohibiting the merger, may be waived in writing by the party to the reorganization agreement entitled to the benefit of such condition.

Additional Agreements

In addition to the agreements described above, each party agreed in the reorganization agreement to take certain other actions, including but not limited to the following:

 

    use commercially reasonable efforts to cause the consummation of the transactions contemplated by the reorganization agreement in accordance with its terms and conditions;

 

    promptly notify the other party in writing of any litigation, or of any claim, controversy or contingent liability that might reasonably be expected to become the subject of litigation, against such party or affecting any of its properties, if such litigation or potential litigation is reasonably likely, in the event of an unfavorable outcome, to result in a material adverse change to such party;

 

78


Table of Contents
    promptly notify the other party of any legal action, suit or proceeding or judicial, administrative or governmental investigation, pending or, to the best knowledge of such party, threatened against such party, or Integrity Bank in the case of Integrity, or Independent Bank in the case of Independent, that (i) questions or would reasonably be expected to question the validity of the reorganization agreement or the agreements contemplated thereby, or any actions taken or to be taken by such party, or Integrity Bank in the case of Integrity, pursuant thereto or (ii) seeks to enjoin or otherwise restrain the transactions contemplated by the reorganization agreement;

 

    promptly notify the other party in writing if any change occurred or was threatened (or any development occurred or was threatened involving a prospective change) in the business, financial condition or operations of such party, or Integrity Bank in the case of Integrity, or Independent Bank in the case of Independent, that has resulted in or would reasonably be expected to result in a material adverse change;

 

    that the confidential information provided by the other party would be used solely for the purpose of reviewing and evaluating the transactions contemplated by the reorganization agreement and any other agreement contemplated thereby, and that such confidential information would be kept confidential by such party;

 

    that it would not make, issue or release, or cause to be made, issued or released, any announcement, statement, press release, acknowledgment or other public disclosure of the existence, terms, conditions or status of the reorganization agreement or the transactions contemplated thereby without the prior written consent of the other party; and

 

    provide to the other party, at least three business days prior to the closing of the merger supplemental disclosure schedules pursuant to the reorganization agreement reflecting any material changes between the date of the reorganization agreement and the closing date.

Integrity agreed in the reorganization agreement to take certain other actions, including, but not limited to the following:

 

    use commercially reasonable efforts to obtain all consents and approvals from third parties required in connection with the consummation of the transactions contemplated by the reorganization agreement, and to cooperate in all commercially reasonable respects with Independent to obtain all such approvals and consents required of such other party;

 

    to the extent permitted by law, use its commercially reasonable efforts to provide Independent all information concerning Integrity that is required for inclusion in this proxy statement/prospectus, or any other application, filing, statement or document to be made or filed with any regulatory or governmental authority in connection with the merger and the other transactions contemplated by the reorganization agreement and to promptly inform Independent if Integrity becomes aware that any information provided or cross referenced contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading and to take the necessary steps to correct such information;

 

    promptly notify Independent in writing if it becomes aware of any fact or condition that makes untrue, or shows to have been untrue, in any material respect, any material written information furnished to Independent by Integrity or any representation or warranty made in or pursuant to the reorganization agreement or that results in Integrity’s failure to comply with any covenant, condition or agreement contained in the reorganization agreement;

 

    afford Independent’s officers, directors, employees, attorneys, accountants, investment bankers and authorized representatives access during regular business hours to the books, contracts, commitments, personnel and records of Integrity and Integrity Bank, and furnish during such period such other information concerning Integrity and Integrity Bank as Independent may reasonably request;

 

79


Table of Contents
    cause Integrity Bank to maintain its allowance for loan and lease losses as of the closing date at a level necessary to fully reserve for loss on its loans and other real estate owned consistent with Integrity Bank’s historical methodology and in compliance with GAAP and RAP, and if certain identified loans have not been resolved prior to the tangible equity determination date, then Integrity shall have made agreed upon provisions for loan loss to reserve for such loans;

 

    terminate, and cause Integrity Bank to terminate, subject to compliance with applicable law, all employee benefit plans of Integrity or Integrity Bank;

 

    accrue for or make the payments required, and cause Integrity Bank to accrue for or make the payments required, pursuant to the employment contracts set forth in the reorganization agreement, and use commercially reasonable efforts to obtain a release from each officer with respect to their agreement;

 

    make available to Independent a list of the Integrity’s shareholders and their addresses, a list showing all transfers of Integrity common stock, a list showing the grant and exercise of options, and such other information as Independent may reasonably request regarding both the ownership and prior transfers of the Integrity common stock and options;

 

    consistent with generally accepted accounting principles, regulatory accounting principles and applicable banking laws and regulations, to make such accounting entries as Independent may reasonably request in order to conform the accounting records of Integrity to the accounting policies and practices of Independent;

 

    purchase before closing of the merger an extended reporting period for four years under its existing directors and officers liability insurance policy for purposes of covering actions occurring prior to the effective time of the merger;

 

    use its commercially reasonable efforts to obtain releases signed by, and receipt of resignations from, each of the directors and executive officers of Integrity and Integrity Bank releasing Integrity and Integrity Bank and their respective successors from any and all claims of such directors and officers, subject to certain limited exceptions, and resigning from the board of Integrity and Integrity Bank, as applicable;

 

    use its commercially reasonable efforts to cause each outside director of Integrity and Integrity Bank to execute and deliver to Independent a director support agreement providing for the continuing support of Independent Bank by the outside directors;

