UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ý | ANNUAL REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 |
For The Fiscal Year Ended December 31, 2014.
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 001-35854
Independent Bank Group, Inc.
(Exact name of registrant as specified in its charter)
Texas | 13-4219346 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1600 Redbud Boulevard, Suite 400 McKinney, Texas | 75069-3257 | |
(Address of principal executive offices) | (Zip Code) | |
(972) 562-9004
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on which Registered |
Common Stock, par value $0.01 per share | NASDAQ Stock Market, Inc., Global Select Market System |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer ý Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý
The aggregate market value of the shares of common stock held by non-affiliates based on the closing price of the common stock on the NASDAQ Global Market on June 30, 2014 was approximately $493,878,000 .
At February 26, 2015, the Company had outstanding 17,119,793 shares of common stock, par value $.01 per share.
Documents Incorporated By Reference:
Portions of the Company’s Proxy Statement relating to the 2015 Annual Meeting of Shareholders, which will be filed within 120 days after December 31, 2014, are incorporated by reference into Part III, Items 10 - 14 of this Annual Report on Form 10-K.
INDEPENDENT BANK GROUP, INC. AND SUBSIDIARIES
Annual Report on Form 10-K
December 31, 2014
PART I | |||
Item 1. | |||
Item 1A. | |||
Item 1B. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
PART II | |||
Item 5. | |||
Item 6. | |||
Item 7. | |||
Item 7A. | |||
Item 8. | |||
Item 9. | |||
Item 9A. | |||
Item 9B. | |||
PART III | |||
Item 10. | |||
Item 11. | |||
Item 12. | |||
Item 13. | |||
Item 14. | |||
PART IV | |||
Item 15. | |||
PART I
ITEM 1. BUSINESS
The disclosures set forth in this item are qualified by Item 1A. Risk Factors, and the section captioned “Forward-Looking Statements” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary statements set forth elsewhere in this report.
General
Independent Bank Group (the “Company”) is a registered bank holding company headquartered in McKinney, Texas, which is located in the northern portion of the Dallas-Fort Worth metropolitan area. The Company was organized as a Texas corporation on September 20, 2002. Through the Company’s wholly owned subsidiary, Independent Bank, a Texas state chartered bank, the Company provides a wide range of relationship-driven commercial banking products and services tailored to meet the needs of businesses, professionals and individuals. The Company operates 39 banking offices in the Dallas-Fort Worth metropolitan area, the Austin/Central Texas area, and the Houston metropolitan area. As of December 31, 2014, the Company had consolidated total assets of approximately $4.1 billion, total loans of approximately $3.2 billion, total deposits of approximately $3.2 billion and total stockholders’ equity of approximately $541 million.
The Company’s primary function is to own all of the stock of Independent Bank. Independent Bank is a locally managed community bank that seeks to provide personal attention and professional assistance to its customer base, which consists principally of small to medium sized businesses, professionals and individuals. Independent Bank’s philosophy includes offering direct access to its officers and personnel, providing friendly, informed and courteous service, local and timely decision making, flexible and reasonable operating procedures, and consistently applied credit policies.
The Company consummated the underwritten initial public offering of its common stock in April 2013. The Company’s common stock is traded on the NASDAQ Global Select Market.
Business Strategy
The Company operates based upon the following core strategies, which the Company designed to enhance shareholder value by growing strategically while preserving asset quality, improving efficiency and increasing profitability:
Grow Organically. The Company focuses on continued organic growth through the Company’s existing footprint and business lines. The Company plans to follow the Company’s community-focused, relationship-driven customer strategy to increase loans and deposits through the Company’s existing locations. Additionally, the Company intends to add teams of experienced bankers to grow in the Company’s current markets and expand into new markets. Preserving the safety and soundness of the Company’s loan portfolio is a fundamental element of the Company’s organic growth strategy. The Company has a strong and conservative credit culture, which allows the Company to maintain the Company’s asset quality as the Company grows.
Grow Through Acquisitions. The Company plans to continue to take advantage of opportunities to acquire other banking franchises both within and outside the Company’s current footprint. Since mid-2010, the Company has completed eight acquisitions that the Company believes have enhanced shareholder value and the Company’s market presence. The following table summarizes each of the eight acquisitions completed since 2010.
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Acquired Institution/Market | Date of Acquisition | Fair Value of Total Assets Acquired |
(dollars in thousands) | ||
Town Center Bank Dallas/North Texas | July 31, 2010 | $37,451 |
Farmersville Bancshares, Inc. Dallas/North Texas | September 30, 2010 | $99,420 |
I Bank Holding Company, Inc. Austin/Central Texas | April 1, 2012 | $172,587 |
The Community Group, Inc. Dallas/North Texas | October 1, 2012 | $110,967 |
Collin Bank Dallas/North Texas | November 30, 2013 | $168,320 |
Live Oak Financial Corp. Dallas/North Texas | January 1, 2014 | $131,008 |
BOH Holdings, Inc. Houston, Texas | April 15, 2014 | $1,188,712 |
Houston City Bancshares, Inc. Houston, Texas | October 1, 2014 | $350,747* |
* Estimated values subject to change pending final acquisition accounting adjustments
As noted in the table above, the Company completed three acquisitions in 2014, acquiring an aggregate of $1.67 billion in total assets. The assets acquired in these acquisitions represented 84.9% of the Company’s asset growth in 2014.
The BOH Holdings acquisition represented the Company’s entry into the Houston market. Houston City Bancshares was a follow on acquisition in the Houston market. Through these two acquisitions, the Company now operates 10 banking centers in the Houston metropolitan area with an aggregate of $1.32 billion in total assets.
The Company believes there will continue to be numerous small to mid-sized banking organizations available for acquisition in the Company’s existing market regions and in attractive new markets in Texas. At December 31, 2014, there were approximately 350 banks in Texas with total assets of less than $1 billion, which affords the Company future opportunities to make acquisitions that the Company believes would strengthen the Company’s business and increase its franchise value over the long term. The Company plans to explore additional opportunities in the growing sub markets within the Company’s current market regions as well as in attractive new markets such as Fort Worth and the San Antonio metropolitan area. Factors considered by the Company to evaluate expansion opportunities include a) similar management and operating philosophy, b) accretive to earnings and increase shareholder value, c) ability to improve efficiency, d) strategic expansion of Company footprint and e) enhance market presence in existing markets. The Company has a scalable infrastructure and experienced acquisition team which it believes will enable the Company to successfully integrate acquired banks. The Company intends to remain disciplined in its approach to acquisitions using appropriate valuation metrics.
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Improve Efficiency and Increase Profitability. The Company employs a systematic and calculated approach to increasing the Company’s profitability and improving the Company’s efficiencies. The Company has updated the Company’s operating capabilities and created synergies within the Company in the areas of technology, data processing, finance, compliance and human resources. The Company believes that the Company’s scalable infrastructure provides the Company with an efficient operating platform from which to grow in the near term without incurring significant incremental noninterest expenses, which will enhance the Company’s returns.
Independent’s Community Banking Services
The Independent Way. Nearly a century after the Company’s beginning, the Company’s dedication to serving the needs of businesses and individuals in the Company’s communities remains stronger than ever. The Company strives to provide the Company’s customers with innovative financial products and services, local decision making and a level of service and responsiveness that is second to none. The Company’s innovative and independent spirit is balanced by adherence to fundamental banking principles that have enabled the Company to remain strong, sound and financially secure even during challenging economic times. The Company is also steeped in a tradition of civic pride as evidenced by the investment of the Company’s time, energies and financial resources in many local organizations to improve and benefit the Company’s communities.
Lending Operations. Through Independent Bank, the Company offers a broad range of commercial and retail lending products to businesses, professionals and individuals. Commercial lending products include owner-occupied commercial real estate loans, interim construction loans, commercial loans (such as SBA guaranteed loans, business term loans, equipment financing and lines of credit and energy related loans) to a diversified mix of small and midsized businesses, and loans to professionals, particularly medical practices. Retail lending products include residential first and second mortgage loans and consumer installment loans, such as loans to purchase cars, boats and other recreational vehicles.
The Company’s strategy is to maintain a broadly diversified loan portfolio by type and location. The Company’s loans are primarily real estate secured loans spread among a variety of types of borrowers, including owner occupied offices for small businesses, medical practices and offices, retail operations and multi-family properties. The Company’s loans are diversified geographically throughout the Company’s Dallas/North Texas region (approximately 42.1%), the Company’s Houston region (approximately 32.6%) and the Company’s Austin/Central Texas region (approximately 25.3%). See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Loan Portfolio” for a more detailed description of the Company’s lending operations.
Deposits. Deposits are the Company’s principal source of funds for use in lending and other general banking purposes. The Company provides a full range of deposit products and services, including a variety of checking and savings accounts, debit cards, online banking, mobile banking, eStatements and bank-by-mail and direct deposit services. The Company also offers business accounts and management services, including analyzed business checking, business savings, and treasury management services. The Company solicits deposits through its relationship-driven team of dedicated and accessible bankers and through community focused marketing.
Other Services. In connection with our relationship driven approach to our customers, the Company offers residential mortgages through our mortgage brokerage division. As a mortgage broker, the Company originates residential mortgages which are sold into the secondary market shortly after closing. The Company also provides wealth management services to its customers including investment advisory and other related services.
Competition
The Company competes in the commercial banking industry solely through Independent Bank and firmly believes that Independent Bank’s long-standing presence in the community and personal service philosophy enhance the Company’s ability to attract and retain customers. This industry is highly competitive, and Independent Bank faces strong direct competition for deposits, loans and other financial-related services. The Company competes with other commercial banks, thrifts and credit unions. Although some of these competitors are situated locally, others have statewide or nationwide presence. In addition, the Company competes with large banks in major financial centers and other financial intermediaries, such as consumer finance companies, brokerage firms, mortgage banking companies, insurance companies, securities firms, mutual funds and certain government agencies as well as major retailers, all actively engaged in providing various types of loans and other financial services. The Company believes that its banking professionals, the range and quality of products that the Company offers and its emphasis on building long-lasting relationships distinguishes Independent Bank from its competitors.
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Employees
As of December 31, 2014, the Company employed approximately 511 persons. The Company provides extensive training to the Company’s employees in an effort to ensure that the Company’s customers receive superior customer service. None of the Company’s employees are represented by any collective bargaining unit or are parties to a collective bargaining agreement. The Company believes that the Company’s relations with the Company’s employees are good.
Available Information
The Company files reports, proxy statements and other information with the Securities and Exchange Commission, or SEC, under the Securities Exchange Act of 1934, as amended. You may read and copy this information at the SEC’s Public Reference Room, 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements and other information about issuers, like the Company, who file electronically with the SEC. The address of that site is http://www.sec.gov.
Documents filed by the Company with the SEC are available from the Company without charge (except for exhibits to the documents). You may obtain documents filed by the Company with the SEC by requesting them in writing or by telephone from the Company at the following address:
Independent Bank Group, Inc.
1600 Redbud Boulevard, Suite 400
McKinney, Texas 75069-3257
Attention: Michelle S. Hickox
Executive Vice President and Chief Financial Officer
Telephone: (972) 562-9004
Documents filed by the Company with the SEC are also available on the Company’s website, www.ibtx.com. Information furnished by the Company and information on, or accessible through, the SEC’s or the Company’s website is not part of this Annual Report on Form 10 K.
Supervision and Regulation
The U.S. banking industry is highly regulated under federal and state law. Consequently, the growth and earnings performance of the Company and its subsidiaries will be affected not only by management decisions and general and local economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities. These authorities include the Board of Governors of the Federal Reserve System, or Federal Reserve, the Federal Deposit Insurance Corporation, or the FDIC, the Office of the Comptroller of the Currency, or the OCC, the Texas Department of Banking, or TDB, the Internal Revenue Service and state taxing authorities. The effect of these statutes, regulations and policies, and any changes to such statutes, regulations and policies, can be significant and cannot be predicted.
The primary goals of the bank regulatory scheme are to maintain a safe and sound banking system and to facilitate the conduct of sound monetary policy. The system of supervision and regulation applicable to the Company and its subsidiaries establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC’s deposit insurance fund, the banks’ depositors and the public, rather than the Company’s shareholders or creditors. The description below summarizes certain elements of the applicable bank regulatory framework. This description is not intended to describe all laws and regulations applicable to the Company and its subsidiaries, and the description is qualified in its entirety by reference to the full text of the statutes, regulations, policies, interpretive letters and other written guidance that are described herein.
Independent Bank Group as a Bank Holding Company
As a bank holding company, the Company is subject to regulation under the Bank Holding Company Act of 1956, or the BHC Act, and to supervision, examination and enforcement by the Federal Reserve. The BHC Act and other federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. The Federal Reserve’s jurisdiction also extends to any company that the Company directly or indirectly controls, such as the Company’s nonbank subsidiaries.
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Regulatory Restrictions on Dividends; Source of Strength. The Company is regarded as a legal entity separate and distinct from Independent Bank. The principal source of the Company’s revenues is dividends received from Independent Bank. As described in more detail below, 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 the Company. 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, the Company should not pay cash dividends that exceed its net income in any year or that can only be funded in ways that weaken its ability to serve as a source of financial strength for its banking subsidiaries, including by borrowing money to pay dividends.
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 Act codified this policy as a statutory requirement. Under this requirement, the Company is expected to commit resources to support Independent Bank, including at times when the Company 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. As discussed below, a bank holding company, in certain circumstances, could be required to guarantee the capital restoration plan of an undercapitalized banking subsidiary. If the capital of Independent Bank were to become impaired, the Federal Reserve could assess the Company for the deficiency. If the Company failed to pay the assessment within three months, the Federal Reserve could order the sale of the Company’s stock in Independent Bank to cover the deficiency.
Scope of Permissible Activities. Under the BHC Act, the Company is prohibited from acquiring a direct or indirect interest in or control of more than 5% of the voting shares of any company that is not a bank or financial holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to or performing services for its subsidiary banks, except that the Company may engage in, directly or indirectly, and may own shares of companies engaged in, certain activities found by the Federal Reserve to be so closely related to banking or managing and controlling banks as to be a proper. These activities include, among others, operating a mortgage, finance, credit card or factoring company; performing certain data processing operations; providing investment and financial advice; acting as an insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, nonoperating basis; and providing certain stock brokerage and investment advisory services. In approving acquisitions or the addition of activities, the Federal Reserve considers, among other things, whether the acquisition or the additional activities can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh such possible adverse effects as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices.
Notwithstanding the foregoing, the Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act of 1999, effective March 11, 2000, or the GLB Act, amended the BHC Act and eliminated the barriers to affiliations among banks, securities firms, insurance companies and other financial service providers. The GLB Act permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. The GLB Act defines “financial in nature” to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve has determined to be closely related to banking. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve.
Safe and Sound Banking Practices. Bank holding companies are not permitted to engage in unsafe and unsound banking practices. The Federal Reserve’s Regulation Y, for example, generally requires a bank holding company to provide the Federal Reserve with prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the bank holding company’s consolidated net worth. The Federal Reserve may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. In certain circumstances, the Federal Reserve could take the position that paying a dividend would constitute an unsafe or unsound banking practice.
The Federal Reserve has broad authority to prohibit activities of bank holding companies and their nonbanking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations, and can assess civil money penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as one million dollars ($1,000,000) for each day the activity continues.
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Anti-Tying Restrictions. Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other nonbanking services offered by a bank holding company or its affiliates.
Capital Adequacy Requirements. The Federal Reserve has historically utilized a system based upon risk-based capital guidelines under a two-tier capital framework to evaluate the capital adequacy of bank holding companies. Tier 1 capital generally consists of common stockholders’ equity, retained earnings, a limited amount of qualifying perpetual preferred stock, qualifying trust preferred securities and noncontrolling interests in the equity accounts of consolidated subsidiaries, less goodwill and certain intangibles. Tier 2 capital generally consists of certain hybrid capital instruments and perpetual debt, mandatory convertible debt securities and a limited amount of subordinated debt, qualifying preferred stock, loan loss allowance, and unrealized holding gains on certain equity securities. The regulatory capital requirements are applicable to the Company because its total consolidated assets equal more than $500 million. Independent Bank is subject to the capital requirements of the FDIC.
Under the guidelines, specific categories of assets are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a “risk-weighted” asset base. The guidelines require a minimum ratio of total capital to total risk-weighted assets of 8.0% (of which at least 4.0% is required to consist of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2 capital. Risk-weighted assets exclude intangible assets such as goodwill and core deposit intangibles.
In addition to the risk-based capital guidelines, the Federal Reserve uses a leverage ratio as an additional tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is a company’s Tier 1 capital divided by its average total consolidated assets. Certain highly rated bank holding companies may maintain a minimum leverage ratio of 3.0%, but other bank holding companies are required to maintain a leverage ratio of at least 4.0%.
The federal banking agencies’ risk-based and leverage capital ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria. Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve guidelines also provide that banking organizations experiencing internal growth or making acquisitions must maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.
On July 2, 2013, the Federal Reserve approved a final rule implementing the revised capital standards issued by the Basel Committee on Banking Supervision, commonly known as “Basel III,” as well as additional capital reforms required by the Dodd-Frank Act. This final rule, once fully phased-in, requires bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity.
The new final capital framework, among other things, (i) introduces as a new capital measure “Common Equity Tier 1,” or CET1, (ii) specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expands the scope of the adjustments as compared to existing regulations.
The new capital rule, when fully phased in, requires, among other things, a new common equity Tier 1 risk-based ratio with a minimum required ratio of 4.5% of total assets and an increase in the minimum required amount of Tier 1 capital from the current level of 4% of total assets to 6% of total risk weighted assets and the continuation of the requirement to maintain total capital of 8% of total risk-weighted assets. Moreover, the new rule requires banks to hold additional capital equal to 2.5% of total assets as a “capital conservation buffer” in order to avoid restrictions on certain activities, including the payment of dividends and certain bonuses. The new rule also provides for a “countercyclical capital buffer” that would be added to the capital conservation buffer generally to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk.
The Company became subject to the new capital rules on January 1, 2015. The Company believes that it will be in compliance with the new capital rules going forward and that the new capital rules will not have a material impact on the Company.
Proposed Liquidity Requirements. Historically, regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, without required formulaic measures. The Basel III final framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward will
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be required by regulation. One test, referred to as the liquidity coverage ratio, or LCR, is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other, referred to as the net stable funding ratio, or NSFR, is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements will incentivize banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source. The LCR was introduced as a requirement on January 1, 2015, but the NSFR will not be introduced as a requirement until January 1, 2018. These new standards are subject to further rulemaking and their terms could change before implementation.
Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators are required to take prompt corrective action to resolve problems associated with insured depository institutions whose capital declines below certain levels. In the event an institution becomes undercapitalized, it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company having control of the undercapitalized institution guarantees the subsidiary’s compliance with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5.0% of the institution’s assets at the time it became undercapitalized or the amount necessary to cause the institution to be adequately capitalized. The bank regulators have greater power in situations where an institution becomes significantly or critically undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve approval of proposed dividends, or might be required to consent to a consolidation or to divest the troubled institution or other affiliates.
Acquisitions by Bank Holding Companies. The BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve before it acquires all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve is required to consider, among other things, the effect of the acquisition on competition, the financial condition, managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served (including the record of performance under the Community Reinvestment Act, or CRA), the effectiveness of the applicant in combating money laundering activities and the extent to which the proposed acquisition would result in greater or more concentrated risks to the stability of the U.S. banking or financial system. The Company’s ability to make future acquisitions will depend on its ability to obtain approval for such acquisitions from the Federal Reserve. The Federal Reserve could deny the Company’s application based on the above criteria or other considerations. For example, the Company could be required to sell banking centers as a condition to receiving regulatory approval, which condition may not be acceptable to the Company or, if acceptable, may reduce the benefit of a proposed acquisition.
Control Acquisitions. Federal and state laws, including the BHCA and the Change in Bank Control Act, or the CBCA, impose additional prior notice or approval requirements and ongoing regulatory requirements on any investor that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution or bank holding company. Whether an investor “controls” a depository institution is based on all of the facts and circumstances surrounding the investment. As a general matter, an investor is deemed to control a depository institution or other company if the investor owns or controls 25% or more of any class of voting securities. Subject to rebuttal, an investor is presumed to control a depository institution or other company if the investor owns or controls 10% or more of any class of voting securities and either the depository institution or company is a public company or no other person will hold a greater percentage of that class of voting securities after the acquisition. If an investor’s ownership of the Company’s voting securities were to exceed certain thresholds, the investor could be deemed to “control” the Company for regulatory purposes, which could subject such investor to regulatory filings or other regulatory consequences.
Regulation of Independent Bank
Independent Bank is a Texas-chartered banking association, the deposits of which are insured by the deposit insurance fund of the FDIC. Independent Bank is not a member of the Federal Reserve System; therefore, Independent Bank is subject to supervision and regulation by the FDIC and the TDB. Such supervision and regulation subject Independent Bank to special restrictions, requirements, potential enforcement actions and periodic examination by the FDIC and the TDB. Because the Federal Reserve regulates the Company, the Federal Reserve also has supervisory authority that directly affects Independent Bank.
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Equivalence to National Bank Powers. The Texas Constitution, as amended in 1986, provides that a Texas-chartered bank has the same rights and privileges that are or may be granted to national banks domiciled in Texas. To the extent that the Texas laws and regulations may have allowed state-chartered banks to engage in a broader range of activities than national banks, the Federal Deposit Insurance Corporation Improvement Act of 1991, or the FDICIA, has operated to limit this authority. The FDICIA provides that no state bank or subsidiary thereof may engage as a principal in any activity not permitted for national banks, unless the institution complies with applicable capital requirements and the FDIC determines that the activity poses no significant risk to the deposit insurance fund of the FDIC. In general, statutory restrictions on the activities of banks are aimed at protecting the safety and soundness of depository institutions.
Financial Modernization. Under the GLB Act, a national bank may establish a financial subsidiary and engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting as principal, insurance company portfolio investment, real estate development, real estate investment, annuity issuance and merchant banking activities. To do so, a bank must be well capitalized, well managed and have a Community Reinvestment Act, or CRA, rating from the FDIC of satisfactory or better. Subsidiary banks of a financial holding company or national banks with financial subsidiaries must remain well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions. Such actions or restrictions could include divestiture of the “financial in nature” subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has a CRA rating of satisfactory of better.
Although the powers of state chartered banks are not specifically addressed in the GLB Act, Texas- chartered banks such as Independent Bank will have the same if not greater powers as national banks through the parity provisions contained in the Texas Constitution and other Texas statutes.
Branching. Texas law provides that a Texas-chartered bank can establish a branch anywhere in Texas provided that the branch is approved in advance by the TDB. The branch must also be approved by the FDIC, which considers a number of factors, including financial history, capital adequacy, earnings prospects, character of management, needs of the community and consistency with corporate powers. The Dodd-Frank Act permits insured state banks to engage in de novo interstate branching if the laws of the state where the new branch is to be established would permit the establishment of the branch if it were chartered by such state.
Restrictions on Transactions with Affiliates and Insiders. Transactions between Independent Bank and its nonbanking subsidiaries and/or affiliates, including the Company, are subject to Section 23A of the Federal Reserve Act. In general, Section 23A of the Federal Reserve Act imposes limits on the amount of such transactions, and also requires certain levels of collateral for loans to affiliated parties. It also limits the amount of advances to third parties that are collateralized by the securities or obligations of the Company or its subsidiaries. Covered transactions with any single affiliate may not exceed 10% of the capital stock and surplus of Independent Bank, and covered transactions with all affiliates may not exceed, in the aggregate, 20% of Independent Bank’s capital and surplus. For a bank, capital stock and surplus refers to the bank’s Tier 1 and Tier 2 capital, as calculated under the risk-based capital guidelines, plus the balance of the allowance for credit losses excluded from Tier 2 capital. Independent Bank’s transactions with all of its affiliates in the aggregate are limited to 20% of the foregoing capital. “Covered transactions” are defined by statute to include a loan or extension of credit to an affiliate, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal Reserve) from the affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. In addition, in connection with covered transactions that are extensions of credit, Independent Bank may be required to hold collateral to provide added security to Independent Bank, and the types of permissible collateral may be limited. The Dodd-Frank Act generally enhances the restrictions on transactions with affiliates.
Affiliate transactions are also subject to Section 23B of the Federal Reserve Act, which generally requires that certain transactions between Independent Bank and its affiliates be on terms substantially the same, or at least as favorable to Independent Bank, as those prevailing at the time for comparable transactions with or involving other nonaffiliated persons.
The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred to herein as “insiders”) contained in the Federal Reserve Act and in Regulation O promulgated by the Federal Reserve apply to all insured institutions and their subsidiaries and bank holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests. Generally, these loans cannot exceed the institution’s total unimpaired capital and surplus, and the FDIC may determine that a lesser amount is appropriate. Loans to senior executive officers of a bank are even further restricted, generally limited to $100,000 per senior executive officer. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions.
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Restrictions on Distribution of Subsidiary Bank Dividends and Assets. Dividends paid by Independent Bank have provided a substantial part of the Company’s operating funds, and for the foreseeable future, it is anticipated that dividends paid by Independent Bank to the Company will continue to be the Company’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.
Because the Company is a legal entity separate and distinct from its subsidiaries, its right to participate in the distribution of assets of any subsidiary upon the subsidiary’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s creditors. The Federal Deposit Insurance Act, or the FDI Act, provides that, in the event of a “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution (including the claims of the FDIC as subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the institution. If Independent Bank fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, nondeposit creditors, including the Company, with respect to any extensions of credit it has made to Independent Bank.
Examinations. The FDIC periodically examines and evaluates state nonmember banks. Based on such an evaluation, the FDIC may revalue the assets of the institution and require that it establish specific reserves to compensate for the difference between the FDIC determined value and the book value of such assets. The TDB also conducts examinations of state banks, but may accept the results of a federal examination in lieu of conducting an independent examination. In addition, the FDIC and TDB may elect to conduct a joint examination.
Audit Reports. Insured institutions with total assets of $500 million or more must submit annual audit reports prepared by independent auditors to federal and state regulators. In some instances, the audit report of the institution’s holding company can be used to satisfy this requirement. Auditors of an insured institution must receive examination reports, supervisory agreements and reports of enforcement actions. For institutions with total assets of $1 billion or more, financial statements prepared in accordance with GAAP, management’s certifications signed by the Company’s and Independent Bank’s chief executive officer and chief accounting or financial officer concerning management’s responsibility for the financial statements, and an attestation by the auditors regarding Independent Bank’s internal controls must also be submitted. For institutions with total assets of more than $3 billion, independent auditors may be required to review quarterly financial statements. The FDICIA requires that Independent Bank have an independent audit committee, consisting only of outside directors, or that the Company has an audit committee that is entirely independent. The committees of such institutions must include members with experience in banking or financial management, must have access to outside counsel, and must not include representatives of large customers.
Capital Adequacy Requirements. The FDIC has adopted regulations establishing minimum requirements for the capital adequacy of insured institutions and may establish higher minimum requirements if, for example, a bank has previously received special attention or has a high susceptibility to interest rate risk. The FDIC’s risk-based capital guidelines generally require state banks to have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4.0% and a ratio of total capital to total risk-weighted assets of 8.0%. The capital categories have the same definitions for Independent Bank as for the Company. The FDIC’s leverage guidelines require state banks to maintain Tier 1 capital of no less than 4.0% of average total assets, except in the case of certain highly rated banks for which the requirement is 3.0% of average total assets. The TDB has issued a policy which generally requires state chartered banks to maintain a leverage ratio (defined in accordance with federal capital guidelines) of 5.0%.
Corrective Measures for Capital Deficiencies. The federal banking regulators are required by the FDI Act to take “prompt corrective action” with respect to capital-deficient institutions that are FDIC-insured. Agency regulations define, for each capital category, the levels at which institutions are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A “well capitalized” bank has a total risk-based capital ratio of 10.0% or higher, a Tier 1 risk-based capital ratio of 6.0% or higher, a leverage ratio of 5.0% or higher, and is not subject to any written agreement, order or directive requiring it to maintain a specific capital level for any capital measure. An “adequately capitalized” bank has a total risk-based capital ratio of 8.0% or higher, a Tier 1 risk-based capital ratio of 4.0% or higher, a leverage ratio of 4.0% or higher (3.0% or higher if the bank was rated a composite 1 in its most recent examination report and is not experiencing significant growth), and does not meet the criteria for a well‑capitalized bank. A bank is “undercapitalized” if it fails to meet any one of the ratios required to be adequately capitalized.
In addition to requiring undercapitalized institutions to submit a capital restoration plan, agency regulations contain broad restrictions on certain activities of undercapitalized institutions, including asset growth, acquisitions, branch establishment and expansion into new lines of business. With certain exceptions, an insured depository institution is prohibited from making
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capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment.
As an institution’s capital decreases, the FDIC’s enforcement powers become more severe. A significantly undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management and other restrictions. The FDIC has only very limited discretion in dealing with a critically undercapitalized institution and is virtually required to appoint a receiver or conservator.
Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital.
Deposit Insurance Assessments. Substantially all of the deposits of Independent Bank are insured up to applicable limits by the deposit insurance fund of the FDIC, and Independent Bank must pay annual deposit insurance assessments to the FDIC for such deposit insurance protection. The FDIC maintains the deposit insurance fund by designating a required reserve ratio. If the reserve ratio falls below the designated level, the FDIC must adopt a restoration plan that provides that the deposit insurance fund will return to an acceptable level generally within five years.
On December 20, 2010, the FDIC raised the minimum designated reserve ratio of the deposit insurance fund to 2.00%, which exceeds the 1.35% reserve ratio that is required by the Dodd-Frank Act. The FDIC has the discretion to set the price for deposit insurance according to the risk for all insured institutions regardless of the level of the reserve ratio. Under the Dodd-Frank Act, the FDIC is required to offset the effect of the higher reserve ratio on small insured depository institutions, which are those with consolidated assets of less than $10 billion.
The deposit insurance fund reserve ratio is maintained by assessing depository institutions and establishing an insurance premium based upon statutory factors. Under its current regulations, the FDIC imposes assessments for deposit insurance according to a depository institution’s ranking in one of four risk categories based upon supervisory and capital evaluations.
On February 7, 2012, the FDIC approved a final rule that amends its existing deposit insurance funds restoration plan and implements certain provisions of the Dodd-Frank Act. Effective as of July 1, 2012, the assessment base is determined using average consolidated total assets minus average tangible equity rather than the current assessment base of adjusted domestic deposits. Because the change resulted in a much larger assessment base, the final rule also lowered the assessment rates in order to keep the total amount collected from financial institutions relatively unchanged from the amounts previously being collected. After the effect of potential base-rate adjustments, the total base assessment rate for Independent Bank could range from 2.5 to 45 basis points on an annualized basis.
Brokered Deposit Restrictions. Adequately capitalized institutions cannot accept, renew or roll over brokered deposits, without receiving a waiver from the FDIC, and are subject to restrictions on the interest rates that can be paid on any deposits. Undercapitalized institutions may not accept, renew or roll over brokered deposits.
Concentrated Commercial Real Estate Lending Regulations. The federal banking agencies have promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real estate lending if (i) total reported loans for construction, land development and other land represent 100% or more of total capital or (ii) total reported loans secured by multifamily and nonfarm residential properties and loans for construction, land development and other land represent 300% or more of total capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. Owner occupied loans are excluded from this second category. If a concentration is present, management must employ heightened risk management practices that address the following key elements: board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending.
Cross-Guarantee Provisions. The Financial Institutions Reform, Recovery and Enforcement Act of 1989, or the FIRREA, contains a “cross-guarantee” provision, which generally makes commonly controlled insured depository institutions liable to the FDIC for any losses incurred in connection with the failure of a commonly controlled depository institution.
Community Reinvestment Act. The CRA and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their entire service area, including low and moderate income neighborhoods, consistent with the safe and sound operations of such banks. These regulations also provide for regulatory assessment of a bank’s record in meeting the needs of its service area when considering applications to establish branches, merger applications and applications to acquire
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the assets and assume the liabilities of another bank. The FIRREA requires federal banking agencies to make public a rating of a bank’s performance under the CRA. In the case of a bank holding company, the CRA performance record of the banks involved in the transaction are reviewed in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or to merge with any other bank holding company. An unsatisfactory CRA record could substantially delay approval or result in denial of an application.
Consumer Laws and Regulations. In addition to the laws and regulations discussed herein, Independent Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, and the Fair Housing Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. Independent Bank must comply with the applicable provisions of these consumer protection laws and regulations as part of their ongoing customer relations.
The Dodd-Frank Act created a new independent Consumer Financial Protection Bureau, which has broad authority to regulate and supervise retail financial services activities of banks, such as Independent Bank, and has the authority to promulgate regulations, issue orders, guidance and policy statements, conduct examinations and bring enforcement actions with regard to consumer financial products and services. In general, however, banks with assets of $10 billion or less, such as Independent Bank, will continue to be examined for consumer compliance by their primary bank regulator.
Privacy. In addition to expanding the activities in which banks and bank holding companies may engage, the GLB Act also imposed new requirements on financial institutions with respect to customer privacy. The GLB Act generally prohibits disclosure of customer information to nonaffiliated third parties unless the customer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to customers annually. Financial institutions, however, are required to comply with state law if it is more protective of customer privacy than the GLB Act.
Anti-Money Laundering and Anti-Terrorism Legislation. A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001, or the USA Patriot Act, substantially broadened the scope of U.S. anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The U.S. Treasury Department has issued and, in some cases, proposed a number of regulations that apply various requirements of the USA Patriot Act to financial institutions. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. The USA Patriot Act requires, among other things, financial institutions to comply with certain due diligence requirements in connection with correspondent or private banking relationships with non-U.S. financial institutions or persons, establish an anti-money laundering program that includes employee training and an independent audit, follow minimum standards for identifying customers and maintaining records of the identification information and make regular comparisons of customers against agency lists of suspected terrorists, their organizations and money launderers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.
Office of Foreign Assets Control Regulation. The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by the U.S. Treasury Department Office of Foreign Assets Control, or OFAC. The OFAC-administered sanctions targeting certain countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to a U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.
Changes in Laws, Regulations or Policies
In general, regulators have increased their focus on the regulation of financial institutions. From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures. Such initiatives may change banking
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statutes and the operating environment of the Company and Independent Bank in substantial and unpredictable ways. The Company cannot determine the ultimate effect that any potential legislation, if enacted, or implementing regulations with respect thereto, would have, upon the financial condition or results of operations of the Company or Independent Bank. A change in statutes, regulations or regulatory policies applicable to the Company or Independent Bank could have a material effect on the financial condition, results of operations or business of the Company and Independent Bank.
Enforcement Powers of Federal and State Banking Agencies
The federal banking agencies have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver. Failure to comply with applicable laws, regulations and supervisory agreements could subject the Company or Independent Bank and their subsidiaries, as well as their respective officers, directors, and other institution‑affiliated parties, to administrative sanctions and potentially substantial civil money penalties. In addition to the grounds discussed above under “Corrective Measures for Capital Deficiencies,” the appropriate federal banking agency may appoint the FDIC as conservator or receiver for a banking institution (or the FDIC may appoint itself, under certain circumstances) if any one or more of a number of circumstances exist. The TDB also has broad enforcement powers over Independent Bank, including the power to impose orders, remove officers and directors, impose fines and appoint supervisors and conservators.
Effect on Economic Environment
The policies of regulatory authorities, including the monetary policy of the Federal Reserve, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve to affect the money supply are open market operations in U.S. government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid for deposits.
Federal Reserve monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The Company cannot predict the nature of future monetary policies and the effect of such policies on the business and earnings of it and its subsidiaries.
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Item 1A. RISK FACTORS
Item 1A. Risk Factors
An investment in the Company’s common stock involves risks. The following is a description of the material risks and uncertainties that the Company believes affect its business and an investment in the common stock. Additional risks and uncertainties that the Company is unaware of, or that it currently deems immaterial, also may become important factors that affect the Company and its business. If any of the risks described in this Annual Report on Form 10-K were to occur, the Company’s financial condition, results of operations and cash flows could be materially and adversely affected. If this were to happen, the value of the common stock could decline significantly and you could lose all or part of your investment.
Risks Related to the Company’s Business
The Company’s success depends significantly on the Company’s management team, and the loss of the Company’s senior executive officers or other key employees and the Company’s inability to recruit or retain suitable replacements could adversely affect the Company’s business, results of operations and growth prospects.
The Company’s success depends significantly on the continued service and skills of the Company’s existing executive management team, particularly David Brooks, the Company’s Chairman of the Board and Chief Executive Officer, Torry Berntsen, the Company’s President and Chief Operating Officer, Daniel Brooks, the Company’s Vice Chairman and Chief Risk Officer, Brian Hobart, the Company’s Vice Chairman and Chief Lending Officer, James Stein, the Company's Vice Chairman-Houston Region, and Michelle Hickox, the Company’s Executive Vice President and Chief Financial Officer. The implementation of the Company’s business and growth strategies also depends significantly on the Company’s ability to retain employees with experience and business relationships within their respective market areas. The Company’s officers may terminate their employment with the Company at any time, and the Company could have difficulty replacing such officers with persons who are experienced in the specialized aspects of the Company’s business or who have ties to the communities within the Company’s market areas. The loss of any of the Company’s key personnel could therefore have an adverse impact on the Company’s business and growth.
The Company’s business concentration in Texas imposes risks and may magnify the adverse effects and consequences to the Company resulting from any regional or local economic downturn affecting Texas.
The Company conducts its operations almost exclusively in Texas. This geographic concentration imposes risks from lack of geographic diversification. The economic conditions in Texas affect the Company’s business, financial condition, results of operations, and future prospects, where adverse economic developments, among other things, could affect the volume of loan originations, increase the level of nonperforming assets, increase the rate of foreclosure losses on loans and reduce the value of the Company’s loans and loan servicing portfolio. Moreover, if the population or income growth in the Company’s market areas is slower than projected, income levels, deposits and housing starts could be adversely affected and could result in a reduction of the Company’s expansion, growth and profitability. The decline in oil prices in late 2014 and early 2015 and the current instability in oil prices has, and is expected to continue to have, a significant impact on the overall Texas economy. Any regional or local economic downturn that affects Texas or existing or prospective borrowers or property values in such areas may affect the Company and the Company’s profitability more significantly and more adversely than the Company’s competitors whose operations are less geographically concentrated.
If the Company is not able to continue its historical levels of growth, it may not be able to maintain its historical earnings trends.
To achieve its past levels of growth, the Company has focused on both internal growth and acquisitions. The Company may not be able to sustain its historical rate of growth or may not be able to grow at all. More specifically, the Company may not be able to obtain the financing necessary to fund additional growth and may not be able to find suitable acquisition candidates. Various factors, such as economic conditions and competition, may impede or prohibit the opening of new banking centers and the completion of acquisitions. Further, the Company may be unable to attract and retain experienced bankers, which could adversely affect its internal growth. If the Company is not able to continue its historical levels of growth, it may not be able to maintain its historical earnings trends.
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The Company’s strategy of pursuing acquisitions exposes the Company to financial, execution and operational risks that could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.
The Company has been pursuing a growth strategy that includes the acquisition of other financial institutions in target markets. The Company has completed eight acquisitions since 2010, and the Company intends to continue this strategy. Such an acquisition strategy, involves significant risks, including the following:
• | finding suitable markets for expansion; |
• | finding suitable candidates for acquisition; |
• | attracting funding to support additional growth; |
• | maintaining asset quality; |
• | attracting and retaining qualified management; and |
• | maintaining adequate regulatory capital. |
Accordingly, the Company may be unable to find suitable acquisition candidates in the future that fit its acquisition and growth strategy.
Acquisitions of financial institutions also involve operational risks and uncertainties, and acquired companies may have unknown or contingent liabilities with no available manner of recourse, exposure to unexpected asset quality problems, key employee and customer retention problems and other problems that could negatively affect the Company’s organization. The Company may not be able to complete future acquisitions or, if completed, the Company may not be able to successfully integrate the operations, management, products and services of the entities that the Company acquires and eliminate redundancies. The integration process may also require significant time and attention from the Company’s management that they would otherwise direct toward servicing existing business and developing new business. Further, the integration process could result in the loss of key employees, disruption of the combined entity’s ongoing business, or inconsistencies in standards, controls, procedures and policies that adversely affect the Company’s ability to maintain relationships with customers or employees or to achieve the anticipated benefits of the transaction. Failure to successfully integrate the entities the Company acquires into the Company’s existing operations may increase the Company’s operating costs significantly and adversely affect the Company’s business and earnings. Acquisitions typically involve the payment of a premium over book and market values and, therefore, some dilution of the Company’s tangible book value and net income per common share may occur in connection with any future transaction.
If the Company does not manage the Company’s growth effectively, the Company’s business, financial condition, results of operations and future prospects could be negatively affected, and the Company may not be able to continue to implement the Company’s business strategy and successfully conduct the Company’s operations.
The Company acquired two separate financial institutions during 2014 which conducted operations in the Houston financial market where the Company had no prior operating experience.
In 2014, the Company acquired two separate banking operations and began operating in the Houston metropolitan area financial market. As a result, the Company is initially relying on the management teams at these banking organizations who joined the Company to provide guidance regarding operating in this new geographic market. Should the Company not be able to retain the services of these key employees or should they be unable to provide the necessary support and guidance for the Company to operate in this new market, the Company may not achieve the results it desires from these two acquisitions. Further, because these acquisitions did not involve as much geographic overlap as some of the Company’s prior acquisitions, the Company may be unable to realize all planned operating efficiencies as a result of the Houston based acquisitions.
The Company may fail to realize the cost savings anticipated from its acquisitions.
Although the Company anticipates that it will realize certain cost savings with respect to the acquisitions that it has completed or will, in the near future, complete, it is possible that the Company may not realize all of the cost savings that the Company has estimated or will estimate that it can realize. For example, unanticipated growth in the Company’s business may require the Company to continue to operate or maintain some facilities or support functions that are expected to be combined or reduced as a result of an acquisition. The Company’s realization of the estimated cost savings also will depend on the Company’s ability to combine the operations of any target bank with Independent Bank in a manner that permits those costs savings to be realized. If the Company is not able to integrate target bank’s operations into Independent Bank’s operations successfully, the anticipated cost savings may not be fully realized, if at all, or may take longer to realize than expected.
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If the goodwill that the Company recorded in connection with a business acquisition becomes impaired, it could require charges to earnings, which would have a negative impact on the Company’s financial condition and results of operations.
Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets that the Company acquired in connection with the purchase of another financial institution. The Company reviews goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that the carrying value of the asset might be impaired.
The Company determines impairment by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in the Company’s results of operations in the periods in which they become known. As of December 31, 2014, the Company’s goodwill totaled $229.5 million. While the Company has not recorded any such impairment charges since the Company initially recorded the goodwill, there can be no assurance that the Company’s future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on the Company’s financial condition and results of operations.