 

    that Independent, at its sole cost and expense, shall have the right to the same extent that Integrity has the right to, upon written notice to Integrity, inspect any real property leased or owned by Integrity or Integrity Bank, including conducting asbestos surveys and sampling, environmental assessments and investigations, and other environmental surveys and analysis, and to conduct further investigation if deemed desirable by Independent and upon reasonable written notice to Integrity and subject to Integrity’s right to place reasonable time and place restrictions on any such further investigation, and further subject to Independent’s obligation to make available to Integrity the results and reports of any such investigation or survey;

 

    use commercially reasonable efforts, including but not limited to notifying appropriate parties and negotiating in good faith a reasonable settlement, to ensure that the data processing contracts and contracts related to the provision of any other electronic banking services, if the merger occurs, be terminated after the consummation of the merger on a date mutually agreed upon by Independent and Integrity; and shall use reasonable efforts and cooperate with Independent to facilitate a smooth conversion of data processing, item processing, network and related hardware and software, telephone systems, telecommunications, data communications and other technologies, including participating in conversion planning, design, mapping and testing activities before the closing date of the merger;

 

    use commercially reasonable efforts to cause the executive officers identified in the reorganization agreement to execute and deliver to Independent an employment agreement providing for their continued employment with Independent Bank following the merger;

 

80


Table of Contents
    provide Independent the opportunity to participate in the defense or settlement of any stockholder litigation against Integrity and/or its directors relating to the merger and other transactions contemplated by the reorganization agreement, and no such settlement shall be agreed to without the prior written consent of Independent;

 

    use commercially reasonably efforts to cause the execution of option cancellation agreements;

 

    Integrity and Integrity Bank will not make any payment or provide any benefit to any officer, director or employee of Integrity or Integrity Bank, or any of their affiliates who is a “disqualified individual” (as defined in Treasury Regulation Section 1.280G-1) under any employment, severance, or termination agreement, other compensation arrangement or benefit plan currently in effect if such payment or benefit would be an “excess parachute payment” (as defined in Section 280G(b)(1) of the Internal Revenue Code of 1986) solely as a result of the transactions contemplated by the reorganization agreement or if the payment or benefit would result in the excise tax of Section 4999 of the Internal Revenue Code of 1986 being imposed on any such person; and

 

    Integrity is required to take all action necessary to terminate and dissolve IBI Liquidating Corporation prior to the tangible equity determination date.

Independent agreed in the reorganization agreement to take certain other actions, including, but not limited to the following:

 

    prepare and file a registration statement with the SEC with respect to the shares of Independent common stock to be issued pursuant to the reorganization agreement, and use its reasonable best efforts to cause the registration statement to become and remain effective; Independent further agreed that none of the information supplied or to be supplied by it for inclusion in (i) the registration statement will, at the time the registration statement and any amendment or supplement thereto becomes effective, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and (ii) the proxy statement/prospectus and any amendment or supplement thereto will, at the date(s) of mailing to Integrity shareholders and at the time of the special meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and Independent will take the necessary steps to correct such information and promptly inform Integrity;

 

    file all documents required to be filed to have the shares of the Independent common stock to be issued pursuant to the reorganization agreement included for listing on the Nasdaq Global Select Market and use its commercially reasonable efforts to effect said listing;

 

    prepare all documentation, to effect all filings and to use its commercially reasonable best efforts to obtain all permits, consents, approvals and authorizations of all third parties and federal or state bank regulatory or governmental authority necessary to consummate the merger and the transactions contemplated by the reorganization agreement;

 

    for a period of four years from the effective time of the merger to indemnify, defend and hold harmless each person entitled to indemnification from Integrity or Integrity Bank against all liabilities arising out of actions or omissions occurring at or prior to the effective time of the merger;

 

    to the extent permitted by applicable law, upon reasonable notice from Integrity, afford and cause Integrity Bank to afford Integrity’s employees and officers and authorized representatives reasonable access to the properties, books and records of Independent and its subsidiaries during normal business hours and furnish Integrity with such additional financial and operating data and other information as to the business and properties of Independent as Integrity may reasonably request from time to time; and

 

   

for a period of two years after the effective time of the merger (or such shorter period of time as may be applicable for “affiliates” of Integrity to sell shares of Independent common stock in accordance

 

81


Table of Contents
 

with Rule 145 of the Securities Act), to use its commercially reasonable efforts to file in a timely manner all reports with the Securities and Exchange Commission, or SEC, required to be filed by it pursuant to Section 13 and Section 15(d) of the Exchange Act (other than current reports on Form 8-K) and submit electronically and post on its corporate website, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T.

Representations and Warranties of Integrity and Independent

In the reorganization agreement, Integrity has made representations and warranties to Independent, and Independent has made representations and warranties to Integrity. The more significant of these relate to (among other things):

 

    corporate organization and existence;

 

    authority and power to execute the reorganization agreement and the bank merger agreement and to complete the transactions contemplated by the reorganization agreement and the bank merger agreement;

 

    the absence of conflicts between the execution of the reorganization agreement and completion of the transactions contemplated by the reorganization agreement and the parties’ charter documents, applicable law and certain other agreements;

 

    capitalization;

 

    compliance with applicable laws and regulatory filings, including tax filings;

 

    the accuracy of their financial statements and reports;

 

    pending or threatened litigation and other proceedings;

 

    the absence of certain changes and events; and

 

    the absence of undisclosed liabilities.

Integrity also has made additional representations and warranties to Independent with respect to (among other things):

 

    its ownership of Integrity Bank;

 

    its investments;

 

    its loan portfolio and reserve for loan losses;

 

    the existence of indebtedness, certain loan agreements and related matters;

 

    title and conditions of tangible assets;

 

    its compliance with regulatory and environmental laws;

 

    its compliance with tax laws, payment of taxes and filing of tax returns;

 

    the existence of certain leases, contracts, commitments and contractual relationships;

 

    actions taken by regulatory authorities and its ability to receive required regulatory approval;

 

    its insurance coverage and fidelity bonds;

 

    its employment relations;

 

    its employees, compensation and benefits plans;

 

    its deferred compensation and salary continuation arrangements, including no excess parachute payments;

 

82


Table of Contents
    its related person transactions;

 

    its absence of certain business practices;

 

    the absence of guarantees;

 

    its data processing agreements;

 

    its deposit accounts;

 

    its loan practices and compliance with financial institution laws, rules and regulations;

 

    its ownership and use of intellectual property rights;

 

    completeness of its books and records;

 

    its compliance with zoning and related laws;

 

    dissenting shareholders;

 

    business combination restrictions;

 

    the receipt of a fairness opinion by its board of directors;

 

    its performance of its fiduciary responsibilities as trustee, custodian, guardian or escrow agent;

 

    its derivative contracts; and

 

    its internal controls.

Independent has also made additional representations and warranties to Integrity with respect to (among other things):

 

    its ownership of Independent Bank;

 

    the “well capitalized” status of Independent and Independent Bank as defined by federal regulations as of the date of the reorganization agreement, its Community Reinvestment Act rating of “satisfactory,” lack of awareness of any fact or circumstance regarding Independent or any Independent subsidiary that would reasonably be likely to materially impede or delay Independent’s ability to obtain all requisite regulatory approvals necessary to consummate the merger in a timely manner;

 

    its independent public accounting firm’s view on its financial statements and accounting procedures;

 

    the timeliness and completeness of its tax filings;

 

    the accuracy and completeness of the listed representations and warranties; and

 

    its compliance with its SEC reporting obligations and the accuracy of such reports.

For detailed information concerning these representations and warranties, reference is made to the reorganization agreement included as Appendix A to this proxy statement/prospectus.

The reorganization agreement contains representations and warranties that Integrity and Independent made to and solely for the benefit of each other. These representations and warranties are subject to materiality standards, which may differ from what may be viewed as material by investors and shareholders, and, in certain cases, were used for the purpose of allocating risk among the parties rather than establishing matters as facts. The assertions embodied in those representations and warranties also are qualified by information in confidential disclosure schedules that the parties have exchanged in connection with signing the reorganization agreement. Although neither Integrity nor Independent believes that the disclosure schedules contain information that the federal securities laws require to be publicly disclosed, the disclosure schedules do contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the attached reorganization agreement.

 

83


Table of Contents

Accordingly, you should not rely on the representations and warranties as characterizations of the actual state of facts, since they were only made as of the date of the reorganization agreement and are modified in important part by the underlying disclosure schedules. Moreover, information concerning the subject matter of the representations and warranties may have changed since the date of the reorganization agreement, which subsequent information may or may not be fully reflected in this proxy statement/prospectus or in Independent’s public disclosures.

Amendment or Waiver of the Reorganization Agreement

No termination, cancellation, modification, amendment, deletion, addition or other change in the reorganization agreement, or any provision thereof, or waiver of any right or remedy therein provided, is effective for any purpose unless specifically set forth in a writing signed by the party or parties to be bound thereby. The waiver of any right or remedy in respect to any occurrence or event on one occasion is not deemed a waiver of such right or remedy in respect to such occurrence or event on any other occasion.

Termination of the Reorganization Agreement

Independent and Integrity can mutually agree at any time to terminate the reorganization agreement without completing the merger. In addition, either Independent or Integrity may decide, without the consent of the other, to terminate the reorganization agreement if:

 

    the conditions to each party’s obligations to close have not been satisfied on or before June 30, 2018, provided that if the conditions precedent have not been satisfied because approval of the reorganization agreement or any other agreement contemplated by it from any regulatory agency whose approval is required has not been received and such delay in the receipt of regulatory approval is not the result of a public comment or protest made in connection with an application for regulatory approval, then either Integrity or Independent can unilaterally extend the June 30, 2018, deadline by up to 30 days by providing written notice, and further provided that, if regulatory approval has not been received and such delay in the receipt of regulatory approval is the result of a protest, then the closing date deadline shall automatically be extended to December 31, 2018, without action by either party;

 

    the required regulatory approvals have not been obtained; or

 

    the merger is not approved by the shareholders of Integrity at the special meeting or the adjournment thereof.

Integrity may terminate the reorganization agreement, without the consent of Independent, if:

 

    Independent breaches or fails to perform in any material respect any of its representations, warranties, covenants or other agreements contained in the reorganization agreement or any other agreement contemplated by the reorganization agreement, and such failure has not been cured within a period of 30 calendar days after written notice from Integrity;

 

    at any time prior to the closing date in order to enter concurrently with such termination into an acquisition agreement or similar agreement with respect to a superior proposal that has been received and considered by Integrity and the Integrity board in accordance with all of the requirements of the reorganization agreement; or

 

    there has been any material adverse change, since June 30, 2017, in the assets, properties, business or financial condition of Independent.