If the Company does not effectively manage the Company’s asset quality and credit risk, the Company would experience loan losses, which could have a material adverse effect on the Company’s financial condition and results of operation.
Making any loan involves risk, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and cash flows available to service debt, and risks resulting from changes in economic and market conditions. The Company’s credit risk approval and monitoring procedures may fail to identify or reduce these credit risks, and they cannot completely eliminate all credit risks related to the Company’s loan portfolio. The Company faces a variety of risk related to its types of loans. Adverse developments affecting commercial real estate values in the Company’s market areas could increase the credit risk associated with commercial real estate loans, impair the value of the property pledged as collateral for these loans, and affect the Company’s ability to sell the collateral upon foreclosure without a loss. Further, due to the larger average size of commercial real estate loans, the Company faces risk that losses incurred on a small number of commercial real estate loans could have a material adverse effect on the Company’s financial condition and results of operations. The Company’s commercial real estate loans also have the risk that repayment is subject to the ongoing business operations of the borrower. The Company’s commercial loans equally have the risk that repayment is subject to the ongoing business operations of the borrower. Commercial loans are often secured by personal property, such as inventory, and intangible property, such as accounts receivable, which if the business is unsuccessful, typically have values insufficient to satisfy the loan without a loss.
If the overall economic climate in the United States, generally, or the Company’s market areas in Texas, specifically, experiences material disruption, the Company’s borrowers may experience difficulties in repaying their loans, the collateral the Company holds may decrease in value or become illiquid, and the level of nonperforming loans, charge-offs and delinquencies could rise and require additional provisions for loan losses, which would cause the Company’s net income and return on equity to decrease.
Negative changes in the economy affecting real estate values and liquidity, and business operating conditions generally, could impair the repayment ability of borrowers and the value of collateral securing the Company’s loans which would result in loan and other losses.
As of December 31, 2014, approximately 76.4% of the Company’s loan portfolio was comprised of loans with real estate as a primary or secondary component of collateral, excluding agricultural loans secured by real estate. As a result, adverse developments affecting real estate values in the Company’s market areas could increase the credit risk associated with the Company’s real estate loan portfolio. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the area in which the real estate is located. Adverse changes affecting real estate values and the liquidity of real estate in one or more of the Company’s markets could increase the credit risk associated with the Company’s loan portfolio, and could result in losses that would adversely affect credit quality, financial condition, and results of operation. Negative changes in the economy affecting real estate values and liquidity in the Company’s market areas could significantly impair the value of property pledged as collateral on loans and affect the Company’s ability to sell the collateral upon foreclosure without a loss or additional losses. Collateral may have to be sold for less than the outstanding balance of the loan, which could result in losses on such loans. Such declines and losses would have a material adverse impact on the Company’s business, results of operations and growth prospects. If real estate values decline, it is also more likely that the Company would
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be required to increase the Company’s allowance for loan losses, which could adversely affect the Company’s financial condition, results of operations and cash flows.
Further, due to the larger average size of commercial real estate loans, the Company faces risk that losses incurred on a small number of commercial real estate loans could have a material adverse effect on the Company’s financial condition and results of operations. Commercial real estate loans also have the risk that repayment is subject to the ongoing business operations of the borrower. The Company’s commercial loans equally have the risk that repayment is subject to the ongoing business operations of the borrower. Commercial loans are often secured by personal property, such as inventory, and intangible property, such as accounts receivable, which if the business is unsuccessful, typically have values insufficient to satisfy the loan without a loss.
The recent decline in oil prices could have a negative effect on the Company’s asset quality.
As of December 31, 2014, approximately 7% of the Company’s loan portfolio was composed of loans made to companies engaged in oil production. Another 1% of the portfolio was made to borrowers engaged in oilfield services. The significant decline in oil prices during late 2014 and early 2015 and the continuing volatility in oil prices could adversely effect these borrowers’ ability to repay these loans and could impair the value of collateral securing these loans. Further, because energy is a material segment of the overall Texas economy, the decline and volatility in oil prices could have an impact on other segments of the Texas economy, including real estate. If oil prices experience further declines, the Company could be required to increase its allowance for loan losses, which could adversely affect the Company’s financial condition, results of operation and cash flows.
The Company’s small to medium-sized business customers may have fewer financial resources than larger entities to weather a downturn in the economy, which may impair a borrower’s ability to repay a loan, and such impairment could adversely affect the Company’s results of operations and financial condition.
The Company focuses its business development and marketing strategy primarily to serve the banking and financial services needs of small to medium-sized businesses. These small to medium-sized businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact the north and central Texas area or the Texas market generally and small to medium-sized businesses are adversely affected, the Company’s results of operations and financial condition may be negatively affected.
The Company’s allowance for loan losses may prove to be insufficient to absorb potential losses in the Company’s loan portfolio, which may adversely affect the Company’s business, financial condition and results of operations.
The Company establishes its allowance for loan losses and maintains it at a level considered adequate by management to absorb probable loan losses based on the Company’s analysis of its portfolio and market environment. The allowance for loan losses represents the Company’s estimate of probable losses in the portfolio at each balance sheet date and is based upon relevant information available to the Company. The allowance contains provisions for probable losses that have been identified relating to specific borrowing relationships, as well as probable losses inherent in the loan portfolio and credit undertakings that are not specifically identified. Additions to the allowance for loan losses, which are charged to earnings through the provision for loan losses, are determined based on a variety of factors, including an analysis of the loan portfolio, historical loss experience and an evaluation of current economic conditions in the Company’s market areas. The actual amount of loan losses is affected by changes in economic, operating and other conditions within the Company’s markets, as well as changes in the financial condition, cash flows, and operations of the Company’s borrowers, all of which are beyond the Company’s control, and such losses may exceed current estimates.
As of December 31, 2014, the Company’s allowance for loan losses as a percentage of total loans was 0.58% and as a percentage of total nonperforming loans was 183.43%. Additional loan losses will likely occur in the future and may occur at a rate greater than the Company has previously experienced. The Company may be required to take additional provisions for loan losses in the future to further supplement the allowance for loan losses, either due to management’s decision to do so or requirements by the Company’s banking regulators. In addition, bank regulatory agencies will periodically review the Company’s allowance for loan losses and the value attributed to nonaccrual loans or to real estate acquired through foreclosure. Such regulatory agencies may require the Company to recognize future charge-offs. These adjustments may adversely affect the Company’s business, financial condition and results of operations.
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A lack of liquidity could adversely affect the Company’s operations and jeopardize the Company’s business, financial condition and results of operations.
Liquidity is essential to the Company’s business. The Company relies on its ability to generate deposits and effectively manage the repayment and maturity schedules of the Company’s loans and investment securities, respectively, to ensure that the Company has adequate liquidity to fund the Company’s operations. An inability to raise funds through deposits, borrowings, the sale of the Company’s investment securities, Federal Home Loan Bank advances, the sale of loans, and other sources could have a substantial negative effect on the Company’s liquidity. The Company’s most important source of funds consists of deposits. Deposit balances can decrease when customers perceive alternative investments as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments, the Company would lose a relatively low-cost source of funds, increasing the Company’s funding costs and reducing the Company’s net interest income and net income.
Other primary sources of funds consist of cash flows from operations, investment maturities and sales of investment securities, and proceeds from the issuance and sale of the Company’s equity and debt securities to investors. Additional liquidity is provided by the ability to borrow from the Federal Reserve Bank and the Federal Home Loan Bank. The Company also may borrow funds from third-party lenders, such as other financial institutions. The Company’s access to funding sources in amounts adequate to finance or capitalize the Company’s activities, or on terms that are acceptable to the Company, could be impaired by factors that affect the Company directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.
Any decline in available funding could adversely impact the Company’s ability to originate loans, invest in securities, meet the Company’s expenses, pay dividends to the Company’s shareholders, or to fulfill obligations such as repaying the Company’s borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on the Company’s liquidity, business, financial condition and results of operations.
The Company may need to raise additional capital in the future, and if the Company fails to maintain sufficient capital, whether due to losses, an inability to raise additional capital, growth or otherwise, the Company’s financial condition, liquidity and results of operations, as well as the Company’s ability to maintain regulatory compliance, would be adversely affected.
The Company faces significant capital and other regulatory requirements as a financial institution. The Company may need to raise additional capital in the future to provide the Company with sufficient capital resources and liquidity to meet the Company’s commitments and business needs, which could include the possibility of financing acquisitions. In addition, the Company, on a consolidated basis, and Independent Bank, on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity. The Company faces significant capital and other regulatory requirements as a financial institution. The Company’s ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and on the Company’s financial condition and performance. In the future, the Company may not be able to raise additional capital if needed or on terms acceptable to the Company. If the Company fails to maintain capital to meet regulatory requirements, the Company’s financial condition, liquidity and results of operations would be materially and adversely affected.
Interest rate shifts may reduce net interest income and otherwise negatively impact the Company’s financial condition and results of operations.
The majority of the Company’s banking assets are monetary in nature and subject to risk from changes in interest rates. Like most financial institutions, the Company’s earnings are significantly dependent on the Company’s net interest income, the principal component of the Company’s earnings, which is the difference between interest earned by the Company from the Company’s interest-earning assets, such as loans and investment securities, and interest paid by the Company on the Company’s interest-bearing liabilities, such as deposits and borrowings. The Company expects that it will periodically experience “gaps” in the interest rate sensitivities of the Company’s assets and liabilities, meaning that either its interest-bearing liabilities will be more sensitive to changes in market interest rates than the Company’s interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to the Company’s position, this “gap” will negatively impact the Company’s earnings. The impact on earnings is more adverse when the slope of the yield curve flattens, that is, when short-term interest rates increase more than long-term interest rates or when long-term interest rates decrease more than short-term interest rates. Many factors impact interest rates, including governmental monetary policies, inflation, recession, changes in unemployment, the money supply, and international disorder and instability in domestic and foreign financial markets.
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Interest rate increases often result in larger payment requirements for the Company’s borrowers, which increase the potential for default. At the same time, the marketability of the property securing a loan may be adversely affected by any reduced demand resulting from higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on loans as borrowers refinance their loans at lower rates.
Changes in interest rates also can affect the value of loans, securities and other assets. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material adverse effect on the Company’s results of operations and cash flows. Further, when the Company places a loan on nonaccrual status, the Company reverses any accrued but unpaid interest receivable, which decreases interest income. At the same time, the Company continues to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of nonperforming assets would have an adverse impact on net interest income.
If short-term interest rates remain at their historically low levels for a prolonged period, and assuming longer term interest rates fall further, the Company could experience net interest margin compression as the Company’s interest earning assets would continue to reprice downward while the Company’s interest-bearing liability rates could fail to decline in tandem. Such an occurrence would have a material adverse effect on the Company’s net interest income and the Company’s results of operations.
The Company’s accounting estimates and risk management processes rely on analytical and forecasting models.
The processes the Company uses to estimate its probable credit losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on the Company’s financial condition and results of operations, depend upon the use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are accurate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation.
If the models the Company uses for interest rate risk and asset-liability management are inadequate, the Company may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models the Company uses for determining its probable credit losses are inadequate, the allowance for credit losses may not be sufficient to support future charge-offs. If the models the Company uses to measure the fair value of financial instruments is inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what the Company could realize upon sale or settlement of such financial instruments. Any such failure in the Company’s analytical or forecasting models could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company could recognize losses on securities held in the Company’s securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.
While the Company attempts to invest a significant percentage of its assets in loans (the Company’s loan to deposit ratio was 98.6% as of December 31, 2014), the Company invests a percentage of its total assets (approximately 5.0% as of December 31, 2014) in investment securities as part of its overall liquidity strategy. As of December 31, 2014, the fair value of the Company’s securities portfolio was approximately $206.1 million.
Factors beyond the Company’s control can significantly influence the fair value of securities in its portfolio and can cause potential adverse changes to the fair value of these securities. For example, fixed-rate securities are generally subject to decreases in market value when market interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or individual borrowers with respect to the underlying securities, and continued instability in the credit markets. Any of the foregoing factors could cause an other-than-temporary impairment in future periods and result in realized losses. The process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting market interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, the Company may recognize realized and/or unrealized losses in future periods, which could have an adverse effect on the Company’s financial condition and results of operations.
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The Company faces strong competition from financial services companies and other companies that offer banking services, which could harm the Company’s business.
The Company conducts its operations almost exclusively in Texas. Many of the Company’s competitors offer the same, or a wider variety of, banking services within the Company’s market areas. These competitors include banks with nationwide operations, regional banks and other community banks. The Company also faces competition from many other types of financial institutions, including savings and loan institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In addition, a number of out-of-state financial intermediaries have opened production offices, or otherwise solicit deposits, in the Company’s market areas. Increased competition in the Company’s markets may result in reduced loans and deposits, as well as reduced net interest margin and profitability. Ultimately, the Company may not be able to compete successfully against current and future competitors. If the Company is unable to attract and retain banking customers, the Company may be unable to continue to grow its loan and deposit portfolios, and the Company’s business, financial condition and results of operations may be adversely affected.
The Company has a continuing need for technological change, and the Company may not have the resources to effectively implement new technology, or the Company may experience operational challenges when implementing new technology.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. The Company’s future success will depend in part upon the Company’s ability to address the needs of the Company’s customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in the Company’s operations as it continues to grow and expand the Company’s market area. The Company may experience operational challenges as it implements these new technology enhancements or products, which could result in the Company not fully realizing the anticipated benefits from such new technology or require the Company to incur significant costs to remedy any such challenges in a timely manner.
Many of the Company’s larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that the Company will be able to provide, which would put the Company at a competitive disadvantage. Accordingly, the Company may not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to its customers.
System failure or cybersecurity breaches of the Company’s network security could subject the Company to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure the Company uses could be vulnerable to unforeseen problems. The Company’s operations are dependent upon its ability to protect its computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from cybersecurity breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes breakdowns or disruptions in the Company’s customer relationship management, general ledger, deposit, loan and other systems could damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company. Computer break-ins, phishing and other cybersecurity disruptions could also jeopardize the security of information stored in and transmitted through the Company’s computer systems and network infrastructure, which may result in significant liability to the Company and may cause existing and potential customers to refrain from doing business with the Company. In addition, advances in computer capabilities could result in a compromise or breach of the systems the Company and the Company’s third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on the Company’s financial condition and results of operations.
The Company may be materially and adversely affected by the creditworthiness and liquidity of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. The Company has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional customers. Many of these transactions expose the Company to credit risk in the event of a default by a counterparty or customer. In addition, the Company’s credit risk may be exacerbated when the collateral held by the Company cannot be
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realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the Company. Any such losses could have a material adverse effect on the Company.
The Company’s operations could be interrupted if the Company’s third-party service providers experience difficulty, terminate their services or fail to comply with banking regulations.
The Company depends on a number of relationships with third-party service providers. Specifically, the Company receives core systems processing, essential web hosting and other Internet systems, deposit processing and other processing services from third-party service providers. If these third-party service providers experience difficulties, or terminate their services, and the Company is unable to replace them with other service providers, particularly on a timely basis, the Company’s operations could be interrupted. If an interruption were to continue for a significant period of time, the Company’s business, financial condition and results of operations could be adversely affected, perhaps materially. Even if the Company is able to replace third party service providers, it may be at a higher cost to the Company, which could adversely affect the Company’s business, financial condition and results of operations.
The Company is subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.
Employee errors and employee and customer misconduct could subject the Company to financial losses or regulatory sanctions and seriously harm the Company’s reputation. Misconduct by the Company’s employees could include hiding unauthorized activities from the Company, improper or unauthorized activities on behalf of the Company’s customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions the Company takes to prevent and detect this activity may not be effective in all cases. Employee errors could also subject the Company to financial claims for negligence.
The Company maintains a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. If the Company’s internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on the Company’s business, financial condition and results of operations.
In addition, the Company relies heavily upon information supplied by third parties, including the information contained in credit applications, property appraisals, title information, equipment pricing and valuation and employment and income documentation, in deciding which loans the Company will originate, as well as the terms of those loans. If any of the information upon which the Company relies is misrepresented, either fraudulently or inadvertently, and the misrepresentation is not detected prior to asset funding, the value of the asset may be significantly lower than expected, or the Company may fund a loan that the Company would not have funded or on terms the Company would not have extended. Whether a misrepresentation is made by the applicant or another third party, the Company generally bears the risk of loss associated with the misrepresentation. A loan subject to a material misrepresentation is typically unsellable or subject to repurchase if it is sold prior to detection of the misrepresentation. The sources of the misrepresentations are often difficult to locate, and it is often difficult to recover any of the monetary losses that the Company may suffer.
New lines of business or new products and services may subject the Company to additional risks.
From time to time, the Company may implement or may acquire new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, the Company may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of the Company’s system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company is subject to claims and litigation pertaining to intellectual property from time to time.
Banking and other financial services companies, such as the Company, rely on technology companies to provide information technology products and services necessary to support the Company’s day-to-day operations. Technology companies frequently
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enter into litigation based on allegations of patent infringement or other violations of intellectual property rights. In addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained. Competitors of the Company’s vendors, or other individuals or companies, have from time to time claimed to hold intellectual property sold to the Company by its vendors. Such claims may increase in the future as the financial services sector becomes more reliant on information technology vendors. The plaintiffs in these actions frequently seek injunctions and substantial damages.
Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or actual litigants, the Company may have to engage in protracted litigation. Such litigation is often expensive, time-consuming, disruptive to the Company’s operations and distracting to management. If the Company is found to infringe one or more patents or other intellectual property rights, it may be required to pay substantial damages or royalties to a third-party. In certain cases, the Company may consider entering into licensing agreements for disputed intellectual property, although no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur. These licenses may also significantly increase the Company’s operating expenses. If legal matters related to intellectual property claims were resolved against the Company or settled, the Company could be required to make payments in amounts that could have a material adverse effect on its business, financial condition and results of operations.
The Company could experience claims and litigation pertaining to fiduciary responsibility.
From time to time, customers make claims and take legal action pertaining to the Company’s performance of its fiduciary responsibilities. Whether customer claims and legal action related to the Company’s performance of its fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to the Company, they may result in significant financial liability, adversely affect the market perception of the Company and its products and services and/or impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company could be subject to environmental risks and associated costs on the Company’s foreclosed real estate assets, which could materially and adversely affect the Company.
A significant portion of the Company’s loan portfolio is secured by real property. During the ordinary course of business, the Company may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Company to incur substantial expenses and may materially reduce the affected property’s value or limit the Company’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Company’s exposure to environmental liability. Although the Company has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Company’s financial condition and results of operations.
The Company’s Chairman and Chief Executive Officer, the Company’s largest shareholder, and certain other officers and directors of the Company, are business partners in business ventures in addition to the Company, which creates potential conflicts of interest and corporate governance issues.
Messrs. David Brooks, Viola, Cifu, Berntsen and Daniel Brooks are partners in Himalayan Ventures, LP, a real estate investment partnership. A dispute between these individuals in connection with this business venture outside of the Company could impact their relationship at the Company and, because of their prominence within the Company, the Company itself.
Risks Related to an Investment in the Company’s Common Stock
The Company’s stock can be volatile.
Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. The Company’s stock price can fluctuate significantly in response to a variety of factors including, among other things:
• | actual or anticipated variations in quarterly results of operations; |
• | recommendations by securities analysts; |
• | operating and stock price performance of other companies that investors deem comparable to the Company; |
• | new reports relating to trends, concerns and other issues in the financial services industry; |
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• | perceptions in the marketplace regarding the Company and/or its competitors; |
• | new technology used, or services offered, by competitors; |
• | significant acquisitions or business combinations involving the Company or its competitors; |
• | the public float and trading volumes for the Company’s common stock; and |
• | changes in government regulations, including tax laws. |
The Company is dependent upon Independent Bank for cash flow, and Independent Bank’s ability to make cash distributions is restricted.
The Company’s primary tangible asset is Independent Bank. As such, the Company depends upon Independent Bank for cash distributions (through dividends on Independent Bank’s stock) that the Company uses to pay the Company’s operating expenses, satisfy the Company’s obligations (including the Company’s senior indebtedness, subordinated debentures, and junior subordinated indebtedness issued in connection with trust preferred securities), and to pay dividends on the Company’s common stock and preferred stock. There are numerous laws and banking regulations that limit Independent Bank’s ability to pay dividends to the Company. If Independent Bank is unable to pay dividends to the Company, the Company will not be able to satisfy the Company’s obligations or pay dividends on the Company’s common stock and preferred stock. Federal and state statutes and regulations restrict Independent Bank’s ability to make cash distributions to the Company. These statutes and regulations require, among other things, that Independent Bank maintain certain levels of capital in order to pay a dividend. Further, state and federal banking authorities have the ability to restrict the payment of dividends by supervisory action.
The Company’s dividend policy may change without notice, and the Company’s future ability to pay dividends is subject to restrictions.
The Company may change its dividend policy at any time without notice to the Company’s shareholders. Holders of the Company’s common stock are entitled to receive only such dividends as the Company’s board of directors may declare out of funds legally available for such payments. Any declaration and payment of dividends on preferred stock and common stock will depend upon the Company’s earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, the Company’s ability to service any equity or debt obligations senior to the preferred stock and, ultimately, the common stock and other factors deemed relevant by its board of directors. Furthermore, consistent with the Company’s strategic plans, growth initiatives, capital availability, projected liquidity needs, and other factors, the Company has made, and will continue to make, capital management decisions and policies that could adversely impact the amount of dividends, if any, paid to the Company’s common shareholders.
The Federal Reserve has indicated that bank holding companies should carefully review their dividend policy in relation to the organization’s overall asset quality, level of current and prospective earnings and level, composition and quality of capital. The guidance provides that the Company inform and consult with the Federal Reserve prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in an adverse change to the Company’s capital structure, including interest on senior debt, subordinated debt and the subordinated debentures underlying the Company’s trust preferred securities. If required payments on the Company’s outstanding senior debt, subordinated debt and junior subordinated debentures, held by its unconsolidated subsidiary trusts, are not made or are suspended, the Company would be prohibited from paying dividends on its common stock.
The Company has adopted a Stock Repurchase Program which, upon implementation, could have an impact upon the Company’s capital adequacy and its tangible book value.
On January 23, 2015, the Company announced the establishment of a stock repurchase program providing for the repurchase of up to $30 million of its common stock. The amount and timing of any share repurchases will depend upon a variety of factors, including the trading price of the Company’s common stock, liquidity, securities laws restrictions, other regulatory restrictions, potential alternative uses of capital, and market and economic conditions. As of February 26, 2015, the Company had not made any repurchases under the program. If the Company repurchases shares, any such repurchase will reduce the stockholder’s equity of the Company and, depending upon the circumstances, could have a negative effect upon the Company’s overall capital adequacy. Further, such repurchases could result in a reduction in the tangible book value per share of the Company’s common stock depending upon the price paid for the repurchased shares.
The Company’s largest shareholder and board of directors have historically controlled, and in the future will continue to be able to control, the Company.
Collectively, as of January 31, 2015, Messrs. Vincent Viola and David Brooks owned 33.7% of the Company’s outstanding common stock on a fully diluted basis. Vincent Viola, the largest shareholder of the Company, currently owns 27.4% of the
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Company’s outstanding common stock, and David Brooks, the Company’s Chairman of the Board and Chief Executive Officer, currently owns 6.3% of the Company’s common stock, each calculated on a fully diluted basis. Further, as of the date hereof, the Company’s other directors and executive officers currently own collectively approximately 11.3% of the Company’s outstanding common stock. As a result, these individuals exert controlling influence in the Company’s management and policies. Further, given the large ownership position of these individuals, it will be difficult for any other shareholder to elect members to the Company’s board of directors or otherwise influence the Company’s management or direction.
In addition, three of the Company’s directors have close professional and personal ties to Vincent Viola, the Company’s largest shareholder. Doug Cifu is the Chief Executive Officer of Virtu Financial, LLC, Mr. Viola’s primary operating entity; Torry Berntsen, the Company’s President and Chief Operating Officer, was formerly Vice Chairman of Virtu Management, LLC, Mr. Viola’s family investment vehicle; and Michael Viola is the son of Vincent Viola. Further, David Brooks, the Company’s Chairman and Chief Executive Officer, has over a 25 year history of ownership and operation of Independent Bank with Vincent Viola; and he has joint investments with Mr. Viola outside of the Company. Given these close relationships, even though he will not serve on the Company’s board, Mr. Viola has and will continue to have a large influence over the direction and operation of the Company.
The Company’s corporate organizational documents and the provisions of Texas law to which the Company is subject contain certain provisions that could have an anti-takeover effect and may delay, make more difficult or prevent an attempted acquisition of the Company that you may favor.
The Company’s certificate of formation and bylaws contain various provisions that could have an anti-takeover effect and may delay, discourage or prevent an attempted acquisition or change in control of the Company. These provisions include the following:
• | staggered terms for directors; |
• | a provision that directors cannot be removed except for cause; |
• | a provision that any special meeting of the Company’s shareholders may be called only by a majority of the Company’s board of directors, the Chairman or a holder or group of holders of at least 20% of the Company’s shares entitled to vote at such special meeting; |
• | a provision that requires the vote of two-thirds of the shares outstanding for major corporate actions, such as an amendment to the Company’s certificate of formation or bylaws or the approval of a merger; and |
• | a provision establishing certain advance notice procedures for nomination of candidates for election as directors and for shareholder proposals to be considered only at an annual or special meeting of shareholders. |
The Company’s certificate of formation provides for noncumulative voting for directors and authorizes the board of directors to issue shares of its preferred stock without shareholder approval and upon such terms as the board of directors may determine. The issuance of the Company’s preferred stock, while providing desirable flexibility in connection with possible acquisitions, financings and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a controlling interest in the Company. In addition, certain provisions of Texas law, including a provision which restricts certain business combinations between a Texas corporation and certain affiliated shareholders, may delay, discourage or prevent an attempted acquisition or change in control of the Company. Also, the Company’s certificate of formation prohibits shareholder action by written consent.
The holders of the Company’s debt obligations and any shares of the Company’s preferred stock currently outstanding or that may be outstanding in the future will have priority over the Company’s common stock with respect to payment in the event of liquidation, dissolution or winding up and with respect to the payment of interest and preferred dividends.
In the event of any winding up and termination of the Company, the Company common stock would rank below all claims of the holders of the Company’s debt and preferred stock. The Company has a senior, revolving credit facility under which the Company may borrow up to $35 million. As of December 31, 2014, the Company currently had not drawn upon this credit facility. Further, as of December 31, 2014, the Company had outstanding
• | $72.7 million of aggregate principal amount of subordinated indebtedness; |
• | $18.1 million of subordinated debentures issued in connection with trust preferred securities; and |
• | $23.9 million of its Series A preferred stock. |
Upon the winding up and termination of the Company, holders of the Company’s common stock will not be entitled to receive any payment or other distribution of assets until after all of the Company’s obligations to the Company’s debt holders have
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been satisfied and holders of the Company’s senior debt, subordinated debt, and junior subordinated debentures issued in connection with trust preferred securities have received any payments and other distributions due to them. In addition, the Company is required to pay interest on the Company’s senior debt, subordinated debt and subordinated debentures and junior subordinated debentures issued in connection with the Company’s trust preferred securities before the Company pays any dividends on the Company’s common stock. Furthermore, in addition to the Company’s outstanding preferred stock, the Company’s board of directors may also, in its sole discretion, designate and issue one or more series of preferred stock from the Company’s authorized and unissued preferred stock, which may have preferences with respect to common stock in dissolution, dividends, liquidation or otherwise.
Prior to April 1, 2013, the Company was treated as an S corporation under Sections 1361 through 1379 of the Internal Revenue Code of 1986, as amended, and claims of taxing authorities related to the Company’s prior status as an S corporation could harm the Company.
On April 1, 2013, the Company’s prior status as an S corporation status terminated and the Company is now treated as a C corporation under the Internal Revenue Code of 1986, as amended, which is applicable to most corporations. As a result, the Internal Revenue Service treats the Company as an entity that is separate and distinct from its shareholders. If the unaudited, open tax years in which the Company was an S corporation are audited by the Internal Revenue Service and the Company is determined not to have qualified for, or to have violated, the Company’s S corporation status, the Company would then be obligated to pay back taxes, interest and penalties, and the Company would not have the right to reclaim tax distributions that the Company previously made to the Company’s shareholders during those periods. These amounts could include taxes on all of the Company’s taxable income while the Company was an S corporation. Any such claims could result in additional costs to the Company and could have a material adverse effect on the Company’s results of operations and financial condition.
The Company has entered into tax indemnification agreements with the persons holding shares of the Company’s common stock immediately prior to the consummation of the Company’s initial public offering, including Messrs. Vincent Viola and David Brooks, and the Company could become obligated to make payments to them for any additional federal, state or local income taxes assessed against them for fiscal periods prior to the completion of the Company’s initial public offering.
Prior to April 1, 2013, the Company had been treated as an S corporation for U.S. federal income tax purposes. In connection with the Company’s initial public offering, the Company’s S corporation status terminated and the Company is now subject to federal and increased state income taxes. In the event of an adjustment to the Company’s reported taxable income for a period or periods prior to termination of the Company’s S corporation status, the Company’s existing shareholders could be liable for additional income taxes for those prior periods. Therefore, the Company has entered into tax indemnification agreements with the persons holding shares of the Company’s common stock immediately prior to the consummation of the Company’s initial public offering. Pursuant to those agreements, the Company has agreed that upon filing any tax return (amended or otherwise), or in the event of any restatement of the Company’s taxable income, in each case for any period during which the Company was an S corporation, the Company will make a payment to each shareholder on a pro rata basis in an amount sufficient so that the shareholder with the highest incremental estimated tax liability (calculated as if the shareholder would be taxable on its allocable share of the Company’s taxable income at the highest applicable federal, state and local tax rates and taking into account all amounts the Company previously distributed in respect of taxes for the relevant period) receives a payment equal to that shareholder’s incremental tax liability. The Company has also agreed to indemnify the shareholders for any interest, penalties, losses, costs or expenses (including reasonable attorneys’ fees) arising out of any claim under the agreements.
The Company is an emerging growth company, and the Company cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make the Company’s common stock less attractive to investors.
The Company is an “emerging growth company,” as defined in the JOBS Act, and the Company is taking advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, reduced disclosure obligations regarding executive compensation in the Company’s periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if the Company complies with the greater obligations of public companies that are not emerging growth companies, the Company may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company qualifies as an emerging growth company. The Company will remain an emerging growth company for up to five years, though the Company may cease to be an emerging growth company earlier under certain circumstances, including if, before the end of such five years, the Company is deemed to be a large accelerated filer under the rules of the SEC (which depends on, among other things, having a market value of common stock held by nonaffiliates in
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excess of $700 million). Investors and securities analysts may find it more difficult to evaluate the Company’s common stock because the Company will rely on one or more of these exemptions, and, as a result, investor confidence and the market price of the Company’s common stock may be materially and adversely affected.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to nonemerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make the Company’s financial statements not comparable with those of another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period because of the potential differences in accounting standards used.
An investment in the Company’s common stock is not an insured deposit and is not guaranteed by the FDIC, so you could lose some or all of your investment.
An investment in the Company’s common stock is not a bank deposit and, therefore, is not insured against loss or guaranteed by the FDIC, any other deposit insurance fund or by any other public or private entity. An investment in the Company’s common stock is inherently risky for the reasons described in this report and shareholders who acquire the Company’s common stock could lose some or all of their investment.
Risks Related to the Business Environment and the Company’s Industry
The Company operates in a highly regulated environment and, as a result, is subject to extensive regulation and supervision.
The Company and the Bank are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not the Company’s shareholders. These regulations affect the Company’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Any change in applicable regulations or federal or state legislation could have a substantial impact on the Company, the Bank and their respective operations.
The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes in light of the recent performance of and government intervention in the financial services sector. Additional legislation and regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could significantly affect the Company’s powers, authority and operations, or the powers, authority and operations of the Bank in substantial and unpredictable ways. Further, regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties. The exercise of this regulatory discretion and power could have a negative impact on the Company. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the Company’s business, financial condition and results of operations.
Monetary policies and regulations of the Federal Reserve could adversely affect the Company’s business, financial condition and results of operations.
In addition to being affected by general economic conditions, the Company’s earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market operations in U.S. government securities, adjustments of the discount rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
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The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The Company cannot predict the effects of such policies upon the Company’s business, financial condition and results of operations.
The Federal Reserve may require the Company to commit capital resources to support Independent Bank.
The Federal Reserve, which examines the Company and Independent Bank, requires a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. In addition, the Dodd-Frank Act directs the federal bank regulators to require that all companies that directly or indirectly control an insured depository institution serve as a source of strength for the institution. Under these requirements, in the future, the Company could be required to provide financial assistance to Independent Bank if it experiences financial distress.
A capital injection may be required at times when the Company does not have the resources to provide it, and therefore the Company may be required to borrow the funds. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the holding company’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the holding company in order to make the required capital injection becomes more difficult and expensive and will adversely impact the holding company’s cash flows, financial condition, results of operations and prospects.
Federal banking agencies periodically conduct examinations of the Company’s business, including compliance with laws and regulations, and the Company’s failure to comply with any supervisory actions to which the Company becomes subject as a result of such examinations could materially and adversely affect the Company.
Texas and federal banking agencies periodically conduct examinations of the Company’s business, including compliance with laws and regulations. If, as a result of an examination, a Texas or federal banking agency were to determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Company’s operations had become unsatisfactory, or that the Company or its management was in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in the Company’s capital, to restrict the Company’s growth, to assess civil monetary penalties against Independent Bank, the Company’s officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate the Company’s deposit insurance. If the Company becomes subject to such regulatory actions, the Company could be materially and adversely affected.
The Company may be required to pay significantly higher FDIC deposit insurance assessments in the future, which could materially and adversely affect the Company.
Insured depository institution failures have significantly increased the loss provisions of the FDIC, resulting in a decline in the designated reserve ratio of the FDIC in recent years. These developments have caused the FDIC premiums to increase assessments and may result in increased assessments in the future.
On February 7, 2011, the FDIC approved a final rule that amended the Deposit Insurance Fund restoration plan and implemented certain provisions of the Dodd-Frank Act. Effective April 1, 2011, the assessment base is determined using average consolidated total assets minus average tangible equity rather than the previous assessment base of adjusted domestic deposits. The final rule also provides the FDIC’s board with the flexibility to adopt actual rates that are higher or lower than the total base assessment rates adopted on February 7, 2011 without notice and comment, if certain conditions are met. An increase in the assessment rates could materially and adversely affect the Company.
The Company faces a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or Patriot Act, and other laws and regulations require financial institutions, among other
26
duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the Treasury to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. There is also increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. If the Company’s policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that the Company has already acquired or may acquire in the future are deficient, the Company would be subject to liability, including fines and regulatory actions such as restrictions on the Company’s ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of the Company’s business plan (including the Company’s acquisition plans), which would negatively impact the Company’s business, financial condition and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for the Company.
There are substantial regulatory limitations on changes of control of bank holding companies.
With certain limited exceptions, federal regulations prohibit a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of the Company’s voting stock or obtaining the ability to control in any manner the election of a majority of the Company’s directors or otherwise direct the management or policies of the Company without prior notice or application to and the approval of the Federal Reserve. Accordingly, prospective investors need to be aware of and comply with these requirements, if applicable, in connection with any such purchase of shares of the Company’s common stock. These provisions effectively inhibit certain mergers or other business combinations, which, in turn, could adversely affect the market price of the Company’s common stock.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company owns its corporate headquarters, which is a 62,000 square foot, four story office building located at 1600 Redbud Blvd., Suite 400, McKinney, Texas 75069, and serves as Independent Bank’s home office. The Company’s building is the most prominent office building in McKinney, providing significant visibility and enhancing the Company’s brand in Collin County. The Company’s remodeling of its headquarters building won U.S. Green Building Council’s “2010 LEED Silver Certification.”
The Company also owns or leases other facilities in which its banking centers are located. The expiration dates of the leases range from 2016 to 2025 and a portion of the leases include renewal periods that may be available at the Company’s option. The following table sets forth specific information regarding the banking centers located in each of the Company’s geographical market areas at December 31, 2014:
County | Number of Banking Centers | Number of Leased Banking Centers | Deposits at December 31, 2014 (in millions) |
Brazoria | 1 | — | $51.0 |
Collin | 10 | 1 | 992.4 |
Dallas | 3 | 1 | 163.4 |
Denton | 3 | 0 | 185.7 |
Fort Bend | 1 | 1 | 34.0 |
Grayson | 6 | 0 | 322.0 |
Harris | 8 | 4 | 1,022.0 |
Travis | 3 | 0 | 175.8 |
Williamson | 2 | 0 | 128.0 |
McLennan | 2 | 2 | 175.3 |
The Company believes that the leases to which the Company is subject are generally on terms consistent with prevailing market terms. With the exception of the Company’s Woodway Branch in Waco (see “Certain Relationships and Related Transactions and Director Independence” incorporated by reference into Part III, Item 13), none of the leases are with the Company’s directors, officers, beneficial owners of more than 5% of the Company’s voting securities or any affiliates of the foregoing. The Company believes that the Company’s facilities are in good condition and are adequate to meet the Company’s operating needs for the foreseeable future.
Item 3. LEGAL PROCEEDINGS
In the normal course of business, the Company or any subsidiary is named or threatened to be named as a defendant in various lawsuits. Management, following consultation with legal counsel, does not expect the ultimate disposition of any or a combination of these matters to have a material adverse effect on the Company’s business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock Market Prices
From April 3, 2013 through December 31, 2013, the Company common stock was listed for trading on the NASDAQ Global Market under the symbol “IBTX.” On January 2, 2014, the Company common stock started trading on the NASDAQ Global Select Market. Quotations of the sales volume and the closing sales prices of the common stock of the Company are listed daily in the NASDAQ Global Select Market’s listings. As of February 26, 2015, there were 378 holders of record for the Company's common stock.
The following table sets forth, for the periods indicated, the high and low intraday sales prices for the Company common stock as reported by the NASDAQ Global Market:
High | Low | |||||
Quarter ending March 31, 2015 (through February 26, 2015) | $ | 39.45 | $ | 29.73 | ||
Quarter ended March 31, 2014 | $ | 59.96 | $ | 48.54 | ||
Quarter ended June 30, 2014 | 61.49 | 44.86 | ||||
Quarter ended September 30, 2014 | 56.2 | 46.01 | ||||
Quarter ended December 31, 2014 | 48.78 | 38.13 | ||||
Quarter ended June 30, 2013 (beginning April 3, 2013) | $ | 31.66 | $ | 26.00 | ||
Quarter ended September 30, 2013 | 37.69 | 29.20 | ||||
Quarter ended December 31, 2013 | 50.58 | 35.67 | ||||
Prior to April 3, 2013, there was no established public trading market for the Company common stock, and the Company was not aware of any trades or transactions in its common stock that occurred in the period from January 1, 2013, through April 1, 2013.
Dividends
Payment of Dividends on Common Stock. The following table summarizes the cash dividends paid on the Company's common stock for the interim period through February 26, 2015 and for the quarterly periods in the years ended December 31, 2014 and 2013.
Cash Dividends Declared per Share | |||
For the Quarter Ending March 31, 2015 (through February 26, 2015) | $ | 0.08 | |
Quarter ended December 31, 2014 | 0.06 | ||
Quarter ended September 30, 2014 | 0.06 | ||
Quarter ended June 30, 2014 | 0.06 | ||
Quarter ended March 31, 2014 | 0.06 | ||
For the Quarter Ended December 31, 2013 | 0.06 | ||
For the Quarter Ended September 30, 2013 | 0.06 | ||
For the Quarter Ended June 30, 2013 | — | ||
For the Quarter Ended March 31, 2013 1 | 0.65 | ||
1 Although the Company was not subject to corporate federal income tax prior to April 1, 2013, the Company made periodic cash distributions to its shareholders in amounts estimated to be necessary for them to pay their estimated U.S. federal income tax liabilities related to the items of the Company's income, gain, deductions and losses allocated to each of the Company's shareholders. The aggregate amount of such cash distributions equaled approximately 35% of the Company's taxable net income for the related period.
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The Company currently expects to continue to pay (when, as and if declared by the Company’s board of directors out of funds legally available for that purpose and subject to regulatory restrictions) regular quarterly cash dividends on its common stock; however, there can be no assurance that the Company will continue to pay dividends in the future. Future dividends on the Company common stock will depend upon its earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, its ability to service any equity or debt obligations senior to the common stock (including the Company’s senior debt and preferred stock discussed below) and other factors deemed relevant by the board of directors of the Company.
As a holding company, the Company is ultimately dependent upon its subsidiaries particularly Independent Bank, to provide funding for its operating expenses, debt service and dividends. Various banking laws applicable to Independent Bank limit the payment of dividends and other distributions by Independent Bank to the Company, and may therefore limit the Company’s ability to pay dividends on its common stock and Series A preferred stock. Regulatory authorities could impose administratively stricter limitations on the ability of Independent Bank to pay dividends to the Company if such limits were deemed appropriate to preserve certain capital adequacy requirements.
Under the credit agreement between the Company and U.S. Bank National Association, or U.S. Bank, the Company 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, the Company may pay dividends and distributions to its shareholders as permitted by applicable governmental laws and regulations, including dividends with respect to the Company’s common stock and Series A preferred stock.
Under the terms of the Company’s junior subordinated debentures held by the Company’s unconsolidated subsidiary trusts, if required payments on such junior subordinated debentures are not made or suspended, the Company would be prohibited from paying dividends on its common stock and Series A preferred stock.
So long as any share of Series A preferred stock remains outstanding, the Company may declare and pay dividends on its common stock only if after giving effect to such dividend, the Company satisfies certain formula requirements under the Series A preferred stock and full dividends on all outstanding shares of Series A preferred stock for the most recently completed dividend period have been or are contemporaneously declared and paid. If a dividend is not declared and paid in full on the Series A preferred stock in respect of any dividend period, then from the last day of such dividend period until the last day of the third dividend period immediately following it, no dividend or distribution shall be declared or paid on the common stock (other than dividends payable solely in shares of common stock).
Payment of Dividends on Series A Preferred Stock. Holders of the Company’s Series A preferred stock, which ranks senior to the Company’s common stock, are entitled to receive at the end of each quarterly dividend period an amount equal to one quarter of the applicable dividend rate (which rate is approximately 1% at December 31, 2014) multiplied by the liquidation amount per each share of Series A preferred stock, which liquidation amount is currently equal to $1,000 per share, or approximately $60,000 per quarter.
Recent Sales of Unregistered Securities
None.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of December 31, 2014, regarding the Company’s equity compensation plans under which the Company’s equity securities are authorized for issuance:
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | ||
Equity compensation plans approved by security holders | — | N/A | 461,785 | ||
Equity compensation plans not approved by security holders | — | N/A | — | ||
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Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Performance Graph
The following Performance Graph compares the cumulative total shareholder return on the Company’s common stock for the period beginning at the close of trading on April 3, 2013 (the end of the first day of trading of the Company’s common stock on the NASDAQ Global Market) to December 31, 2014, with the cumulative total return of the S&P 500 Total Return Index and NASDAQ Bank Index for the same period. Dividend reinvestment has been assumed. The Performance Graph assumes $100 invested on April 3, 2013, in the Company’s common stock, the S&P 500 Total Return Index and NASDAQ Bank Index. The historical stock price performance for the Company’s common stock shown on the graph below is not necessarily indicative of future stock performance.