In addition, Independent may terminate the reorganization agreement, without the consent of Integrity, if:

 

    Integrity breaches or fails to perform in any material respect any of its representations, warranties, covenants or other agreements contained in the reorganization agreement or any other agreement contemplated by the reorganization agreement, and such failure has not been cured within a period of 30 calendar days after written notice from Independent;

 

84


Table of Contents
    the Integrity board has (i) recommended to the holders of Integrity common stock that they tender their shares in a tender or exchange offer commenced by an unaffiliated third party for more than 15% of the outstanding Integrity common stock, (ii) effected a change in the board’s recommendation with respect to the merger or recommended to the Integrity shareholders acceptance or approval of any alternative acquisition proposal or (iii) notified Independent in writing that Integrity intends to accept a superior proposal;

 

    any of the following have occurred with respect to environmental matters regarding Integrity within 90 days of the date of the reorganization agreement: (i) the factual substance of any representations and warranties of Integrity in the reorganization agreement is not materially true and accurate, (ii) the results of any environmental inspection or other environmental survey by Independent are disapproved by Independent because such inspection or survey identifies a material or violation of applicable environmental laws that would result in a material adverse change to Integrity or Integrity Bank, (iii) Integrity refuses to allow such inspection or survey in a manner that Independent reasonably considers necessary, (iv) such inspection or survey identifies an event, condition or circumstance that would require a material remedial or cleanup action or result in a material adverse change in the assets, properties, business or financial condition of Integrity, (v) such inspection or survey reveals the presence of any underground or above ground storage tank in, on or under any real property owned or leased by Integrity or Integrity Bank that is not shown to be in material compliance with all applicable environmental laws, or that has had a release of petroleum or some other hazardous material that has not been cleaned up to the satisfaction of the relevant governmental authority or any other party with a right to compel such cleanup or (vi) such inspection or survey identifies the presence of any asbestos-containing material in, on or under any real property owned or leased by Integrity or Integrity Bank, the removal of which would result in a material adverse change in the assets, properties, business or financial condition of Integrity, subject, in the case of each of the foregoing, to notice and the right of Integrity to satisfactorily correct any such matter; or

 

    there has been any material adverse change, since June 30, 2017, in the assets, properties, business or financial condition of Integrity or Integrity Bank.

Termination Fee

To compensate Independent for entering into the reorganization agreement, taking actions to consummate the transactions contemplated by the reorganization agreement and incurring the related costs and expenses and other losses and expense, including foregoing the pursuit of other opportunities, the reorganization agreement provides that Integrity will pay to Independent a termination fee of $4,650,000 if the reorganization agreement is terminated:

 

    by Integrity because it receives an alternative acquisition proposal and, under certain terms and conditions, determines that it is a superior proposal to that of the reorganization agreement, taking into account any adjustment made by Independent to the merger consideration, provided that Independent is not in material breach of the reorganization agreement;

 

    by either Independent or Integrity if the Integrity shareholders do not approve the reorganization agreement and the merger by the requisite vote at the Integrity special meeting or any adjournment thereof and either (i) at the time of such disapproval, there exists an acquisition proposal with respect to Integrity other than that of Independent that has not been withdrawn prior to the special meeting or (ii) within 12 months of the termination of the reorganization agreement, Integrity enters into a definitive agreement with any third party with respect to any acquisition proposal; or

 

   

by Independent if the Integrity board has (i) recommended to the Integrity shareholders that they tender their shares in a tender or exchange offer commenced by an unaffiliated third party for more than 15% of the outstanding Integrity common stock, (ii) effected a change in the board’s recommendation with respect to the merger or recommended to the Integrity shareholders acceptance or approval of any

 

85


Table of Contents
 

alternative acquisition proposal or (iii) notified Independent in writing that Integrity intends to accept a superior proposal.

Except with respect to termination fees and expenses, as discussed above, in the event of the termination of the reorganization agreement without breach by any party, the reorganization agreement will be void and have no effect, without liability on the part of any party or the directors, officers or shareholders of any party, except as specifically contemplated in the reorganization agreement.

Financial Interests of Directors and Officers of Integrity in the Merger

In considering the recommendation of the board of directors of Integrity to vote for the proposal to approve the reorganization agreement, Integrity shareholders should be aware that certain directors and officers of Integrity have interests in the merger that are in addition to, or different from, their interests as shareholders of Integrity. The board of Integrity was aware of these interests and considered them in approving the reorganization agreement. These interests include:

Employment Agreements with Independent Bank. Independent and Independent Bank have entered into employment agreements with each of Messrs. Ahmed, Marshall and Phillips who are currently executive officers and employees of Integrity Bank, to be effective, if at all, upon completion of the merger, that include noncompetition and nonsolicitation obligations to Independent Bank. Pursuant to these agreements, these individuals will become officers and employees of Independent Bank and will be entitled to receive completion bonuses in the range of $40,000 to $100,000, annual salaries in the range of $200,000 to $275,000, annual incentive bonuses based upon attainment of pre-established performance goals of Independent Bank or upon the profitability of Independent Bank’s mortgage operations, grants of restricted shares of Independent common stock in the range of 3,000 to 7,000 shares of Independent common stock, and certain additional incidental benefits from Independent Bank during the term of such person’s employment with Independent Bank. These agreements do not have change of control or severance provisions. If the employees are terminated other than for cause, the employee will receive his salary and annual incentive bonus through the remainder of the term.