Comparison of Cumulative Total Return*
Among Independent Bank Group, Inc., the S&P 500 Index and the NASDAQ Bank Index
* | $100 invested on April 3, 2013, in stock or index, including investment of dividends. Fiscal year ended December 31. |
April 3, 2013 | June 30, 2013 | September 30, 2013 | December 31, 2013 | March 31, 2014 | June 30, 2014 | September 30, 2014 | December 31, 2014 | |||||||||||||||||
Independent Bank Group, Inc. | $ | 100 | $ | 103.54 | $ | 122.83 | $ | 169.65 | $ | 200.93 | $ | 190.64 | $ | 162.68 | $ | 134.1 | ||||||||
S&P 500 | 100 | 103.91 | 109.36 | 120.86 | 123.04 | 129.48 | 130.94 | 137.4 | ||||||||||||||||
NASDAQ Bank | 100 | 109.28 | 114.90 | 128.58 | 131.85 | 128.76 | 122.63 | 132.23 | ||||||||||||||||
(Copyright © 2015 Standard & Poor’s Capital IQ, a division of The McGraw-Hill Companies, Inc. All rights reserved.) (www.spcapitaliq.com)
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company for, and as of, the end of each of the years in the five-year period ended December 31, 2014, is derived from and should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing elsewhere in this Annual Report on Form 10-K.
You should read the following financial information relating to the Company in conjunction with other information contained in this Annual Report on Form 10-K, including the information set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II, Item 7, beginning on page 35 and the consolidated financial statements of the Company and related accompanying notes included elsewhere in this Annual Report on Form 10-K. The Company’s historical results for any prior period are not necessarily indicative of results to be expected in any future period. As described elsewhere in this Annual Report on Form 10-K, the Company has consummated several acquisitions in recent fiscal periods. The results and other financial information of those acquired operations are not included in the information below for the periods 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 the Company’s future results.
As of and for the Year Ended December 31, | |||||||||||||||
(dollars in thousands except per share) | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
Selected Income Statement Data | |||||||||||||||
Interest income | $ | 140,132 | $ | 87,214 | $ | 71,890 | $ | 59,639 | $ | 51,734 | |||||
Interest expense | 15,987 | 12,281 | 13,337 | 13,358 | 13,669 | ||||||||||
Net interest income | 124,145 | 74,933 | 58,553 | 46,281 | 38,065 | ||||||||||
Provision for loan losses | 5,359 | 3,822 | 3,184 | 1,650 | 4,043 | ||||||||||
Net interest income after provision for loan losses | 118,786 | 71,111 | 55,369 | 44,631 | 34,022 | ||||||||||
Noninterest income (excluding acquisition gains) | 13,624 | 11,021 | 9,168 | 7,708 | 5,464 | ||||||||||
Gain on acquisitions | — | — | — | — | 6,692 | ||||||||||
Noninterest expense | 88,512 | 57,671 | 47,160 | 38,639 | 33,062 | ||||||||||
Income tax expense | 14,920 | 4,661 | — | — | — | ||||||||||
Net income | 28,978 | 19,800 | 17,377 | 13,700 | 13,116 | ||||||||||
Preferred stock dividends | 169 | — | — | — | — | ||||||||||
Net income available to common shareholders | 28,809 | 19,800 | 17,377 | 13,700 | 13,116 | ||||||||||
Pro forma net income (1) (unaudited) | n/a | 16,174 | 12,147 | 9,357 | 8,775 | ||||||||||
Per Share Data (Common Stock)(2) | |||||||||||||||
Earnings: | |||||||||||||||
Basic | $ | 1.86 | $ | 1.78 | $ | 2.23 | $ | 2.00 | $ | 1.95 | |||||
Diluted (3) | 1.85 | 1.77 | 2.23 | 2.00 | 1.95 | ||||||||||
Pro forma earnings:(1) (unaudited) | |||||||||||||||
Basic | n/a | 1.45 | 1.56 | 1.37 | 1.31 | ||||||||||
Diluted (3) | n/a | 1.44 | 1.56 | 1.37 | 1.31 | ||||||||||
Dividends (4) | 0.24 | 0.77 | 1.12 | 0.89 | 0.63 | ||||||||||
Book value (5) | 30.35 | 18.96 | 15.06 | 12.55 | 11.13 | ||||||||||
Tangible book value (6) | 16.15 | 15.89 | 11.19 | 10.53 | 9.02 | ||||||||||
Selected Period End Balance Sheet Data | |||||||||||||||
Total assets | $ | 4,132,639 | $ | 2,163,984 | 1,740,060 | $1,254,377 | $1,098,216 | ||||||||
Cash and cash equivalents | 324,047 | 93,054 | 102,290 | 56,654 | 86,346 | ||||||||||
Securities available for sale | 206,062 | 194,038 | 113,355 | 93,991 | 52,611 | ||||||||||
Total loans (gross) | 3,205,537 | 1,726,543 | 1,378,676 | 988,671 | 860,128 | ||||||||||
Allowance for loan losses | 18,552 | 13,960 | 11,478 | 9,060 | 8,403 | ||||||||||
Goodwill and core deposit intangible | 241,912 | 37,852 | 31,993 | 13,886 | 14,453 | ||||||||||
Other real estate owned | 4,763 | 3,322 | 6,819 | 8,392 | 7,854 | ||||||||||
Adriatica real estate owned | — | — | 9,727 | 16,065 | — | ||||||||||
Noninterest-bearing deposits | 818,022 | 302,756 | 259,664 | 168,849 | 133,307 | ||||||||||
Interest-bearing deposits | 2,431,576 | 1,407,563 | 1,131,076 | 861,635 | 794,236 | ||||||||||
Borrowings (other than junior subordinated debentures) | 306,147 | 195,214 | 201,118 | 118,086 | 75,656 | ||||||||||
Junior subordinated debentures (7) | 18,147 | 18,147 | 18,147 | 14,538 | 14,538 | ||||||||||
Series A Preferred Stock | 23,938 | — | — | — | — | ||||||||||
Total stockholders’ equity | 540,851 | 233,772 | 124,510 | 85,997 | 76,044 | ||||||||||
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Selected Performance Metrics | |||||||||||||||
Return on average assets(8) | 0.87 | % | 1.04 | % | 1.17% | 1.16% | 1.35% | ||||||||
Return on average equity (8) | 6.65 | 9.90 | 16.54 | 17.36 | 19.19 | ||||||||||
Return on average common equity (8) | 6.89 | 9.90 | 16.54 | 17.36 | 19.19 | ||||||||||
Pro forma return on average assets(1) (8) (unaudited) | n/a | 0.85 | 0.82 | 0.79 | 0.91 | ||||||||||
Pro forma return on average equity(1) (8) (unaudited) | n/a | 8.09 | 11.56 | 11.86 | 12.84 | ||||||||||
Net interest margin (9) | 4.19 | 4.30 | 4.40 | 4.42 | 4.43 | ||||||||||
Efficiency ratio (10) | 64.25 | 67.10 | 69.64 | 71.57 | 75.95 | ||||||||||
Dividend payout ratio (11) | 12.90 | 14.20 | 11.89 | 13.26 | 13.54 | ||||||||||
Credit Quality Ratios | |||||||||||||||
Nonperforming assets to total assets | 0.36 | % | 0.58 | % | 1.59 | % | 2.85 | % | 2.19 | % | |||||
Nonperforming loans to total loans (12) | 0.32 | 0.53 | 0.81 | 1.14 | 1.89 | ||||||||||
Allowance for loan losses to nonperforming loans (12) | 183.43 | 152.93 | 104.02 | 80.32 | 51.93 | ||||||||||
Allowance for loan losses to total loans | 0.58 | 0.81 | 0.83 | 0.92 | 0.98 | ||||||||||
Net charge-offs to average loans outstanding (unaudited) | 0.03 | 0.09 | 0.06 | 0.11 | 0.31 | ||||||||||
Capital Ratios | |||||||||||||||
Tier 1 capital to average assets | 8.15 | % | 10.71 | % | 6.45 | % | 6.89 | % | 6.98 | % | |||||
Tier 1 capital to risk-weighted assets (13) | 9.83 | 12.64 | 8.22 | 8.59 | 8.88 | ||||||||||
Total capital to risk-weighted assets (13) | 12.59 | 13.83 | 10.51 | 11.19 | 11.10 | ||||||||||
Total stockholders’ equity to total assets | 13.09 | 10.80 | 7.16 | 6.86 | 6.92 | ||||||||||
Total common equity to total assets (14) | 12.51 | 10.80 | 7.16 | 6.86 | 6.92 | ||||||||||
Tangible common equity to tangible assets (14) | 7.07 | 9.21 | 5.42 | 5.81 | 5.68 | ||||||||||
(1) | Prior to April 1, 2013, the Company 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, the Company 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 ended on or before March 31, 2013. As of April 1, 2013, the Company terminated its S corporation election and commenced being subject to federal income taxation as a C corporation. The Company 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%, 30.1%, 31.7% and 33.1% for the years ended December 31, 2013, 2012, 2011 and 2010, respectively, and adjusting its historical net income for each period presented to give effect to the pro forma provision for federal income taxes for such period. |
(2) | The per share amounts and the weighted average shares outstanding for each of the periods shown have been adjusted to give effect to the 3.2-for-one split of the shares of the Company’s common stock that was effective as of February 22, 2013. |
(3) | The Company 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. The increase in 2013 largely relates to the Company’s initial public offering and the increase in 2014 largely relates to shares issued in three acquisitions completed in 2014. See Note 1 to the Company’s consolidated financial statements appearing elsewhere in this Annual Report on Form 10 K for more information regarding the dilutive effect of its outstanding warrants and regarding certain nonvested shares of common stock, the effect of which is anti-dilutive. 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: |
For the Year Ended December 31, | ||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||
Weighted average shares outstanding-basic | 15,208,544 | 10,921,777 | 7,626,205 | 6,668,534 | 6,518,224 | |||||
Weighted average shares outstanding-diluted | 15,306,998 | 10,990,245 | 7,649,366 | 6,675,078 | 6,518,224 | |||||
(4) | Dividends declared include quarterly cash distributions paid to the Company’s shareholders in the relevant period to provide them with funds to pay their federal income tax liabilities incurred as a result of the pass-through of the Company’s net taxable income for the first three months of the year ended December 31, 2013 and for each other such period shown 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 $0.00 per share, $0.52 per share, $0.85 per share, $0.63 per share and $0.36 per share for the years ended December 31, 2014, 2013, 2012, 2011 and 2010, respectively. |
(5) | Book value per share equals the Company’s 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, 2014, 2013, 2012, 2011 and 2010 was 17,032,669 shares, 12,330,158 shares, 8,269,707 shares, 6,850,288 shares and 6,832,323 shares, respectively. |
(6) | The Company 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 is a non-GAAP financial measure, and, as the Company calculates tangible book value, the most directly comparable GAAP financial measure is total stockholders’ equity. See the Company’s reconciliation of non-GAAP financial measures presented in the foregoing selected financial information to their most directly comparable GAAP financial measures under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures” in Part II, Item 7. |
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(7) | Each of five wholly owned, but nonconsolidated, subsidiaries of the Company holds a series of the Company’s junior subordinated debentures purchased by the subsidiary in connection with, and paid for with the proceeds of, the issuance of trust issued preferred securities by that subsidiary. The Company has guaranteed the payment of the amounts payable under each of those issues of trust preferred securities. |
(8) | The Company 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. The Company 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 be, for that period. The Company calculates its average assets and average equity for a period by dividing the sum of its total asset balance or total stockholder’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. The Company calculates its return on average common equity by excluding the preferred stock dividends to derive at net income available to common shareholders and excluding the average balance of its Series A preferred stock from the total average equity to derive at common average equity. |
(9) | Net interest margin for a period represents net interest income for that period divided by average interest-earning assets for that period. |
(10) | 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 bargain purchase gains recognized in connection with certain of the Company’s acquisitions and realized gains or losses from sales of investment securities for that period. |
(11) | The Company calculates its 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 (4) above) divided by its basic earnings per share for such period. |
(12) | Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest, and accruing loans modified under troubled debt restructurings. |
(13) | The Company calculates its risk-weighted assets using the standardized method of the Basel II Framework, as implemented by the Federal Reserve and the FDIC. |
(14) | The Company calculates common equity as of the end of the period as total stockholders' equity less the preferred stock at period end. The Company calculates tangible common equity as of the end of a period as total common stockholders’ equity (excluding preferred stock) less goodwill and other intangible assets as of the end of the period and calculates 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 the Company calculates tangible common equity to tangible assets, the most directly comparable GAAP financial measure is total stockholders’ equity to total assets. See the Company’s reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations-GAAP Financial Measure” in Part II, Item 7. |
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. Certain risks, uncertainties and other factors, including those set forth under “Risk Factors” in Part I, Item 1A, and elsewhere in this Annual Report on Form 10-K, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis.
Cautionary Note Regarding Forward Looking Statements
This Annual Report on Form 10-K, our other filings with the SEC, and other press releases, documents, reports and announcements that we make, issue or publish may contain statements that we believe are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are statements or projections with respect to matters such as our future results of operations, including our future revenues, income, expenses, provision for taxes, effective tax rate, earnings per share and cash flows, our future capital expenditures and dividends, our future financial condition and changes therein, including changes in our loan portfolio and allowance for loan losses, our future capital structure or changes therein, the plan and objectives of management for future operations, our future or proposed acquisitions, the future or expected effect of acquisitions on our operations, results of operations and financial condition, our future economic performance and the statements of the assumptions underlying any such statement. Such statements are typically 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 we make are based on the Company’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. The Company’s actual results may differ materially from those contemplated by the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance. Many possible events or factors could affect the future financial results and performance of the Company and could cause such results or performance to differ materially from those expressed in forward-looking statements. These factors include, but are not limited to, the following:
• | worsening business and economic conditions nationally, regionally and in our target markets, particularly in Texas and the geographic areas in which we operate; |
• | our dependence on our management team and our ability to attract, motivate and retain qualified personnel; |
• | the concentration of our business within our geographic areas of operation in Texas; |
• | deteriorating asset quality and higher loan charge-offs; |
• | concentration of our loan portfolio in commercial and residential real estate loans and changes in the prices, values and sales volumes of commercial and residential real estate; |
• | inaccuracy of the assumptions and estimates we make in establishing reserves for probable loan losses and other estimates; |
• | the quality of the assets acquired from other organizations being lower than determined in our due diligence investigation and related exposure to unrecoverable losses on loans acquired; |
• | lack of liquidity, including as a result of a reduction in the amount of sources of liquidity we currently have; |
• | material decreases in the amount of deposits we hold; |
• | regulatory requirements to maintain minimum capital levels and transactions in which we engage that impact our capital levels; |
• | changes in market interest rates that affect the pricing of our loans and deposits and our net interest income; |
• | fluctuations in the market value and liquidity of the securities that we hold for sale; |
• | 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 of assets that we have under administration; |
• | the institution and outcome of litigation and other legal proceeding against us or to which we become subject; |
• | worsening market conditions 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 our regulators, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act; |
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• | changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and/or Public Company Accounting Oversight Board: |
• | 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 and flooding, that may affect general economic conditions; and |
• | the other factors that are described in Part I, Item 1A. of this Annual Report on Form 10-K under the caption “Risk Factors.” |
We urge you to consider all of these risks, uncertainties and other factors carefully in evaluating all of the various forward-looking statements that we may make. 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 different materially from the anticipated results expressed or implied in that forward-looking statement. Any forward-looking statement made by the Company in any report, filing, press release, document, report or announcement speaks only as of the date on which it is made. The Company undertakes no obligation to update any 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. The Company believes it has chosen these assumptions or bases in good faith and they are reasonable. However, the Company cautions you that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. The Company undertakes no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
The Company was organized as a bank holding company in 2002. On January 1, 2009, the Company merged with Independent Bank Group Central Texas, Inc., and, since that time, the Company has pursued a strategy to create long-term shareholder value through organic growth of the Company’s community banking franchise in the Company’s market areas and through selective acquisitions of complementary banking institutions with operations in the Company’s market areas or in new market areas, such as Houston, Texas. On April 8, 2013, the Company consummated the initial public offering of its common stock which is traded on the NASDAQ Global Select Market.
The Company’s principal business is lending to and accepting deposits from businesses, professionals and individuals. The Company conducts all of the Company’s banking operations through Independent Bank. The Company derives its income principally from interest earned on loans and, to a lesser extent, income from securities available for sale. The Company also derives income from noninterest sources, such as fees received in connection with various deposit services and mortgage brokerage operations. From time to time, the Company also realizes gains on the sale of assets. The Company’s principal expenses include interest expense on interest-bearing customer deposits, advances from the Federal Home Loan Bank of Dallas, or FHLB, and other borrowings, operating expenses, such as salaries, employee benefits, occupancy costs, data processing and communication costs, expenses associated with other real estate owned, other administrative expenses, provisions for loan losses and the Company’s assessment for FDIC deposit insurance.
The Company intends for this discussion and analysis to provide the reader with information that will assist in understanding the Company’s financial statements, the changes in certain key items in those financial statements from period to period and the primary factors that accounted for those changes. This discussion relates to the Company and its consolidated subsidiaries and should be read in conjunction with the Company’s consolidated financial statements as of December 31, 2014, 2013 and 2012 and for the fiscal years ended December 31, 2014, 2013 and 2012, and the accompanying notes, appearing elsewhere in this Annual Report on Form 10-K. The Company’s fiscal year ends on December 31.
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Certain Events Affect Year-over-Year Comparability
Acquisitions
During 2014, 2013 and 2012, the Company completed a total of six acquisitions. These acquisitions increased total assets, gross loans and deposits on their respective acquisition date as detailed below.
(dollars in millions) | Acquisition Date | Total Assets | Gross Loans | Deposits |
I Bank Holding Company | April 1, 2012 | $172.6 | $116.9 | $122.9 |
The Community Group | October 1, 2012 | 111.0 | 63.5 | 93.6 |
Collin Bank | November 29, 2013 | 168.3 | 72.3 | 111.7 |
Live Oak Financial Corp. | January 1, 2014 | 131.0 | 71.3 | 105.0 |
BOH Holdings, Inc. | April 15, 2014 | 1,188.7 | 785.2 | 820.8 |
Houston Community Bancshares, Inc. * | October 1, 2014 | 350.7 | 194.9 | 303.1 |
* Estimated values subject to change pending final acquisition accounting adjustments
The Company issued an aggregate 4,737,067 shares of common stock in connection with the four most recent acquisitions. The comparability of the Company’s consolidated results of operations for the years ended December 31, 2014, 2013 and 2012 are affected by these acquisitions.
For more information on these acquisitions, see the Grow Through Acquisitions section as discussed in Part I, Item 1. Business.
The Company’s Initial Public Offering
The Company consummated the initial public offering of its common stock in April 2013. The period-over-period comparability of certain aspects of the Company’s results of operations and the changes in the Company’s financial condition from December 31, 2012, to December 31, 2014, are affected by the issuance of 3,680,000 shares of the Company’s common stock in that offering and the Company’s receipt of the net proceeds of the sale of those shares of the Company’s common stock. In particular, the period-over-period comparability of the Company’s earnings per share and return on equity is affected by such issuance of the shares in its initial public offering.
S Corporation Status
From its formation in 2002 through March 31, 2013, the Company elected to be taxed for federal income tax purposes as an S corporation under the provisions of Section 1361 through 1379 of the Internal Revenue Code. As a result, the Company’s net income was not subject to, and the Company did not pay, U.S. federal income taxes and the Company was not required to make any provision or recognize any liability for federal income tax in its financial statements for the periods ended on or prior to March 31, 2013. The Company terminated its status as an S corporation in connection with its initial public offering as of April 1, 2013. Starting April 1, 2013, the Company became subject to corporate federal income tax and the Company’s net income for each subsequent fiscal year and each subsequent interim period reflects and, in the future, will reflect, a provision for federal income taxes. As a result of that change in the Company’s status under the federal income tax laws, the net income and earnings per share data presented in the Company’s historical financial statements set forth elsewhere in this Annual Report on Form 10-K, which do not include any provision for federal income taxes, are not comparable with the Company’s net income and earnings per share in periods in which the Company was taxed as a C corporation, which is calculated by including a provision for federal income taxes.
Deferred tax assets and liabilities are, and in future periods will be, recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of any change in tax rates will be recognized in income in the quarter such change takes place. On April 1, 2013, the Company recorded an initial net deferred tax asset of $1.8 million to recognize the difference between the financial statement carrying amounts of assets and liabilities and their respective tax bases as of the date that the Company became a taxable corporate entity.
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Discussion and Analysis of Results of Operations
The following discussion and analysis of the Company’s results of operations compares its results of operations for the year ended December 31, 2014, with its results of operations for the year ended December 31, 2013, and its results of operations for the year ended December 31, 2012.
Results of Operations
The Company’s net income available to common shareholders increased by $9.0 million, or 45.5%, to $28.8 million ($1.85 per common shares on a diluted basis) for the year ended December 31, 2014, from $19.8 million ($1.77 per common share on a diluted basis) for the year ended December 31, 2013. The increase resulted from a $49.2 million increase in net interest income and a $2.6 million increase in noninterest income, partially offset by a $1.5 million increase in the provision for loan losses and a $30.8 million increase in noninterest expense. The Company’s net income for the year ended December 31, 2014, and, therefore, the Company’s return on average assets and the Company’s return on average equity, were adversely affected by $3.6 million of acquisition-related expenses. The Company posted returns on average common equity of 6.89% and 9.90%, returns on average assets of 0.87% and 1.04%, and efficiency ratios of 64.25% and 67.10% for the fiscal years ended December 31, 2014, and 2013, respectively. The efficiency ratio is calculated by dividing total noninterest expense (which does not include the provision for loan losses) by net interest income plus noninterest income. The Company’s dividend payout ratio was 12.90% and 14.20% and the equity to assets ratio was 13.09% and 10.80% for the years ended December 31, 2014 and 2013, respectively.
For the fiscal year ended December 31, 2013, net income was $19.8 million ($1.77 per common share on a diluted basis) compared with $17.4 million ($2.23 per common share on a diluted basis) for the fiscal year ended December 31, 2012. The Company’s net income for the fiscal year ended December 31, 2013 was $16.2 million ($1.44 per common share on a diluted basis) on a proforma basis due to the change in the Company’s taxable status effective April 1, 2013. The Company posted returns on average common equity of 9.90% and 16.54%, returns on average assets of 1.04% and 1.17% and efficiency ratios of 67.10% and 69.64% for the fiscal years ended December 31, 2013 and 2012, respectively. The Company’s dividend payout ratio was 14.20% and 11.89% and the equity to assets ratio was 10.80% and 7.16% for the years ended December 31, 2013 and 2012, respectively.
Net Interest Income
The Company’s net interest income is its interest income, net of interest expenses. Changes in the balances of the Company’s earning assets and its deposits, FHLB advances and other borrowings, as well as changes in the market interest rates, affect the Company’s net interest income. The difference between the Company’s average yield on earning assets and its average rate paid for interest-bearing liabilities is its net interest spread. Noninterest-bearing sources of funds, such as demand deposits and stockholders’ equity, also support the Company’s earning assets. The impact of the noninterest-bearing sources of funds is reflected in the Company’s net interest margin, which is calculated as annualized net interest income divided by average earning assets.
The Company earned net interest income of $124.1 million for the year ended December 31, 2014, an increase of $49.2 million, or 65.7%, from $74.9 million for the year ended December 31, 2013. The increase in net interest income was due to growth of the Company’s average interest-earning assets and a reduction in the Company’s cost of funds for the fiscal year ended 2014 as a result of an increase in noninterest-bearing deposits. The Company’s net interest margin for the fiscal year ended 2014 decreased to 4.19% from 4.30% in the fiscal year ended 2013, and the Company’s interest rate spread for the fiscal year ended 2014 decreased to 4.03% from the 4.15% interest rate spread for the fiscal year ended 2013. The average balance of interest-earning assets for the fiscal year ended 2014 increased by $1.2 billion, or 69.9%, to $3.0 billion from an average balance of $1.7 billion for the fiscal year ended 2013. The average aggregate balance of noninterest-bearing checking accounts increased to $601.8 million for the fiscal year ended 2014 from $259.4 million for the fiscal year ended 2013. The increases in interest-earning assets and noninterest-bearing deposits occurred as a result of the three acquisitions that the Company completed in 2014, while the balance of the increases came from organic loan and deposit growth. The decrease in net interest margin was offset by an increase in the ratio of average interest-earning assets to interest-bearing liabilities to 129.76% for the year ended December 31, 2014 from 121.42% for the prior year. The Company’s net interest margin for the year ended December 31, 2014 was adversely affected by a 28 basis point decline in the weighted-average yield on interest-earning assets to 4.73% for the year ended December 31, 2014, from 5.01% for the year ended December 31, 2013. This decline in yield resulted from changes in market interest rates and the competitive landscape.
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Net interest income was $74.9 million for the fiscal year ended December 31, 2013, an increase of $16.4 million, or 28.0%, from $58.6 million at December 31, 2012. This increase is due primarily to a $412.2 million increase, or 31.0%, in average interest earning assets to $1.7 billion for the fiscal year ended December 31, 2013 compared to $1.3 billion for the fiscal year ended December 31, 2012. The greatest portion of the increases in interest-earning assets and noninterest-bearing deposits occurred as a result of the acquisitions the Company completed in October 2012 and November 2013, while the balance of the increases came from organic loan and deposit growth. In addition, discount accretion on acquired loans of $1.4 million and $233 thousand is included in net interest income for the fiscal years ended December 31, 2013 and 2012, respectively. The significant increase in acquired loan accretion was primarily related to the unexpected payoff of four purchased acquired loans which had significant non-accretable discounts. The net interest margin for the fiscal year ended December 31, 2013 decreased 10 basis points to 4.30% compared to 4.40% for the fiscal year ended December 31, 2012. The average yield on interest earning assets decreased 40 basis points from 5.41% to 5.01%. The effect of this decrease was offset by a decrease in the average rate paid on interest bearing liabilities of 28 basis points from 1.14% to 0.86%. The average yield on interest earning assets would have been 4.93% for the fiscal year ended December 31, 2013 compared to 5.39% for the fiscal year ended December 31, 2012 without the effect of the discount accretion on acquired loans.
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Average Balance Sheet Amounts, Interest Earned and Yield Analysis. The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the fiscal years ended December 31, 2014, 2013 and 2012. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances.
For The Years Ended December 31, | |||||||||||||||||||||||||||||||||
2014 | 2013 | 2012 | |||||||||||||||||||||||||||||||
Average Outstanding Balance (1) | Interest | Yield/ Rate | Average Outstanding Balance (1) | Interest | Yield/ Rate | Average Outstanding Balance (1) | Interest | Yield/ Rate | |||||||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||||||||||||||
Loans (1) | $ | 2,628,667 | $ | 135,461 | 5.15 | % | $ | 1,502,817 | $ | 84,350 | 5.61 | % | $ | 1,179,007 | $ | 69,494 | 5.89 | % | |||||||||||||||
Taxable securities | 174,578 | 2,803 | 1.61 | 95,259 | 1,516 | 1.59 | 73,731 | 1,288 | 1.75 | % | |||||||||||||||||||||||
Nontaxable securities | 57,825 | 1,429 | 2.47 | 31,247 | 1,024 | 3.28 | 25,397 | 828 | 3.26 | % | |||||||||||||||||||||||
Federal funds sold and other | 99,083 | 439 | 0.44 | 112,841 | 324 | 0.29 | 51,811 | 280 | 0.54 | % | |||||||||||||||||||||||
Total interest-earning assets | 2,960,153 | $ | 140,132 | 4.73 | 1,742,164 | $ | 87,214 | 5.01 | 1,329,946 | $ | 71,890 | 5.41 | % | ||||||||||||||||||||
Noninterest-earning assets | 369,449 | 158,748 | 157,668 | ||||||||||||||||||||||||||||||
Total assets | $ | 3,329,602 | $ | 1,900,912 | $ | 1,487,614 | |||||||||||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||
Checking accounts | $ | 1,052,528 | $ | 4,797 | 0.46 | $ | 734,475 | $ | 3,826 | 0.52 | $ | 579,495 | $ | 4,529 | 0.78 | ||||||||||||||||||
Savings accounts | 129,707 | 345 | 0.27 | 114,699 | 373 | 0.33 | 110,118 | 710 | 0.64 | ||||||||||||||||||||||||
Money market accounts | 123,392 | 347 | 0.28 | 50,661 | 135 | 0.27 | 32,976 | 117 | 0.35 | ||||||||||||||||||||||||
Certificates of deposit | 674,556 | 4,048 | 0.60 | 334,269 | 2,640 | 0.79 | 285,564 | 2,995 | 1.05 | ||||||||||||||||||||||||
Total deposits | 1,980,183 | 9,537 | 0.48 | 1,234,104 | 6,974 | 0.57 | 1,008,153 | 8,351 | 0.83 | ||||||||||||||||||||||||
FHLB advances | 242,695 | 3,678 | 1.52 | 165,354 | 3,303 | 2.00 | 105,072 | 2,383 | 2.27 | ||||||||||||||||||||||||
Notes payable, repurchase agreements and other borrowings | 40,179 | 2,230 | 5.55 | 17,255 | 1,461 | 8.47 | 39,963 | 2,072 | 5.18 | ||||||||||||||||||||||||
Junior subordinated debentures | 18,147 | 542 | 2.99 | 18,147 | 543 | 2.99 | 15,260 | 531 | 3.48 | ||||||||||||||||||||||||
Total interest-bearing liabilities | 2,281,204 | 15,987 | 0.70 | 1,434,860 | 12,281 | 0.86 | 1,168,448 | 13,337 | 1.14 | ||||||||||||||||||||||||
Noninterest-bearing checking accounts | 601,764 | 259,432 | 203,248 | ||||||||||||||||||||||||||||||
Noninterest-bearing liabilities | 11,152 | 6,626 | 10,863 | ||||||||||||||||||||||||||||||
Stockholders’ equity | 435,482 | 199,994 | 105,055 | ||||||||||||||||||||||||||||||
Total liabilities and equity | $ | 3,329,602 | $ | 1,900,912 | $ | 1,487,614 | |||||||||||||||||||||||||||
Net interest income | $ | 124,145 | $ | 74,933 | $ | 58,553 | |||||||||||||||||||||||||||
Interest rate spread | 4.03 | % | 4.15 | % | 4.27 | % | |||||||||||||||||||||||||||
Net interest margin (2) | 4.19 | 4.30 | 4.40 | ||||||||||||||||||||||||||||||
Average interest earning assets to interest bearing liabilities | 129.76 | 121.42 | 113.82 | ||||||||||||||||||||||||||||||
(1) | Average loan balances include nonaccrual loans. |
(2) | Net interest margins for the periods presented represent: (i) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (ii) average interest-earning assets for the period. |
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Interest Rates and Operating Interest Differential. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on the Company’s interest-earning assets and the interest incurred on the Company’s interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous year’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the prior year’s volume. For purpose of the following table, changes attributable to both volume and rate, which cannot be segregated, have been allocated to the changes due to volume and the changes due to rate in proportion to the relationship of the absolute dollar amount of change in each.
For the Fiscal Year Ended December 31, 2014 vs. 2013 | For the Fiscal Year Ended December 31, 2013 vs. 2012 | ||||||||||||||||||||||
Increase (Decrease) Due to | Total Increase (Decrease) | Increase (Decrease) Due to | Total Increase (Decrease) | ||||||||||||||||||||
(dollars in thousands) | Volume | Rate | Volume | Rate | |||||||||||||||||||
Interest-earning assets | |||||||||||||||||||||||
Loans | $ | 58,527 | $ | (7,416 | ) | $ | 51,111 | $ | 18,310 | $ | (3,454 | ) | $ | 14,856 | |||||||||
Taxable securities | 1,273 | 14 | 1,287 | 350 | (122 | ) | 228 | ||||||||||||||||
Nontaxable securities | 705 | (300 | ) | 405 | 192 | 4 | 196 | ||||||||||||||||
Federal funds sold and other | (43 | ) | 158 | 115 | 219 | (175 | ) | 44 | |||||||||||||||
Total interest-earning assets | 60,462 | (7,544 | ) | 52,918 | 19,071 | (3,747 | ) | 15,324 | |||||||||||||||
Interest-bearing liabilities | |||||||||||||||||||||||
Checking accounts | $ | 1,496 | $ | (525 | ) | $ | 971 | $ | 1,031 | $ | (1,734 | ) | $ | (703 | ) | ||||||||
Savings accounts | 45 | (73 | ) | (28 | ) | 28 | (365 | ) | (337 | ) | |||||||||||||
Limited access money market accounts | 204 | 8 | 212 | 52 | (34 | ) | 18 | ||||||||||||||||
Certificates of deposit | 2,165 | (757 | ) | 1,408 | 459 | (814 | ) | (355 | ) | ||||||||||||||
Total deposits | 3,910 | (1,347 | ) | 2,563 | 1,570 | (2,947 | ) | (1,377 | ) | ||||||||||||||
FHLB advances | 1,299 | (924 | ) | 375 | 1,232 | (312 | ) | 920 | |||||||||||||||
Notes payable, repurchase agreements and other borrowings | 1,410 | (641 | ) | 769 | (1,530 | ) | 919 | (611 | ) | ||||||||||||||
Junior subordinated debentures | — | (1 | ) | (1 | ) | 92 | (80 | ) | 12 | ||||||||||||||
Total interest-bearing liabilities | 6,619 | (2,913 | ) | 3,706 | 1,364 | (2,420 | ) | (1,056 | ) | ||||||||||||||
Net interest income | $ | 53,843 | $ | (4,631 | ) | $ | 49,212 | $ | 17,707 | $ | (1,327 | ) | $ | 16,380 | |||||||||
As a result of the current interest rate environment and competitive pressure in the market, yields on the loans the Company makes may decline in future periods. The Company intends to mitigate the effect of any such decreases on the Company’s results of operations by growing the Company’s loan portfolio and managing the liability side of the Company’s balance sheet through the reduction of the Company’s cost of funds.
Interest Income. The Company’s total interest income increased $52.9 million, or 60.7%, to $140.1 million for the year ended December 31, 2014, from $87.2 million for the year ended December 31, 2013. The Company’s total interest income increased $15.3 million, or 21.3%, to $87.2 million for the fiscal year ended December 31, 2013 from $71.9 million for the fiscal year ended December 31, 2012. The following tables set forth the major components of the Company’s interest income for the fiscal years ended December 31, 2014, 2013 and 2012 and the period-over-period variations in such categories of interest income:
(dollars in thousands) | For the Fiscal Year Ended December 31, | Variance | For the Fiscal Year Ended December 31, | Variance | |||||||||||||||||||
2014 | 2013 | 2014 v. 2013 | 2013 | 2012 | 2013 v. 2012 | ||||||||||||||||||
Interest income | |||||||||||||||||||||||
Interest and fees on loans | $ | 135,461 | $ | 84,350 | $ | 51,111 | $ | 84,350 | $ | 69,494 | $ | 14,856 | |||||||||||
Interest on taxable securities | 2,803 | 1,516 | 1,287 | 1,516 | 1,288 | 228 | |||||||||||||||||
Interest on nontaxable securities | 1,429 | 1,024 | 405 | 1,024 | 828 | 196 | |||||||||||||||||
Interest on federal funds sold and other | 439 | 324 | 115 | 324 | 280 | 44 | |||||||||||||||||
Total interest income | $ | 140,132 | $ | 87,214 | $ | 52,918 | $ | 87,214 | $ | 71,890 | $ | 15,324 | |||||||||||
The 60.6% increase in the Company’s interest and fees on loans for the year ended December 31, 2014, from the year ended December 31, 2013 was primarily attributable to a $1.1 billion increase in the average balance of the Company’s loans to $2.6 billion during the fiscal year ended 2014 as compared with the average balance of $1.5 billion for the fiscal year ended 2013.
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The increase resulted from the Company’s acquisition of an aggregate of $1.1 billion of loans in the Live Oak Financial Corp. transaction in January 2014, the BOH Holdings transaction in April 2014 and the Houston City Bancshares transaction in October 2014 and the organic growth of the Company’s loan portfolio.
The 21.4 % increase in the Company’s interest and fees on loans for the fiscal year ended December 31, 2013 from the fiscal year ended December 31, 2012 was primarily attributable to a $323.8 million, or 27.5%, increase in the average balance of the Company’s loans to $1.5 billion during the fiscal year ended December 31, 2013 as compared with the average balance of $1.2 billion for the fiscal year ended December 31, 2012. The increase in average loans was primarily due to organic growth during 2013 with a small increase in average loans due to the Collin Bank acquisition as of November 29, 2013 which added approximately $72 million in total loans.
The interest the Company earned on taxable securities, which consists primarily of government agency and residential pass-through securities, increased 84.9% for the year ended December 31, 2014, due primarily to an 83.3% increase in the average balance of taxable securities from $95.3 million for the year ended December 31, 2013 to $174.6 million for the year ended December 31, 2013. Interest on taxable securities increased 17.7% from 2012 to 2013 primarily due to the increase in average balances of taxable securities during the year from $73.7 million during the year ended December 31, 2012 to $95.3 million for the year ended December 31, 2013.
The interest the Company earned on nontaxable securities during the fiscal year ended 2014 increased by 39.6% from the fiscal year ended 2013 primarily as a result of an increase in the average portfolio balance from $31.2 million for the year ended December 31, 2013 to $57.8 million for the year ended December 31, 2013. The interest the Company earned on nontaxable securities during the fiscal year ended December 31, 2013 increased by 23.7% from the fiscal year ended December 31, 2012, primarily as a result of an increase in the average portfolio balance for the fiscal year ended December 31, 2013. The average balance of nontaxable securities increased by 23.0%, to $31.2 million for the fiscal year ended December 31, 2013, from $25.4 million for the fiscal year ended December 31, 2012.
The increase in average balances for both taxable and nontaxable securities in both periods was due to securities acquired in the Company's acquisition of Collin Bank in November 2013. The increase from 2012 to 2013 was also due to the investment of a portion of the IPO proceeds in securities. The increase from 2013 to 2014 was also affected by the Company's three acquisitions completed during 2014.
Interest Expense. Total interest expense on the Company’s interest-bearing liabilities increased $3.7 million, or 30.2%, to $16.0 million for the year ended December 31, 2014, from $12.3 million in the prior year. Total interest expense on the Company’s interest-bearing liabilities decreased $1.1 million, or 7.9%, to $12.3 million for the fiscal year ended December 31, 2013 from $13.3 million for the fiscal year ended December 31, 2012. The following table sets forth the major components of the Company’s interest expense for the fiscal years ended December 31, 2014, 2013 and 2012 and the period-over-period variations in such categories of interest expense:
(dollars in thousands) | For the Fiscal Year Ended December 31, | Variance | For the Fiscal Year Ended December 31, | Variance | |||||||||||||||||||
2014 | 2013 | 2014 v. 2013 | 2013 | 2012 | 2013 v. 2012 | ||||||||||||||||||
Interest Expense | |||||||||||||||||||||||
Interest on deposits | $ | 9,537 | $ | 6,974 | $ | 2,563 | $ | 6,974 | $ | 8,351 | $ | (1,377 | ) | ||||||||||
Interest of FHLB advances | 3,678 | 3,303 | $ | 375 | 3,303 | 2,383 | 920 | ||||||||||||||||
Interest on notes payable, repurchase agreements and other borrowings | 2,230 | 1,461 | $ | 769 | 1,461 | 2,072 | (611 | ) | |||||||||||||||
Interest on junior subordinated debentures | 542 | 543 | $ | (1 | ) | 543 | 531 | 12 | |||||||||||||||
Total interest expense | $ | 15,987 | $ | 12,281 | $ | 3,706 | $ | 12,281 | $ | 13,337 | $ | (1,056 | ) | ||||||||||
Interest expense on deposits for the fiscal year ended 2014 increased by $2.6 million, or 36.8%, primarily as a result of a 60.5% year-over-year increase in the Company’s average balance on the Company’s interest-bearing deposit accounts attributable to the Company’s three acquisitions in 2014 and organic deposit growth. This increase was partially offset by a nine basis point decrease in the weighted-average rate of interest the Company paid on the Company’s deposits. The average rate on the Company’s deposits decreased by 9 basis points to 0.48% on average interest-bearing deposits of $2.0 billion for the fiscal year ended 2014, from 0.57% on average interest-bearing deposits of $1.2 billion for the fiscal year ended 2013. This decrease in cost of funds for this source of funding primarily resulted from lower market interest rates and the 45.1% increase in the
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portion of deposits represented by average balance of interest-bearing checking, savings and limited access money market accounts, on which the Company typically pays lower rates than those the Company pays on its certificates of deposit.
Interest expense on deposits for the fiscal year ended December 31, 2013 decreased by $1.4 million, or 16.5%, primarily as a result of a decrease in the weighted-average rate of interest the Company paid on its deposits, although the effect of that decrease was partially offset by a 26.7% period-over-period increase in the Company’s average balance on its interest-bearing checking accounts attributable to its fourth quarter acquisition in 2012 and organic deposit growth. The average rate of interest paid on the Company’s deposits decreased by 26 basis points to 0.57% on average interest-bearing deposits of $1.2 billion for the fiscal year ended December 31, 2013 from 0.83% on average interest-bearing deposits of $1.0 billion for the fiscal year ended December 31, 2012. This decrease in cost of funds for this source of funding primarily resulted from lower market interest rates and the 24.5% increase in the portion of deposits represented by average balance of interest-bearing checking, savings and limited access money market accounts, on which the Company typically pays lower rates than those the Company pays on its certificates of deposit.
Interest expense on FHLB advances for the fiscal year ended 2014 increased by $375 thousand, or 11.4%, due primarily to a higher average balance of such advances. The average balance of the Company’s FHLB advances increased by $77.3 million primarily as a result of the assumption of $95.0 million of FHLB advances in the Company’s acquisition of BOH Holdings in April 2014.
Interest expense on FHLB advances for the fiscal year ended December 31, 2013 increased by $920 thousand, or 38.6%, due primarily to a higher average balance of such advances. The average balance of the Company’s FHLB advances for the fiscal year ended December 31, 2013 increased by $60.3 million, or 57.4% to $165.4 million from the average balance of $105.1 million for the fiscal year ended December 31, 2012. The Company increased long term advances in the fourth quarter of 2012 to manage interest rate risk on new loan originations. In addition, the Company assumed $26.0 million in FHLB advances in the Collin Bank acquisition completed November 30, 2013.
Interest expense on repurchase agreements and other borrowings for the fiscal year ended 2014 increased by $769 thousand, or 52.6%, primarily as a result of a higher average balance of such borrowings. The average balance of the Company’s notes payable and other borrowings increased by $22.9 million primarily as a result of an increase in the Company’s subordinated debentures. The Company issued $65 million of subordinate debt in a public offering in July 2014 to fund the cash portion of the acquisition of Houston City Bancshares and to provide additional capital to the Bank to support growth. Interest expense on this subordinate debt totaled $1.7 million for the year ended December 31, 2014. This increase in interest expense was partially offset by the effect of the repayment of $15.7 million in principal amount of notes payable and $13.1 million in principal amount of subordinated debt during the year ended December 31, 2013.
Interest expense on notes payable and other borrowings for the fiscal year ended December 31, 2013, decreased by $611 thousand, or 29.5%, primarily as a result of a lower average balance of such borrowings. The average balance of the Company’s notes payable and other borrowings decreased by $22.7 million primarily as a result of the repayment of $15.7 million in principal amount of notes payable and $13.1 million in principal amount of subordinated debt during the fiscal year ended December 31, 2013. These payments were funded with a portion of the net proceeds of the Company’s initial public offering of its common stock.
Provision for Loan Losses
Management actively monitors the Company’s asset quality and provides specific loss provisions when necessary. Provisions for loan losses are charged to income to bring the total allowance for loan losses to a level deemed appropriate by management based on such factors as historical loss experience, trends in classified loans and past dues, the volume and growth in the loan portfolio, current economic conditions and the value of collateral.
Loans are charged off against the allowance for loan losses when appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for loan losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the determination.
The Company increased the Company’s allowance for loan losses to $18.6 million as of December 31, 2014, by making provisions for loan losses totaling $5.4 million in the fiscal year ended December 31, 2014, which was a $1.5 million, or 40.2%, increase over the provision for loan losses of $3.8 million the Company made in the fiscal year ended December 31, 2013. The increase in the Company’s allowance for loan losses was made as a result organic growth in the Company’s loan portfolio during the year. The effect of the provision for loan losses in the fiscal year ended December 31, 2014, on the Company’s allowance for loan losses was partially offset by net charge-offs for that period of $767 thousand, which net charge-
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offs were .03% of the Company’s average loans outstanding during such period. The effect of the provision for loan losses in fiscal year ended December 31, 2013, had been partially offset by net charge-offs of $1.3 million during that period. The Company’s net charge-offs were lower in the fiscal year ended December 31, 2014, as a result of improvement in the quality of the Company’s loan portfolio.
The balance of the provision for loan losses was made based on the Company’s assessment of the credit quality of the Company’s loan portfolio and in view of the amount of the Company’s net charge-offs in that period. The Company did not make any provision for loan losses with respect to the loans acquired in the Company’s three acquisitions completed in 2014 because, in accordance with acquisition accounting standards, the Company recorded the loans acquired in those acquisitions at fair value and determined that the Company’s fair value adjustments appropriately reflected the probability of losses on those loans as of the acquisition date. The Company does not believe there has been any deterioration of credit of these acquired loans since these acquisitions and has not recorded a subsequent provision.
The Company made a $3.8 million provision for loan losses for the fiscal year ended December 31, 2013 compared to $3.2 million for the comparable period in 2012. The increase in the provision was primarily to properly reserve for the growth in the Company’s loan portfolio. Net charge-offs were $1.3 million, or 0.09% of total loans for the fiscal year ended December 31, 2013 compared to $766 thousand, or 0.06% of total loans for the fiscal year ended December 31, 2012. The chargeoffs for 2013 primarily related to three loans totaling $1.1 million.
Noninterest Income
The following table sets forth the major components of noninterest income for the fiscal years ended December 31, 2014, 2013 and 2012 and the period-over-period variations in such categories of noninterest income:
For the Fiscal Year Ended December 31, | Variance | For the Fiscal Year Ended December 31, | Variance | ||||||||||||||||||||
(dollars in thousands) | 2014 | 2013 | 2014 v. 2013 | 2013 | 2012 | 2013 v. 2012 | |||||||||||||||||
Noninterest Income | |||||||||||||||||||||||
Service charges on deposit accounts | $ | 6,009 | $ | 4,841 | $ | 1,168 | $ | 4,841 | $ | 3,386 | $ | 1,455 | |||||||||||
Mortgage fee income | 3,953 | 3,743 | 210 | 3,743 | 4,116 | (373 | ) | ||||||||||||||||
Gain on sale of loans | 1,078 | — | 1,078 | — | — | — | |||||||||||||||||
Gain on sale of branch | — | — | — | — | 38 | (38 | ) | ||||||||||||||||
Gain on sale of other real estate | 71 | 1,507 | (1,436 | ) | 1,507 | 1,135 | 372 | ||||||||||||||||
Gain (loss) on sale of securities available for sale | 362 | — | 362 | — | (3 | ) | 3 | ||||||||||||||||
Loss on sale of premises and equipment | (22 | ) | (18 | ) | (4 | ) | (18 | ) | (343 | ) | 325 | ||||||||||||
Increase in cash surrender value of bank owned life insurance | 972 | 348 | 624 | 348 | 327 | 21 | |||||||||||||||||
All other noninterest income | 1,201 | 600 | 601 | 600 | 512 | 88 | |||||||||||||||||
Total noninterest income | $ | 13,624 | $ | 11,021 | $ | 2,603 | $ | 11,021 | $ | 9,168 | $ | 1,853 | |||||||||||
Noninterest income increased $2.6 million, or 23.6%, to $13.6 million for the fiscal year ended 2014 from $11.0 million for fiscal the fiscal year ended 2013. Total noninterest income increased $1.9 million, or 20.2%, for the fiscal year ended December 31, 2013, compared to the fiscal year ended December 31, 2012. Significant changes in the components of noninterest income are discussed below.
Service Charges. Service charges on deposit accounts increased $1.2 million, or 24.1%, for the fiscal year ended December 31, 2014, as compared to the same period in 2013. The increase in service charge income is due to an increase in deposit accounts due primarily to acquisition growth in late 2013 and in 2014. Service charges on deposit accounts for the fiscal year ended December 31, 2013 increased $1.5 million, or 43.0%, compared to the comparable period in 2012. The increase in the period primarily relates to ATM service fees, which were previously been reported net of related expense and commencing in 2013 were being reported on a gross basis with offsetting expense being reported in noninterest expense, which expense is $1.2 million for the fiscal year ended December 31, 2013. In 2012, ATM fees were settled on a net basis.
Mortgage Fee Income. Mortgage fee income for the year ended December 31, 2014 increased $210 thousand, or 5.6%, over the same period in 2013. This slight increase from 2013 is due to increased mortgage activity during the second half of 2014 due to stabilized mortgage rates and introduction of this product in our Houston branches. Mortgage fee income for the year ended December 31, 2013 decreased $373.0 thousand, or 9.1%, compared to the comparable period in 2012. This decrease is directly related to a comparable decrease in mortgage loan origination volume from the comparable prior year period.
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Gain on Sale of Loans. Gain on sale of loans for the year ended December 31, 2014 totaled $1.1 million due to the sale of a $12.0 million SBA loan portfolio that the Company acquired in the BOH Holdings acquisition. No such sales occurred in 2013 or 2012.
Gain on Sale of Other Real Estate. Gains on sale of other real estate were $71 thousand for the year ended December 31, 2014, and $1.5 million for the same period in 2013. The 2013 sales relate to several sales of property including the remaining Adriatica property, on which the Company recognized a $1.3 million gain. Other real estate gains of $1.1 million for the year ended December 31, 2012 are related to several sales of property including two sales of Adriatica property. [See “Certain Relationships and Related Transactions and Director Independence-Related Person Transactions” in Part III, Item 13 and Part IV, Item 15, Footnote 22.]
Gain (Loss) on Sale of Securities Available for Sale. The gain on sale of securities available for sale totaled $362 thousand for the year ended December 31, 2014 due the Company's decision to sell a portion of their pass-through securities to take advantage of a favorable position in the market and position the portfolio for reduced interest rate risk. There were no sales during 2013 and the Company recognized a minimal loss on the sale of securities available for sale in 2012.
Loss on Sale of Premises and Equipment. Loss on sale of premises and equipment was minimal for 2014 and 2013. Loss on gain of sale of premises and equipment totaling $343 for the year ended December 31, 2012 was primarily due to a loss recognized on the sale of the corporate aircraft during that year.
Increase in Cash Surrender Value of Bank Owned Life Insurance. Increase in earnings on bank owned life insurance increased $624 thousand, or 179.3%, for the year ended December 31, 2014, compared to the same period in 2013. The increase in earnings is due to additional investment in insurance policies in the fourth quarter of 2013 and insurance policies acquired in the BOH Holdings acquisition. The change in bank owned life insurance earnings was not significant between years 2013 and 2012.
Other Noninterest Income. Other noninterest income for the year ended December 31, 2014, increased $601 thousand, or 100.2%, compared to the same period in 2013. The increase is directly related the addition of the wealth management group in 2014 as well as increased fee income related to the four acquisitions by the Company completed in November 2013, January 2014, April 2014 and October 2014.
Noninterest Expense
Noninterest expense increased $30.8 million, or 53.5%, to $88.5 million for the year ended 2014 from $57.7 million for the year ended 2013. The increase from 2013 to 2014 is primarily due to increases in salaries and benefits expenses, occupancy expenses, professional fees expenses, acquisition expenses and other noninterest expenses related to completed acquisitions in November 2013, January 2014, April 2014 and October 2014.
Noninterest expense increased $10.5 million, or 22.3%, for the year ended December 31, 2013, compared to the comparable period in 2012. The overall increase from 2012 to 2013 is primarily due to increases in salaries and benefits expenses, occupancy expenses, other real estate impairment and other noninterest expenses related to acquisitions. In addition, the Company had more acquisition-related expenses in 2013 than in 2012 due to the completed acquisition of Collin Bank in November 2013 as well as the announced acquisitions of Live Oak Financial Corp. and BOH Holdings.
The following table sets forth the major components of the Company’s noninterest expense for the years ended December 31, 2014, 2013 and 2012, and the period-over-period variations in such categories of noninterest expense:
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For the Year Ended December 31, | Variance | For the Year Ended December 31, | Variance | ||||||||||||||||||||
(dollars in thousands) | 2014 | 2013 | 2014 v. 2013 | 2013 | 2012 | 2013 v. 2012 | |||||||||||||||||
Noninterest Expense | |||||||||||||||||||||||
Salaries and employee benefits | $ | 52,337 | $ | 31,836 | $ | 20,501 | $ | 31,836 | $ | 26,569 | $ | 5,267 | |||||||||||
Occupancy | 13,250 | 9,042 | 4,208 | 9,042 | 7,317 | 1,725 | |||||||||||||||||
Data processing | 2,080 | 1,347 | 733 | 1,347 | 1,198 | 149 | |||||||||||||||||
FDIC assessment | 1,797 | 500 | 1,297 | 500 | 800 | (300 | ) | ||||||||||||||||
Advertising and public relations | 835 | 684 | 151 | 684 | 626 | 58 | |||||||||||||||||
Communications | 1,787 | 1,385 | 402 | 1,385 | 1,334 | 51 | |||||||||||||||||
Other real estate owned expense, net | 232 | 485 | (253 | ) | 485 | 220 | 265 | ||||||||||||||||
Net expenses of operations of IBG Adriatica | 23 | 806 | (783 | ) | 806 | 832 | (26 | ) | |||||||||||||||
Impairment of other real estate | 22 | 549 | (527 | ) | 549 | 94 | 455 | ||||||||||||||||
Core deposit intangible amortization | 1,281 | 703 | 578 | 703 | 656 | 47 | |||||||||||||||||
Professional fees | 2,567 | 1,298 | 1,269 | 1,298 | 1,104 | 194 | |||||||||||||||||
Acquisition expense, including legal | 3,626 | 1,956 | 1,670 | 1,956 | 1,401 | 555 | |||||||||||||||||
Other | 8,675 | 7,080 | 1,595 | 7,080 | 5,009 | 2,071 | |||||||||||||||||
Total noninterest expense | $ | 88,512 | $ | 57,671 | $ | 30,841 | $ | 57,671 | $ | 47,160 | $ | 10,511 | |||||||||||
Salaries and Employee Benefits. Salaries and employee benefits expense, which historically has been the largest component of the Company’s noninterest expense, increased $20.5 million, or 64.4%, for the year ended December 31, 2014, compared to the same period in 2013. The increase was primarily attributable to an increase in the number of the Company’s full-time equivalent employees from 340 to 511, which resulted from the three acquisitions the Company completed in January 2014, April 2014 and October 2014, as well as the addition of new lending personnel. In addition, there was approximately $4.0 million in compensation paid to certain Bank of Houston officers that entered into employment agreements with the Company during the second quarter of 2014. Salaries and employee benefits expense increased $5.3 million, or 19.8%, for the year ended December 31, 2013, compared to the same period in 2012. The increase was primarily attributable to an increase in the number of the Company’s full-time equivalent employees from 316 to 340 and includes the the addition of lending teams in the Company’s high growth markets during the second half of 2012 and third quarter of 2013. Also contributing to the increase is compensation expense relating to the issuance of 111,420 shares of restricted stock under the 2013 Equity Incentive Plan in connection with the Company’s April 2013 initial public offering.
Occupancy Expense. Occupancy expense increased $4.2 million, or 46.5%, for the year ended December 31, 2014 compared to the same period in 2013 and increased $1.7 million, or 23.6%, for the year ended December 31, 2013 compared to the same period in 2012. The increases resulted from higher maintenance contract expenses, building lease expenses and property taxes, attributable primarily to the six acquisitions completed in the three year period. Eleven, one and three branch(es) were added as a result of the 2014, 2013 and 2012 acquisition(s), respectively. In addition, the increase in both periods was due to the Company's new Austin building in May 2013. The establishment of the Company’s Dallas location in June 2012 also contributed to the increase between 2012 and 2013.
Data Processing. Data processing fees increased $733 thousand, or 54.4%, for the year ended December 31, 2014, compared to the same period in 2013 and increased $149 thousand, or 12.4% for the year . The change is due to increased online banking fees and other costs related directly to an increase in accounts over the same period prior year, related both to organic growth and growth through acquisitions.
FDIC Assessment. FDIC assessment expense increased $1.3 million, or 259.4%, compared to the same period in 2013. The increase is due to a higher assessment associated with an increase in deposit accounts, both due to organic growth and growth through acquisitions. In addition, the increase is due to a non-recurring refund of $504 thousand of the Company's prepaid assessment during the second quarter of 2013. FDIC assessment decreased $300 thousand for the year ended December 31, 2013, compared to the comparable period in 2012. The decrease is primarily due to the nonrecurring refund of $504 thousand of the Company’s prepaid assessment during the year ended December 31, 2013, offset by a general increase in assessments due to increased deposit levels in 2013 over 2012.
Net expenses from operations of IBG Adriatica. Net expenses from the operations of IBG Adriatica decreased $783 thousand, or 97.1% to $23 thousand for the year ended December 31, 2014 from $806 thousand for the year ended December 31, 2013. The change was due to the Adriatica property being sold at December 31, 2013 and becoming inactive in early 2014. The minimal expenses recognized were due miscellaneous costs related to the winding down of that entity. The change in net expenses of Adritatica from 2012 to 2013 (while the entity was still in operation) was minimal.
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Other Real Estate Impairment. Other real estate impairment totaling $22 thousand was recognized during the year ended December 31, 2014, while there was $549 thousand in impairment charges recognized for the same period in 2013 and $94 thousand in impairment charges recognized in 2012. Approximately $261 thousand of the expense for the for the year ended December 31, 2013, was related to an ORE property located in the Austin, Texas area that was in negotiation to sell at a lower amount than the recorded book value. Approximately $217 thousand of the remaining impairment expense for that period was recorded on two properties located in Frisco, Texas, for which the Company had obtained updated appraisals.
Core Deposit Intangible Amortization. Amortization expense on core deposit intangibles increased $578 thousand for the year ended December 31, 2014, respectively over the same period in 2013. The increase is due primarily to core deposit intangibles of $11,188 acquired in the four acquisitions occurring in November 2013, January 2014, April 2014 and October 2014. The $47 thousand increase from 2012 to 2013 is primarily due to core intangibles of $1,362 acquired in the 2012 acquisitions and partly due to the $582 thousand core intangible added from the Collin bank transaction in November 2013. Core deposit intangibles are being amortized on the straight line method over 10 years.
Professional Fees. Professional fees increased $1.3 million, or 97.8%, for the year ended December 31, 2014, over the same period in 2013. The increase is due to an increase in attorney and accountants fees related to more SEC filings in 2014 including, the Company's annual report, proxy, shelf and other registration statements. The change in professional fees from 2012 to 2013 was not significant.
Acquisition Expense. Acquisition expense is primarily legal, advisory and accounting fees associated with services to facilitate the acquisition of other banks. Acquisition expenses also include data processing conversion costs. Total acquisition expenses for the year ended December 31, 2014, increased $1.7 million, or 85.4% over the same period in 2013. The increase is primarily due to more acquisition activity in 2014 compared to 2013 as the Bank closed three acquisitions in 2014 (in January, April and October) compared to one in 2013. Total acquisition expenses for year ended December 31, 2013, increased $555 thousand, or 39.6%, over the same period in 2012. Acquisition expenses for the year ended December 31, 2013, is higher than the comparable period in 2012 primarily due to more acquisition activity in 2013 compared to 2012. The Company closed two acquisitions in 2012, one in April and one in October. In 2013, the Company closed the Collin Bank transaction and incurred significant expenses relating to the announced acquisitions of Live Oak Financial Corp. and BOH Holdings, which were completed in 2014.
Other. Other noninterest expense increased by $1.6 million, or 22.5%, compared to the same period in 2013. The majority of the increase relates to general increases in operations due to organic growth within the Company as well as acquisition activity occurring in January 2014, April 2014 and October 2014. Other expense increased by $2.1 million, or 41.3%, for the year ended December 31, 2013, compared to the comparable period in 2012. The majority of the increase relates to ATM exchange fees, which had settled on a net basis prior to 2013 and were recorded in noninterest income. ATM expense was $1.2 million for the year ended December 31, 2013. In addition, general operating expenses were higher in 2013 due to acquisitions completed in April and October 2012 and November 2013.
Income Tax Expense
Income tax expense was $14.9 million for the year ended December 31, 2014, which is an effective tax rate of 34.0%. Income tax expense was $4.7 million for the year ended December 31, 2013 and includes the initial deferred tax asset recorded on April 1, 2013, that resulted in a credit to income tax expense of $1.8 million. As a result of its prior status as an S corporation as discussed above, the Company had no federal tax expense for the quarters ended on or prior to March 31, 2013. The Company was not subject to income tax expense until April 1, 2013, the date which it became a taxable entity. The Company has determined that had it been taxed as a C corporation and paid federal income taxes in the periods ended prior to April 1, 2013, its federal tax rates would have been 33.9% for the year ended December 31, 2013 and 30.1% for the year ended December 31, 2012. On a pro forma basis, the Company’s federal income tax expense would have been $8.3 million for the year ended December 31, 2013, and $5.2 million for the year ended December 31, 2012, resulting in pro forma net income, after federal taxes, for those periods of $16.2 million and $12.1 million, respectively.
No valuation allowance for deferred tax assets was recorded at December 31, 2014 or 2013, as management believes it is more likely than not that all of the deferred tax assets will be realized.
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Quarterly Financial Information
The following table presents certain unaudited consolidated quarterly financial information regarding the Company’s results of operations for the quarters ended December 31, September 30, June 30 and March 31 in the years ended December 31, 2014 and 2013. This information should be read in conjunction with the Company’s consolidated financial statements as of and for the fiscal years ended December 31, 2014 and December 31, 2013 appearing elsewhere in this Annual Report on Form 10-K. Prior to April 1, 2013, the Company elected to be taxed for federal income tax purposes as an S corporation under Sections 1361 through 1379 of the Internal Revenue Code of 1986, as amended. As a result and as reflected in the information appearing below, the Company did not pay, and made no provision for, federal income taxes for any quarter ended on or before March 31, 2013.
Quarter Ended 2014 | ||||||||||||
December 31 | September 30 | June 30 | March 31 | |||||||||
(dollars in thousands, except per share data) | (unaudited) | |||||||||||
Interest Income | $ | 42,952 | $ | 36,940 | $ | 35,078 | $ | 25,162 | ||||
Interest Expense | 4,777 | 4,509 | 3,674 | 3,027 | ||||||||
Net Interest Income | 38,175 | 32,431 | 31,404 | 22,135 | ||||||||
Provision for loan losses | 1,751 | 976 | 1,379 | 1,253 | ||||||||
Net interest income after provision for loan losses | 36,424 | 31,455 | 30,025 | 20,882 | ||||||||
Noninterest income | 3,961 | 4,210 | 3,119 | 2,334 | ||||||||
Noninterest expense | 24,931 | 22,162 | 25,343 | 16,076 | ||||||||
Income before income taxes | 15,454 | 13,503 | 7,801 | 7,140 | ||||||||
Provision for income taxes | 5,356 | 4,543 | 2,682 | 2,339 | ||||||||
Net income | $ | 10,098 | $ | 8,960 | $ | 5,119 | $ | 4,801 | ||||
Preferred stock dividends | 60 | 60 | 49 | — | ||||||||
Net income available to common shareholders | $ | 10,038 | $ | 8,900 | $ | 5,070 | $ | 4,801 | ||||
Comprehensive income | $ | 10,385 | $ | 9,225 | $ | 6,521 | $ | 6,380 | ||||
Basic earnings per share | $ | 0.59 | $ | 0.54 | $ | 0.32 | $ | 0.38 | ||||
Diluted earnings per share | 0.59 | 0.54 | 0.32 | 0.38 | ||||||||
Quarter Ended 2013 | ||||||||||||
December 31 | September 30 | June 30 | March 31 | |||||||||
(dollars in thousands, except per share data) | (unaudited) | |||||||||||
Interest income | $ | 22,847 | $ | 21,841 | $ | 21,105 | $ | 21,421 | ||||
Interest expense | 2,894 | 2,926 | 3,255 | 3,206 | ||||||||
Net interest income | 19,953 | 18,915 | 17,850 | 18,215 | ||||||||
Provision for loan losses | 883 | 830 | 1,079 | 1,030 | ||||||||
Net interest income after provision for loan losses | 19,070 | 18,085 | 16,771 | 17,185 | ||||||||
Noninterest income | 3,412 | 2,451 | 2,732 | 2,426 | ||||||||
Noninterest expense | 15,714 | 14,650 | 13,384 | 13,923 | ||||||||
Income before income taxes | $ | 6,768 | $ | 5,886 | $ | 6,119 | $ | 5,688 | ||||
Provision for income taxes | $ | 2,489 | $ | 1,927 | $ | 245 | $ | — | ||||
Net income | $ | 4,279 | $ | 3,959 | $ | 5,784 | $ | 5,688 | ||||
Comprehensive income | $ | 3,707 | $ | 4,610 | $ | 2,971 | $ | 4,804 | ||||
Basic earnings per share | $ | 0.35 | $ | 0.33 | $ | 0.49 | $ | 0.69 | ||||
Diluted earnings per share | 0.35 | 0.33 | 0.49 | 0.68 | ||||||||
48
Discussion and Analysis of Financial Condition
The following discussion and analysis of the Company’s financial condition discusses and analyzes the financial condition of the Company as of December 31, 2014 and 2013 and certain changes in that financial condition from December 31, 2013, to December 31, 2014, and from December 31, 2012, to December 31, 2013.
Assets
The Company’s total assets increased by $2.0 billion, or 91.0%, to $4.1 billion as of December 31, 2014, from $2.2 billion as of December 31, 2013, primarily due to the acquisition of $1.7 billion of total assets from the Company’s three acquisitions in 2014 and organic growth.
The Company’s total assets increased by $423.9 million, or 24.4%, to $2.2 billion as of December 31, 2013, from $1.7 billion at December 31, 2012. Such increase was primarily the result of a $345.4 million, or 25.3%, increase in the Company’s loans, net of allowance for loan losses, from December 31, 2012 to December 31, 2013, which occurred for the reasons discussed in “-Loan Portfolio” below as well as the receipt and investment of the portion of the net proceeds of $86.6 million from the Company’s initial public offering of its common stock not applied to the repayment of indebtedness. In addition, this increase is partially due to the acquisition of Collin Bank, which had approximately $168 million in total assets upon its acquisition in November 2013.
Loan Portfolio
The Company’s loan portfolio is the largest category of the Company’s earning assets. As of December 31, 2014, loans, net of the allowance for loan losses, totaled $3.2 billion, which is an increase of 86.1% over the total at December 31, 2013. The increase is due to both organic growth and approximately $1.05 billion due to loans acquired in the Company's three acquisitions during the year. As of December 31, 2013, loans, net of allowance for loan losses, totaled $1.7 billion, which is an increase of 25.3% over the previous year end. The growth in the loan portfolio from December 31, 2012 to December 31, 2013 is primarily due to an increase in commercial and commercial real estate loan activity as a result of new lending teams, including experienced energy lenders, added during the second half of 2012.
The following table presents the balance and associated percentage of each major category in the Company’s loan portfolio as of December 31, 2014, 2013, 2012, 2011 and 2010:
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||||||||||||||||
(dollars in thousands) | Amount | % of Total | Amount | % of Total | Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||||||||||||||
Commercial | $ | 672,052 | 21.0 | % | $ | 241,178 | 14.0 | % | $ | 169,882 | 12.3 | % | $ | 127,827 | 12.9 | % | $ | 121,805 | 14.2 | % | ||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||||
Commercial | 1,450,434 | 45.2 | 843,436 | 48.9 | 648,494 | 47.0 | 470,820 | 47.6 | % | 361,106 | 42.0 | |||||||||||||||||||||||
Commercial construction, land and land development | 334,964 | 10.5 | 130,320 | 7.5 | 97,329 | 7.1 | 79,063 | 8.0 | % | 81,270 | 9.4 | |||||||||||||||||||||||
Residential (1) | 518,478 | 16.2 | 342,037 | 19.8 | 315,349 | 22.9 | 222,929 | 22.6 | % | 211,297 | 24.6 | |||||||||||||||||||||||
Single family interim construction | 138,278 | 4.3 | 83,144 | 4.8 | 67,920 | 4.9 | 24,592 | 2.5 | % | 20,402 | 2.4 | |||||||||||||||||||||||
Agricultural | 38,822 | 1.2 | 40,558 | 2.3 | 40,127 | 2.9 | 34,923 | 3.5 | % | 32,902 | 3.8 | |||||||||||||||||||||||
Consumer | 52,267 | 1.6 | 45,762 | 2.7 | 39,502 | 2.9 | 28,437 | 2.9 | % | 31,270 | 3.6 | |||||||||||||||||||||||
Other | 242 | — | 108 | — | 73 | — | 80 | — | 76 | — | ||||||||||||||||||||||||
3,205,537 | 100.0 | % | 1,726,543 | 100.0 | % | 1,378,676 | 100.0 | % | 988,671 | 100.0 | % | 860,128 | 100.0 | % | ||||||||||||||||||||
Deferred loan fees | (487 | ) | — | — | — | — | ||||||||||||||||||||||||||||
Allowance for loan losses | (18,552 | ) | (13,960 | ) | (11,478 | ) | (9,060 | ) | (8,403 | ) | ||||||||||||||||||||||||
Total loans, net | $ | 3,186,498 | $ | 1,712,583 | $ | 1,367,198 | $ | 979,611 | $ | 851,725 | ||||||||||||||||||||||||
(1) Includes mortgage loans held for sale as of December 31, 2014, 2013, 2012, 2011 and 2010 of $4.5 million, $3.4 million, $9.2 million, $3.0 million and $3.3 million, respectively.
Gross loans increased $1.5 billion, or 85.7%, to $3.2 billion at December 31, 2014, from $1.7 billion at December 31, 2013. Gross loans increased $348 million, or 25.2%, to $1.7 billion as of December 31, 2013, and from $1.4 billion as of December 31, 2012. The loan growth is as a result of the organic growth of the Company’s loan portfolio and the Company’s three acquisitions in 2014, one in 2013 and two in 2012.
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The following table sets forth the contractual maturities, including scheduled principal repayments, of the Company’s loan portfolio (which includes balloon notes) and the distribution between fixed and adjustable interest rate loans as of December 31, 2014:
As of December 31, 2014 | Within One Year | One Year to Five Years | After Five Years | Total | ||||||||||||||||||||
(dollars in thousands) | Fixed Rate | Adjustable Rate | Fixed Rate | Adjustable Rate | Fixed Rate | Adjustable Rate | Fixed Rate | Adjustable Rate | ||||||||||||||||
Commercial | $ | 47,571 | $ | 133,551 | $ | 150,900 | $ | 284,832 | $ | 35,404 | $ | 19,794 | $ | 233,875 | $ | 438,177 | ||||||||
Real estate: | ||||||||||||||||||||||||
Commercial real estate | 50,865 | 23,412 | 507,518 | 143,772 | 208,032 | 516,835 | 766,415 | 684,019 | ||||||||||||||||
Commercial construction, land and land development | 45,414 | 30,584 | 104,556 | 65,986 | 17,454 | 70,970 | 167,424 | 167,540 | ||||||||||||||||
Residential real estate | 46,462 | 10,261 | 210,386 | 4,874 | 131,847 | 114,648 | 388,695 | 129,783 | ||||||||||||||||
Single family interim construction | 45,960 | 67,171 | 9,230 | 4,950 | 9,890 | 1,077 | 65,080 | 73,198 | ||||||||||||||||
Agricultural | 6,636 | 6,554 | 11,080 | 468 | 1,123 | 12,961 | 18,839 | 19,983 | ||||||||||||||||
Consumer | 10,695 | 7,183 | 32,243 | 1,051 | 951 | 144 | 43,889 | 8,378 | ||||||||||||||||
Other | 242 | — | — | — | — | — | 242 | — | ||||||||||||||||
Total loans | $ | 253,845 | $ | 278,716 | $ | 1,025,913 | $ | 505,933 | $ | 404,701 | $ | 736,429 | $ | 1,684,459 | $ | 1,521,078 | ||||||||
The principal categories of the Company’s loan portfolio are discussed below:
Commercial loans. The Company provides a mix of variable and fixed rate commercial loans. The loans are typically made to small-and medium-sized manufacturing, wholesale, retail, energy related service businesses and medical practices for working capital needs and business expansions. Commercial loans generally include lines of credit and loans with maturities of five years or less. The loans are generally made with operating cash flows as the primary source of repayment, but may also include collateralization by inventory, accounts receivable, equipment and/or personal guarantees. Additionally, our commercial loan portfolio includes loans made to customers in the energy industry, which is a complex, technical and cyclical industry. Experienced bankers with specialized energy lending experience originate our energy loans. Companies in this industry produce, extract, develop, exploit and explore for oil and natural gas. Loans are primarily collateralized with proven producing oil and gas reserves based on a technical evaluation of these reserves. The Company plans to continue to make commercial loans an area of emphasis in the Company’s lending operations in the future.
The Company’s commercial loan portfolio increased $430.9 million, or 178.65%, to $672.1 million as of December 31, 2014, from $241.2 million as of December 31, 2013, with the increase primarily attributable to the commercial loans acquired in the Company’s acquisitions in 2014 and growth in the Bank's energy portfolio. The energy E&P portfolio totaled $231.7 million, or approximately 7.2% of the total portfolio at December 31, 2014 up from $68.3 million, or 4.0% of the total portfolio at December 31, 2013. Commercial loans increased $71.3 million, or 42.0%, to $241.2 million as of December 31, 2013 from $169.9 million as of December 31, 2012. This increase is primarily attributable to organic growth in the Company’s commercial loan portfolio.
Commercial real estate loans. The Company’s commercial real estate loans generally are used by customers to finance their purchase of office buildings, retail centers, medical facilities and mixed-use buildings. Approximately 48%, 43% and 55% of the Company’s commercial real estate loans as of December 31, 2014, 2013, and 2012, respectively, were owner-occupied. Such loans generally involve less risk than loans on investment property. The Company expects that commercial real estate loans will continue to be a significant portion of the Company’s total loan portfolio and an area of emphasis in the Company’s lending operations.
The Company’s commercial real estate loans increased $607.0 million, or 72.0%, to $1.45 billion as of December 31, 2014 from $843.4 million as of December 31, 2013, as a result of the Company’s three acquisitions in 2014 and increased lending activity. Commercial real estate loans increased $194.9 million, or 30.1%, to $843.4 million as of December 31, 2013 from $648.5 million as of December 31, 2012. That increase was due to a general increase in lending activity, primarily in the Austin region.
Commercial construction, land and land development loans. The Company’s commercial construction, land and land development loans comprise loans to fund commercial construction, land acquisition and real estate development construction. Although the Company continues to make commercial construction loans, land acquisition and land development loans on a selective basis, the Company does not expect the Company’s lending in this area to result in this category of loans being a significantly greater portion of the Company’s total loan portfolio.
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The Company’s loans in this segment increased $204.6 million, or 157.0%, to $335.0 million as of December 31, 2014 from $130.3 million as of December 31, 2013. Commercial construction, land and land development loans in this segment of its loan portfolio increased $33.0 million, or 33.9%, to $130.3 million as of December 31, 2013, from $97.3 million as of December 31, 2012. The increase in such loans from December 31, 2013, to December 31, 2014, resulted primarily from the Company’s three acquisitions in 2014 while the increase in loans in this category from December 31, 2012, to December 31, 2013, was primarily as a result of general increased lending activity in this area.
Residential Real Estate Loans. The Company’s residential real estate loans are primarily made with respect to and secured by single-family homes, which are both owner-occupied and investor owned and include a limited amount of home equity loans, with a relatively small average loan balance spread across many individual borrowers. The Company offers a variety of mortgage loan portfolio products which generally are amortized over five to 30 years. Loans collateralized by 1-4 family residential real estate generally have been originated in amounts of no more than 80% of appraised value. The Company requires mortgage title insurance and hazard insurance. The Company retains these portfolio loans for its own account rather than selling them into the secondary market. By doing so, the Company incurs interest rate risk as well as the risks associated with nonpayments on such loans. The Company’s loan portfolio also includes a number of multi-family housing real estate loans. The Company expects that the Company will continue to make residential real estate loans, with an emphasis on single-family housing loans, so long as housing values in the Company’s markets do not deteriorate from current prevailing levels and the Company is able to make such loans consistent with the Company’s current credit and underwriting standards.
Residential real estate loans increased $176.4 million, or 51.6%, to $518.5 million at December 31, 2014 from $342.0 million as of December 31, 2013. The increase in loans in this category from December 31, 2013 to December 31, 2014, resulted from the Company’s three acquisitions and increased lending activity. The Company’s residential real estate loan portfolio grew by $26.7 million, or 8.5%, to a balance of $342.0 million as of December 31, 2013 from $315.3 million as of December 31, 2012. The increase in this loan category resulted from the sustained demand in the residential real estate market. The significantly slower rate of growth in this type of loan from December 31, 2012, to December 31, 2013, reflects the effect of the I Bank acquisition on the rate of growth in 2012.
Single-Family Interim Construction Loans. The Company makes single-family interim construction loans to home builders and individuals to fund the construction of single-family residences with the understanding that such loans will be repaid from the proceeds of the sale of the homes by builders or, in the case of individuals building their own homes, with the proceeds of a permanent mortgage loan. Such loans are secured by the real property being built and are made based on the Company’s assessment of the value of the property on an as-completed basis. The Company expects to continue to make single-family interim construction loans so long as demand for such loans continues and the market for single-family housing and the values of such properties remain stable or continue to improve in the Company’s markets.
Single family interim construction loans increased $55.1 million, or 66.3%, to $138.3 million at December 31, 2014 from $83.1 million as of December 31, 2013, as a result of the acquisition of these types of loans in the Company’s three acquisitions in 2014. The balance of single-family interim construction loans in the Company’s loan portfolio increased by $15.2 million, or 22.4%, to $83.1 million as of December 31, 2013 from the balance of $67.9 million as of December 31, 2012, which resulted from the sustained demand in the residential real estate market.
Other Categories of Loans. Other categories of loans included in the Company’s loan portfolio include agricultural loans made to farmers and ranchers relating to their operations, consumer loans made to individuals for personal purposes, including automobile purchase loans and personal loans. None of these categories of loans represents more than 3% of the Company’s total loan portfolio as of December 31, 2014, 2013, or 2012 and such categories continue to decline as a % of the Company's total loan portfolio.
Asset Quality
Nonperforming Assets. The Company has established procedures to assist the Company in maintaining the overall quality of the Company’s loan portfolio. In addition, the Company has adopted underwriting guidelines to be followed by the Company’s lending officers and require significant senior management review of proposed extensions of credit exceeding certain thresholds. When delinquencies exist, the Company rigorously monitors the levels of such delinquencies for any negative or adverse trends. The Company’s loan review procedures include approval of lending policies and underwriting guidelines by Independent Bank’s board of directors, an annual independent loan review, approval of large credit relationships by Independent Bank’s Executive Loan Committee and loan quality documentation procedures. The Company, like other financial institutions, is subject to the risk that its loan portfolio will be subject to increasing pressures from deteriorating borrower credit due to general economic conditions.
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The Company discontinues accruing interest on a loan when management of the Company believes, after considering the Company’s collection efforts and other factors, that the borrower’s financial condition is such that collection of interest of that loan is doubtful. Loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans, including troubled debt restructurings, that are placed on nonaccrual status or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The Company did not make any changes in the Company’s nonaccrual policy during the fiscal years of 2014, 2013 or 2012.
Placing a loan on nonaccrual status has a two-fold impact on net interest earnings. First, it may cause a charge against earnings for the interest which had been accrued in the current year but not yet collected on the loan. Second, it eliminates future interest income with respect to that particular loan from the Company’s revenues. Interest on such loans is not recognized until the entire principal is collected or until the loan is returned to performing status. The Company had $3.7 million, $2.7 million and $6.6 million in loans on nonaccrual status as of December 31, 2014, 2013, and 2012, respectively. The Company had an increase in loans on nonaccrual status from December 31, 2013 to December 31, 2014 primarily from one commercial loan totaling $1.4 million that was placed on nonaccrual status in the fourth quarter of 2014. The Company’s loans on nonaccrual status decreased from December 31, 2013 to December 31, 2014 primarily as a result of the payoff of a $1.8 million loan that was on nonaccrual status at December 31, 2012 and a foreclosure that resulted in the transfer of a $2.3 million nonaccrual loan to other real estate owned.
Real estate the Company has acquired as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned until sold. The Company’s policy is to initially record other real estate at fair value less estimated costs to sell at the date of foreclosure. After foreclosure, other real estate is carried at the lower of the initial carrying amount (fair value less estimated costs to sell or lease), or at the value determined by subsequent appraisals or internal valuations of the other real estate.
The Company obtains appraisals of real property that secure loans and may update such appraisals of real property securing loans categorized as nonperforming loans and potential problem loans, in each case as required by regulatory guidelines. In instances where updated appraisals reflect reduced collateral values, an evaluation of the borrower’s overall financial condition is made to determine the need, if any, for possible write-downs or appropriate additions to the allowance for loan losses.
The Company periodically modifies loans to extend the term or make other concessions to help a borrower with a deteriorating financial condition stay current on their loan and to avoid foreclosure. The Company generally does not forgive principal or interest on loans or modify the interest rates on loans to rates that are below market rates. Under applicable accounting standards, such loan modifications are generally classified as troubled debt restructurings.
The following table sets forth the allocation of the Company’s nonperforming assets among the Company’s different asset categories as of the dates indicated. The Company classifies nonperforming loans as nonaccrual loans, loans past due 90 days or more and still accruing interest or loans modified under restructurings as a result of the borrower experiencing financial difficulties. The balances of nonperforming loans reflect the net investment in these assets, including deductions for purchase discounts.
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As of December 31, | ||||||||||||||||||||
(dollars in thousands) | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||
Nonaccrual loans | ||||||||||||||||||||
Commercial | $ | 1,449 | $ | 357 | $ | 218 | $ | 131 | $ | 194 | ||||||||||
Real estate: | ||||||||||||||||||||
Commercial real estate, construction, land and land development | 70 | 253 | 4,857 | 1,291 | 5,531 | |||||||||||||||
Residential real estate | 2,117 | 1,852 | 894 | 2,864 | 2,079 | |||||||||||||||
Single-family interim construction | — | 170 | 560 | 91 | — | |||||||||||||||
Consumer | 67 | 43 | 70 | 54 | 42 | |||||||||||||||
Total nonaccrual loans (1) | 3,703 | 2,675 | 6,599 | 4,431 | 7,846 | |||||||||||||||
Loans delinquent 90 days or more and still accruing | ||||||||||||||||||||
Commercial | 157 | — | — | 31 | 39 | |||||||||||||||
Real estate: | ||||||||||||||||||||
Residential real estate | 288 | — | — | — | 92 | |||||||||||||||
Agricultural | — | — | — | — | 2 | |||||||||||||||
Consumer | 6 | — | 2 | 24 | 1 | |||||||||||||||
Total loans delinquent 90 days or more and still accruing | 451 | — | 2 | 55 | 134 | |||||||||||||||
Troubled debt restructurings, not included in nonaccrual loans | ||||||||||||||||||||
Commercial | 30 | 107 | 481 | 552 | 147 | |||||||||||||||
Real estate: | ||||||||||||||||||||
Commercial real estate, construction, land and land development | 4,668 | 5,090 | 1,778 | 6,094 | 7,671 | |||||||||||||||
Residential real estate | 1,254 | 1,288 | 2,165 | 136 | 382 | |||||||||||||||
Consumer | 8 | 1 | 9 | 12 | — | |||||||||||||||
Total troubled debt restructurings, not included in nonaccrual loans | 5,960 | 6,486 | 4,433 | 6,794 | 8,200 | |||||||||||||||
Total nonperforming loans | 10,114 | 9,161 | 11,034 | 11,280 | 16,180 | |||||||||||||||
Other real estate owned (Bank only): | ||||||||||||||||||||
Commercial real estate, construction, land and land development | 4,763 | 3,322 | 6,166 | 7,835 | 7,164 | |||||||||||||||
Agricultural real estate | — | — | — | 457 | 535 | |||||||||||||||
Residential real estate | — | 653 | 100 | 155 | ||||||||||||||||
Total other real estate owned | 4,763 | 3,322 | 6,819 | 8,392 | 7,854 | |||||||||||||||
Adriatica real estate owned | — | — | 9,727 | 16,065 | — | |||||||||||||||
Total nonperforming assets | $ | 14,877 | $ | 12,483 | $ | 27,580 | $ | 35,737 | $ | 24,034 | ||||||||||
Ratio of nonperforming loans to total loans | 0.32 | % | 0.53 | % | 0.81 | % | 1.14 | % | 1.89 | % | ||||||||||
Ratio of nonperforming assets to total assets | 0.36 | 0.58 | 1.59 | 2.85 | 2.19 | |||||||||||||||
(1) Nonaccrual loans include troubled debt restructurings of $1.3 million, $1.5 million, $3.1 million, $305 thousand and $480 thousand as of December 31, 2014, 2013, 2012, 2011 and 2010, respectively.