Support Agreements. Independent has entered into separate support agreements with each of the directors of Integrity and Integrity Bank, specifically, Messrs. Carol S. Chiu, Kyle A. Frazier, Robert L. Gerry, III, George J. Kacal, William J. Kacal, Fred C. Leonard, III, James M. McElray, Charles M. Neff, Jr., Albert L. Reese, Jr., Dewey A. Stringer, III, Jeffrey K. Van Wart, Gary R. Wooley, all of whom are directors of Integrity, to be effective, if at all, upon completion of the merger. Each of those agreements provides, among other things, that such director agrees to use reasonable efforts to refrain from harming the goodwill and customer and client relationships of Independent Bank, as well as limited confidentiality, noncompetition and nonsolicitation obligations following the closing date.

Indemnification. The directors and officers of Integrity will receive indemnification from Independent for a period of four years after completion of the merger to the same extent and subject to the conditions set forth in the certificate of formation and bylaws of Integrity and continued director and officer liability coverage for a period of four years after completion of the merger. Any amounts paid by Integrity Bank to purchase continued director and officer liability coverage will reduce Integrity’s adjusted tangible equity for purposes of calculating the merger consideration payable to Integrity shareholders. See “—Possible Downward Adjustment to the $31.6 million Cash Portion of the Merger Consideration.”

Cashout of Certain Outstanding Stock Options. Certain directors and executive officers of Integrity and Integrity Bank hold Integrity stock options to purchase an aggregate of 112,523 shares of Integrity common stock. All such directors and executive officers are expected to exercise their respective Integrity stock options prior to the tangible equity determination date. However, to the extent one or more of those persons do not exercise their Integrity options prior to the merger’s effective time, they will receive cash in connection with the cashout of their Integrity stock options that are outstanding and unexercised at the merger’s effective time. Any

 

86


Table of Contents

such payments made to those persons in respect of their Integrity stock options will reduce the cash portion of the merger consideration received by the Integrity shareholders in the merger.

Addendums to Deferred Compensation Agreements. Independent has entered into addendums to the deferred compensation agreements with Messrs. Neff and McElray clarifying the payment of certain benefits provided for in the deferred compensation agreements upon a change in control.

Director Long-Term Care Agreements. Independent has entered into director long-term care agreements with each of the directors of Integrity providing for the payment of premiums for certain long-term care insurance benefits.

Certain Compensation Related to the Transactions

The following table sets forth information regarding the compensation for Integrity’s named executive officers (as identified in accordance with SEC regulations) based on the proposed transactions under the reorganization agreement, assuming that the proposed transactions were completed on February 23, 2018.

Compensation Related to the Transaction Contemplated by the Reorganization Agreement—Integrity

The following table sets forth the information regarding certain compensation which the named executive officers of Integrity may receive that is based on or that otherwise relates to the merger. The amounts are calculated assuming that the effective date of the merger and a qualifying termination occurs on May 1, 2018 (which is the earliest date that we expect the merger to close), and that all required conditions to the payment of these amounts have been satisfied.

 

Name

   Cash      Equity(1)      Pension/NQDL      Perquisites/
Benefits(2)
     Other(3)      Total  

Charles M. Neff, Jr.

   $ —        $ —        $ —        $ 2,205,000      $ 29,777      $ 2,234,777  

James M. McElray

     —          —          —          1,943,250        33,004        1,976,254  

Hazem A. Ahmed

     —          —          —          —          —          —    

Charles B. Phillips

     —          —          —          —          —          —    

Phillip Montgomery

     —          —          —          —          —          —    

 

(1) Messrs. McElray, Marshall and Montgomery have incentive stock options that will vest early as a result of the merger, as follows:

 

Name

   Number of
Integrity Stock
Options
     Exercise Price
Per Share
     Estimated
Merger
Consideration
per Share
     Aggregate Value
of Accelerated
Integrity Stock
Options(3)
 

James M. McElray

     4,000      $ 24.50      $ 34.81      $ 41,240  

Phillip Montgomery

     3,500        24.50        34.81        36,085  

The estimated merger consideration per share is based upon the average closing price of Independent common stock for the five trading days following the announcement of the transaction on November 28, 2017, which was $68.81, and the following additional assumptions: outstanding Integrity stock options to acquire 163,523 shares of Integrity common stock are exercised prior to the occurrence of the merger; outstanding Integrity stock options to acquire 64,000 shares of Integrity common stock are not exercised prior to the occurrence of the merger; and Integrity’s adjusted tangible equity equals or exceeds $84.0 million on the tangible equity determination date.

(2) Messrs. Neff and McElray have a deferred compensation plan that originated in 2013. The aggregate payout amounts upon completion of the merger are noted above, assuming the merger is consummated May 1, 2018. The amounts accrued under the plan from the date of inception through April 30, 2018 will be $1,319,133 for Mr. Neff and $544,300 for Mr. McElray.

 

87


Table of Contents
(3) These amounts represent eight years of premiums for long-term care insurance that are being accelerated and are payable to Messrs. Neff and McElray as a result of the consummation of the merger, assuming the merger is consummated May 1, 2018.