Nonaccrual loans increased to $3.7 million at December 31, 2014, from $2.7 million as of December 31, 2013 due to the addition of one commercial loan totaling $1.4 million that was placed on nonaccrual in the fourth quarter of 2014. Troubled debt restructurings that were also on nonaccrual status totaled $1.3 million and $1.5 million at December 31, 2014 and December 31, 2013, respectively. Nonaccrual loans decreased from $6.6 million as of December 31, 2012 to $2.7 million as of December 31, 2013. Troubled debt restructurings that were also on nonaccrual status totaled $1.5 million and $3.1 million at December 31, 2013 and December 31, 2012, respectively. These decreases primarily resulted from the payoff of a $1.8 million loan that was on nonaccrual at December 31, 2012 and a foreclosure that resulted in the transfer of a $2.3 million nonaccrual loan to other real estate. Loans past due 90 days and still accruing totaled $451 thousand as of December 31, 2014. The largest portion of this balance was a $288 thousand commercial real estate construction loan that was pending a renewal at December 31, 2014. The loan was subsequently renewed and returned to performing status.
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The balance of the Company’s nonperforming loans remained relatively stable from December 31, 2011 to December 31, 2012, as the Company’s troubled debt restructurings and loans delinquent 90 days or more and still accruing declined due to continued paydowns, while nonaccrual loans increased. The decrease of $4.9 million, or 30.3%, in nonperforming loans during fiscal 2011 resulted from collections and foreclosures.
The Company did not recognize any interest income on nonaccrual loans during fiscal 2014, 2013 or 2012 while the loans were in nonaccrual status. The amount of interest the Company included in the Company’s net interest income for fiscal year 2014, 2013 and 2012 with respect to nonperforming loans was $433 thousand, $257 thousand and $351 thousand, respectively. Additional interest income that the Company would have recognized on these nonperforming loans had they been current in accordance with their original terms was $203 thousand, $158 thousand and $277 thousand, respectively, during fiscal year 2014, 2013 and 2012.
As of December 31, 2014, the Company had a total of 66 loans with an aggregate principal balance of $16.7 million that were not currently nonaccrual loans, 90 days past due loans or troubled debt restructurings, but where the Company had information about possible credit problems of the borrowers that caused the Company’s management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and that could result in those loans becoming nonaccrual loans, 90 days past due loans or troubled debt restructurings in the future.
The Company generally continues to use the classification of acquired loans classified nonaccrual or 90 days and accruing as of the acquisition date. The Company does not classify acquired loans as troubled debt restructurings, or TDRs, unless the Company modifies an acquired loan subsequent to acquisition that meets the TDR criteria. Reported delinquency of the Company’s purchased loan portfolio is based upon the contractual terms of the loans.
As of December 31, 2014, the Company had other real estate with a carrying value of $4.8 million, up slightly from the $3.3 million balance as of December 31, 2013. The increase is due primarily to three branches totaling $2.4 million that were closed during 2014 and transferred to other real estate owned. As of December 31, 2013, the Company had other real estate with a carrying value of $3.3 million, down $3.5 million from the balance as of December 31, 2012, resulting from the sale of the IBG Adriatica properties and the sale of several other properties during the year.
The Company utilizes an asset risk classification system in compliance with guidelines established by the state and federal banking regulatory agencies as part of the Company’s efforts to improve asset quality. In connection with examinations of insured institutions, examiners have the authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: “substandard,” “doubtful,” and “loss.” Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values. An asset classified as loss is not considered collectible and is of such little value that continuance as an asset is not warranted. The Company produces a problem asset report that is reviewed by Independent Bank’s board of directors monthly. That report also includes “pass/watch” loans and other assets especially mentioned or OAEM. Pass/watch loans have a potential weakness that requires more frequent monitoring. OAEM credits have weaknesses that require attention. Officers and senior management review these loans monthly to determine if a more severe rating is warranted.
Allowance for Loan Losses. The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. The Company’s allowance for loan losses represents the Company’s estimate of probable and reasonably estimable loan losses inherent in loans held for investment as of the respective balance sheet date. The Company’s methodology for assessing the adequacy of the allowance for loan losses includes a general allowance for performing loans, which are grouped based on similar characteristics, and an allocated allowance for individual impaired loans. Actual credit losses or recoveries are charged or credited directly to the allowance.
The Company establishes a general allowance for loan losses that the Company believes to be adequate for the losses the Company estimates to be inherent in the Company’s loan portfolio. In making the Company’s evaluation of the credit risk of the loan portfolio, the Company considers factors such as the volume, growth and composition of the loan portfolio, the effect of changes in the local real estate market on collateral values, trends in past dues, the experience of the lender, changes in lending policy, the effects on the loan portfolio of current economic indicators and their probable impact on borrowers, historical loan loss experience, the amount of nonperforming loans and related collateral and the evaluation of the Company’s loan portfolio by the loan review function.
The Company may assign a specific allowance to individual loans based on an impairment analysis. Loans are considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of
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the loan agreement. The amount of impairment is based on an analysis of the most probable source of repayment, including the present value of the loan’s expected future cash flows, the estimated market value or the fair value of the underlying collateral. Loans evaluated for impairment include all commercial, real estate, agricultural loans and TDRs.
The Company follows a loan review program to evaluate the credit risk in the loan portfolio. Throughout the loan review process, the Company maintains an internally classified loan watch list, which, along with a delinquency list of loans, helps management assess the overall quality of the Company’s loan portfolio and the adequacy of the allowance for loan losses. Charge-offs occur when the Company deems a loan to be uncollectible.
Analysis of the Allowance for Loan Losses. The following table sets forth the allowance for loan losses by category of loan:
As of December 31, | |||||||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||||||||
(dollars in thousands) | Amount | % of Total Loans(1) | Amount | % of Total Loans(1) | Amount | % of Total Loans(1) | Amount | % of Total Loans(1) | Amount | % of Total Loans(1) | |||||||||||||||
Commercial loans | $ | 5,051 | 21.0 | % | $ | 2,401 | 14.0 | % | $ | 2,377 | 12.3 | % | $ | 1,259 | 12.9 | % | $ | 1,228 | 14.2 | % | |||||
Real estate: | |||||||||||||||||||||||||
Commercial real estate, construction, land and land development | 10,110 | 55.7 | 7,872 | 56.4 | 4,924 | 54.1 | 5,051 | 55.6 | 4,294 | 51.4 | |||||||||||||||
Residential real estate | 2,205 | 16.2 | 2,440 | 19.8 | 2,965 | 22.9 | 1,964 | 22.6 | 1,639 | 24.6 | |||||||||||||||
Single family interim construction | 669 | 4.3 | 577 | 4.8 | 523 | 4.9 | 317 | 2.5 | 250 | 2.4 | |||||||||||||||
Agricultural | 246 | 1.2 | 238 | 2.3 | 159 | 2.9 | 209 | 3.5 | 167 | 3.8 | |||||||||||||||
Consumer | 146 | 1.6 | 363 | 2.7 | 278 | 2.9 | 235 | 2.9 | 293 | 3.6 | |||||||||||||||
Unallocated | 125 | — | 69 | — | 252 | — | 25 | — | 532 | — | |||||||||||||||
Total allowance for loan losses | $ | 18,552 | 100.0 | % | $ | 13,960 | 100.0 | % | $ | 11,478 | 100.0 | % | $ | 9,060 | 100.0 | % | $ | 8,403 | 100.0 | % | |||||
(1) Represents the percentage of Independent’s total loans included in each loan category.
As of December 31, 2014, the allowance for loan losses amounted to $18.6 million, or 0.58%, of total loans held for investment, compared with $14.0 million, or 0.81%, as of December 31, 2012 and $11.5 million, or 0.84%, as of December 31, 2012. The decrease in the December 31, 2014 to December 31, 2013, ratio is attributable to loans acquired in the Live Oak Financial Corp., BOH Holdings and Houston City Bancshares acquisitions that are recorded at fair value and do not have an allowance as of December 31, 2014 as there has been no evidence of credit deterioration since acquisition date. The increase in the allowance of $2.5 million for fiscal year 2013 was primarily in response to the organic growth in its total loans during the fiscal year in addition to loans acquired in the two acquisitions in 2012. The loans acquired in the November 2013 Collin Bank acquisition did not affect the allowance balance at December 31, 2013. The problem assets in that acquisition that might have required an allowance for loan loss if the Company had originated those loans were instead appropriately recorded at their fair value determined in accordance with business combination accounting guidance, as were other loans acquired in the acquisition. The allowance balance increased $2.4 million during fiscal year 2012 in response to organic loan growth during the year. The acquired loans in the 2012 acquisitions were also recorded at fair value at the date of acquisition, thus having minimal effect on the December 31, 2012 allowance balance.
The allowance for loans losses as a percentage of nonperforming loans increased to 183.43% at December 31, 2014 compared to 152.93% at December 31, 2013. The increase is due primarily to the increase in the recorded allowance to account for the Company's organic growth in loan portfolio during this time. As of December 31, 2014, the Company recorded a specific allowance for loan losses of $475 thousand for impaired loans totaling $3.6 million, compared to a specific allowance of $855 thousand on impaired loans totaling $5.4 million as of December 31, 2013.
The allowance for loan losses as a percentage of nonperforming loans increased from 104.02% at December 31, 2012, to 152.93% at December 31, 2013, due to the decrease in nonperforming loans from $11.0 million at December 31, 2012, to $9.2 million at December 31, 2013. As of December 31, 2013, the Company had made a specific allowance for loan losses of $855 thousand for impaired loans totaling $5.4 million, compared with a specific allowance of $989 thousand for impaired loans totaling $7.6 million as of December 31, 2012. This decrease resulted from the foreclosure and transfer of a $2.3 million impaired loan to other real estate owned.
Although the allowance for loan losses to nonperforming loans has increased significantly over the periods presented in the Company’s consolidated financial statements appearing in this Annual Report on Form 10-K, the Company does not expect to decrease the Company’s allowance as a percentage of total loans. The allowance is primarily related to loans evaluated
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collectively and will continue to increase as the Company’s loan portfolio grows. Additional provision expense will vary depending on future credit quality trends within the portfolio.
The following table provides an analysis of the provisions for loan losses, net charge-offs and recoveries for the years ended December 31, 2014, 2013, 2012, 2011 and 2010 and the effects of those items on the Company’s allowance for loan losses:
As of and for the Year Ended December 31, | |||||||||||||||
(dollars in thousands) | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
Allowance for loan losses-balance at beginning of year | $ | 13,960 | $ | 11,478 | $ | 9,060 | $ | 8,403 | $ | 6,742 | |||||
Charge-offs | |||||||||||||||
Commercial | (368 | ) | (612 | ) | (169 | ) | (23 | ) | (579 | ) | |||||
Real estate: | |||||||||||||||
Commercial real estate, construction, land and land development | (371 | ) | (634 | ) | (484 | ) | (694 | ) | (416 | ) | |||||
Residential real estate | (32 | ) | (130 | ) | (178 | ) | (316 | ) | (837 | ) | |||||
Single-family interim construction | — | — | — | (20 | ) | (561 | ) | ||||||||
Consumer | (143 | ) | (64 | ) | (86 | ) | (94 | ) | (114 | ) | |||||
Total charge-offs | (914 | ) | (1,440 | ) | (917 | ) | (1,147 | ) | (2,507 | ) | |||||
Recoveries | |||||||||||||||
Commercial | 19 | 20 | 26 | 17 | 15 | ||||||||||
Real estate: | |||||||||||||||
Commercial real estate, construction, land and land development | 79 | 28 | 68 | 35 | 3 | ||||||||||
Residential real estate | 8 | 10 | 3 | — | 49 | ||||||||||
Single-family interim construction | 11 | — | — | 49 | 10 | ||||||||||
Consumer | 30 | 42 | 54 | 53 | 48 | ||||||||||
Total recoveries | 147 | 100 | 151 | 154 | 125 | ||||||||||
Net charge-offs | (767 | ) | (1,340 | ) | (766 | ) | (993 | ) | (2,382 | ) | |||||
Provision for loan losses | 5,359 | 3,822 | 3,184 | 1,650 | 4,043 | ||||||||||
Allowance for loan losses-balance at end of year | $ | 18,552 | $ | 13,960 | $ | 11,478 | $ | 9,060 | $ | 8,403 | |||||
Ratios | |||||||||||||||
Net charge-offs to average loan outstanding | 0.03 | % | 0.09 | % | 0.06 | % | 0.11 | % | 0.31 | % | |||||
Allowance for loan losses to nonperforming loans at end of year | 183.43 | 152.39 | 104.02 | 80.32 | 51.93 | ||||||||||
Allowance for loan losses to total loans at end of year (1) | 0.58 | 0.81 | 0.84 | 0.92 | 0.98 | ||||||||||
(1) Calculation excludes loans held for sale from total loans.
The ratio of the Company’s allowance for loan losses to total loans was 0.58% as of December 31, 2014, compared to 0.81% as of December 31, 2013, which primarily resulted from $1.1 billion of acquired loans being recorded at fair value at acquisition date. Such remaining loans having no allowance allocated at December 31, 2014 as their has been no evidence of deterioration of credit post acquisition. The ratio of net charge-offs to average loans outstanding decreased to 0.03% for the year ended December 31, 2014, from 0.09% for the year ended December 31, 2013, as a result of improvement in the financial condition of the Company’s borrowers and the value of the collateral securing the Company’s loans as well as the continued conservative underwriting of the portfolio.
The Company’s ratio of allowance to loan losses to total loans as of December 31, 2013 was 0.81% relatively unchanged from 0.84% at December 31, 2012 as a result of the $3.8 million provision for loan losses made during the fiscal year ended December 31, 2013 in connection with the growth in the Company’s loan portfolio and net charge-offs of $1.3 million during that period. The ratio of net charge-offs to average loans outstanding during the fiscal year ended December 31, 2013 increased to 0.09% from 0.06% for the year ended December 31, 2012. The increase primarily occurred as a result of three large charge-offs totaling $1.1 million during fiscal year 2013.
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Securities Available for Sale
The Company’s investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit, interest rate and duration risk. The types and maturities of securities purchased are primarily based on the Company’s current and projected liquidity and interest rate sensitivity positions. The following table sets forth the book value, which is equal to fair market value because all investment securities the Company held were classified as available for sale as of the applicable date, and the percentage of each category of securities as of December 31, 2014, 2013 and 2012:
As of December 31, | |||||||||||||||
2014 | 2013 | 2012 | |||||||||||||
(dollars in thousands) | Book Value | % of Total | Book Value | % of Total | Book Value | % of Total | |||||||||
Securities available for sale | |||||||||||||||
U.S. Treasury securities | $ | 1,006 | 0.49 | % | $ | 3,513 | 1.81 | % | $ | 3,547 | 3.13 | % | |||
Government agency securities | 58,023 | 28.16 | 94,415 | 48.66 | % | 70,211 | 61.94 | % | |||||||
Obligations of state and municipal subdivisions | 76,899 | 37.32 | 36,615 | 18.87 | % | 36,814 | 32.48 | % | |||||||
Residential pass-through securities guaranteed by FNMA, GNMA, FHLMC and FHR | 69,053 | 33.51 | 57,443 | 29.60 | % | 680 | 0.60 | % | |||||||
Corporate bonds | 1,081 | 0.52 | 2,052 | 1.06 | % | 2,103 | 1.85 | % | |||||||
Total securities available for sale | $ | 206,062 | 100.00 | % | $ | 194,038 | 100.00 | % | $ | 113,355 | 100.00 | % | |||
The Company recognized a gain on sale of securities of $362 thousand during 2014. The Company had no gain or loss on sales of securities in the fiscal year ended December 31, 2013, but recognized a nominal loss on sale of securities during the fiscal year ended December 31, 2012. Securities represented 5.0%, 9.0% and 6.5% of the Company’s total assets at December 31, 2014, 2013 and 2012, respectively.
Certain investment securities are valued at less than their historical cost. Management evaluates securities for other-than-temporary impairment (OTTI) on at least a quarterly basis and more frequently when economic of market conditions warrant such an evaluation. Management does not intend to sell any debt securities it holds and believes the Company more likely than not will not be required to sell any debt securities it holds before their anticipated recovery, at which time the Company will receive full value for the securities. Management has the ability and intent to hold the securities classified as available for sale that were in a loss position as of December 31, 2014 for a period of time sufficient for an entire recovery of the cost basis of the securities. For those securities that are impaired, the unrealized losses are largely due to interest rate changes. The fair value is expected to recover as the securities approach their maturity date. Management believes any impairment in the Company’s securities at December 31, 2014, is temporary and no impairment has been realized in the Company’s consolidated financial statements.
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The following table sets forth the book value, scheduled maturities and weighted average yields for the Company’s investment portfolio as of December 31, 2014:
(dollars in thousands) | Book Value | % of Total Investment Securities | Weighted Average Yield | ||||
U.S. Treasury securities | |||||||
Maturing within one year | $ | — | — | % | — | % | |
Maturing in one to five years | 1,006 | 0.49 | 1.06 | ||||
Maturing in five to ten years | — | — | — | ||||
Maturing after ten years | — | — | — | ||||
Total U.S. Treasury securities | 1,006 | 0.49 | 1.06 | ||||
Government agency securities | |||||||
Maturing within one year | — | — | — | ||||
Maturing in one to five years | 42,062 | 20.41 | 1.28 | ||||
Maturing in five to ten years | 14,131 | 6.86 | 1.89 | ||||
Maturing after ten years | 1,830 | 0.89 | 1.68 | ||||
Total government agency securities | 58,023 | 28.16 | 1.45 | ||||
Obligations of state and municipal subdivisions | |||||||
Maturing within one year | 3,880 | 1.88 | 1.24 | ||||
Maturing in one to five years | 6,844 | 3.32 | 1.63 | ||||
Maturing in five to ten years | 25,155 | 12.21 | 3.21 | ||||
Maturing after ten years | 41,020 | 19.91 | 4.50 | ||||
Total obligations of state and municipal subdivisions | 76,899 | 37.32 | 3.67 | ||||
Residential pass through securities guaranteed by FNMA, GNMA, FHLMC and FHR | |||||||
Maturing within one year | 1 | — | 7.50 | ||||
Maturing in one to five years | 47,271 | 22.94 | 2.51 | ||||
Maturing in five to ten years | 18,556 | 9.01 | 2.79 | ||||
Maturing after ten years | 3,225 | 1.56 | 3.52 | ||||
Total residential pass through securities guaranteed by FNMA, GNMA, FHLMC and FHR | 69,053 | 33.51 | 2.63 | ||||
Corporate bonds | |||||||
Maturing within one year | — | — | — | ||||
Maturing in one to five years | — | — | — | ||||
Maturing in five to ten years | 1,081 | 0.52 | 3.10 | ||||
Maturing after ten years | — | — | — | ||||
Total corporate bonds | 1,081 | 0.52 | 3.10 | ||||
Total investment securities | $ | 206,062 | 100.00 | % | 2.66 | % | |
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The following table summarizes the amortized cost of securities classified as available for sale and their approximate fair values as of the dates shown:
(dollars in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||
Securities available for sale | |||||||||||||||
As of December 31, 2014 | |||||||||||||||
U.S. treasuries | $ | 999 | $ | 7 | $ | — | $ | 1,006 | |||||||
Government agency securities | 58,174 | 199 | (350 | ) | 58,023 | ||||||||||
Obligations of state and municipal subdivisions | 75,599 | 1,837 | (537 | ) | 76,899 | ||||||||||
Corporate bonds | 1,068 | 13 | — | 1,081 | |||||||||||
Residential pass through securities guaranteed by FNMA, GNMA, FHLMC and FHR | 67,437 | 1,616 | — | 69,053 | |||||||||||
$ | 203,277 | $ | 3,672 | $ | (887 | ) | $ | 206,062 | |||||||
As of December 31, 2013 | |||||||||||||||
U.S. treasuries | $ | 3,498 | $ | 15 | $ | — | $ | 3,513 | |||||||
Government agency securities | 95,407 | 84 | (1,076 | ) | 94,415 | ||||||||||
Obligations of state and municipal subdivisions | 37,861 | 541 | (1,787 | ) | 36,615 | ||||||||||
Corporate bonds | 2,079 | — | (27 | ) | 2,052 | ||||||||||
Residential pass through securities guaranteed by FNMA, GNMA, FHLMC, FHLB, FFCB and FHR | 57,844 | 67 | (468 | ) | 57,443 | ||||||||||
$ | 196,689 | $ | 707 | $ | (3,358 | ) | $ | 194,038 | |||||||
As of December 31, 2012 | |||||||||||||||
U.S. treasuries | $ | 3,493 | $ | 54 | $ | — | $ | 3,547 | |||||||
Government agency securities | 69,636 | 575 | — | 70,211 | |||||||||||
Obligations of state and municipal subdivisions | 34,908 | 2,123 | (217 | ) | 36,814 | ||||||||||
Corporate bonds | 2,105 | 23 | (25 | ) | 2,103 | ||||||||||
Residential mortgage backed securities guaranteed by FNMA, GNMA, FHLMC and SBA | 635 | 45 | — | 680 | |||||||||||
$ | 110,777 | $ | 2,820 | $ | (242 | ) | $ | 113,355 | |||||||
The Company’s securities available for sale, carried at fair value, increased $12.0 million, or 6.2%, during the fiscal year ended December 31, 2014 and increased $80.7 million, or 71.2%, during fiscal 2013 and $19.4 million, or 20.6%, during fiscal 2012. The increase in fiscal 2013 was primarily due to purchases of agency securities for additional liquidity and due to residential pass through securities that were acquired in the Collin Bank acquisition in November 2014. The increase in the Company’s investment portfolio from December 31, 2011 to December 31, 2012 primarily reflected an increase in government agency securities and obligations of state and municipal subdivisions. This growth in the Company’s portfolio occurred primarily as the result of growth in the Company’s assets available for investment and the acquisition of approximately $10.3 million in securities acquired in the Company’s acquisition of CGI, including $6.3 million in municipal securities and $2.1 million in corporate bonds.
Residential pass-through securities (mortgage backed securities) are securities that have been developed by pooling a number of real estate mortgages that are principally issued by federal agencies. These securities are deemed to have high credit ratings, and minimum regular minimum monthly cash flows of principal and interest are guaranteed by the issuing agencies.
Unlike U.S. Treasury and U.S. government agency securities, which have a lump sum payment at maturity, mortgage-backed securities provide cash flows from regular principal and interest payments and principal prepayments throughout the lives of the securities. Premiums and discounts on mortgage-backed securities are amortized over the expected life of the security and may be impacted by prepayments. As such, mortgage-backed securities which are purchased at a premium will generally suffer decreasing net yields as interest rates drop because home owners tend to refinance their mortgages resulting in prepayments and an acceleration of premium amortization, Securities purchased at a discount will generally obtain higher net yields in a decreasing interest rate environment as prepayments result in acceleration of discount accretion.
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Cash and Cash Equivalents
Cash and cash equivalents increased $231.0 million, or 248.2%, to $324.0 million as of December 31, 2014, from $93.1 million as of December 31, 2013. Such increase in fiscal 2014 was necessary to maintain compliance with the Company’s liquidity policy of holding cash and investment securities held for sale in an amount equal to at least 10% of the Company’s total assets.
Cash and cash equivalents decreased $9.2 million, or 9.0%, to $93.1 million as of December 31, 2013, from $102.3 million as of December 31, 2012.
Certificates of Deposit Held in Other Banks
The Company owned certificates of deposit held in other banks in the amount of $7.7 million as of December 31, 2012, which the Company acquired in the I Bank acquisition and all of which matured during 2013. There were no certificates of deposit held in other banks as of December 31, 2014 and 2013.
Goodwill and Core Deposit Intangible, Net
The Company’s total goodwill was $229.5 million as of December 31, 2014, $34.7 million as of December 31, 2013, and was $28.7 million as of December 31, 2012. Goodwill represents the excess of the consideration paid over the fair value of the net assets acquired. Goodwill increased by $7.0 million, $165.9 million and $21.2 million relating to the acquisitions of Live Oak Financial Corp., BOH Holdings, Inc. and Houston City Bancshares, respectively and increased by $574 thousand relating to final acquisition accounting adjustments made to Collin Bank during 2014. Goodwill increased $6.0 million from December 31, 2012 to December 31, 2013 related to the acquisition of Collin Bank in November 2013.
The Company’s other intangible asset, the Company’s core deposit intangible, net, was $12.5 million as of December 31, 2014, $3.1 million as of December 31, 2013, and $3.3 million as of December 31, 2012. The Company’s core deposit intangible is amortized on a straight-line basis over its estimated life of 10 years. The decreases in the Company’s core deposit intangible, net, from December 31, 2012 to December 31, 2013 occurred as the result of the amortization of the Company’s core deposit intangible in the fiscal year ended December 31, 2013, offset by the addition of a $600 core deposit intangible acquired in the Collin Bank acquisition. The increase in core deposit intangibles from December 31, 2013 to December 31, 2014 was due to $882 thousand, $7.3 million and $2.5 million in core deposit intangibles acquired in the Live Oak Financial Corp, BOH Holdings, Inc. and Houston City Bancshares transactions, respectively during 2014 and offset partially by the amortization expense on core intangibles for the year.
Liabilities
The Company’s total liabilities increased $1.7 billion, or 86.1%, to $3.6 billion as of December 31, 2014, from $1.9 billion as of December 31, 2013, primarily due to the assumption of deposit liabilities of $1.2 billion in the three acquisitions completed in 2014. The balance of the increase is accounted for by organic growth in the Company’s deposit base, an increase in FHLB advances of $41.9 million, increases in the Company’s subordinated debentures of $65.0 million.
The Company’s total liabilities increased $314.7 million, or 19.5%, to $1.9 billion as of December 31, 2013, from $1.6 billion as of December 31, 2012, primarily due to organic deposit growth of $208.4 million. In addition, the increase was due in part to the acquisition of $111.2 million in deposits and the assumption of $26.0 million in FHLB advances in connection with the acquisition of Collin Bank. The increase was offset in part by the repayment of a total of $28.8 million in principal amount of notes payable and subordinated debt of the Company with a portion of the net proceeds of the Company’s initial public offering of its common stock.
Deposits
Deposits represent Independent Bank’s primary source of funds. The Company continues to focus on growing core deposits through the Company’s relationship driven banking philosophy and community-focused marketing programs.
The total deposits of $3.2 billion as of December 31, 2014, compared with total deposits of $1.7 billion as of December 31, 2013, reflecting a $1.5 billion, or 90.0%, increase from December 31, 2013. The increase was primarily due to $1.2 billion in deposits acquired in the Company's three acquisitions during 2014, but also in part due to organic deposit growth. As of December 31, 2014 and 2013, noninterest-bearing demand, interest-bearing checking, savings deposits and limited access money market accounts accounted for 75% of the Company’s total deposits, while individual retirement accounts and certificates of deposit made up 25% of total deposits. Noninterest-bearing demand deposits totaled $818.0 million, or 25.2% of
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total deposits, as of December 31, 2014, compared with $302.8 million, or 17.7% of total deposits, as of December 31, 2013 , which drives down the total cost of deposits 10 basis points from 0.47% at December 31, 2013 to 0.37% at December 31, 2014. The average cost of interest-bearing deposits was 0.57% per annum for 2014 compared with 0.48% for 2013.
Total deposits were $1.7 billion as of December 31, 2013, an increase of $319.6 million, or 23.0%, compared to $1.4 billion as of December 31, 2012. Such increase resulted primarily from organic growth of 14.9% in interest-bearing deposits from December 31, 2012, to December 31, 2013. As of December 31, 2013, noninterest-bearing demand, interest-bearing checking, savings deposits and limited access money market accounts accounted for 75% of the Company’s total deposits, while individual retirement accounts and certificates of deposit made up 25% of total deposits. Noninterest-bearing demand deposits totaled $303 million, or 17.7% of total deposits, as of December 31, 2013, compared with $259.7 million, or 18.7% of total deposits, as of December 31, 2012, with the decrease in the percentage of total deposits represented by noninterest-bearing demand deposits occurring as a result of growth in interest-bearing deposits over the fiscal year ended December 31, 2012 and the mix of deposits acquired in the Collin Bank acquisition. The average cost of deposits decreased to 0.57% in 2013 from 0.83% in 2012.
The decrease in the average cost of deposits during the comparable periods was primarily the result of decreases in interest rates offered on certain deposit products due to decreases in average market interest rates and decreases in renewal interest rates on maturing certificates of deposit given the current low interest rate environment.
The following table summarizes the Company’s average deposit balances and weighted average rates for the periods presented:
For the Year Ended December 31, 2014 | For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||||||
(dollars in thousands) | Balance | Weighted Average Rate | Balance | Weighted Average Rate | Balance | Weighted Average Rate | |||||||||
Deposit Type | |||||||||||||||
Noninterest-bearing demand accounts | $ | 601,764 | — | % | $ | 259,432 | — | % | $ | 203,248 | — | % | |||
Interest-bearing checking accounts | 1,052,528 | 0.46 | 734,475 | 0.52 | 579,495 | 0.78 | |||||||||
Savings accounts | 129,707 | 0.27 | 114,699 | 0.33 | 110,118 | 0.65 | |||||||||
Limited access money market accounts | 123,392 | 0.28 | 50,661 | 0.27 | 32,976 | 0.36 | |||||||||
Certificates of deposit, including individual retirement accounts (IRA) | 674,556 | 0.60 | 334,269 | 0.79 | 285,564 | 1.05 | |||||||||
Total deposits | $ | 2,581,947 | 0.37 | % | $ | 1,493,536 | 0.47 | % | $ | 1,211,401 | 0.69 | % | |||
The following table sets forth the maturity of time deposits (including IRA deposits) of $100,000 or more as of December 31, 2014:
Maturity within: | |||||||||||||||
(dollars in thousands) | Three Months | Three to Six Months | Six to Twelve Months | After Twelve Months | Total | ||||||||||
Individual retirement accounts | $ | 2,649 | $ | 2,694 | $ | 5,515 | $ | 5,337 | $ | 16,195 | |||||
Certificates of deposit (excluding CDARS) | 134,354 | 116,301 | 157,425 | 120,231 | 528,311 | ||||||||||
CDARS | 51,411 | 35,975 | 48,034 | 2,850 | 138,270 | ||||||||||
Total | $ | 188,414 | $ | 154,970 | $ | 210,974 | $ | 128,418 | $ | 682,776 | |||||
Short-Term Borrowings
The Company’s deposits have historically provided the Company with a major source of funds to meet the daily liquidity needs of the Company’s customers and fund growth in earning assets. However, from time to time the Company may also engage in short-term borrowings. At December 31, 2014, the Company had $55.0 million in short-term borrowings outstanding, all of which were short-term FHLB advances. At December 31, 2013, the Company had $13.0 million in short-term borrowings outstanding, which were assumed in the Collin Bank acquisition and are discussed in the FHLB Advances section below. The Company did not have any other short-term borrowings outstanding at December 31, 2012 as a result of funding available from other sources. The Company has not historically needed to engage in significant short-term borrowing through sources such as federal funds purchased, securities sold under agreements to repurchase or Federal Reserve Discount Window advances to meet the daily liquidity needs of the Company’s customers or fund growth in earning assets.
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FHLB Advances
In addition to deposits, the Company utilizes FHLB advances either as a short-term funding source or a longer-term funding source and to manage the Company’s interest rate risk on the Company’s loan portfolio. FHLB advances can be particularly attractive as a longer-term funding source to balance interest rate sensitivity and reduce interest rate risk.
The Company’s FHLB borrowings totaled $229.4 million as of December 31, 2014, compared with $187.5 million as of December 31, 2013, and $164.6 million as of December 31, 2012. The increase from December 31, 2013, to December 31, 2014, is primarily to provide additional short-term liquidity due to loan growth. The increase from December 31, 2012 to December 31, 2013 is due to the assumption of $26.0 million in FHLB advances in connection with the Collin Bank acquisition, including the $13.0 million in short term advances discussed above. As of December 31, 2014, 2013 and 2012, the Company had $727.3 million, $218.0 million and $267.5 million, respectively, in unused and available advances from the FHLB. At December 31, 2014, the Company’s FHLB advances are collateralized by assets, including a blanket pledge of certain loans with a carrying value of $1.3 billion and FHLB stock. As of December 31, 2014, and December 31, 2013, the Company had $354.2 million and $274.6 million, respectively, in undisbursed advance commitments (letters of credit) with the FHLB. The FHLB letters of credit were obtained in lieu of pledging securities to secure public fund deposits that are over the FDIC insurance limit. There were no disbursements against the advance commitments as of either December 31, 2014, or December 31, 2013.
The following table provides a summary of the Company’s FHLB advances at the dates indicated:
As of December 31, | |||||||||
2014 | 2013 | 2012 | |||||||
Fixed-rate, fixed term, at rates from 0.18% to 6.26%, with a weighted-average of 1.48% (maturing January 2015 through January 2026) | $ | 229,405 | — | ||||||
Fixed-rate, fixed term, at rates from 0.14% to 6.26%, with a weighted-average of 1.83% (maturing January 2014 through January 2026) | — | $ | 187,484 | ||||||
Fixed-rate, fixed term, at rates from 1.12% to 6.26%, with a weighted-average of 2.01% (maturing March 2013 through January 2026) | — | — | $ | 164,601 | |||||
As of December 31, 2014, the scheduled maturities of the Company’s FHLB advances were as follows (dollars in thousands):
Maturing Within | Principal Amount to Mature | ||
As of December 31, 2014 | |||
First Year | $ | 91,000 | |
Second Year | 32,513 | ||
Third Year | 30,000 | ||
Fourth Year | 35,000 | ||
Fifth Year | 40,069 | ||
Thereafter | 823 | ||
$ | 229,405 | ||
Other Long-Term Indebtedness
As of December 31, 2014, 2013 and 2012, the Company had $72.7 million, $7.7 million, and $36.5 million, respectively, of long-term indebtedness (other than FHLB advances and junior subordinated debentures) outstanding, which included notes payable and subordinated debentures. The increase in the Company’s long-term indebtedness from December 31, 2013, to December 31, 2014, resulted from the issuance of $65.0 million of the Company’s subordinated notes to provide a portion of the funds to complete the Houston City Bancshares acquisition in 2014. The decrease in such long-term indebtedness from December 31, 2012, to December 31, 2013, resulted primarily from the repayment of $28.8 million in principal amount of notes payable and subordinated debentures during that period with a portion of the proceeds of the Company’s initial public offering.
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As of December 31, 2014, the scheduled principal maturities of the Company’s other long-term indebtedness are as follows (dollars in thousands):
Maturing Within | Principal Amount to Mature | ||
As of December 31, 2014 | |||
First Year | $ | 1,933 | |
Second Year | 1,933 | ||
Third Year | 1,932 | ||
Fourth Year | 1,932 | ||
Fifth Year | — | ||
Thereafter | 65,000 | ||
$ | 72,730 | ||
Junior Subordinated Debentures
As of December 31, 2014, 2013, and 2012, the Company had outstanding an aggregate of $18.1 million principal amount of five series of junior subordinated securities issued to five unconsolidated subsidiary trusts. Each series of debentures was purchased by one of the trusts with the net proceeds of the issuance by such trust of floating rate trust preferred securities. These junior subordinated debentures are unsecured and will mature between March 2033 and June 2037. Each of the series of debentures bears interest at a per annum rate equal to three-month LIBOR plus a spread that ranges from 1.60% to 3.25%, with a weighted average spread of 2.68%. As of December 31, 2014, the interest rate on the various series of debentures was 3.48%, 3.08%, 2.63%, 3.48% and 1.84%, respectively, while as of December 31, 2013, the interest rate on the various series of debentures was 3.49%, 3.09%, 2.64%, 3.49% and 1.84%, respectively. Interest on each series of these debentures is payable quarterly, although the Company may, from time to time defer the payment of interest on any series of these debentures. A deferral of interest payments would, however, restrict the Company’s right to declare and pay cash distributions, including dividends, on the Company’s common stock or making distributions with respect to any of the Company’s future debt instruments that rank equally or are junior to such debentures. The Company may redeem the debentures, which are intended to qualify as Tier 1 capital, at the Company’s option, subject to approval of the Federal Reserve.
Capital Resources and Liquidity Management
Capital Resources
The Company’s stockholders’ equity is influenced by the Company’s earnings, the sales and redemptions of common stock that the Company makes, the dividends the Company pays on its common stock, and, to a lesser extent, any changes in unrealized holding gains or losses occurring with respect to the Company’s securities available for sale.
Total stockholder’s equity was $540.9 million at December 31, 2014, compared with $233.8 million at December 31, 2013, an increase of approximately $307.1 million. The increase was due primarily to the issuance of common stock totaling $250.2 million in connection with the Company's acquisition of Live Oak Financial Corp., BOH Holdings and Houston City Bancshares and the issuance of Series A preferred stock of $23.9 million in connection with the BOH Holdings acquisition. In addition, there was stock awards amortization of $2.9 million, $1.4 million in excess tax benefits on vested restricted stock, an increase of $3.5 million in unrealized gain (loss) on available for sale securities and net income of $29.0 million earned by the Company for the fiscal year ended December 31, 2014, offset by dividends paid of $3.9 million.
Total stockholder’s equity was $233.8 million at December 31, 2013 compared with $124.5 million at December 31, 2012, an increase of approximately $109.3 million. The increase was due primarily to the sale of 3,680,000 shares of common stock in connection with the Company’s initial public offering, resulting in net proceeds of $86.6 million, common stock valued at $11.9 million issued in connection with the acquisition of Collin Bank, stock awards amortization of $1.5 million and the net income of $19.8 million earned by the Company for the fiscal year ended December 31, 2013, offset by dividends paid of $6.8 million and a decrease in unrealized gain (loss) on available for sale securities of $3.7 million.
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Liquidity Management
Liquidity refers to the measure of the Company’s ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting the Company’s operating, capital and strategic cash flow needs, all at a reasonable cost. The Company’s asset and liability management policy is intended to maintain adequate liquidity and, therefore, enhance the Company’s ability to raise funds to support asset growth, meet deposit withdrawals and lending needs, maintain reserve requirements, and otherwise sustain operations. The Company accomplishes this through management of the maturities of the Company’s interest-earning assets and interest-bearing liabilities. The Company believes that the Company’s present position is adequate to meet the Company’s current and future liquidity needs.
The Company continuously monitors the Company’s liquidity position to ensure that assets and liabilities are managed in a manner that will meet all of the Company’s short-term and long-term cash requirements. The Company manages the Company’s liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of the Company’s shareholders. The Company also monitors its liquidity requirements in light of interest rate trends, changes in the economy, and the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits.
Liquidity risk management is an important element in the Company’s asset/liability management process. The Company’s short-term and long-term liquidity requirements are primarily to fund on-going operations, including payment of interest on deposits and debt, extensions of credit to borrowers, capital expenditures and shareholder dividends. These liquidity requirements are met primarily through cash flow from operations, redeployment of pre-paid and maturing balances in the Company’s loan and investment portfolios, debt financing and increases in customer deposits. The Company’s liquidity position is supported by management of liquid assets and liabilities and access to alternative sources of funds. Liquid assets include cash, interest-bearing deposits in banks, federal funds sold, securities available for sale and maturing or prepaying balances in the Company’s investment and loan portfolios. Liquid liabilities include core deposits, federal funds purchased, securities sold under repurchase agreements and other borrowings. Other sources of liquidity include the sale of loans, the ability to acquire additional national market noncore deposits, the issuance of additional collateralized borrowings such as FHLB advances, the issuance of debt securities, borrowings through the Federal Reserve’s discount window and the issuance of equity securities. For additional information regarding the Company’s operating, investing and financing cash flows, see the Consolidated Statements of Cash Flows provided in the Company’s consolidated financial statements.
In addition to the liquidity provided by the sources described above, the Company maintains correspondent relationships with other banks in order to sell loans or purchase overnight funds should additional liquidity be needed. As of December 31, 2014, the Company had established federal funds lines of credit totaling $125.0 million with five unaffiliated banks. At December 31, 2013 and 2012, the Company had established federal funds lines of credit with one unaffiliated bank totaling $40.0 million and $25.0 million, respectively, with no amounts advanced against those lines at either of those times. Based on the values of stock, securities, and loans pledged as collateral, as of December 31, 2014, 2013 and 2012, the Company had additional borrowing capacity with the FHLB of $727.3 million, $218.0 million and $267.5 million, respectively. The balances maintained in that account as of December 31, 2014, 2013 and 2012, were not significant. The correspondent account is a demand account. The normal services associated with a correspondent banking relationship, including clearing of checks, sales and purchases of participations in loans and investments and sales and purchases of federal funds.
During 2014, the Company entered into a $35.0 million unsecured revolving line of credit with an unrelated bank. The line bears interest at LIBOR plus 2.50% and matures May 3, 2015. As of December 31, 2014, there is no outstanding balance on the line. The Company is required to meet certain financial covenants on a quarterly basis which includes maintaining $5 million in cash at Independent Bank Group.
The Company is a corporation separate and apart from Independent Bank and, therefore, the Company must provide for the Company’s own liquidity. The Company’s main source of funding is dividends declared and paid to the Company by Independent Bank. Statutory and regulatory limitations exist that affect the ability of Independent Bank to pay dividends to the Company. Management believes that these limitations will not impact the Company’s ability to meet the Company’s ongoing short-term cash obligations. For additional information regarding dividend restrictions, see “Risk Factors-Risks Related to the Company’s Business” in Part I, Item 1A, and “Supervision and Regulation” under Part I, Item 1, “Business.”
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Regulatory Capital Requirements
The Company’s capital management consists of providing equity to support the Company’s current and future operations. The Company is subject to various regulatory capital requirements administered by state and federal banking agencies, including the TDB, Federal Reserve and the FDIC. Failure to meet minimum capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s financial condition and results of operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Company expects that, as a result of recent developments such as the Dodd-Frank Act and Final BASEL III Rules, the Company will be subject to increasingly stringent regulatory capital requirements. For further discussion of the changing regulatory framework in which the Company operates, see “Supervision and Regulation” under Part I, Item 1, “Business.”
As of December 31, 2014, the risk-based capital standards issued by the FDIC required all state nonmember banks to have “Tier 1 capital” of at least 4% and “total risk-based” capital (Tier 1 and Tier 2) of at least 8.0% of total risk-weighted assets. “Tier 1 capital” generally includes common stock equity and qualifying perpetual preferred stock together with related surpluses and retained earnings, less deduction for goodwill and various other intangibles. “Tier 2 capital” may consist of a limited amount of intermediate-term preferred stock, a limited amount of term subordinated debt, certain hybrid capital instruments and other debt securities, perpetual preferred stock not qualifying as Tier 1 capital, and a limited amount (no greater than 1.25% of risk weighted assets) of the general valuation allowance for loan losses. The sum of Tier 1 capital and Tier 2 capital is “total risk-based capital.”
The FDIC has also adopted guidelines which supplement the risk-based capital guidelines with a minimum ratio of Tier 1 capital to average total consolidated tangible assets, or “leverage ratio,” of 4.0% for institutions with well diversified risk, including no undue interest rate exposure; excellent asset quality; high liquidity; good earnings; and that are generally considered to be strong banking organizations, rated composite 1 under applicable federal guidelines, and that are not experiencing or anticipating significant growth. Other banking organizations are required to maintain a leverage ratio of at least 4.0%. These rules further provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels and comparable to peer group averages, without significant reliance on intangible assets.
The FDIC has promulgated regulations setting the levels at which an insured institution such as Independent Bank would be considered “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Independent Bank is considered “well-capitalized” for purposes of the applicable prompt corrective action regulations.
As of December 31, 2014, 2013, and 2012, the Company exceeded all capital ratio requirements under prompt corrective action and other regulatory requirements, as detailed in the table below:
As of December 31, 2014 | ||||
Actual | Required to be considered well capitalized | Required to be considered adequately capitalized | ||
Ratio | Ratio | Ratio | ||
Tier 1 capital to average assets ratio | 8.15 | % | ≥5.00% | 4.00-5.00% |
Tier 1 capital to risk-weighted assets ratio | 9.83 | ≥6.00 | 4.00-6.00 | |
Total capital to risk-weighted assets ratio | 12.59 | ≥10.00 | 8.00-10.00 | |
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As of December 31, 2013 | ||||
Actual | Required to be considered well capitalized | Required to be considered adequately capitalized | ||
Ratio | Ratio | Ratio | ||
Tier 1 capital to average assets ratio | 10.71 | % | ≥5.00% | 4.00-5.00% |
Tier 1 capital to risk-weighted assets ratio | 12.64 | ≥6.00 | 4.00-6.00 | |
Total capital to risk-weighted assets ratio | 13.83 | ≥10.00 | 8.00-10.00 | |
As of December 31, 2012 | ||||
Actual | Required to be considered well capitalized | Required to be considered adequately capitalized | ||
Ratio | Ratio | Ratio | ||
Tier 1 capital to average assets ratio | 6.45 | % | ≥5.00% | 4.00-5.00% |
Tier 1 capital to risk-weighted assets ratio | 8.22 | ≥6.00 | 4.00-6.00 | |
Total capital to risk-weighted assets ratio | 10.51 | ≥10.00 | 8.00-10.00 | |
In July 2013, federal banking agencies issued the final rules (Basel III Capital Rules) establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, compared to the current U.S. risk-based capital rules. The final rule implements a revised definition of regulatory capital, a new common equity Tier 1 minimum capital requirement of 4.50%, and a higher minimum Tier 1 capital requirement of 6.00% (which is an increase from 4.00%). Under the final rule, the total capital ratio remains at 8.00% and the minimum leverage ratio (Tier 1 capital to total assets) for all banking organizations, regardless of supervisory rating, is 4.00%. The Basel III Capital Rules are effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period for certain provisions).
Contractual Obligations
In the ordinary course of the Company’s operations, the Company enters into certain contractual obligations, such as obligations for operating leases and other arrangements with respect to deposit liabilities, FHLB advances and other borrowed funds. The Company believes that it will be able to meet its contractual obligations as they come due through the maintenance of adequate cash levels. The Company expects to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. The Company has in place various borrowing mechanisms for both short-term and long-term liquidity needs.
During the fiscal year ended December 31, 2014, the Company acquired deposit accounts and repurchase agreements in the Live Oak Financial Corp., BOH Holdings and Houston City Bancshares transactions. In addition, the Company assumed leases for five branches acquired in the BOH Holdings and Houston Community Bancshares acquisitions. The Company also issued $65 million in subordinated debt in July 2014. Other than acquired accounts, subordinate debt issued and normal changes in the ordinary course of business, there have been no significant changes in the types of contractual obligations or amounts due since December 31, 2013.
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The following table contains supplemental information regarding the Company’s total contractual obligations as of December 31, 2014:
(dollars in thousands) | Payments Due | ||||||||||||||
Within One Year | One to Three Years | Three to Five Years | After Five Years | Total | |||||||||||
Deposits without a stated maturity | $ | 2,426,738 | $ | — | $ | — | $ | — | $ | 2,426,738 | |||||
Time deposits | 659,338 | 135,620 | 27,835 | 67 | 822,860 | ||||||||||
FHLB advances | 91,000 | 62,513 | 75,069 | 823 | 229,405 | ||||||||||
Subordinated debt | 1,933 | 3,865 | 1,932 | 65,000 | 72,730 | ||||||||||
Junior subordinated debentures | — | — | — | 18,147 | 18,147 | ||||||||||
Operating leases | 1,706 | 3,065 | 1,372 | 1,770 | 7,913 | ||||||||||
Total contractual obligations | $ | 3,180,715 | $ | 205,063 | $ | 106,208 | $ | 85,807 | $ | 3,577,793 | |||||
The Company believes that it will be able to meet its contractual obligations as they come due through the maintenance of adequate cash levels. The Company expects to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. The Company has in place various borrowing mechanisms for both short-term and long-term liquidity needs.
Off-Balance Sheet Arrangements
In the normal course of business, the Company enters into various transactions, which, in accordance with accounting principles generally accepted in the United States, are not included in the Company’s consolidated balance sheets. However, the Company has only limited off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources. Independent Bank enters into these transactions to meet the financing needs of the Company’s customers. These transactions include commitments to extend credit and issue standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
Commitments to Extend Credit. Independent Bank enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of Independent Bank’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Independent Bank minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.
Standby Letters of Credit. Standby letters of credit are written conditional commitments that Independent Bank issues to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, Independent Bank would be required to fund the commitment. The maximum potential amount of future payments Independent Bank could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the customer is obligated to reimburse Independent Bank for the amount paid under this standby letter of credit.
Independent Bank’s commitments to extend credit and outstanding standby letters of credit were $565.9 million and $8.6 million, respectively, as of December 31, 2014. Independent Bank’s commitments to extend credit and outstanding standby letters of credit were $365.6 million and $2.1 million, respectively, as of December 31, 2013. Independent Bank’s commitments to extend credit and outstanding standby letters of credit were $153.9 million and $2.7 million, respectively, as of December 31, 2012. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements. The Company manages the Company’s liquidity in light of the aggregate amounts of commitments to extend credit and outstanding standby letters of credit in effect from time to time to ensure that the Company will have adequate sources of liquidity to fund such commitments and honor drafts under such letters of credit.
The Company guarantees the distributions and payments for redemption or liquidation of the trust preferred securities issued by the Company’s wholly owned subsidiary trusts to the extent of funds held by the trusts. Although this guarantee is not separately recorded, the obligation underlying the guarantee is fully reflected on the Company’s consolidated balance sheets as junior subordinated debentures, which debentures are held by the Company’s subsidiary trusts. The junior subordinated debentures currently qualify as Tier 1 capital under the Federal Reserve capital adequacy guidelines. For additional information regarding the subordinated debentures, see Note 13 to the Company’s consolidated financial statements.
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Asset/Liability Management and Interest Rate Risk
The principal objective of the Company’s asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing net income and preserving adequate levels of liquidity and capital. The Investment Committee of Independent Bank’s board of directors has oversight of Independent Bank’s asset and liability management function, which is managed by the Company’s Chief Financial Officer. The Company’s Chief Financial Officer meets with the Company’s senior executive management team regularly to review, among other things, the sensitivity of the Company’s assets and liabilities to market interest rate changes, local and national market conditions and market interest rates. That group also reviews the liquidity, capital, deposit mix, loan mix and investment positions of the Company.
The Company’s management and the Company’s board of directors are responsible for managing interest rate risk and employing risk management policies that monitor and limit the Company’s exposure to interest rate risk. Interest rate risk is measured using net interest income simulations and market value of portfolio equity analyses. These analyses use various assumptions, including the nature and timing of interest rate changes, yield curve shape, prepayments on loans, securities and deposits, deposit decay rates, pricing decisions on loans and deposits, reinvestment/ replacement of asset and liability cash flows.
Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows.
The Company also analyzes the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net interest income where the calculated value is the result of the market value of assets less the market value of liabilities. The economic value of equity is a longer term view of interest rate risk because it measures the present value of the future cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to the Company’s future earnings and is used in conjunction with the analyses on net interest income.
The Company conducts periodic analyses of our sensitivity to interest rate risks through the use of a third-party proprietary interest-rate sensitivity model. That model has been customized to our specifications. The analyses conducted by use of that model are based on current information regarding our actual interest-earnings assets, interest-bearing liabilities, capital and other financial information that we supply. The third party uses that information in the model to estimate our sensitivity to interest rate risk.
The Company’s interest rate risk model indicated that it was in a balanced position in terms of interest rate sensitivity as of December 31, 2014. The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase and a 100 basis point decrease in interest rates on net interest income based on the interest rate risk model as of December 31, 2014:
Hypothetical Shift in Interest Rates (in bps) | % Change in Projected Net Interest Income |
200 | (0.45)% |
100 | (0.52) |
(100) | (4.24) |
These are good faith estimates and assume that the composition of the Company’s interest sensitive assets and liabilities existing at each year-end will remain constant over the relevant twelve-month measurement period and that changes in market interest rates are instantaneous and sustained across the yield curve regardless of duration of pricing characteristics of specific assets or liabilities. Also, this analysis does not contemplate any actions that the Company might undertake in response to changes in market interest rates. The Company believes these estimates are not necessarily indicative of what actually could occur in the event of immediate interest rate increases or decreases of this magnitude. As interest-bearing assets and liabilities re-price in different time frames and proportions to market interest rate movements, various assumptions must be made based on historical relationships of these variables in reaching any conclusion. Since these correlations are based on competitive and market conditions, the Company anticipates that its future results will likely be different from the foregoing estimates, and such differences could be material.
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Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than the Company’s projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that the Company’s management may undertake to manage the risks in response to anticipated changes in interest rates and actual results may also differ due to any actions taken in response to the changing rates.
As part of the Company’s asset/liability management strategy, the Company’s management has emphasized the origination of shorter duration loans as well as variable rate loans to limit the negative exposure to a rate increase, as well as obtaining funding with FHLB advances to manage interest rate risks on funding of loan commitments. Additionally, a significant portion of the loans in the Company’s loan portfolio typically have short-term maturities. The Company’s strategy with respect to liabilities has been to emphasize transaction accounts, particularly noninterest or low interest-bearing nonmaturing deposit accounts, which are less sensitive to changes in interest rates. In response to this strategy, nonmaturing deposit accounts have been a large portion of total deposits and totaled 74.7% of total deposits as of December 31, 2014, 75.1% of total deposits as of December 31, 2013, and 78.5% of total deposits as of December 31, 2012. The Company had brokered deposits, including CDARS totaling $355.1 million, $62.4 million and $31.2 million, at December 31, 2014, 2013 and 2012, respectively. The Company intends to focus on the Company’s strategy of increasing noninterest or low interest-bearing nonmaturing deposit accounts, but may consider the use brokered deposits as a stable source of funding.
Inflation and Changing Prices
The largest component of earnings for the Company is net interest income, which is affected by changes in interest rates. Changes in interest rates are also influenced by changes in the rate of inflation, although not necessarily at the same rate or in the same magnitude. In management's opinion, changes in interest rates have a more significant impact to the Company's operations than do changes in inflation. However, inflation, does impact the operating costs of the Company, primarily employment costs and other services.
Critical Accounting Policies and Estimates
The preparation of the Company’s consolidated financial statements in accordance with U.S. generally accepted accounting principles, or GAAP, requires the Company to make estimates and judgments that affect the Company’s reported amounts of assets, liabilities, income and expenses and related disclosure of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. The Company evaluates the Company’s estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
Accounting policies, as described in detail in the notes to the Company’s consolidated financial statements are an integral part of the Company’s financial statements. A thorough understanding of these accounting policies is essential when reviewing the Company’s reported results of operations and the Company’s financial position. The Company believes that the critical accounting policies and estimates discussed below require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain. Changes in these estimates, that are likely to occur from period to period, or the use of different estimates that the Company could have reasonably used in the current period, would have a material impact on the Company’s financial position, results of operations or liquidity.
Acquired Loans. The Company’s accounting policies require that the Company evaluates all acquired loans for evidence of deterioration in credit quality since origination and to evaluate whether it is probable that the Company will collect all contractually required payments from the borrower.
Acquired loans from the transactions accounted for as a business combination include both nonperforming loans with evidence of credit deterioration since their origination date and performing loans. The Company accounts for performing loans under ASC Paragraph 310-20, Nonrefundable Fees and Other Costs, with the related discount being adjusted for over the life of the loan and recognized as interest income. The Company accounts for the nonperforming loans acquired in accordance with ASC Paragraph 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. At the date of the acquisition, acquired loans are recorded at their fair value.
The Company recognizes the difference between the undiscounted cash flows the Company expects (at the time the Company acquires the loan) to be collected and the investment in the loan, or the “accretable yield,” as interest income using the interest method over the life of the loan. The Company does not recognize contractually required payments for interest and principal that exceed undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” as a yield adjustment, loss
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accrual or valuation allowance. Increases in the expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over the loan’s remaining life, while decreases in expected cash flows are recognized as impairment. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition.
Upon an acquisition, the Company generally continues to use the classification of acquired loans classified nonaccrual or 90 days and accruing. The Company does not classify acquired loans as TDRs unless the Company modifies an acquired loan subsequent to acquisition that meets the TDR criteria. Reported delinquency of the Company’s purchased loan portfolio is based upon the contractual terms of the loans.
Allowance for Loan Losses. The allowance for loan losses represents management’s estimate of probable and reasonably estimable credit losses inherent in the loan portfolio. In determining the allowance, the Company estimates losses on individual impaired loans, or groups of loans which are not impaired, where the probable loss can be identified and reasonably estimated. On a quarterly basis, the Company assesses the risk inherent in the Company’s loan portfolio based on qualitative and quantitative trends in the portfolio, including the internal risk classification of loans, historical loss rates, changes in the nature and volume of the loan portfolio, industry or borrower concentrations, delinquency trends, detailed reviews of significant loans with identified weaknesses and the impacts of local, regional and national economic factors on the quality of the loan portfolio. Based on this analysis, the Company records a provision for loan losses in order to maintain the allowance at appropriate levels.
Determining the amount of the allowance is considered a critical accounting estimate, as it requires significant judgment and the use of subjective measurements, including management’s assessment of overall portfolio quality. The Company maintains the allowance at an amount the Company believes is sufficient to provide for estimated losses inherent in the Company’s loan portfolio at each balance sheet date, and fluctuations in the provision for loan losses may result from management’s assessment of the adequacy of the allowance. Changes in these estimates and assumptions are possible and may have a material impact on the Company’s allowance, and therefore the Company’s financial position, liquidity or results of operations.
Goodwill and Core Deposit Intangible. The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at least annually and on an interim basis if an event or circumstance indicates that it is likely an impairment has occurred. The Company first assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a two step impairment test is unnecessary. If the Company concludes otherwise, then it is required to perform a first step of the two step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. In testing for impairment in the past, the fair value of net assets is estimated based on an analysis of the Company’s market value.
Determining the fair value of goodwill is considered a critical accounting estimate because the allocation of the fair value of goodwill to assets and liabilities requires significant management judgment and the use of subjective measurements. Variability in the market and changes in assumptions or subjective measurements used to allocate fair value are reasonably possible and may have a material impact on the Company’s financial position, liquidity or results of operations.
Core deposit intangibles are acquired customer relationships that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. Core deposit intangibles are being amortized on a straight-line basis over their estimated useful lives of ten years. Core deposit intangibles are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Emerging Growth Company. The JOBS Act permits the Company, as an “emerging growth company,” to take advantage of an extended transition period to comply with new or revised accounting standards and not commence complying with new or revised accounting standards until private companies must do so. Under the JOBS Act, the Company may make an irrevocable election to “opt out” of that extended transition period and comply with new or revised accounting standards when public companies that are not emerging growth companies must commence complying with those standards. The Company has elected not to “opt out” of the extended transition period at this time. Consequently, when a new or revised accounting standard has application dates that are different for public companies and private companies, the Company will commence complying with the new or revised standard only when private companies must do so. The Company will continue to commence complying with new or revised accounting standards in this manner until the Company ceases to be an emerging growth company unless the Company previously elects to opt out of the extended transition period, as the Company may do under the
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JOBS Act. Any such future election by the Company will be irrevocable and will apply to all accounting standards issued or revised after such election.
As a consequence of the Company’s determination to take advantage of the extended transition period, the Company’s consolidated financial statements as of a particular date and for a particular period in the future may not be comparable to the financial statements as of such date and for such period of a public company situated similarly to the Company that is neither an emerging growth company nor an emerging growth company that has opted out of the extended transition period. Such financial statements of the other company may be prepared in conformity with new or revised accounting standards then applicable to public companies, but not to private companies, while, if the Company is then in the extended transition period, the Company’s consolidated financial standards would not be prepared in conformity with such new or revised accounting standards.
Recently Issued Accounting Pronouncements
The Company has evaluated new accounting pronouncements that have recently been issued and have determined that there are no new accounting pronouncements that should be described in this section that will impact the Company’s operations, financial condition or liquidity in future periods. Refer to Note 2 of the Company’s audited consolidated financial statements for a discussion of recent accounting pronouncements that have been adopted by the Company or that will require enhanced disclosures in the Company’s financial statements in future periods.
Non-GAAP Financial Measures
The Company identifies certain of the financial measures discussed in this Annual Report on Form 10-K as being “non-GAAP financial measures.” In accordance with the SEC’s rules, the Company classifies a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles as in effect from time to time in the United States in the Company’s statements of income, balance sheet or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.
The non-GAAP financial measures that the Company discusses in this Annual Report on Form 10-K should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which the Company calculates the non-GAAP financial measures that the Company discusses in this Annual Report on Form 10-K may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures the Company has discussed in this Annual Report on Form 10-K when comparing such non-GAAP financial measures.
Tangible Book Value Per Common Share. Tangible book value is a non-GAAP measures generally used by financial analysts and investment bankers to evaluate capital adequacy. The Company calculates: (a) tangible common equity as total stockholders’ equity less goodwill and other intangible assets; and (b) tangible book value per common share as tangible common equity (as described in clause (a)) divided by shares of common stock outstanding. For tangible book value, the most directly comparable financial measure calculated in accordance with GAAP is the Company’s book value.
The Company believes that this non-GAAP financial measure is important information to be provided to you because, as do the Company’s 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 the Company’s capital adequacy without the effect of the Company’s goodwill and other intangible assets and compare the Company’s 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 acquisition accounting method of accounting for mergers and acquisitions.
The following table presents, as of the dates set forth below, total stockholders’ equity to tangible common equity and presents the Company’s tangible book value per common share compared with the Company’s book value per common share:
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As of December 31, | |||||||||||||||
(dollars in thousands, except per share data) | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
Tangible Common Equity | |||||||||||||||
Total common stockholders’ equity | $ | 516,913 | $ | 233,772 | $ | 124,510 | $ | 85,997 | $ | 76,044 | |||||
Adjustments: | |||||||||||||||
Goodwill | (229,457 | ) | (34,704 | ) | (28,742 | ) | (11,222) | (11,222) | |||||||
Core deposit intangibles | (12,455 | ) | (3,148 | ) | (3,251 | ) | (2,664) | (3,231) | |||||||
Tangible common equity | $ | 275,001 | $ | 195,920 | $ | 92,517 | $ 72,111 | $ 61,591 | |||||||
Common shares outstanding(1) | 17,032,669 | 12,330,158 | 8,269,707 | 6,850,293 | 6,832,328 | ||||||||||
Book value per common share | $ | 30.35 | $ | 18.96 | $15.06 | $12.55 | $11.13 | ||||||||
Tangible book value per common share | 16.15 | 15.89 | 11.19 | 10.53 | 9.02 | ||||||||||
(1) | The Company calculates the common shares outstanding as set forth in note 5 to the tabular presentation of Independent’s historical selected financial data and other information appearing above. |
Tier 1 Capital to Risk-Weighted Assets Ratio. The Company calculates the Tier 1 capital to risk-weighted assets ratio by dividing (a) the Company’s Tier 1 capital less noncommon elements, including qualifying trust preferred securities, by (b) risk-weighted assets, which are calculated in accordance with applicable bank regulatory requirements. Applicable bank regulatory requirements do not require the Company to disclose on a recurring basis the Company’s Tier 1 capital ratio. Management is currently monitoring this ratio, along with the applicable bank regulatory ratios, in evaluating the Company’s capital levels and believes that, at this time, the ratio may continue to be information that may be of interest to investors and analysts and assist them in assessing the adequacy of the Company’s capital and risk tolerance in view of the Company’s capital position. The financial measure calculated in accordance with GAAP most directly comparable to the Tier 1 capital to risk-weighted assets ratio is the ratio of the Company’s total stockholders’ equity to risk-weighted assets.
The following table presents the Company’s total stockholders’ equity (on a GAAP basis) to Tier 1 capital and presents the Tier 1 capital to risk-weighted assets ratio and the ratio of total stockholders’ equity to risk-weighted assets as of the dates set forth below:
As of December 31, | |||||||||||||||
(dollars in thousands) | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
Tier 1 Capital | |||||||||||||||
Total common stockholders’ equity-GAAP | $ | 516,913 | $ | 233,772 | $ | 124,510 | $ 85,997 | $ 76,044 | |||||||
Adjustments: | |||||||||||||||
Unrealized loss (gain) on available-for-sale securities | (2,403 | ) | 1,130 | (2,578 | ) | (2,162) | (866) | ||||||||
Goodwill | (229,457 | ) | (34,704 | ) | (28,742 | ) | (11,222) | (11,222) | |||||||
Other intangibles | (12,455 | ) | (3,148 | ) | (3,251 | ) | (2,664) | (3,231) | |||||||
Qualifying Restricted Core Capital Elements (TRUPS) | 17,600 | 17,600 | 17,600 | 14,100 | 14,100 | ||||||||||
Tier 1 capital | $ | 290,198 | $ | 214,650 | $ | 107,539 | $ 84,049 | $ 74,825 | |||||||
Total Risk-weighted Assets | |||||||||||||||
On balance sheet | $ | 3,059,172 | $ | 1,637,117 | $ | 1,297,795 | $ | 971,322 | $ | 834,898 | |||||
Off balance sheet | 136,241 | 60,397 | 10,860 | 6,850 | 8,139 | ||||||||||
Total risk-weighted assets | $ | 3,195,413 | $ | 1,697,514 | $ | 1,308,655 | $ | 978,172 | $ | 843,037 | |||||
Total common stockholders’ equity to risk-weighted assets ratio | 16.18 | % | 13.77 | % | 9.51 | % | 8.79 | % | 9.02 | % | |||||
Tier 1 common equity to risk-weighted assets ratio | 9.08 | 12.64 | 8.22 | 8.59 | 8.88 | ||||||||||
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the market risk of the Company's financial instruments, see Part II, Item. 7. Management's Discussion and Analysis of Financial Condition and Results of Operation--Financial Condition--Asset/Liability Management and Interest Rate Risk. The Company's principal market risk exposure is to changes in interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, the reports thereon, the notes thereto and supplementary data commence at page 75 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. As of the end of the period covered by this Annual Report on Form 10-K, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, were effective as of the end of the period covered by this report.
Changes in internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2014, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
As of December 31, 2014, management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control-Integrated Framework,” issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in 1992. This assessment included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y‑9C) to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act. Based on the assessment management determined that the Company maintained effective internal control over financial reporting as of December 31, 2014.
McGladrey LLP, the independent registered public accounting firm, audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K. Their report is included in Part IV, Item 15. Exhibits and Financial Statements under the heading "Report of Independent Registered Public Accounting Firm." This Annual Report on Form 10-K does not include an attestation report of the Company's registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for an Emerging Growth Company.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 is incorporated herein by reference to the information under the captions “Election of Directors,” “Current Executive Officers and Directors,” “Beneficial Ownership of the Company’s Common Stock by Management and Principal Shareholders of the Company-Section 16(a) Beneficial Ownership Reporting Compliance,” “Board and Committee Matters-Audit Committee,” “Board and Committee Matters-Director Nominations” and “Board and Committee Matters-Code of Conduct: Code of Ethics for Chief Executive Officer and Senior Financial Officers” in the Company’s definitive Proxy Statement for its 2015 Annual Meeting of Shareholders (the “2015 Proxy Statement”) to be filed with the Commission pursuant to Regulation 14A under the Exchange Act within 120 days of the Company’s fiscal year end.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by reference to the information under the captions “Executive Compensation and Other Matters” in the 2015 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
Certain information required by this Item 12 is included under “Securities Authorized for Issuance under Equity Compensation Plans” in Part II, Item 5 of this Annual Report on Form 10-K. The other information required by this Item is incorporated herein by reference to the information under the caption “Beneficial Ownership of Common Stock by Management and Principal Shareholders of the Company” and "Securities Authorized for Issuance Under Equity Compensation Plans" in the 2015 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item 13 is incorporated herein by reference to the information under the captions “Board and Committee Matters-Director Independence” and “Certain Relationships and Related Person Transactions” in the 2015 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 is incorporated herein by reference to the information under the caption “Board and Committee Matters-Fees paid to Independent Registered Public Accounting Firm” and “Board and Committee Matters-Audit Committee Pre-Approval Policy” in the 2015 Proxy Statement.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements. Reference is made to the Consolidated Financial Statements, the report thereon and the notes thereto commencing at page 79 of this Annual Report on Form 10-K. Set forth below is a list of such Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Income for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
2. Financial Statement Schedules. All supplemental schedules are omitted as inapplicable or because the required information is included in the Consolidated Financial Statements or notes thereto.
3. The exhibits to this Annual Report on Form 10-K listed below have been included only with the copy of this report filed with the Securities and Exchange Commission. The Company will furnish a copy of any exhibit to shareholders upon written request to the Company and payment of a reasonable fee not to exceed the Company’s reasonable expense.
Each exhibit marked with an asterisk is filed or furnished with this Annual Report on Form 10-K as noted below.
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EXHIBIT LIST
Exhibit Number | Description |
2.1 | Agreement and Plan of Reorganization, dated as of June 2, 2014, by and among the Registrant and Houston City Bancshares (incorporated herein by reference to Appendix A to the Registrant’s Registration Statement on Form S-4 (Registration No. 333-197556)) |
3.1 | Amended and Restated Certificate of Formation of the Registrant (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-186912) (the “Form S-1 Registration Statement”)) |
3.2 | Certificate of Amendment to Amended and Restated Certificate of Formation of the Registrant (incorporated herein by reference to Exhibit 3.3 to the Form S-1 Registration Statement) |
3.3 | Third Amended and Restated Bylaws of the Registrant (incorporated herein by reference to Exhibit 3.2 to the Form S-1 Registration Statement) |
3.4 | Certificate of Merger, dated January 2, 2014, of Live Oak Financial Corp. with and into Independent Bank Group, Inc. (incorporated herein by reference to Exhibit 3.5 to the Registrant’s Registration Statement on Form S-3 (Registration No. 333-196627 (the “Form S-3 Registration Statement”)) |
3.5 | Certificate of Merger, dated April 15, 2014, of BOH Holdings, Inc. with and into Independent Bank Group, Inc. (incorporated herein by reference to Exhibit 3.6 to the Form S-3 Registration Statement |
4.1 | Form of certificate representing shares of the Registrant’s common stock (incorporated herein by reference to Exhibit 4.1 to the Form S-1 Registration Statement) |
4.2 | Form of Common Stock Purchase Warrant, with schedules of differences (incorporated herein by reference to Exhibit 4.2 to the Form S-1 Registration Statement) |
4.3 | Statement of Designations of Senior Non-Cumulative Perpetual Preferred Stock, Series A of the Registrant, as filed with the Office of the Secretary of State of the State of Texas on April 15, 2014 (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on April 17, 2014) |
4.4 | Form of certificate representing shares of the Registrant’s Series A preferred stock (incorporated herein by reference to Exhibit 4.3 to the Form S-3 Registration Statement) |
4.5 | Independent Bank 401(k) Profit Sharing Plan, including the related Adoption Agreement (incorporated herein by reference to Exhibit 4.9 to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-198483)) |
The other instruments defining the rights of holders of the long-term debt securities of the Registrant and its subsidiaries are omitted pursuant to section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The Registrant hereby agrees to furnish copies of these instruments to the Securities and Exchange Commission upon request. | |
10.1 | Loan and Subordinated Debenture Purchase Agreement, dated December 23, 2008, between Independent Bank Group, Inc. and TIB The Independent BankersBank (incorporated herein by reference to Exhibit 10.1 to the Form S-1 Registration Statement) |
10.2 | Term Promissory Note, dated December 24, 2008, by Independent Bank Group, Inc. payable to TIB The Independent BankersBank in the original principal amount of $12,000,000 (incorporated herein by reference to Exhibit 10.2 to the Form S-1 Registration Statement) |
10.3 | Subordinated Debenture, dated December 24, 2008, by Independent Bank Group, Inc. payable to TIB The Independent BankersBank in the original principal amount of $4,500,000 (incorporated herein by reference to Exhibit 10.3 to the Form S-1 Registration Statement) |
10.4 | Pledge and Security Agreement, dated December 24, 2008, between Independent Bank Group, Inc. and TIB The Independent BankersBank (incorporated herein by reference to Exhibit 10.4 to the Form S-1 Registration Statement) |
10.5 | Letter Loan Agreement, dated March 15, 2012, between Independent Bank Group, Inc. and TIB The Independent BankersBank (incorporated herein by reference to Exhibit 10.5 to the Form S-1 Registration Statement) |
10.6 | Promissory Note, dated March 15, 2012, by Independent Bank Group, Inc. payable to TIB The Independent BankersBank in the original principal amount of $7,000,000 (incorporated herein by reference to Exhibit 10.6 to the Form S-1 Registration Statement) |
10.7 | Pledge Agreement, dated March 15, 2012, between Independent Bank Group, Inc. and TIB The Independent BankersBank (incorporated herein by reference to Exhibit 10.7 to the Form S-1 Registration Statement) |
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10.8 | Loan Agreement, dated June 28, 2011, between IBG Adriatica Holdings, Inc. and First United Bank and Trust Company (incorporated herein by reference to Exhibit 10.8 to the Form S-1 Registration Statement) |
10.9 | Commercial Promissory Note, dated June 28, 2011, by IBG Adriatica Holdings, Inc. payable to First United Bank and Trust Company in the original principal amount of $12,187,500 (incorporated herein by reference to Exhibit 10.9 to the Form S-1 Registration Statement) |
10.10 | Security Agreement, dated June 28, 2011, between IBG Adriatica Holdings, Inc. and First United Bank and Trust Company (incorporated herein by reference to Exhibit 10.10 to the Form S-1 Registration Statement) |
10.11 | Commercial Deed of Trust, Security Agreement, Financing Statement and Assignment of Rents, dated July 29, 2011, by IBG Adriatica Holdings, Inc. for the benefit of First United Bank and Trust Company (incorporated herein by reference to Exhibit 10.11 to the Form S-1 Registration Statement) |
10.12 | Commercial Guaranty Agreement, dated June 28, 2011, by Independent Bank Group, Inc. in favor of First United Bank and Trust Company (incorporated herein by reference to Exhibit 10.12 to the Form S-1 Registration Statement) |
10.13 | Loan Purchase and Sale Agreement between IBG Adriatica Holdings, Inc., as assignee of Independent Bank Group, Inc., and First United Bank and Trust Company, as amended (incorporated herein by reference to Exhibit 10.13 to the Form S-1 Registration Statement) |
10.14 | Real Estate Acquisition and Option Agreement, dated the December 22, 2011, between IBG Adriatica Holdings, Inc. and Himalayan Ventures, L.P. (incorporated herein by reference to Exhibit 10.14 to the Form S-1 Registration Statement) |
10.15 | Real Estate Acquisition Agreement, dated November 15, 2012, between IBG Adriatica Holdings, Inc. and Himalayan St. Paul’s Square Holdings, LLC (incorporated herein by reference to Exhibit 10.15 to the Form S-1 Registration Statement) |
10.16 | Real Estate Acquisition Agreements by and between IBG Adriatica Holdings, Inc. and Himalayan Ventures, L.P. dated December 5, 2013 (incorporated herein by reference to Exhibit 10.16 to the Registrant’s Registration Statement on Form S-4 (Registration No. 333-193373) (the “BOH Registration Statement”)) |
10.17 | Form of Indemnification Agreement for directors and officers (incorporated herein by reference to Exhibit 10.16 to the Form S-1 Registration Statement) |
10.18 | Form of S-Corporation Revocation, Tax Allocation and Indemnification Agreement (incorporated herein by reference to Exhibit 10.17 to the Form S-1 Registration Statement) |
10.19 | 2005 Stock Grant Plan, with form of Notice of Grant Letter Agreement, as amended, and related Form of Notice of Grant Letter Agreement relating to the written compensation contracts (incorporated herein by reference to Exhibit 10.18 to the Form S-1 Registration Statement) |
10.20 | 2012 Stock Grant Plan, with form of Notice of Grant Letter Agreement (incorporated herein by reference to Exhibit 10.19 to the Form S-1 Registration Statement) |
10.21 | 2013 Equity Incentive Plan, with form of Restricted Stock Award Agreement (incorporated herein by reference to Exhibit 10.20 to the Form S-1 Registration Statement) |
10.22 | Agreement and Plan of Reorganization, dated December 22, 2011, between Independent Bank Group, Inc. and I Bank Holding Company, Inc. (incorporated herein by reference to Exhibit 10.21 to the Form S-1 Registration Statement) |
10.23 | Agreement and Plan of Reorganization, dated July 2, 2012, between Independent Bank Group, Inc. and The Community Group, Inc. (incorporated herein by reference to Exhibit 10.22 to the Form S-1 Registration Statement) |
10.24 | Purchase and Assumption Agreement, dated January 13, 2009, between Independent Bank and First State Bank (incorporated herein by reference to Exhibit 10.23 to the Form S-1 Registration Statement) |
10.25 | Purchase and Assumption Agreement, dated June 29, 2012, between Independent Bank and Citizens National Bank (incorporated herein by reference to Exhibit 10.24 to the Form S-1 Registration Statement) |
10.26 | Agreement and Plan of Reorganization by and between Independent Bank Group, Inc. and Collin Bank dated as of July 18, 2013 (incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement on Form S-4 (Registration No. 333-190946)) |
10.27 | Agreement and Plan of Reorganization by and between Independent Bank Group, Inc. and Live Oak Financial Corp. dated as of August 22, 2013 (incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement on Form S-4 (Registration No. 333-191670)) |
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10.28 | Employment Agreement, dated November 21, 2013, between Independent Bank Group, Inc. and James D. Stein, including related Restricted Stock Grant (incorporated herein by reference to Exhibit 10.28 to the BOH Registration Statement) |
10.29 | Subordinated Debt Indenture, dated as of June 25, 2014, between Independent Bank Group, Inc. and Wells Fargo Bank Shareowner Services, in its capacity as Indenture Trustee (incorporated herein by reference to Exhibit 4.6 to the Registrant’s Amendment No. 1 to the Form S-3 Registration Statement) |
10.30 | First Supplemental Indenture, dated as of July 17, 2014, between Independent Bank Group, Inc. and Wells Fargo Bank Shareowner Services, in its capacity as Indenture Trustee (incorporated herein by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K, dated July 17, 2014) |
10.31 | Credit Agreement, dated as of June 4, 2014, between Independent Bank Group, Inc. and U.S. Bank National Association (incorporated herein by reference to Exhibit 10.14 to the Form S-3 Registration Statement) |
10.32 | Amendment No. 1 to the Credit Agreement, dated July 14, 2014, between Independent Bank Group, Inc. and U.S. Bank National Association (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, dated July 17, 2014) |
12.1 | Statement regarding computation of Earnings to Fixed Charges and Preferred Share Dividends Ratios* |
21.1 | Subsidiaries of Independent Bank Group, Inc.* |
23.1 | Consent of McGladrey LLP, Independent Registered Public Accounting Firm of Independent Bank Group, Inc.* |
31.1 | Chief Executive Officer Section 302 Certification* |
31.2 | Chief Financial Officer Section 302 Certification* |
32.1 | Chief Executive Officer Section 906 Certification* |
32.2 | Chief Financial Officer Section 906 Certification* |
101.INS | XBRL Instant Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
* | Filed herewith |
78
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Independent Bank Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Independent Bank Group, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting under Public Company Accounting Oversight Board (PCAOB) standards. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting under PCAOB standards. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Independent Bank Group, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
/s/ McGladrey LLP
Dallas, Texas
February 27, 2015
79
Independent Bank Group, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2014 and 2013
(Dollars in thousands, except share information)
December 31, | ||||||||
Assets | 2014 | 2013 | ||||||
Cash and due from banks | $ | 153,158 | $ | 25,874 | ||||
Interest-bearing deposits in other banks | 170,889 | 67,180 | ||||||
Cash and cash equivalents | 324,047 | 93,054 | ||||||
Securities available for sale (amortized cost of $203,277 and 196,689, respectively) | 206,062 | 194,038 | ||||||
Loans held for sale | 4,453 | 3,383 | ||||||
Loans, net of allowance for loan losses of $18,552 and $13,960, respectively | 3,182,045 | 1,709,200 | ||||||
Premises and equipment, net | 88,902 | 72,735 | ||||||
Other real estate owned | 4,763 | 3,322 | ||||||
Federal Home Loan Bank (FHLB) of Dallas stock and other restricted stock | 12,321 | 9,494 | ||||||
Bank-owned life insurance (BOLI) | 39,784 | 21,272 | ||||||
Deferred tax asset | 2,235 | 4,834 | ||||||
Goodwill | 229,457 | 34,704 | ||||||
Core deposit intangible, net | 12,455 | 3,148 | ||||||
Other assets | 26,115 | 14,800 | ||||||
Total assets | $ | 4,132,639 | $ | 2,163,984 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 818,022 | $ | 302,756 | ||||
Interest-bearing | 2,431,576 | 1,407,563 | ||||||
Total deposits | 3,249,598 | 1,710,319 | ||||||
FHLB advances | 229,405 | 187,484 | ||||||
Repurchase agreements | 4,012 | — | ||||||
Other borrowings | 69,410 | 4,460 | ||||||
Other borrowings, related parties | 3,320 | 3,270 | ||||||
Junior subordinated debentures | 18,147 | 18,147 | ||||||
Other liabilities | 17,896 | 6,532 | ||||||
Total liabilities | 3,591,788 | 1,930,212 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Series A preferred stock (23,938.35 and 0 shares issued and outstanding, respectively) | 23,938 | — | ||||||
Common stock (17,032,669 and 12,330,158 shares outstanding, respectively) | 170 | 123 | ||||||
Additional paid-in capital | 476,609 | 222,116 | ||||||
Retained earnings | 37,731 | 12,663 | ||||||
Accumulated other comprehensive income (loss) | 2,403 | (1,130 | ) | |||||
Total stockholders’ equity | 540,851 | 233,772 | ||||||
Total liabilities and stockholders’ equity | $ | 4,132,639 | $ | 2,163,984 | ||||
See Notes to Consolidated Financial Statements
80
Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2014, 2013 and 2012
(Dollars in thousands, except per share information)
Years ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Interest income: | ||||||||||||
Interest and fees on loans | $ | 135,461 | $ | 84,350 | $ | 69,494 | ||||||
Interest on taxable securities | 2,803 | 1,516 | 1,288 | |||||||||
Interest on nontaxable securities | 1,429 | 1,024 | 828 | |||||||||
Interest on federal funds sold and other | 439 | 324 | 280 | |||||||||
Total interest income | 140,132 | 87,214 | 71,890 | |||||||||
Interest expense: | ||||||||||||
Interest on deposits | 9,537 | 6,974 | 8,351 | |||||||||
Interest on FHLB advances | 3,678 | 3,303 | 2,383 | |||||||||
Interest on repurchase agreements, notes payable and other borrowings | 2,230 | 1,461 | 2,072 | |||||||||
Interest on junior subordinated debentures | 542 | 543 | 531 | |||||||||
Total interest expense | 15,987 | 12,281 | 13,337 | |||||||||
Net interest income | 124,145 | 74,933 | 58,553 | |||||||||
Provision for loan losses | 5,359 | 3,822 | 3,184 | |||||||||
Net interest income after provision for loan losses | 118,786 | 71,111 | 55,369 | |||||||||
Noninterest income: | ||||||||||||
Service charges on deposit accounts | 6,009 | 4,841 | 3,386 | |||||||||
Mortgage fee income | 3,953 | 3,743 | 4,116 | |||||||||
Gain on sale of loans | 1,078 | — | — | |||||||||
Gain on sale of branch | — | — | 38 | |||||||||
Gain on sale of other real estate | 71 | 1,507 | 1,135 | |||||||||
Gain (loss) on sale of securities available for sale | 362 | — | (3 | ) | ||||||||
Loss on sale of premises and equipment | (22 | ) | (18 | ) | (343 | ) | ||||||
Increase in cash surrender value of BOLI | 972 | 348 | 327 | |||||||||
Other | 1,201 | 600 | 512 | |||||||||
Total noninterest income | 13,624 | 11,021 | 9,168 | |||||||||
Noninterest expense: | ||||||||||||
Salaries and employee benefits | 52,337 | 31,836 | 26,569 | |||||||||
Occupancy | 13,250 | 9,042 | 7,317 | |||||||||
Data processing | 2,080 | 1,347 | 1,198 | |||||||||
FDIC assessment | 1,797 | 500 | 800 | |||||||||
Advertising and public relations | 835 | 684 | 626 | |||||||||
Communications | 1,787 | 1,385 | 1,334 | |||||||||
Net other real estate owned expenses (including taxes) | 232 | 485 | 220 | |||||||||
Operations of IBG Adriatica, net | 23 | 806 | 832 | |||||||||
Other real estate impairment | 22 | 549 | 94 | |||||||||
Core deposit intangible amortization | 1,281 | 703 | 656 | |||||||||
Professional fees | 2,567 | 1,298 | 1,104 | |||||||||
Acquisition expense, including legal | 3,626 | 1,956 | 1,401 | |||||||||
Other | 8,675 | 7,080 | 5,009 | |||||||||
Total noninterest expense | 88,512 | 57,671 | 47,160 | |||||||||
Income before taxes | 43,898 | 24,461 | 17,377 | |||||||||
Income tax expense | 14,920 | 4,661 | — | |||||||||
Net income | $ | 28,978 | $ | 19,800 | $ | 17,377 | ||||||
Basic earnings per share | $ | 1.86 | $ | 1.78 | $ | 2.23 | ||||||
Diluted earnings per share | $ | 1.85 | $ | 1.77 | $ | 2.23 | ||||||
Pro Forma: | ||||||||||||
Income tax expense | n/a | 8,287 | 5,230 | |||||||||
Net income | n/a | $ | 16,174 | $ | 12,147 | |||||||
Basic earnings per share | n/a | $ | 1.45 | $ | 1.56 | |||||||
Diluted earnings per share | n/a | $ | 1.44 | $ | 1.56 | |||||||
See Notes to Consolidated Financial Statements
81
Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2014, 2013 and 2012
(Dollars in thousands)
Years ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Net income | $ | 28,978 | $ | 19,800 | $ | 17,377 | ||||||
Other comprehensive income (loss) before tax: | ||||||||||||
Change in net unrealized gains (losses) on available for sale securities during the year | 5,798 | (5,229 | ) | 413 | ||||||||
Reclassification adjustment for gain (loss) on sale of securities available for sale included in net income | (362 | ) | — | 3 | ||||||||
Other comprehensive income (loss) before tax | 5,436 | (5,229 | ) | 416 | ||||||||
Income tax expense (benefit) | 1,903 | (1,521 | ) | — | ||||||||
Other comprehensive income (loss), net of tax | 3,533 | (3,708 | ) | 416 | ||||||||
Comprehensive income | $ | 32,511 | $ | 16,092 | $ | 17,793 | ||||||
See Notes to Consolidated Financial Statements
82
Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2014, 2013 and 2012
(Dollars in thousands, except for par value and per share information)
Series A Preferred Stock $.01 Par Value 10 million shares authorized | Common Stock $.01 Par Value 100 million shares authorized | Additional Paid in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||
Balance, December 31, 2011 | $ | — | 6,852,309 | $ | 69 | $ | 59,196 | $ | 24,594 | $ | (24 | ) | $ | 2,162 | $ | 85,997 | ||||||||||||||
Net income | — | — | — | — | 17,377 | — | — | 17,377 | ||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | 416 | 416 | ||||||||||||||||||||||
Stock issued | — | 1,243,824 | 12 | 25,253 | — | — | — | 25,265 | ||||||||||||||||||||||
Stock issued for acquisition of bank | — | 182,221 | 2 | 3,699 | — | — | — | 3,701 | ||||||||||||||||||||||
Stock based compensation expense | — | — | — | 643 | — | — | — | 643 | ||||||||||||||||||||||
Treasury stock purchased (6,631 shares) | — | — | — | — | — | (208 | ) | — | (208 | ) | ||||||||||||||||||||
Dividends ($1.12 per share) | — | — | — | — | (8,681 | ) | — | — | (8,681 | ) | ||||||||||||||||||||
Balance, December 31, 2012 | — | 8,278,354 | 83 | 88,791 | 33,290 | (232 | ) | 2,578 | 124,510 | |||||||||||||||||||||
Net income | — | — | — | — | 19,800 | — | — | 19,800 | ||||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | — | — | (3,708 | ) | (3,708 | ) | ||||||||||||||||||||
Treasury stock retired | — | (8,647 | ) | — | (232 | ) | — | 232 | — | — | ||||||||||||||||||||
Common stock issued, net of offering costs | — | 3,680,000 | 37 | 86,534 | — | — | — | 86,571 | ||||||||||||||||||||||
Reclassification adjustment for change in taxable status | — | — | — | 33,624 | (33,624 | ) | — | — | — | |||||||||||||||||||||
Stock issued for acquisition of bank | — | 247,731 | 2 | 11,859 | — | — | — | 11,861 | ||||||||||||||||||||||
Restricted stock granted | — | 132,720 | 1 | (1 | ) | — | — | — | — | |||||||||||||||||||||
Excess tax benefit on restricted stock vested | — | — | — | 72 | — | — | — | 72 | ||||||||||||||||||||||
Stock based compensation expense | — | — | — | 1,469 | — | — | — | 1,469 | ||||||||||||||||||||||
Dividends ($0.77 per share) | — | — | — | — | (6,803 | ) | — | — | (6,803 | ) | ||||||||||||||||||||
Balance, December 31, 2013 | — | 12,330,158 | 123 | 222,116 | 12,663 | — | (1,130 | ) | 233,772 | |||||||||||||||||||||
Net income | — | — | — | — | 28,978 | — | — | 28,978 | ||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | — | 3,533 | 3,533 | ||||||||||||||||||||||
Series A preferred stock issued | 23,938 | — | — | — | — | — | — | 23,938 | ||||||||||||||||||||||
Stock issued for acquisition of banks, net of offering costs of $566 | — | 4,489,336 | 45 | 250,172 | — | — | — | 250,217 | ||||||||||||||||||||||
Restricted stock forfeited | — | (394 | ) | — | — | — | — | — | — | |||||||||||||||||||||
Restricted stock granted | — | 213,569 | 2 | (2 | ) | — | — | — | — | |||||||||||||||||||||
Excess tax benefit on restricted stock vested | — | — | — | 1,409 | — | — | — | 1,409 | ||||||||||||||||||||||
Stock based compensation expense | — | — | — | 2,914 | — | — | — | 2,914 | ||||||||||||||||||||||
Preferred stock dividends | — | — | — | — | (169 | ) | — | — | (169 | ) | ||||||||||||||||||||
Dividends ($0.24 per share) | — | — | — | — | (3,741 | ) | — | — | (3,741 | ) | ||||||||||||||||||||
Balance, December 31, 2014 | $ | 23,938 | 17,032,669 | $ | 170 | $ | 476,609 | $ | 37,731 | $ | — | $ | 2,403 | $ | 540,851 | |||||||||||||||
See Notes to Consolidated Financial Statements
83
Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2014, 2013 and 2012
(Dollars in thousands)
Years ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 28,978 | $ | 19,800 | $ | 17,377 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation expense | 5,285 | 4,322 | 3,524 | |||||||||
Amortization of core deposit intangibles | 1,281 | 703 | 656 | |||||||||
Amortization (accretion) of premium (discount) on securities, net | 2,002 | 145 | (1 | ) | ||||||||
Stock grants amortized | 2,914 | 1,469 | 643 | |||||||||
FHLB stock dividends | (47 | ) | (27 | ) | (17 | ) | ||||||
Net loss (gain) on sale of premises and equipment | 22 | 18 | 343 | |||||||||
Gain on sale of loans | (1,078 | ) | — | — | ||||||||
Gain on sale of branch | — | — | (38 | ) | ||||||||
(Gain) loss on sale of securities available for sale | (362 | ) | — | 3 | ||||||||
Gain recognized on other real estate transactions | (71 | ) | (1,507 | ) | (1,135 | ) | ||||||
Impairment of other real estate | 22 | 549 | 94 | |||||||||
Deferred tax expense (benefit) | 71 | (2,083 | ) | — | ||||||||
Provision for loan losses | 5,359 | 3,822 | 3,184 | |||||||||
Increase in cash surrender value of life insurance | (972 | ) | (348 | ) | (327 | ) | ||||||
Mortgage loans originated for sale | (148,910 | ) | (161,160 | ) | (177,063 | ) | ||||||
Proceeds from sale of mortgage loans | 147,840 | 166,939 | 170,892 | |||||||||
Net change in other assets | (4,769 | ) | (2,582 | ) | 95 | |||||||
Net change in other liabilities | 3,047 | 701 | (421 | ) | ||||||||
Net cash provided by operating activities | 40,612 | 30,761 | 17,809 | |||||||||
Cash flows from investing activities: | ||||||||||||
Proceeds from maturities and paydowns of securities available for sale | 1,483,062 | 282,102 | 245,581 | |||||||||
Proceeds from sale of securities available for sale | 19,260 | 4,067 | 2,078 | |||||||||
Purchases of securities available for sale | (1,430,794 | ) | (309,853 | ) | (256,295 | ) | ||||||
Proceeds from maturities of certificates held in other banks | — | 7,720 | 9,358 | |||||||||
Purchase of bank owned life insurance contracts | — | (10,000 | ) | — | ||||||||
Net redemptions (purchases) of FHLB stock | 4,033 | (146 | ) | (1,584 | ) | |||||||
Proceeds from sale of SBA loans | 12,147 | — | — | |||||||||
Net loans originated | (439,366 | ) | (285,181 | ) | (202,371 | ) | ||||||
Additions to premises and equipment | (4,854 | ) | (6,795 | ) | (14,063 | ) | ||||||
Proceeds from sale of premises and equipment | 18 | 442 | 5,095 | |||||||||
Proceeds from sale of other real estate owned | 3,415 | 17,081 | 8,880 | |||||||||
Capitalized additions to other real estate | (28 | ) | (93 | ) | (592 | ) | ||||||
Cash received from acquired banks | 286,596 | 22,792 | 46,230 | |||||||||
Cash paid in connection with acquisitions | (60,812 | ) | (18,412 | ) | (46,600 | ) | ||||||
Net cash transferred in branch sale | — | — | (18,563 | ) | ||||||||
Net cash used in investing activities | (127,323 | ) | (296,276 | ) | (222,846 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Net increase in demand deposits, NOW and savings accounts | 230,070 | 145,085 | 183,919 | |||||||||
Net increase (decrease) in time deposits | 79,850 | 63,330 | (20,039 | ) | ||||||||
Net change in FHLB advances | (53,079 | ) | (3,117 | ) | 69,810 | |||||||
Net change in repurchase agreements | 279 | — | — | |||||||||
Repayments of notes payable and other borrowings | — | (28,787 | ) | (10,958 | ) | |||||||
Proceeds from other borrowings | 65,000 | — | 11,680 | |||||||||
Offering costs paid in connection with acquired banks | (566 | ) | — | — | ||||||||
Proceeds from sale of common stock | — | 86,571 | 25,150 | |||||||||
Treasury stock purchased | — | — | (208 | ) | ||||||||
Dividends paid | (3,850 | ) | (6,803 | ) | (8,681 | ) | ||||||
Net cash provided by financing activities | 317,704 | 256,279 | 250,673 | |||||||||
Net change in cash and cash equivalents | 230,993 | (9,236 | ) | 45,636 | ||||||||
Cash and cash equivalents at beginning of year | 93,054 | 102,290 | 56,654 | |||||||||
Cash and cash equivalents at end of year | $ | 324,047 | $ | 93,054 | $ | 102,290 | ||||||
See Notes to Consolidated Financial Statements
84
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Note 1. Summary of Significant Accounting Policies
Nature of Operations: Independent Bank Group, Inc. (IBG) through its subsidiary, Independent Bank, a Texas state banking corporation (Bank) (collectively known as the Company), provides a full range of banking services to individual and corporate customers in the north, central and southeast Texas areas through its various branch locations in those areas. The Company is engaged in traditional community banking activities, which include commercial and retail lending, deposit gathering, investment and liquidity management activities. The Company’s primary deposit products are demand deposits, money market accounts and certificates of deposit, and its primary lending products are commercial business and real estate, real estate mortgage and consumer loans.