Voting Agreement

The directors of Integrity and certain entities that they represent have entered into an agreement to vote the shares of Integrity common stock that they control in favor of approval of the reorganization agreement and the merger and in the manner most favorable to the consummation of the merger and the transactions contemplated by the reorganization agreement; provided, however, that the Integrity shareholders who entered into the voting agreement would be permitted to vote to accept a superior proposal to acquire Integrity. As of February 23, 2018, 1,130,526 shares of Integrity common stock, or 23% of the 4,883,429 shares of Integrity common stock then outstanding and entitled to vote at the Integrity special meeting, were bound by the voting agreement.

Nasdaq Global Select Market Listing

Independent has agreed to file all documents required to be filed to have the shares of Independent common stock to be issued pursuant to the reorganization agreement approved for listing on the Nasdaq Global Select Market and to use its commercially reasonable efforts to effect such listing. The obligations of the parties to complete the merger are subject to such shares having been authorized for listing on the Nasdaq Global Select Market.

Material U.S. Federal Income Tax Consequences of the Merger

For ease of reference, the merger of Integrity with and into Independent is referred to in this proxy statement/prospectus as the “merger.”

The following discussion addresses the material U.S. federal income tax consequences of the merger to U.S. holders (as defined below) of Integrity common stock. The discussion is based on the Internal Revenue Code of 1986, as amended, referred to as the “Code,” Treasury regulations, administrative rulings and judicial decisions, all as currently in effect and all of which are subject to change (possibly with retroactive effect) and to differing interpretations, and is the opinion of Andrews Kurth Kenyon LLP and Jackson Walker L.L.P. insofar as it sets forth specific legal conclusions under U.S. federal income tax law. The opinions of counsel are included as exhibits to the registration statement of which this proxy statement/prospectus forms a part.

This discussion applies only to U.S. holders (as defined below) that hold their Integrity common stock as a capital asset within the meaning of Section 1221 of the Code, each of which we refer to in this document as a “holder.” Further, this discussion does not address all aspects of U.S. federal taxation that may be relevant to a particular stockholder in light of its personal circumstances or to stockholders subject to special treatment under U.S. federal income tax laws, including:

 

    banks or trusts,

 

    tax-exempt organizations,

 

    insurance companies,

 

    dealers in securities or foreign currency,

 

    traders in securities who elect to apply a mark-to-market method of accounting,

 

    pass-through entities and investors in such entities,

 

    foreign persons,

 

    U.S. expatriates,

 

88


Table of Contents
    regulated investment companies and real estate investment trusts,

 

    broker-dealers,

 

    holders liable for the alternative minimum tax,

 

    holders that have a functional currency other than the U.S. dollar,

 

    holders who received their Integrity common stock through the exercise of employee stock options, through a tax-qualified retirement plan or otherwise as compensation, and

 

    holders who hold Integrity common stock as part of a hedge, straddle, constructive sale, conversion transaction or other integrated investment.

In addition, the discussion does not address any alternative minimum tax or any state, local or foreign tax consequences of the merger, nor does it address any tax consequences arising under the unearned income Medicare contribution tax pursuant to the Health Care and Education Reconciliation Act of 2010.

For purposes of this discussion, a “U.S. holder” is a beneficial owner of Integrity common stock who is, for U.S. federal income tax purposes: (i) an individual who is a citizen or resident of the United States; (ii) a corporation or other entity taxable as a corporation created or organized under the laws of the United States or any of its political subdivisions; (iii) an estate that is subject to U.S. federal income tax on its income regardless of its source; or (iv) a trust (A) if a U.S. court is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all substantial decisions of the trust or (B) that was in existence on August 29, 1996 and has made a valid election to be treated as a United States person for U.S. federal income tax purposes.

This discussion does not address the tax treatment of partnerships (or entities or arrangements that are treated as partnerships for U.S. federal income tax purposes) or persons that hold their Integrity common stock through partnerships or other pass-through entities for U.S. federal income tax purposes. If a partnership, including any entity or arrangement treated as a partnership for U.S. federal income tax purposes, holds shares of Integrity common stock, the U.S. federal income tax treatment of a partner in such partnership will depend upon the status of the partner and the activities of the partnership. We urge such partners and partnerships to consult their own tax advisors regarding the particular tax consequences of the merger to them.

We urge each holder of Integrity common stock to consult its tax advisor with respect to the particular tax consequences of the merger to such holder.

Tax Opinions

The obligations of the parties to complete the merger are conditioned on, among other things, the receipt by Independent and Integrity of opinions from Andrews Kurth Kenyon LLP and Jackson Walker L.L.P., respectively, each dated the closing date of the merger, that for U.S. federal income tax purposes the merger will be treated as a reorganization within the meaning of Section 368(a) of the Code. The conditions relating to receipt of the opinions may be waived by both Independent and Integrity. Neither Independent nor Integrity currently intends to waive the conditions related to the receipt of the opinions. However, if these conditions were waived, Integrity would resolicit the approval of its shareholders prior to completing the merger. In addition, the obligation of each of Andrews Kurth Kenyon LLP and Jackson Walker L.L.P. to deliver such opinions is conditioned on the merger’s satisfying the continuity of proprietary interest requirement. That requirement generally will be satisfied if the aggregate value of the Independent stock constitutes at least 42% of the aggregate value of the aggregate merger consideration at the time the merger becomes effective. The opinions will be based on certain facts, representations, covenants and assumptions, including representations of Independent and Integrity.