Basis of Presentation: The accompanying consolidated financial statements include the accounts of IBG, its wholly-owned subsidiaries, the Bank and IBG Adriatica Holdings, Inc. (Adriatica) and the Bank’s wholly-owned subsidiaries, IBG Real Estate Holdings, Inc., and IBG Aircraft Acquisition, Inc. Adriatica was formed in 2011 to acquire a mixed use residential and retail real estate development in McKinney, Texas (see Note 22). Adriatica became inactive in 2014. All material intercompany transactions and balances have been eliminated in consolidation. In addition, the Company wholly-owns IB Trust I (Trust I), IB Trust II (Trust II), IB Trust III (Trust III), IB Centex Trust I (Centex Trust I) and Community Group Statutory Trust I (CGI Trust I). The Trusts were formed to issue trust preferred securities and do not meet the criteria for consolidation (see Note 13).
Accounting standards codification: The Financial Accounting Standards Board's (FASB) Accounting Standards Codification (ASC) is the officially recognized source of authoritative U.S. generally accepted accounting principles (GAAP) applicable to all public and non-public non-governmental entities. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.
Segment Reporting: The Company has one reportable segment. The Company’s chief operating decision-maker uses consolidated results to make operating and strategic decisions.
Initial Public Offering (IPO): IBG qualifies as an “emerging growth company” as defined by the Jumpstart Our Business Startups Act (JOBS Act). In October 2012, the Board of Directors of the Company approved a resolution for IBG to sell shares of common stock to the public in an initial public offering. On December 28, 2012, the Company submitted a confidential draft Registration Statement on Form S-1 with the SEC with respect to the shares to be registered and sold. On February 27, 2013, the Company filed a Registration Statement on Form S-1 with the SEC. That Registration Statement was declared effective by the SEC on April 2, 2013. The Company sold and issued 3,680,000 shares of common stock at $26 per share in reliance on that Registration Statement. Total proceeds received by the Company, net of offering costs were approximately $87 million.
In connection with the initial public offering, on February 22, 2013, the Company amended its certificate of incorporation to affect a 3.2 for one stock split of its common stock and change the par value of common stock from $1 to $.01. All previously reported share amounts have been retrospectively restated to give effect to the stock split and the common stock account has been reallocated to additional paid in capital to reflect the new par value. The Company also terminated its S-Corporation status and became a taxable corporate entity (C Corporation) on April 1, 2013. The consolidated statement of stockholders' equity presents a constructive distribution to the owners followed by a contribution to the capital of the corporate entity. The transfer did not affect total stockholders’ equity.
Use of estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Accordingly, actual results could differ from those estimates. The material estimates included in the financial statements relate to the allowance for loan losses, the valuation of goodwill and valuation of assets and liabilities acquired in business combinations.
Cash and cash equivalents: For the purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. All highly liquid investments with an initial maturity of less than ninety days are considered to be cash equivalents. The Company maintains deposits with other financial institutions in amounts that
85
exceed FDIC insurance coverage. The Company's management monitors the balance in these accounts and periodically assesses the financial condition of the other financial institutions. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risks on cash or cash equivalents.
Cash and cash equivalents include interest-bearing funds of $170,889 and $67,180 at December 31, 2014 and 2013, respectively.
Securities: Securities classified as available for sale are those debt securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors.
Securities available for sale are reported at fair value with unrealized gains or losses reported as a separate component of other comprehensive income, net of tax. The amortization of premiums and accretion of discounts, computed by the interest method over their contractual lives, are recognized in interest income.
Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings on the trade date.
In estimating other than temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to retain its investment and whether it is more likely than not the Company will be required to sell its investment before its anticipated recovery in fair value. When the Company does not intend to sell the security, and it is more likely than not that it will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other than temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.
Loans held for sale: The Company originates residential mortgage loans that may subsequently be sold to an unaffiliated third party. The loans are not securitized and if sold, are sold without recourse. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by aggregate outstanding commitments from investors. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Gains and losses on sales of loans are recognized in noninterest income at settlement dates and are determined by the difference between the sales proceeds and the carrying value of the loans.
Acquired loans: Acquired loans from the transactions accounted for as a business combination include both non- performing loans with evidence of credit deterioration since their origination date and performing loans. The Company is accounting for the non-performing loans acquired in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. At the date of the acquisition, the acquired loans are recorded at their fair value and there is no carryover of the seller's allowance for loan losses.
Purchased credit impaired loans are accounted for individually. The Company estimates the amount and timing
of undiscounted expected cash flows for each loan, and the expected cash flows in excess of fair value is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan's contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).
Over the life of the loan, expected cash flows continue to be estimated. If the expected cash flows decrease, an impairment loss is recorded. If the expected cash flows increase, it is recognized as part of future interest income.
The performing loans are being accounted for under ASC 310-20, Nonrefundable Fees and Other Costs, with the related discount being adjusted for over the life of the loan and recognized as interest income.
Loans, net: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance adjusted for the allowance for loan losses and deferred loan fees.
Fees and costs associated with originating loans are generally recognized in the period they are incurred, except in the Houston market, which fees are deferred. The provisions of ASC 310, Receivables, generally provide that such fees and related costs be deferred and recognized over the life of the loan as an adjustment of yield. Management believes that not deferring such amounts and amortizing them over the life of the related loans does not materially affect the financial position or results of operations of the Company.
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Allowance for loan losses: The allowance for loan losses is maintained at a level considered adequate by management to provide for probable loan losses. The allowance is increased by provisions charged to expense. Loans are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The provision for loan losses is the amount, which, in the judgment of management, is necessary to establish the allowance for loan losses at a level that is adequate to absorb known and inherent risks in the loan portfolio. See Note 6 for further information on the Company's policies and methodology used to estimate the allowance for loan losses.
Premises and equipment, net: Land is carried at cost. Bank premises, furniture and equipment and aircraft are carried at cost, less accumulated depreciation computed principally by the straight-line method over the estimated useful lives of the assets, which range from three to thirty years.
Leasehold improvements are carried at cost and are depreciated over the shorter of the estimated useful life or the lease period.
Long-term assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate that their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Other real estate owned: Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell.
Revenue and expenses from operations of other real estate owned and Adriatica real estate and impairment charges on other real estate are included in noninterest expense. Gains and losses on sale of other real estate are included in noninterest income.
Goodwill and core deposit intangible, net: Goodwill represents the excess of costs over fair value of net assets of businesses acquired. Goodwill is tested for impairment annually on December 31 or on an interim basis if an event triggering impairment may have occurred.
Core deposit intangibles are acquired customer relationships arising from bank acquisitions and are being amortized on a straight-line basis over their estimated useful lives of ten years. Core deposit intangibles are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows.
Restricted stock: The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB of Dallas and Independent Bankers Financial Corporation stock do not have readily determinable fair values as ownership is restricted and they lack a ready market. As a result, these stocks are carried at cost and evaluated periodically by management for impairment. Both cash and stock dividends are reported as income.
Bank-owned life insurance: Bank-owned life insurance is recorded at the amount that can be realized under the insurance contracts at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Changes in the net cash surrender value of the policies, as well as insurance proceeds received are reflected in noninterest income.
Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities (excluding deferred tax assets and liabilities related to business combinations or components of other comprehensive income). Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. The effect of a change in tax rates on deferred assets and liabilities is recognized in income taxes during the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the expected amount more likely than not to be realized. Realization of deferred tax assets is dependent upon the level of historical income, prudent and feasible tax planning strategies, reversals of deferred tax liabilities and estimates of future taxable income.
The Company evaluates uncertain tax positions at the end of each reporting period. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by
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the taxing authorities, based on the technical merits of the position. The tax benefit recognized in the financial statements from any such position is measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. Any interest and/or penalties related to income taxes are reported as a component of income tax expense.
Loan commitments and related financial instruments: In the ordinary course of business, the Company has entered into certain off-balance-sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.
Management estimates losses on off-balance-sheet financial instruments using the same methodology as for portfolio loans. Estimated losses on off-balance-sheet financial instruments are recorded by charges to the provision for losses and credits to other liabilities in the Company's consolidated balance sheet. There were no estimated losses on off-balance sheet financial instruments as of December 31, 2014 or 2013.
Stock based compensation: Compensation cost is recognized for restricted stock awards issued to employees based on the market price of the Company's common stock on the grant date. Stock-based compensation expense is generally recognized using the straight-line method over the requisite service period for all awards.
Transfers of financial assets: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Advertising Costs: Advertising costs are expensed as incurred.
Business combinations: The Company applies the acquisition method of accounting for business combinations. Under the acquisition method, the acquiring entity in a business combination recognizes 100% of the assets acquired and liabilities assumed at their acquisition date fair values. Management utilizes valuation techniques appropriate for the asset or liability being measured in determining these fair values. Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized. Acquisition-related costs are expensed as incurred.
Comprehensive income: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. Gains and losses on available for sale securities are reclassified to net income as the gains or losses are realized upon sale of the securities. Other than temporary impairment charges are reclassified to net income at the time of the charge.
Pro forma statements: Because the Company was not a taxable entity prior to April 1, 2013, pro forma amounts for income tax expense and basic and diluted earnings per share have been presented assuming the Company’s effective tax rate of 33.9% for the year ended December 31, 2013 as if it had been a C Corporation during the entire period. The difference in the statutory rate of 35% and the Company’s effective rate is primarily due to nontaxable income earned on municipal securities and bank owned life insurance. In addition, the pro forma results for the year ended December 31, 2013 excludes the initial deferred tax credit recorded as a result of the change in tax status as discussed in Note 14.
Fair values of financial instruments: Accounting standards define fair value, establish a framework for measuring fair value in U.S. generally accepted accounting principles, and require certain disclosures about fair value measurements (see Note 18, Fair Value Measurements). In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company's creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.
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Subsequent events: Companies are required to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued. They must recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial statement preparation process. Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. The Company has evaluated subsequent events through the date of filing these financial statements with the SEC and noted no subsequent events requiring financial statement recognition or disclosure, except as disclosed in Note 25.
Earnings per share: Basic earnings per common share are net income divided by the weighted average number of common shares outstanding during the period. The unvested share-based payment awards that contain rights to non forfeitable dividends are considered participating securities for this calculation. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock warrants. The dilutive effect of participating non vested common stock was not included as it was anti-dilutive. Proceeds from the assumed exercise of dilutive stock warrants are assumed to be used to repurchase common stock at the average market price.
Years ended December 31, | |||||||||||
2014 | 2013 | 2012 | |||||||||
Basic earnings per share: | |||||||||||
Net income | $ | 28,978 | $ | 19,800 | $ | 17,377 | |||||
Less: Preferred stock dividends | (169 | ) | — | — | |||||||
Net income after preferred stock dividends | 28,809 | 19,800 | 17,377 | ||||||||
Less: | |||||||||||
Undistributed earnings allocated to participating securities | 406 | 259 | 168 | ||||||||
Dividends paid on participating securities | 60 | 135 | 169 | ||||||||
Net income available to common shareholders | $ | 28,343 | $ | 19,406 | $ | 17,040 | |||||
Weighted-average basic shares outstanding | 15,208,544 | 10,921,777 | 7,626,205 | ||||||||
Basic earnings per share | $ | 1.86 | $ | 1.78 | $ | 2.23 | |||||
Diluted earnings per share: | |||||||||||
Net income available to common shareholders | $ | 28,343 | $ | 19,406 | $ | 17,040 | |||||
Total weighted-average basic shares outstanding | 15,208,544 | 10,921,777 | 7,626,205 | ||||||||
Add dilutive stock warrants | 98,454 | 68,468 | 23,161 | ||||||||
Total weighted-average diluted shares outstanding | 15,306,998 | 10,990,245 | 7,649,366 | ||||||||
Diluted earnings per share | $ | 1.85 | $ | 1.77 | $ | 2.23 | |||||
Pro forma earnings per share: | |||||||||||
Pro forma net income | n/a | $ | 16,174 | $ | 12,147 | ||||||
Less undistributed earnings allocated to participating securities | n/a | 187 | 66 | ||||||||
Less dividends paid on participating securities | n/a | 135 | 169 | ||||||||
Pro forma net income available to common shareholders after tax | n/a | $ | 15,852 | $ | 11,912 | ||||||
Pro forma basic earnings per share | n/a | $ | 1.45 | $ | 1.56 | ||||||
Pro forma diluted earnings per share | n/a | $ | 1.44 | $ | 1.56 | ||||||
Anti-dilutive participating securities | 96,840 | 159,485 | 105,238 | ||||||||
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Note 2. Recent Accounting Pronouncements
ASU 2013-11, Income Taxes (Topic 740)--Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 provides that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. ASU 2013-11 was effective for the Company on January 1, 2014 and did not have a material impact to the Company's financial statements.
Note 3. Restrictions on Cash and Due From Banks
At December 31, 2014 and 2013, the Company had a deposit reserve requirement of $5,025 and $5,877, respectively, with the Federal Reserve Bank, which was met through usable vault cash as a result of the Company's decision to hold a portion of excess cash with the Federal Reserve.
Note 4. Statement of Cash Flows
The Company has chosen to report on a net basis its cash receipts and cash payments for time deposits accepted and repayments of those deposits, and loans made to customers and principal collections on those loans. The Company uses the indirect method to present cash flows from operating activities. Other supplemental cash flow information is presented below:
Years ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Cash transactions: | ||||||||||||
Interest expense paid | $ | 14,016 | $ | 12,095 | $ | 13,329 | ||||||
Income taxes paid | $ | 7,730 | $ | 5,910 | $ | — | ||||||
Noncash transactions: | ||||||||||||
Accrued preferred stock dividends | $ | 60 | $ | — | $ | — | ||||||
Transfers of loans to other real estate owned | $ | 1,203 | $ | 2,919 | $ | 885 | ||||||
Loans to facilitate the sale of other real estate owned | $ | 48 | $ | 113 | $ | 3,473 | ||||||
Writeoff of debt origination costs related to warrants | $ | — | $ | 223 | $ | — | ||||||
Security purchased, not yet settled | $ | 327 | $ | — | $ | — | ||||||
Excess tax benefit on restricted stock vested | $ | 1,409 | $ | 72 | $ | — | ||||||
Common stock issued for noncompete agreement | $ | — | $ | — | $ | 115 | ||||||
Transfer of bank premises to other real estate | $ | 2,400 | $ | — | $ | 379 | ||||||
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Supplemental schedule of noncash investing activities from acquisitions and branch sale is as follows:
Years Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Noncash assets acquired | ||||||||||||
Certificates of deposit held in other banks | $ | — | $ | — | $ | 17,078 | ||||||
Securities available for sale | 79,429 | 62,373 | 10,314 | |||||||||
Restricted stock | 6,813 | 1,156 | 1,417 | |||||||||
Loans | 1,051,390 | 72,611 | 180,448 | |||||||||
Premises and equipment | 19,038 | 141 | 5,717 | |||||||||
Other real estate owned | 1,224 | — | 1,545 | |||||||||
Goodwill | 194,179 | 5,962 | 17,774 | |||||||||
Core deposit intangibles | 10,606 | 600 | 1,362 | |||||||||
Bank owned life insurance | 17,540 | — | — | |||||||||
Other assets | 3,650 | 2,160 | 1,669 | |||||||||
Total assets | $ | 1,383,869 | $ | 145,003 | $ | 237,324 | ||||||
Noncash liabilities assumed: | ||||||||||||
Deposits | $ | 1,228,854 | $ | 111,164 | $ | 216,444 | ||||||
Repurchase agreements | 3,733 | — | — | |||||||||
FHLB advances | 95,000 | 26,000 | 12,500 | |||||||||
Junior subordinated debt | — | — | 3,609 | |||||||||
Other liabilities | 7,345 | 358 | 700 | |||||||||
Total liabilities | $ | 1,334,932 | $ | 137,522 | $ | 233,253 | ||||||
Cash and cash equivalents acquired from acquisitions | $ | 286,596 | $ | 22,792 | $ | 46,230 | ||||||
Cash paid to shareholders of acquired banks | $ | 60,812 | $ | 18,412 | $ | 46,600 | ||||||
Series A preferred stock exchanged in connection with acquired banks | $ | 23,938 | $ | — | $ | — | ||||||
Fair value of common stock issued to shareholders of acquired bank | $ | 250,783 | $ | 11,861 | $ | 3,701 | ||||||
Noncash assets transferred: | ||||||||||||
Loans | $ | — | $ | — | $ | 807 | ||||||
Premises and equipment | — | — | 280 | |||||||||
Goodwill | — | — | 254 | |||||||||
Core deposit intangibles | — | — | 119 | |||||||||
Other assets | — | — | 13 | |||||||||
Total assets | $ | — | $ | — | $ | 1,473 | ||||||
Noncash liabilities transferred: | ||||||||||||
Deposits | $ | — | $ | — | $ | 20,068 | ||||||
Other liabilities | — | — | 6 | |||||||||
Total liabilities | $ | — | $ | — | $ | 20,074 | ||||||
Cash and cash equivalents transferred in branch sale | $ | — | $ | — | $ | 133 | ||||||
Deposit premium received | $ | — | $ | — | $ | 414 | ||||||
Cash paid to buyer, net of deposit premium | $ | — | $ | — | $ | 18,430 | ||||||
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In addition, the following measurement-period adjustments were made during the year ended December 31, 2014 relating the 2013 acquisition of Collin Bank:
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Noncash assets acquired: | ||||||||||||
Loans | $ | (328 | ) | $ | — | $ | — | |||||
Goodwill | 574 | — | — | |||||||||
Core deposit intangibles | (18 | ) | — | — | ||||||||
Other assets | 297 | — | — | |||||||||
Total assets | $ | 525 | $ | — | $ | — | ||||||
Noncash liabilities assumed: | ||||||||||||
Deposits | $ | 505 | $ | — | $ | — | ||||||
Other liabilities | 20 | — | — | |||||||||
Total liabilities | $ | 525 | $ | — | $ | — | ||||||
Note 5. Securities Available for Sale
Securities available for sale have been classified in the consolidated balance sheets according to management’s intent. The amortized cost of securities and their approximate fair values at December 31, 2014 and 2013, are as follows:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Securities Available for Sale | ||||||||||||||||
December 31, 2014: | ||||||||||||||||
U.S. treasuries | $ | 999 | $ | 7 | $ | — | $ | 1,006 | ||||||||
Government agency securities | 58,174 | 199 | (350 | ) | 58,023 | |||||||||||
Obligations of state and municipal subdivisions | 75,599 | 1,837 | (537 | ) | 76,899 | |||||||||||
Corporate bonds | 1,068 | 13 | — | 1,081 | ||||||||||||
Residential pass-through securities guaranteed by FNMA, GNMA, FHLMC and FHR | 67,437 | 1,616 | — | 69,053 | ||||||||||||
$ | 203,277 | $ | 3,672 | $ | (887 | ) | $ | 206,062 | ||||||||
December 31, 2013: | ||||||||||||||||
U.S. treasuries | $ | 3,498 | $ | 15 | $ | — | $ | 3,513 | ||||||||
Government agency securities | 95,407 | 84 | (1,076 | ) | 94,415 | |||||||||||
Obligations of state and municipal subdivisions | 37,861 | 541 | (1,787 | ) | 36,615 | |||||||||||
Corporate bonds | 2,079 | — | (27 | ) | 2,052 | |||||||||||
Residential pass-through securities guaranteed by FNMA, GNMA, FHLMC, FHLB, FFCB and FHR | 57,844 | 67 | (468 | ) | 57,443 | |||||||||||
$ | 196,689 | $ | 707 | $ | (3,358 | ) | $ | 194,038 | ||||||||
Securities with a carrying amount of approximately $174,741 and $111,673 at December 31, 2014 and 2013, respectively, were pledged to secure public fund deposits.
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Proceeds from sale of securities available for sale and gross gains and losses for the years ended December 31, 2014, 2013 and 2012 were as follows:
Years ended December 31, | |||||||||||
2014 | 2013 | 2012 | |||||||||
Proceeds from sale | $ | 19,260 | $ | 4,067 | $ | 2,078 | |||||
Gross gains | $ | 362 | $ | — | $ | — | |||||
Gross losses | $ | — | $ | — | $ | 3 | |||||
The amortized cost and estimated fair value of securities available for sale at December 31, 2014, by contractual maturity, are shown below. Maturities of pass-through certificates will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
December 31, 2014 | ||||||||
Securities Available for Sale | ||||||||
Amortized Cost | Fair Value | |||||||
Due in one year or less | $ | 3,876 | $ | 3,880 | ||||
Due from one year to five years | 50,203 | 49,911 | ||||||
Due from five to ten years | 40,104 | 40,368 | ||||||
Thereafter | 41,657 | 42,850 | ||||||
135,840 | 137,009 | |||||||
Residential pass-through securities guaranteed by FNMA, GNMA, FHLMC and FHR | 67,437 | 69,053 | ||||||
$ | 203,277 | $ | 206,062 | |||||
The number of securities, unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2014 and 2013, are summarized as follows:
Less Than 12 Months | Greater Than 12 Months | Total | ||||||||||||||||||||||||||
Description of Securities | Number of Securities | Estimated Fair Value | Unrealized Losses | Number of Securities | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | ||||||||||||||||||||
Securities Available for Sale | ||||||||||||||||||||||||||||
December 31, 2014 | ||||||||||||||||||||||||||||
Government agency securities | 6 | 6,396 | (24 | ) | 14 | 22,671 | (326 | ) | 29,067 | (350 | ) | |||||||||||||||||
Obligations of state and municipal subdivisions | 44 | 16,636 | (197 | ) | 13 | 8,541 | (340 | ) | 25,177 | (537 | ) | |||||||||||||||||
50 | $ | 23,032 | $ | (221 | ) | 27 | $ | 31,212 | $ | (666 | ) | $ | 54,244 | $ | (887 | ) | ||||||||||||
December 31, 2013 | ||||||||||||||||||||||||||||
Government agency securities | 46 | $ | 74,331 | $ | (1,076 | ) | — | $ | — | $ | — | $ | 74,331 | $ | (1,076 | ) | ||||||||||||
Obligations of state and municipal subdivisions | 21 | 11,888 | (1,139 | ) | 6 | 4,047 | (648 | ) | 15,935 | (1,787 | ) | |||||||||||||||||
Corporate bonds | 2 | 2,052 | (27 | ) | — | — | — | 2,052 | (27 | ) | ||||||||||||||||||
Residential pass-through securities guaranteed by FNMA, GNMA, FHLMC, FHLB, FFCB and FHR | 14 | 49,126 | (468 | ) | — | — | — | 49,126 | (468 | ) | ||||||||||||||||||
83 | $ | 137,397 | $ | (2,710 | ) | 6 | $ | 4,047 | $ | (648 | ) | $ | 141,444 | $ | (3,358 | ) | ||||||||||||
Unrealized losses are generally due to changes in interest rates. The Company has the intent to hold these securities until maturity or a forecasted recovery and it is more likely than not that the Company will not have to sell the securities before the recovery of their cost basis. As such, the losses are deemed to be temporary.
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Note 6. Loans, Net and Allowance for Loan Losses
Loans, net at December 31, 2014 and 2013, consisted of the following:
December 31, | ||||||||
2014 | 2013 | |||||||
Commercial | $ | 672,052 | $ | 241,178 | ||||
Real estate: | ||||||||
Commercial | 1,450,434 | 843,436 | ||||||
Commercial construction, land and land development | 334,964 | 130,320 | ||||||
Residential | 514,025 | 338,654 | ||||||
Single family interim construction | 138,278 | 83,144 | ||||||
Agricultural | 38,822 | 40,558 | ||||||
Consumer | 52,267 | 45,762 | ||||||
Other | 242 | 108 | ||||||
3,201,084 | 1,723,160 | |||||||
Deferred loan fees | (487 | ) | — | |||||
Allowance for loan losses | (18,552 | ) | (13,960 | ) | ||||
$ | 3,182,045 | $ | 1,709,200 | |||||
The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans.
Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. The Company’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. These cash flows, however, may not be as expected and the value of collateral securing the loans may fluctuate. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short term loans may be made on an unsecured basis. Additionally, our commercial loan portfolio includes loans made to customers in the energy industry, which is a complex, technical and cyclical industry. Experienced bankers with specialized energy lending experience originate our energy loans. Companies in this industry produce, extract, develop, exploit and explore for oil and natural gas. Loans are primarily collateralized with proven producing oil and gas reserves based on a technical evaluation of these reserves. At December 31, 2014, there was approximately $231.7 million of E&P energy loans outstanding.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors the diversification of the portfolio on a quarterly basis by type and geographic location. Management also tracks the level of owner occupied property versus non owner occupied property.
Land and commercial land development loans are underwritten using feasibility studies, independent appraisal reviews and financial analysis of the developers or property owners. Generally, borrowers must have a proven track record of success. Commercial construction loans are generally based upon estimates of cost and value of the completed project. These estimates may not be accurate. Commercial construction loans often involve the disbursement of substantial funds with the repayment dependent on the success of the ultimate project. Sources of repayment for these loans may be pre-committed permanent financing or sale of the developed property. Management believes the loans in this portfolio are geographically diverse and due to the increased risk are monitored closely by management and the board of directors on a quarterly basis.
Residential real estate and single family interim construction loans are underwritten primarily based on borrowers’ credit scores, documented income and minimum collateral values. Relatively small loan amounts are spread across many individual
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borrowers which minimizes risk in the residential portfolio. In addition, management evaluates trends in past dues and current economic factors on a regular basis.
Agricultural loans are collateralized by real estate and/or agricultural-related assets. Agricultural real estate loans are primarily comprised of loans for the purchase of farmland. Loan-to-value ratios on loans secured by farmland generally do not exceed 80% and have amortization periods limited to twenty years. Agricultural non-real estate loans are generally comprised of term loans to fund the purchase of equipment, livestock and seasonal operating lines to cash grain farmers to plant and harvest corn and soybeans. Specific underwriting standards have been established for agricultural-related loans including the establishment of projections for each operating year based on industry developed estimates of farm input costs and expected commodity yields and prices. Operating lines are typically written for one year and secured by the crop and other farm assets as considered necessary.
Agricultural loans carry significant credit risks as they involve larger balances concentrated with single borrowers or groups of related borrowers. In addition, repayment of such loans depends on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. Farming operations may be affected by adverse weather conditions such as drought, hail or floods that can severely limit crop yields.
Consumer loans represent less than 3% of the outstanding total loan portfolio. Collateral consists primarily of automobiles and other personal assets. Credit score analysis is used to supplement the underwriting process.
Most of the Company’s lending activity occurs within the State of Texas, primarily in the north, central and southeast Texas regions. The majority of the Company’s portfolio consists of commercial and residential real estate loans. As of December 31, 2014 and 2013, there were no concentrations of loans related to a single industry in excess of 10% of total loans.
The allowance for loan losses is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio.
The allowance is derived from the following two components: 1) allowances established on individual impaired loans, which are based on a review of the individual characteristics of each loan, including the customer’s ability to repay the loan, the underlying collateral values, and the industry the customer operates in, and 2) allowances based on actual historical loss experience for the last three years for similar types of loans in the Company’s loan portfolio adjusted for primarily changes in the lending policies and procedures; collection, charge-off and recovery practices; nature and volume of the loan portfolio; volume and severity of nonperforming loans; existence and effect of any concentrations of credit and the level of such concentrations and current, national and local economic and business conditions. This second component also includes an unallocated allowance to cover uncertainties that could affect management’s estimate of probable losses. The unallocated allowance reflects the imprecision inherent in the underlying assumptions used in the methodologies for estimating this component.
The Company’s management continually evaluates the allowance for loan losses determined from the allowances established on individual loans and the amounts determined from historical loss percentages adjusted for the qualitative factors above. Should any of the factors considered by management change, the Company’s estimate of loan losses could also change and would affect the level of future provision expense. While the calculation of the allowance for loan losses utilizes management’s best judgment and all the information available, the adequacy of the allowance for loan losses is dependent on a variety of factors beyond the Company’s control, including, among other things, the performance of the entire loan portfolio, the economy, changes in interest rates and the view of regulatory authorities towards loan classifications.
In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses, and may require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their examinations.
Loans requiring an allocated loan loss provision are generally identified at the servicing officer level based on review of weekly past due reports and/or the loan officer’s communication with borrowers. In addition, past due loans are discussed at weekly officer loan committee meetings to determine if classification is warranted. The Company’s credit department has implemented an internal risk based loan review process to identity potential internally classified loans that supplements the annual independent external loan review. The external review generally covers all loans greater than $1.5 million annually. These reviews include analysis of borrower’s financial condition, payment histories and collateral values to determine if a loan should be internally classified. Generally, once classified, an impaired loan analysis is completed by the credit department to determine if the loan is impaired and the amount of allocated allowance required.
95
The Texas economy, specifically the Company’s lending area of north, central and southeast Texas, has generally performed better and recovered faster than certain other parts of the country. However, the recent drop in oil prices has the potential to have a negative impact on the Texas economy. The risk of loss associated with all segments of the portfolio could increase due to this impact.