 

89


Table of Contents

If any of the representations or assumptions upon which such opinions are based are inconsistent with the actual facts, the U.S. federal income tax consequences of the merger could be adversely affected. These opinions are not binding on the Internal Revenue Service or the courts, and neither Independent nor Integrity intends to request a ruling from the Internal Revenue Service regarding the U.S. federal income tax consequences of the merger. Therefore, while the merger is conditioned upon the delivery by tax counsel to each of Independent and Integrity of its opinion that the merger will qualify as a reorganization within the meaning of Section 368(a) of the Code, no assurance can be given that the Internal Revenue Service will not assert, or that a court would not sustain, a position contrary to any of those set forth below.

U.S. Federal Income Tax Consequences of the Merger Generally

The following discussion regarding the U.S. federal income tax consequences of the merger is the opinion of Andrews Kurth Kenyon LLP and Jackson Walker L.L.P. insofar as it sets forth specific legal conclusions under U.S. federal income tax law and assumes that the merger will be consummated as described in the reorganization agreement and this proxy statement/prospectus and Independent and Integrity will not waive the opinion condition described above in “—Tax Opinions.” The merger will be treated for U.S. federal income tax purposes as a reorganization qualifying under the provisions of Section 368(a) of the Code and as a consequence the merger will have the following U.S. federal income tax consequences.

If, pursuant to the merger, a holder exchanges all of the shares of Integrity common stock actually owned by it for a combination of Independent common stock and cash, the holder will recognize gain (but not loss) equal to the lesser of cash received (excluding any cash received in lieu of a fractional share of Independent common stock) or gain realized in the merger. The amount of gain realized will equal the amount by which the cash plus the fair market value, at the effective time of the merger, of the Independent common stock exceeds the adjusted tax basis in the Integrity common stock to be surrendered in exchange therefor. For this purpose, gain or loss must be calculated separately for each identifiable block of shares surrendered in the exchange, and a loss realized on one block of shares may not be used to offset a gain realized on another block of shares. We urge holders to consult their tax advisors regarding the manner in which cash and Independent common stock should be allocated among different blocks of Integrity common stock. Any recognized gain generally will be long-term capital gain if the holder’s holding period with respect to the Integrity common stock surrendered is more than one year at the effective time of the merger. If, however, the cash received has the effect of the distribution of a dividend, the gain will be treated as a dividend to the extent of the holder’s ratable share of accumulated earnings and profits of Integrity as calculated for U.S. federal income tax purposes. See “—Possible Treatment of Cash as a Dividend” below.

The aggregate adjusted tax basis of Independent common stock received (including fractional shares deemed received and redeemed as described below) by a holder that exchanges its shares of Integrity common stock for a combination of Independent common stock and cash pursuant to the merger will be equal to the aggregate adjusted tax basis of the shares of Integrity common stock surrendered for Independent common stock and cash, reduced by the amount of cash received by the holder pursuant to the merger (excluding any cash received instead of a fractional share of Independent common stock) and increased by the amount of gain (including any portion of the gain that is treated as a dividend as described below but excluding any gain or loss resulting from the deemed receipt and redemption of fractional shares described below), if any, recognized by the holder on the exchange. The holding period of the Independent common stock (including fractional shares deemed received and redeemed as described below) will include the holding period of the shares of Integrity common stock surrendered.

Possible Treatment of Cash as a Dividend

Any gain recognized by a holder may be treated as a dividend for U.S. federal income tax purposes to the extent of the holder’s ratable share of Integrity’s accumulated “earnings and profits.” In general, the determination of whether the gain recognized in the exchange will be treated as capital gain or has the effect of a distribution of a dividend depends upon whether and to what extent the exchange reduces the holder’s deemed

 

90


Table of Contents

percentage stock ownership of Independent. For purposes of this determination, the holder is treated as if it first exchanged all of its shares of Integrity common stock solely for Independent common stock and then Independent immediately redeemed, which we refer to as the “deemed redemption,” a portion of the Independent common stock in exchange for the cash the holder actually received. The gain recognized in the deemed redemption will be treated as capital gain if the deemed redemption is (1) “substantially disproportionate” with respect to the holder or (2) “not essentially equivalent to a dividend.”

The deemed redemption will generally be “substantially disproportionate” with respect to a holder if the percentage described in (2) below is less than 80% of the percentage described in (1) below. Whether the deemed redemption is “not essentially equivalent to a dividend” with respect to a holder will depend upon the holder’s particular circumstances. At a minimum, however, in order for the deemed redemption to be “not essentially equivalent to a dividend,” the deemed redemption must result in a “meaningful reduction” in the holder’s deemed percentage stock ownership of Independent. That determination requires a comparison of (1) the percentage of the outstanding stock of Independent that the holder is deemed actually and constructively to have owned immediately before the deemed redemption and (2) the percentage of the outstanding stock of Independent that is actually and constructively owned by the holder immediately after the deemed redemption. In applying the above tests, a holder may, under the constructive ownership rules, be deemed to own stock that is owned by other persons or stock underlying a holder’s option to purchase in addition to the stock actually owned by the holder.

The Internal Revenue Service has ruled that a stockholder in a publicly held corporation whose relative stock interest is minimal (e.g., less than 1%) and who exercises no control with respect to corporate affairs is generally considered to have a “meaningful reduction” if that stockholder has a relatively minor (e.g., approximately 3%) reduction in its percentage stock ownership under the above analysis. Accordingly, the gain recognized in the exchange by such a stockholder would be treated as capital gain.

These rules are complex and dependent upon the specific factual circumstances particular to each holder. Consequently, we urge each holder that may be subject to these rules to consult its tax advisor as to the application of these rules to the particular facts relevant to such holder.

Cash Received Instead of a Fractional Share

A holder of Integrity common stock who receives cash instead of a fractional share of Independent common stock will be treated as having received such fractional share and then as having received such cash in redemption of the fractional share. Gain or loss generally will be recognized based on the difference between the amount of cash received instead of the fractional share and the portion of the holder’s aggregate adjusted tax basis of the shares of Integrity common stock surrendered which is allocable to the fractional share. Such gain or loss generally will be long-term capital gain or loss if the holding period for such shares of Integrity common stock is more than one year at the effective time of the merger. Long-term capital gains of noncorporate taxpayers are subject to reduced rates of taxation. The deductibility of capital losses is subject to limitations.

Dissenters’ Rights of the Holders of Integrity Common Stock

Upon the proper exercise of dissenters’ rights, a holder of Integrity common stock will exchange all of the shares of Integrity common stock actually owned by that holder solely for cash and that holder will recognize gain or loss equal to the difference between the amount of cash received and its adjusted tax basis in the shares of Integrity common stock surrendered, which gain or loss will be long-term capital gain or loss if the holder’s holding period with respect to the Integrity common stock surrendered is more than one year. For this purpose, gain or loss must be calculated separately for each identifiable block of shares surrendered in the exchange, and a loss realized on one block of shares may not be used to offset a gain realized on another block of shares. We urge holders to consult their tax advisors regarding the manner in which cash should be allocated among different blocks of Integrity common stock. Long-term capital gains of noncorporate taxpayers are subject to reduced rates of taxation. The deductibility of capital losses is subject to limitations. Although the law is unclear, if the holder

 

91


Table of Contents

constructively owns shares of Integrity common stock that are exchanged for shares of Independent common stock in the merger or otherwise owns shares of Independent common stock actually or constructively after the merger, the consequences to that holder may be that all or a portion of the consideration is treated as a dividend, and the amount of consideration, if any, treated as a dividend may not be limited to the amount of that holder’s gain. In general, the determination of whether the gain recognized in the exchange will be treated as capital gain or has the effect of a distribution of a dividend depends upon whether and to what extent the exchange reduces the holder’s deemed percentage stock ownership of Independent. These rules are complex and dependent upon the specific factual circumstances particular to each holder. Consequently, we urge each holder that may be subject to these rules to consult its tax advisor as to the application of these rules to the particular facts relevant to such holder.

Certain Tax Reporting Rules

Under applicable Treasury regulations, “significant holders” of Integrity stock will be required to comply with certain reporting requirements. A Integrity stockholder should be viewed as a “significant holder” if, immediately before the merger, such holder held 5% or more, by vote or value, of the total outstanding Integrity common stock. Significant holders generally will be required to file a statement with the holder’s U.S. federal income tax return for the taxable year that includes the consummation of the merger. That statement must set forth the holder’s adjusted tax basis in, and the fair market value of, the shares of Integrity common stock surrendered pursuant to the merger (both as determined immediately before the surrender of shares), the date of the merger, and the name and employer identification number of Independent and Integrity, and the holder will be required to retain permanent records of these facts. We urge each holder of Integrity common stock to consult its tax advisor as to whether such holder may be treated as a “significant holder.”

Information Reporting and Backup Withholding

Payments of cash pursuant to the merger may, under certain circumstances, be subject to information reporting and backup withholding unless the recipient provides proof of an applicable exemption or furnishes its taxpayer identification number, and otherwise complies with all applicable requirements of the backup withholding rules. Any amounts withheld under the backup withholding rules are not an additional tax and will be allowed as a refund or credit against such holder’s U.S. federal income tax liability, provided the required information is timely furnished to the Internal Revenue Service.

This discussion of certain material U.S. federal income tax consequences is not tax advice. We urge holders of Integrity common stock to consult their tax advisors with respect to the application of U.S. federal income tax laws to their particular situations as well as any tax consequences arising under the U.S. federal estate or gift tax rules, or under the laws of any state, local, foreign or other taxing jurisdiction or under any applicable tax treaty.

Accounting Treatment

The merger will be accounted for under the acquisition method of accounting under accounting principles generally accepted in the United States of America. Under this method, Integrity’s assets and liabilities as of the date of the merger will be recorded at their respective fair values. Any difference between the purchase price for Integrity and the fair value of the identifiable net assets acquired (including intangibles) will be recorded as goodwill. In accordance with ASC Topic 805, Business Combinations, the goodwill resulting from the merger will not be amortized to expense, but instead will be reviewed for impairment at least annually and to the extent goodwill is impaired, its carrying value will be written down to its implied fair value and a charge will be made to earnings. Core deposit and other intangibles with definite useful lives recorded by Independent in connection with the merger will be amortized to expense in accordance with such rules. The consolidated financial statements of Independent issued after the merger will reflect the results attributable to the acquired operations of Integrity beginning on the date of completion of the merger.

 

92


Table of Contents

Restrictions on Resales of Independent Common Stock Received in the Merger

The shares of Independent common stock issued in the merger will not be subject to any restrictions on transfer arising under the Securities Act of 1933, as amended, except for shares of Independent common stock issued to any Integrity shareholder who may be deemed to be an “affiliate” of Independent after comple