The economy and other risk factors are minimized by the Company’s underwriting standards which include the following principles: 1) financial strength of the borrower including strong earnings, high net worth, significant liquidity and acceptable debt to worth ratio, 2) managerial business competence, 3) ability to repay, 4) loan to value, 5) projected cash flow and 6) guarantor financial statements as applicable. The following is a summary of the activity in the allowance for loan losses by loan class for the years ended December 31, 2014, 2013 and 2012:
Commercial | Commercial Real Estate, Land and Land Development | Residential Real Estate | Single-Family Interim Construction | Agricultural | Consumer | Other | Unallocated | Total | |||||||||||||||||||
Year ended December 31, 2014 | |||||||||||||||||||||||||||
Balance at the beginning of year | $ | 2,401 | $ | 7,872 | $ | 2,440 | $ | 577 | $ | 238 | $ | 363 | $ | — | $ | 69 | $ | 13,960 | |||||||||
Provision for loan losses | 2,999 | 2,530 | (211 | ) | 81 | 8 | (104 | ) | — | 56 | 5,359 | ||||||||||||||||
Charge-offs | (368 | ) | (371 | ) | (32 | ) | — | — | (143 | ) | — | — | (914 | ) | |||||||||||||
Recoveries | 19 | 79 | 8 | 11 | — | 30 | — | — | 147 | ||||||||||||||||||
Balance at end of year | $ | 5,051 | $ | 10,110 | $ | 2,205 | $ | 669 | $ | 246 | $ | 146 | $ | — | $ | 125 | $ | 18,552 | |||||||||
Year ended December 31, 2013 | |||||||||||||||||||||||||||
Balance at the beginning of year | $ | 2,377 | $ | 4,924 | $ | 2,965 | $ | 523 | $ | 159 | $ | 278 | $ | — | $ | 252 | $ | 11,478 | |||||||||
Provision for loan losses | 616 | 3,554 | (405 | ) | 54 | 79 | 107 | — | (183 | ) | 3,822 | ||||||||||||||||
Charge-offs | (612 | ) | (634 | ) | (130 | ) | — | — | (64 | ) | — | — | (1,440 | ) | |||||||||||||
Recoveries | 20 | 28 | 10 | — | — | 42 | — | — | 100 | ||||||||||||||||||
Balance at end of year | $ | 2,401 | $ | 7,872 | $ | 2,440 | $ | 577 | $ | 238 | $ | 363 | $ | — | $ | 69 | $ | 13,960 | |||||||||
Year ended December 31, 2012 | |||||||||||||||||||||||||||
Balance at the beginning of year | $ | 1,259 | $ | 5,051 | $ | 1,964 | $ | 317 | $ | 209 | $ | 235 | $ | — | $ | 25 | $ | 9,060 | |||||||||
Provision for loan losses | 1,261 | 289 | 1,176 | 206 | (50 | ) | 75 | — | 227 | 3,184 | |||||||||||||||||
Charge-offs | (169 | ) | (484 | ) | (178 | ) | — | — | (86 | ) | — | — | (917 | ) | |||||||||||||
Recoveries | 26 | 68 | 3 | — | — | 54 | — | — | 151 | ||||||||||||||||||
Balance at end of year | $ | 2,377 | $ | 4,924 | $ | 2,965 | $ | 523 | $ | 159 | $ | 278 | $ | — | $ | 252 | $ | 11,478 | |||||||||
96
The following table details the amount of the allowance for loan losses and recorded investment in loans by class as of December 31, 2014 and 2013:
Commercial | Commercial Real Estate, Land and Land Development | Residential Real Estate | Single-Family Interim Construction | Agricultural | Consumer | Other | Unallocated | Total | |||||||||||||||||||
December 31, 2014 | |||||||||||||||||||||||||||
Allowance for losses: | |||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 339 | $ | 124 | $ | 8 | $ | — | $ | — | $ | 4 | $ | — | $ | — | $ | 475 | |||||||||
Collectively evaluated for impairment | 4,712 | 9,986 | 2,197 | 669 | 246 | 142 | — | 125 | 18,077 | ||||||||||||||||||
Loans acquired with deteriorated credit quality | — | — | — | — | — | — | — | — | — | ||||||||||||||||||
Ending balance | $ | 5,051 | $ | 10,110 | $ | 2,205 | $ | 669 | $ | 246 | $ | 146 | $ | — | $ | 125 | $ | 18,552 | |||||||||
Loans: | |||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 1,479 | $ | 6,768 | $ | 3,387 | $ | — | $ | — | $ | 75 | $ | — | $ | — | $ | 11,709 | |||||||||
Collectively evaluated for impairment | 666,830 | 1,724,514 | 508,833 | 138,278 | 38,822 | 52,159 | 242 | — | 3,129,678 | ||||||||||||||||||
Acquired with deteriorated credit quality | 3,743 | 54,116 | 1,805 | — | — | 33 | — | — | 59,697 | ||||||||||||||||||
Ending balance | $ | 672,052 | $ | 1,785,398 | $ | 514,025 | $ | 138,278 | $ | 38,822 | $ | 52,267 | $ | 242 | $ | — | $ | 3,201,084 | |||||||||
December 31, 2013 | |||||||||||||||||||||||||||
Allowance for losses: | |||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 313 | $ | 504 | $ | 14 | $ | — | $ | — | $ | 24 | $ | — | $ | — | $ | 855 | |||||||||
Collectively evaluated for impairment | 2,088 | 7,368 | 2,426 | 577 | 238 | 339 | — | 69 | 13,105 | ||||||||||||||||||
Loans acquired with deteriorated credit quality | — | — | — | — | — | — | — | — | — | ||||||||||||||||||
Ending balance | $ | 2,401 | $ | 7,872 | $ | 2,440 | $ | 577 | $ | 238 | $ | 363 | $ | — | $ | 69 | $ | 13,960 | |||||||||
Loans: | |||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 501 | $ | 8,013 | $ | 3,182 | $ | 170 | $ | — | $ | 68 | $ | — | $ | — | $ | 11,934 | |||||||||
Collectively evaluated for impairment | 234,103 | 959,254 | 334,770 | 82,974 | 40,558 | 45,682 | 108 | — | 1,697,449 | ||||||||||||||||||
Acquired with deteriorated credit quality | 6,574 | 6,489 | 702 | — | — | 12 | — | — | 13,777 | ||||||||||||||||||
Ending balance | $ | 241,178 | $ | 973,756 | $ | 338,654 | $ | 83,144 | $ | 40,558 | $ | 45,762 | $ | 108 | $ | — | $ | 1,723,160 | |||||||||
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Nonperforming loans by loan class at December 31, 2014 and 2013, are summarized as follows:
Commercial | Commercial Real Estate, Land and Land Development | Residential Real Estate | Single-Family Interim Construction | Agricultural | Consumer | Other | Total | |||||||||||||||||||||||||
December 31, 2014: | ||||||||||||||||||||||||||||||||
Nonaccrual loans | $ | 1,449 | $ | 70 | $ | 2,117 | $ | — | $ | — | $ | 67 | $ | — | $ | 3,703 | ||||||||||||||||
Loans past due 90 days and still accruing | 157 | 288 | — | — | — | 6 | — | 451 | ||||||||||||||||||||||||
Troubled debt restructurings (not included in nonaccrual or loans past due and still accruing) | 30 | 4,668 | 1,254 | — | — | 8 | — | 5,960 | ||||||||||||||||||||||||
$ | 1,636 | $ | 5,026 | $ | 3,371 | $ | — | $ | — | $ | 81 | $ | — | $ | 10,114 | |||||||||||||||||
December 31, 2013: | ||||||||||||||||||||||||||||||||
Nonaccrual loans | $ | 357 | $ | 253 | $ | 1,852 | $ | 170 | $ | — | $ | 43 | $ | — | $ | 2,675 | ||||||||||||||||
Loans past due 90 days and still accruing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Troubled debt restructurings (not included in nonaccrual or loans past due and still accruing) | 107 | 5,090 | 1,288 | — | — | 1 | — | 6,486 | ||||||||||||||||||||||||
$ | 464 | $ | 5,343 | $ | 3,140 | $ | 170 | $ | — | $ | 44 | $ | — | $ | 9,161 | |||||||||||||||||
The accrual of interest is discontinued on a loan when management believes after considering collection efforts and other factors that the borrower's financial condition is such that collection of interest is doubtful. All interest accrued but not collected for loans that are placed on nonaccrual status or charged-off is reversed against interest income. Cash collections on nonaccrual loans are generally credited to the loan receivable balance, and no interest income is recognized on those loans until the principal balance has been collected. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Impaired loans are those loans where it is probable that all amounts due according to contractual terms of the loan agreement will not be collected. The Company has identified these loans through its normal loan review procedures. Impaired loans are measured based on 1) the present value of expected future cash flows discounted at the loans effective interest rate; 2) the loan's observable market price; or 3) the fair value of collateral if the loan is collateral dependent. Substantially all of the Company’s impaired loans are measured at the fair value of the collateral. In limited cases, the Company may use other methods to determine the level of impairment of a loan if such loan is not collateral dependent.
All commercial, real estate, agricultural loans and troubled debt restructurings are considered for individual impairment analysis. Smaller balance consumer loans are collectively evaluated for impairment.
98
Impaired loans by loan class at December 31, 2014 and 2013, are summarized as follows:
Commercial | Commercial Real Estate, Land and Land Development | Residential Real Estate | Single-Family Interim Construction | Agricultural | Consumer | Other | Total | |||||||||||||||||||||||||
December 31, 2014: | ||||||||||||||||||||||||||||||||
Recorded investment in impaired loans: | ||||||||||||||||||||||||||||||||
Impaired loans with an allowance for loan losses | $ | 1,475 | $ | 2,056 | $ | 13 | $ | — | $ | — | $ | 7 | $ | — | $ | 3,551 | ||||||||||||||||
Impaired loans with no allowance for loan losses | 4 | 4,712 | 3,374 | — | — | 68 | — | 8,158 | ||||||||||||||||||||||||
Total | $ | 1,479 | $ | 6,768 | $ | 3,387 | $ | — | $ | — | $ | 75 | $ | — | $ | 11,709 | ||||||||||||||||
Unpaid principal balance of impaired loans | $ | 1,482 | $ | 7,274 | $ | 3,605 | $ | — | $ | — | $ | 93 | $ | — | $ | 12,454 | ||||||||||||||||
Allowance for loan losses on impaired loans | $ | 339 | $ | 124 | $ | 8 | $ | — | $ | — | $ | 4 | $ | — | $ | 475 | ||||||||||||||||
December 31, 2013: | ||||||||||||||||||||||||||||||||
Recorded investment in impaired loans: | ||||||||||||||||||||||||||||||||
Impaired loans with an allowance for loan losses | $ | 401 | $ | 3,866 | $ | 1,135 | $ | — | $ | — | $ | 40 | $ | — | $ | 5,442 | ||||||||||||||||
Impaired loans with no allowance for loan losses | 100 | 4,147 | 2,047 | 170 | — | 28 | — | 6,492 | ||||||||||||||||||||||||
Total | $ | 501 | $ | 8,013 | $ | 3,182 | $ | 170 | $ | — | $ | 68 | $ | — | $ | 11,934 | ||||||||||||||||
Unpaid principal balance of impaired loans | $ | 501 | $ | 8,408 | $ | 3,216 | $ | 170 | $ | — | $ | 75 | $ | — | $ | 12,370 | ||||||||||||||||
Allowance for loan losses on impaired loans | $ | 313 | $ | 504 | $ | 14 | $ | — | $ | — | $ | 24 | $ | — | $ | 855 | ||||||||||||||||
For the year ended December 31, 2014: | ||||||||||||||||||||||||||||||||
Average recorded investment in impaired loans | $ | 502 | $ | 7,484 | $ | 3,253 | $ | 34 | $ | — | $ | 69 | $ | — | $ | 11,342 | ||||||||||||||||
Interest income recognized on impaired loans | $ | 64 | $ | 400 | $ | 83 | $ | — | $ | — | $ | 3 | $ | — | $ | 550 | ||||||||||||||||
For the year ended December 31, 2013: | ||||||||||||||||||||||||||||||||
Average recorded investment in impaired loans | $ | 649 | $ | 8,669 | $ | 3,384 | $ | 34 | $ | — | $ | 80 | $ | — | $ | 12,816 | ||||||||||||||||
Interest income recognized on impaired loans | $ | 28 | $ | 517 | $ | 148 | $ | 6 | $ | — | $ | 6 | $ | — | $ | 705 | ||||||||||||||||
For the year ended December 31, 2012: | ||||||||||||||||||||||||||||||||
Average recorded investment in impaired loans | $ | 777 | $ | 12,291 | $ | 3,976 | $ | 46 | $ | — | $ | 99 | $ | — | $ | 17,189 | ||||||||||||||||
Interest income recognized on impaired loans | $ | 27 | $ | 483 | $ | 187 | $ | — | $ | — | $ | 8 | $ | — | $ | 705 | ||||||||||||||||
Certain impaired loans have adequate collateral and do not require a related allowance for loan loss.
The Company will charge off that portion of any loan which management considers a loss. Commercial and real estate loans are generally considered for charge-off when exposure beyond collateral coverage is apparent and when no further collection of the loss portion is anticipated based on the borrower’s financial condition.
The restructuring of a loan is considered a “troubled debt restructuring” if both 1) the borrower is experiencing financial difficulties and 2) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, extending amortization and other actions intended to minimize potential losses.
99
A “troubled debt restructured” loan is identified as impaired and measured for credit impairment as of each reporting period in accordance with the guidance in ASC 310-10-35. The recorded investment in troubled debt restructurings, including those on nonaccrual, was $7,302 and $7,938 as of December 31, 2014 and 2013.
Following is a summary of loans modified under troubled debt restructurings during the years ended December 31, 2014 and 2013:
.
Commercial | Commercial Real Estate, Land and Land Development | Residential Real Estate | Single-Family Interim Construction | Agricultural | Consumer | Other | Total | |||||||||||||||||||||||||
Troubled debt restructurings during the year ended December 31, 2014 | ||||||||||||||||||||||||||||||||
Number of contracts | — | 2 | — | — | — | 1 | — | 3 | ||||||||||||||||||||||||
Pre-restructuring outstanding recorded investment | $ | — | $ | 1,108 | $ | — | $ | — | $ | — | $ | 9 | $ | — | $ | 1,117 | ||||||||||||||||
Post-restructuring outstanding recorded investment | $ | — | $ | 1,108 | $ | — | $ | — | $ | — | $ | 9 | $ | — | $ | 1,117 | ||||||||||||||||
Troubled debt restructurings during the year ended December 31, 2013 | ||||||||||||||||||||||||||||||||
Number of contracts | — | 3 | — | — | — | — | — | 3 | ||||||||||||||||||||||||
Pre-restructuring outstanding recorded investment | $ | — | $ | 2,015 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 2,015 | ||||||||||||||||
Post-restructuring outstanding recorded investment | $ | — | $ | 2,015 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 2,015 | ||||||||||||||||
At December 31, 2014 and 2013, there were no loans modified under troubled debt restructurings during the previous twelve month period that subsequently defaulted during the years ended December 31, 2014 and 2013. At December, 31, 2014 and 2013, the Company had no commitments to lend additional funds to any borrowers with loans whose terms have been modified under troubled debt restructurings.
Modifications primarily relate to extending the amortization periods of the loans and interest rate concessions. The majority of these loans were identified as impaired prior to restructuring; therefore, the modifications did not materially impact the Company’s determination of the allowance for loan losses.
100
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. The following table presents information regarding the aging of past due loans by loan class as of December 31, 2014 and 2013:
Loans 30-89 Days Past Due | Loans 90 or More Past Due | Total Past Due Loans | Current Loans | Total Loans | ||||||||||||||||
December 31, 2014 | ||||||||||||||||||||
Commercial | $ | 6,006 | $ | 157 | $ | 6,163 | $ | 665,889 | $ | 672,052 | ||||||||||
Commercial real estate, land and land development | 973 | 288 | 1,261 | 1,784,137 | 1,785,398 | |||||||||||||||
Residential real estate | 1,258 | 554 | 1,812 | 512,213 | 514,025 | |||||||||||||||
Single-family interim construction | 410 | — | 410 | 137,868 | 138,278 | |||||||||||||||
Agricultural | — | — | — | 38,822 | 38,822 | |||||||||||||||
Consumer | 1,899 | 8 | 1,907 | 50,360 | 52,267 | |||||||||||||||
Other | — | — | 242 | 242 | ||||||||||||||||
$ | 10,546 | $ | 1,007 | $ | 11,553 | $ | 3,189,531 | $ | 3,201,084 | |||||||||||
December 31, 2013 | ||||||||||||||||||||
Commercial | $ | 257 | $ | 357 | $ | 614 | $ | 240,564 | $ | 241,178 | ||||||||||
Commercial real estate, land and land development | 2,076 | 73 | 2,149 | 971,607 | 973,756 | |||||||||||||||
Residential real estate | 1,322 | 1,603 | 2,925 | 335,729 | 338,654 | |||||||||||||||
Single-family interim construction | — | 170 | 170 | 82,974 | 83,144 | |||||||||||||||
Agricultural | 3 | — | 3 | 40,555 | 40,558 | |||||||||||||||
Consumer | 97 | 1 | 98 | 45,664 | 45,762 | |||||||||||||||
Other | — | — | 108 | 108 | ||||||||||||||||
$ | 3,755 | $ | 2,204 | $ | 5,959 | $ | 1,717,201 | $ | 1,723,160 | |||||||||||
The Company’s internal classified report is segregated into the following categories: 1) Pass/Watch, 2) Other Assets Especially Mentioned (OAEM), 3) Substandard and 4) Doubtful. The loans placed in the Pass/Watch category reflect the Company’s opinion that the loans reflect potential weakness which requires monitoring on a more frequent basis. The loans in the OAEM category reflect the Company’s opinion that the credit contains weaknesses which represent a greater degree of risk and warrant extra attention. These loans are reviewed monthly by officers and senior management to determine if a change in category is warranted. The loans placed in the Substandard category are considered to be potentially inadequately protected by the current debt service capacity of the borrower and/or the pledged collateral. These credits, even if apparently protected by collateral value, have shown weakness related to adverse financial, managerial, economic, market or political conditions which may jeopardize repayment of principal and interest. There is possibility that some future loss could be sustained by the Company if such weakness is not corrected. The Doubtful category includes loans that are in default or principal exposure is probable. Substandard and Doubtful loans are individually evaluated to determine if they should be classified as impaired and an allowance is allocated if deemed necessary under ASC 310-10.
The loans that are not impaired are included with the remaining “pass” credits in determining the portion of the allowance for loan loss based on historical loss experience and other qualitative factors. The portfolio is segmented into categories including: commercial loans, consumer loans, commercial real estate loans, residential real estate loans and agricultural loans. The adjusted historical loss percentage is applied to each category. Each category is then added together to determine the allowance allocated under ASC 450-20.
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A summary of loans by credit quality indicator by class as of December 31, 2014 and 2013, is as follows:
Pass | Pass/ Watch | OAEM | Substandard | Doubtful | Total | |||||||||||||||||||
December 31, 2014 | ||||||||||||||||||||||||
Commercial | $ | 647,894 | $ | 16,919 | $ | 977 | $ | 6,262 | $ | — | $ | 672,052 | ||||||||||||
Commercial real estate, construction, land and land development | 1,759,533 | 8,667 | 6,008 | 11,190 | — | 1,785,398 | ||||||||||||||||||
Residential real estate | 505,920 | 2,188 | 325 | 5,592 | — | 514,025 | ||||||||||||||||||
Single-family interim construction | 138,278 | — | — | — | — | 138,278 | ||||||||||||||||||
Agricultural | 38,422 | 57 | — | 343 | — | 38,822 | ||||||||||||||||||
Consumer | 52,055 | 39 | 50 | 123 | — | 52,267 | ||||||||||||||||||
Other | 242 | — | — | — | — | 242 | ||||||||||||||||||
$ | 3,142,344 | $ | 27,870 | $ | 7,360 | $ | 23,510 | $ | — | $ | 3,201,084 | |||||||||||||
December 31, 2013 | ||||||||||||||||||||||||
Commercial | $ | 231,080 | $ | 7,199 | $ | 1,311 | $ | 1,453 | $ | 135 | $ | 241,178 | ||||||||||||
Commercial real estate, construction, land and land development | 952,863 | 10,697 | 2,982 | 7,214 | — | 973,756 | ||||||||||||||||||
Residential real estate | 328,918 | 5,379 | 454 | 3,903 | — | 338,654 | ||||||||||||||||||
Single-family interim construction | 83,144 | — | — | — | — | 83,144 | ||||||||||||||||||
Agricultural | 40,328 | 210 | — | 20 | — | 40,558 | ||||||||||||||||||
Consumer | 45,556 | 82 | 39 | 85 | — | 45,762 | ||||||||||||||||||
Other | 108 | — | — | — | — | 108 | ||||||||||||||||||
$ | 1,681,997 | $ | 23,567 | $ | 4,786 | $ | 12,675 | $ | 135 | $ | 1,723,160 | |||||||||||||
The Company has acquired certain loans which experienced credit deterioration since origination (purchased credit impaired (PCI) loans). Accretion on PCI loans is based on estimated future cash flows, regardless of contractual maturity. There are no PCI loans outstanding for acquisitions prior to 2012.
The following table summarizes the outstanding balance and related carrying amount of purchased credit impaired loans by acquired bank as of the respective acquisition date for the acquisitions occurring in 2014 and 2013:
Acquisition Date | |||||||||||||||
October 1, 2014 | April 15, 2014 | January 1, 2014 | November 30, 2013 | ||||||||||||
Houston City Bancshares * | BOH Holdings | Live Oak Financial Corp. | Collin Bank | ||||||||||||
Outstanding balance | $ | 12,021 | $ | 53,316 | $ | 3,583 | $ | 11,897 | |||||||
Nonaccretable difference | (1,240 | ) | (3,717 | ) | (519 | ) | (1,810 | ) | |||||||
Accretable yield | (561 | ) | (3,511 | ) | (182 | ) | (408 | ) | |||||||
Carrying amount | $ | 10,220 | $ | 46,088 | $ | 2,882 | $ | 9,679 | |||||||
* Amounts represent provisional estimates and are subject to final acquisition accounting adjustments.
The changes in accretable yield during the year ended December 31, 2014 in regard to loans transferred at acquisition for which it was probable that all contractually required payments would not be collected are presented in the table below. Activity in accretable yield for the year ended December 31, 2013 was not material.
102
2014 | |||
Balance at January 1 | 408 | ||
Additions | 4,254 | ||
Accretion | (2,116 | ) | |
Net transfers to/from nonaccretable | — | ||
Balance at December 31 | 2,546 | ||
The carrying amount of acquired PCI loans included in the consolidated balance sheet and the related outstanding balance at December 31, 2014 and 2013, were as follows:
December 31, | |||||||
2014 | 2013 | ||||||
Outstanding balance | $ | 69,371 | $ | 15,768 | |||
Carrying amount | 59,697 | 13,777 | |||||
At December 31, 2014 and 2013, there was no allocation established in the allowance for loan losses related to purchased credit impaired loans.
Note 7. Premises and Equipment, Net
Premises and equipment, net at December 31, 2014 and 2013 consisted of the following:
December 31, | |||||||
2014 | 2013 | ||||||
Land | $ | 19,421 | $ | 14,548 | |||
Building | 69,243 | 58,853 | |||||
Furniture, fixtures and equipment | 21,356 | 16,243 | |||||
Aircraft | 5,298 | 5,298 | |||||
Leasehold and tenant improvements | 1,416 | 641 | |||||
Construction in progress | 25 | 36 | |||||
116,759 | 95,619 | ||||||
Less accumulated depreciation | (27,857 | ) | (22,884 | ) | |||
$ | 88,902 | $ | 72,735 | ||||
Depreciation expense amounted to $5,285, $4,322 and $3,524 for the years ended December 31, 2014, 2013 and 2012, respectively.
The Company leases offices in the corporate location and other buildings to other unaffiliated tenants. Rental income of $399, $726 and $588 was recognized during the years ended December 31, 2014, 2013 and 2012, respectively. This rental income is recorded in the statements of income as an offset to occupancy expense.
At December 31, 2014, minimum future rental payments receivable from these tenants were as follows:
First year | $ | 196 | |
Second year | 71 | ||
Third year | 31 | ||
Fourth year | — | ||
Fifth year | — | ||
$ | 298 | ||
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Note 8. Other Real Estate Owned
Other real estate owned at December 31, 2014 and 2013 consisted of the following:
December 31, | |||||||
2014 | 2013 | ||||||
Construction, land and land development | $ | 1,761 | $ | 3,053 | |||
Commercial real estate | 3,002 | 269 | |||||
$ | 4,763 | $ | 3,322 | ||||
Note 9. Goodwill and Core Deposit Intangible, Net
At December 31, 2014 and 2013, goodwill totaled $229,457 and $34,704, respectively. In 2013, the Company recorded goodwill of $5,962 relating to the Collin Bank transaction and made measurement-period adjustments of $574 during 2014. In 2014, additional goodwill was recorded totaling $7,046, $165,932 and $21,201 relating the Live Oak Financial Corp., BOH Holdings and Houston City Bancshares acquisitions, respectively (Note 23).
The gross carrying value and accumulated amortization of core deposit intangible is as follows:
December 31, | |||||||
2014 | 2013 | ||||||
Core deposit intangible | $ | 17,562 | $ | 6,974 | |||
Less accumulated amortization | (5,107 | ) | (3,826 | ) | |||
$ | 12,455 | $ | 3,148 | ||||
Amortization of the core deposit intangible amounted to $1,281, $703 and $656 for the years ended December 31, 2014, 2013 and 2012, respectively.
The future amortization expense related to core deposit intangible remaining at December 31, 2014 is as follows:
First year | $ | 1,464 | |
Second year | 1,443 | ||
Third year | 1,443 | ||
Fourth year | 1,421 | ||
Fifth year | 1,376 | ||
Thereafter | 5,308 | ||
$ | 12,455 | ||
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Note 10. Deposits
Deposits at December 31, 2014 and 2013 consisted of the following:
December 31, | |||||||||||||
2014 | 2013 | ||||||||||||
Amount | Percent | Amount | Percent | ||||||||||
Noninterest-bearing demand accounts | $ | 818,022 | 25.2 | % | $ | 302,756 | 17.7 | % | |||||
Interest-bearing checking accounts | 1,213,937 | 37.4 | 796,225 | 46.6 | |||||||||
Savings accounts | 142,989 | 4.4 | 122,257 | 7.1 | |||||||||
Limited access money market accounts | 251,790 | 7.7 | 62,985 | 3.7 | |||||||||
Certificates of deposit and individual retirement accounts (IRA), less than $250,000 | 509,072 | 15.7 | 264,239 | 15.4 | |||||||||
Certificates of deposit and individual retirement accounts (IRA), $250,000 and greater | 313,788 | 9.6 | 161,857 | 9.5 | |||||||||
$ | 3,249,598 | 100.0 | % | $ | 1,710,319 | 100.0 | % | ||||||
At December 31, 2014, the scheduled maturities of certificates of deposit, including IRAs, were as follows:
First year | $ | 659,338 | |
Second year | 111,483 | ||
Third year | 24,137 | ||
Fourth year | 16,436 | ||
Fifth year | 11,399 | ||
Thereafter | 67 | ||
$ | 822,860 | ||
Brokered deposits at December 31, 2014 and 2013 totaled $355,112 and $62,388, respectively. Approximately $36,207 in brokered deposits was acquired in the BOH Holdings, Inc. acquisition in April 2014.
Note 11. Federal Home Loan Bank Advances
At December 31, 2014, the Company has advances from the FHLB of Dallas under note payable arrangements with maturities which range from January 5, 2015 to January 1, 2026. Payments on these notes are made monthly. The weighted average interest rate of all notes was 1.48% and 1.83% at December 31, 2014 and 2013, respectively. The balances outstanding on these advances were $229,405 and $187,484 at December 31, 2014 and 2013, respectively.
Contractual maturities of FHLB advances at December 31, 2014 were as follows:
First year | $ | 91,000 | |
Second year | 32,513 | ||
Third year | 30,000 | ||
Fourth year | 35,000 | ||
Fifth year | 40,069 | ||
Thereafter | 823 | ||
$ | 229,405 | ||
The advances are secured by FHLB stock owned by the Company and a blanket lien on certain loans with an aggregate available carrying value of $1,309,767 at December 31, 2014. The Company had remaining credit available under the FHLB advance program of $727,311 at December 31, 2014.
At December 31, 2014, the Company had $354,235 in undisbursed advance commitments (letters of credit) with the FHLB. As of December 31, 2014, these commitments mature on various dates from January 2015 through September 2016. The FHLB
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letters of credit were obtained in lieu of pledging securities to secure public fund deposits that are over the FDIC insurance limit. At December 31, 2014, there were no disbursements against the advance commitments.
Note 12. Repurchase Agreements and Other Borrowings
The Company assumed repurchase agreement accounts in the Live Oak Financial Corp. acquisition on January 1, 2014. At December 31, 2014 and 2013, repurchase accounts totaled $4,012 and $0, respectively. Securities held in safekeeping totaling $5,995 are pledged as security on these repurchase agreement accounts.
Other borrowings at December 31, 2014 and 2013 consisted of the following:
December 31, | |||||||
2014 | 2013 | ||||||
Unsecured subordinated debentures (notes) in the amount of $65,000. Interest payments of 5.875% will be made semiannually on February 1 and August 1 of each year beginning February 1, 2015. The maturity date is August 1, 2024. The notes may not be redeemed prior to maturity and meet the criteria to be recognized as Tier 2 capital for regulatory purposes. | 65,000 | — | |||||
Unsecured subordinated debentures in the amount of $5,000. Interest payments at 7.00% are made quarterly and semiannual principal payments of $625 will be due beginning January 15, 2015. The remaining principal and accrued interest is due on July 15, 2018. The debentures meet the criteria to be recognized as Tier 2 capital for regulatory purposes. | 5,000 | 5,000 | |||||
Unsecured subordinated debentures in the amount of $2,730. Interest payments at 7.00% are made quarterly and semiannual principal payments of $341 will be due beginning April 15, 2015. The remaining principal and accrued interest is due on October 15, 2018. The debentures meet the criteria to be recognized as Tier 2 capital for regulatory purposes. | 2,730 | 2,730 | |||||
$ | 72,730 | $ | 7,730 | ||||
At December 31, 2014 and 2013, other borrowings included amounts owed to related parties of $3,320 and $3,270, respectively.
At December 31, 2014, the scheduled principal maturities of the Company's other borrowings are as follows:
First year | $ | 1,933 | |
Second year | 1,933 | ||
Third year | 1,932 | ||
Fourth year | 1,932 | ||
Fifth year | — | ||
Thereafter | 65,000 | ||
$ | 72,730 | ||
During 2014, the Company entered into a $35 million unsecured revolving line of credit with an unrelated bank. The line bears interest at LIBOR plus 2.50% and matures May 3, 2015. As of December 31, 2014, there is no outstanding balance on the line. The Company is required to meet certain financial covenants on a quarterly basis, which includes maintaining $5,000 in cash at Independent Bank Group.
In addition, the Company has established federal funds lines of credit note with five unaffiliated banks totaling $125 million of borrowing capacity at December 31, 2014. The Company had a fed funds line with one unaffiliated bank totaling $40 million at December 31, 2013. The lines have no stated maturity date and the lenders may terminate the lines at any time without notice. The lines are provided on an unsecured basis and must be repaid the following business day from when the funds were borrowed. There were no borrowings against the lines at December 31, 2014 or 2013.
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Note 13. Junior Subordinated Debentures
In March 2003, IB Trust I, an unconsolidated subsidiary of the Company, issued 5,000 shares of floating rate trust preferred securities at $1,000 per share for an aggregate price of $5,000, all of which was outstanding at December 31, 2014 and 2013. These securities bear an interest rate of 3.25% over the three-month LIBOR (3.48% and 3.49% at December 31, 2014 and 2013, respectively). The trust preferred securities will mature in March 2033. The proceeds from the sale of the trust preferred securities and the issuance of $155 in common securities to the Company were used by Trust I to purchase approximately $5,155 of floating rate junior subordinated debentures of the Company which have the same payment terms as the trust preferred securities. Distributions on the trust preferred securities and on the common securities issued to the Company were payable quarterly beginning June 2003.
In March 2004, IB Trust II, an unconsolidated subsidiary of the Company, issued 3,000 shares of floating rate trust preferred securities at $1,000 per share for an aggregate price of $3,000, all of which was outstanding at December 31, 2014 and 2013. These securities bear an interest rate of 2.85% over the three-month LIBOR (3.08% and 3.09% at December 31, 2014 and 2013, respectively). The trust preferred securities will mature in March 2034. The proceeds from the sale of the trust preferred securities and the issuance of $93 in common securities to the Company were used by Trust II to purchase approximately $3,093 of floating rate junior subordinated debentures of the Company which have the same payment terms as the trust preferred securities. Distributions on the trust preferred securities and on the common securities issued to the Company were payable quarterly beginning June 2004.
In December 2004, IB Trust III, an unconsolidated subsidiary of the Company, issued 3,600 shares of floating rate trust preferred securities at $1,000 per share for an aggregate price of $3,600, all of which was outstanding at December 31, 2014 and 2013. These securities bear an interest rate of 2.40% over the three-month LIBOR (2.63% and 2.64% at December 31, 2014 and 2013, respectively). The trust preferred securities will mature in December 2035. The proceeds from the sale of the trust preferred securities and the issuance of $112 in common securities to the Company were used by Trust I to purchase approximately $3,712 of floating rate junior subordinated debentures of the Company which have the same payment terms as the trust preferred securities. Distributions on the trust preferred securities and on the common securities issued to the Company were payable quarterly beginning March 2005.
In February 2005, IB Centex Trust I, an unconsolidated subsidiary of the Company, issued 2,500 shares of floating rate trust preferred securities at $1,000 per share for an aggregate price of $2,500, all of which was outstanding at December 31, 2014 and 2013. These securities bear an interest rate of 3.25% over the three- month LIBOR (3.48% and 3.49% at December 31, 2014 and 2013, respectively). The trust preferred securities will mature in February 2035. The proceeds from the sale of the trust preferred securities and the issuance of $78 in common securities to the Company were used by Centex Trust I to purchase approximately $2,578 of floating rate junior subordinated debentures of the Company which have the same payment terms as the trust preferred securities. Distributions on the trust preferred securities and on the common securities issued to the Company were payable quarterly beginning June 2005.
In connection with the acquisition of Community Group Inc. in 2012, the Company, assumed $3,500 (3,500 shares with a liquidation amount of $1,000 per security) of Floating Rate Cumulative Trust Preferred Securities (TPS) which were issued through a wholly-owned subsidiary, Community Group Statutory Trust I (CGI Trust I) and all of which were outstanding at December 31, 2014 and 2013. CGI Trust I invested the total proceeds from the sale of TPS and the $109 proceeds from the sale of common stock to CGI in floating rate Junior Subordinated Debentures (Debentures) issued by CGI. Interest on the TPS is payable quarterly on March 15, June 15, September 15, and December 15 of each year at a rate equal to the three month LIBOR rate plus 1.60% (1.84% at December 31, 2014 and 2013). Principal payments are due at maturity on June 21, 2037. The Company may redeem the Debentures, in whole or in part, on any interest payment date on or after the redemption date of June 21, 2012 at an amount equal to the principal amount of the Debentures being redeemed plus accrued and unpaid interest on such Debentures to the redemption date
Except under certain circumstances, the common securities issued to the Company by the trusts possess sole voting rights with respect to matters involving those entities. Under certain circumstances, the Company may, from time to time, defer the debentures' interest payments, which would result in a deferral of distribution payments on the related trust preferred securities and, with certain exceptions, prevent the Company from declaring or paying cash distributions on the Company's common stock and any other future debt ranking equally with or junior to the debentures. The trust preferred securities are guaranteed by the Company.
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Note 14. Income Taxes
Income tax expense for the years ended December 31, 2014 and 2013 is as follows:
Years Ended December 31, | |||||||
2014 | 2013 | ||||||
Current income tax expense | $ | 14,849 | $ | 6,744 | |||
Deferred income tax expense (benefit) | 71 | (2,083 | ) | ||||
Income tax expense, as reported | $ | 14,920 | $ | 4,661 | |||
In connection with the initial public offering, the Company terminated its S-Corporation status and became a taxable entity (C Corporation) on April 1, 2013. As such, periods prior to April 1, 2013 will not reflect income tax expense. The reported income tax expense for the year ended December 31, 2013 reflects the initial recording of the deferred tax net asset of $1,760, which is the result of timing differences in the recognition of income/deductions for generally accepted accounting principles (GAAP) and tax purposes. The consolidated statements of income present pro forma results of operations for the prior year period.
Reported income tax expense differed from the amounts computed by applying the U.S. federal statutory income tax rate of 35% to income before income taxes for the years ended December 31, 2014 and 2013 as follows:
Years Ended December 31, | ||||||||
2014 | 2013 | |||||||
Income tax expense computed at the statutory rate | $ | 15,364 | $ | 6,571 | ||||
Initial recording of deferred tax asset | — | (1,760 | ) | |||||
Tax-exempt interest income from municipal securities | (500 | ) | (259 | ) | ||||
Tax-exempt loan income | (174 | ) | (86 | ) | ||||
Bank owned life insurance income | (340 | ) | (93 | ) | ||||
Non-deductible acquisition expenses | 486 | 279 | ||||||
Other | 84 | 9 | ||||||
$ | 14,920 | $ | 4,661 | |||||
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Components of deferred tax assets and liabilities are as follows:
December 31, | |||||||
2014 | 2013 | ||||||
Deferred tax assets: | |||||||
Allowance for loan losses | $ | 6,420 | $ | 4,776 | |||
NOL carryforwards from acquisitions | 793 | 1,352 | |||||
Net unrealized loss on available for sale securities | — | 928 | |||||
Acquired loan fair market value adjustments | 4,310 | 1,159 | |||||
Restricted stock | 1,121 | 1,044 | |||||
Reserve for bonuses | 138 | — | |||||
Deferred loan fees | 170 | — | |||||
Acquisition costs | 41 | 140 | |||||
Securities | — | 305 | |||||
Start up costs | 344 | 329 | |||||
Other real estate owned | 284 | 310 | |||||
Unearned rent income | 48 | 55 | |||||
Nonaccrual loans | 32 | 69 | |||||
Other | 147 | 76 | |||||
13,848 | 10,543 | ||||||
Deferred tax liabilities: | |||||||
Premises and equipment | (5,776 | ) | (4,539 | ) | |||
Net unrealized gain on available for sale securities | (975 | ) | — | ||||
Core deposit intangibles | (4,348 | ) | (1,102 | ) | |||
Securities | (332 | ) | — | ||||
FHLB stock | (52 | ) | (68 | ) | |||
Other | (130 | ) | — | ||||
(11,613 | ) | (5,709 | ) | ||||
Net deferred tax asset | $ | 2,235 | $ | 4,834 | |||
At December 31, 2014, the Company had federal net operating loss carryforwards of approximately $2,266 which expire at various dates from 2028 to 2032. Deferred tax assets are recognized for net operating losses because the benefit is more likely than not to be realized. No valuation allowance for deferred tax assets was recorded at December 31, 2014 or 2013 as management believes it is more likely than not that all of the deferred tax assets will be realized.
The Company does not have any uncertain tax positions and does not have any interest and penalties recorded in the income statement for the years ended December 31, 2014 and 2013. The Company files a consolidated income tax return in the US federal tax jurisdiction. The Company is no longer subject to examination by the US federal tax jurisdiction for years prior to 2011.
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Note 15. Commitments and Contingencies
Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. The commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of this instrument. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. At December 31, 2014 and 2013, the approximate amounts of these financial instruments were as follows:
December 31, | ||||||||
2014 | 2013 | |||||||
Commitments to extend credit | $ | 565,881 | $ | 365,575 | ||||
Standby letters of credit | 8,571 | 2,120 | ||||||
$ | 574,452 | $ | 367,695 | |||||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, farm crops, property, plant and equipment and income-producing commercial properties.
Letters of credit are written conditional commitments used by the Company to guarantee the performance of a customer to a third party. The Company’s policies generally require that letter of credit arrangements contain security and debt covenants similar to those contained in loan arrangements. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the table above. If the commitment is funded, the Company would be entitled to seek recovery from the customer. As of December 31, 2014 and 2013, no amounts have been recorded as liabilities for the Company’s potential obligations under these guarantees.
Litigation
The Company is involved in certain legal actions arising from normal business activities. Management believes that the outcome of such proceedings will not materially affect the financial position, results of operations or cash flows of the Company.
Lease Commitments
The Company leases certain branch facilities and other facilities. Rent expense related to these leases amounted to $1,410, $716 and $413 for the years ended December 31, 2014, 2013 and 2012, respectively.
At December 31, 2014, minimum future rental payments due under noncancelable lease commitments were as follows:
First year | $ | 1,706 | |
Second year | 1731 | ||
Third year | 1334 | ||
Fourth year | 774 | ||
Fifth year | 598 | ||
Thereafter | 1770 | ||
$ | 7,913 | ||
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Note 16. Related Party Transactions
In the ordinary course of business, the Company has and expects to continue to have transactions, including loans to its officers, directors and their affiliates. In the opinion of management, such transactions are on the same terms as those prevailing at the time for comparable transactions with unaffiliated persons. Loan activity for officers, directors and their affiliates for the year ended December 31, 2014 is as follows:
Balance at beginning of year | $ | 40,756 | |
New loans | 7,010 | ||
Repayments | (16,406 | ) | |
Changes in affiliated persons | 4,848 | ||
Balance at end of year | $ | 36,208 | |
See also Note 12 for related party borrowings.
Note 17. Employee Benefit Plans
The Company has a 401(k) profit sharing plan (Plan) which covers employees over the age of eighteen who have completed ninety days of credited service, as defined by the Plan. The Plan provides for “before tax” employee contributions through salary reduction contributions under Section 401(k) of the Internal Revenue Code. A participant may choose a salary reduction not to exceed the dollar limit set by law each year ($17.5 in 2014). Contributions by the Company and by participants are immediately fully vested. The Plan provides for the Company to make 401(k) matching contributions ranging from 50% to 100% depending upon the employee's years of service, but limited to 6% of the participant's eligible salary. The Plan also provides for the Company to make additional discretionary contributions to the Plan. The Company made contributions of approximately $894, $524 and $435 for the years ended December 31, 2014, 2013 and 2012, respectively.
Note 18. Fair Value Measurements
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
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The following table represents assets and liabilities reported on the consolidated balance sheets at their fair value on a recurring basis as of December 31, 2014 and 2013 by level within the ASC Topic 820 fair value measurement hierarchy:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Assets/ Liabilities Measured at Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
December 31, 2014 | ||||||||||||||||
Measured on a recurring basis: | ||||||||||||||||
Assets: | ||||||||||||||||
Investment securities available for sale: | ||||||||||||||||
U.S. treasuries | $ | 1,006 | $ | — | $ | 1,006 | $ | — | ||||||||
Government agency securities | 58,023 | — | 58,023 | — | ||||||||||||
Obligations of state and municipal subdivisions | 76,899 | — | 76,899 | — | ||||||||||||
Corporate bonds | 1,081 | — | 1,081 | — | ||||||||||||
Residential pass-through securities guaranteed by FNMA, GNMA, FHLMC and FHR | 69,053 | — | 69,053 | — | ||||||||||||
December 31, 2013 | ||||||||||||||||
Measured on a recurring basis: | ||||||||||||||||
Assets: | ||||||||||||||||
Investment securities available for sale: | ||||||||||||||||
U.S. treasuries | $ | 3,513 | $ | — | $ | 3,513 | $ | — | ||||||||
Government agency securities | 94,415 | — | 94,415 | — | ||||||||||||
Obligations of state and municipal subdivisions | 36,615 | — | 36,615 | — | ||||||||||||
Corporate bonds | 2,052 | — | 2,052 | — | ||||||||||||
Residential pass-through securities guaranteed by FNMA, GNMA, FHLMC, FHLB, FFCB and FHR | 57,443 | — | 57,443 | — | ||||||||||||
There were no transfers between level categorizations for the years presented.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury and other yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things.
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In accordance with ASC Topic 820, certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the assets carried on the consolidated balance sheet by caption and by level in the fair value hierarchy at December 31, 2014 and 2013, for which a nonrecurring change in fair value has been recorded:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||
Assets/ Liabilities Measured at Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Period Ended Total Losses | ||||||||||||||||
December 31, 2014 | ||||||||||||||||||||
Measured on a nonrecurring basis: | ||||||||||||||||||||
Assets: | ||||||||||||||||||||
Impaired loans | $ | 4,943 | $ | — | $ | — | $ | 4,943 | $ | 188 | ||||||||||
Other real estate | 138 | — | — | 138 | 22 | |||||||||||||||
December 31, 2013 | ||||||||||||||||||||
Measured on a nonrecurring basis: | ||||||||||||||||||||
Assets: | ||||||||||||||||||||
Impaired loans | $ | 1,514 | $ | — | $ | — | $ | 1,514 | $ | 497 | ||||||||||
Other real estate | 2,449 | — | — | 2,449 | 537 | |||||||||||||||
Impaired loans (loans which are not expected to repay all principal and interest amounts due in accordance with the original contractual terms) are measured at an observable market price (if available) or at the fair value of the loan’s collateral (if collateral dependent). Fair value of the loan’s collateral is determined by appraisals or independent valuation which is then adjusted for the estimated costs related to liquidation of the collateral. Management’s ongoing review of appraisal information may result in additional discounts or adjustments to valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. Therefore, the Company has categorized its impaired loans as Level 3. Impaired loans are evaluated for additional impairment on a quarterly basis and adjusted as necessary.
The Company has no nonfinancial assets or nonfinancial liabilities measured at fair value on a recurring basis. Other real estate is measured at fair value on a nonrecurring basis (upon initial recognition or subsequent impairment). Other real estate is classified within Level 3 of the valuation hierarchy. When transferred from the loan portfolio, other real estate is adjusted to fair value less estimated selling costs and is subsequently carried at the lower of carrying value or fair value less estimated selling costs. The fair value is determined using an external appraisal process, discounted based on internal criteria.
In addition, mortgage loans held for sale are required to be measured at the lower of cost or fair value. The fair value of mortgage loans held for sale is based upon binding quotes or bids from third party investors. As of December 31, 2014 and 2013, all mortgage loans held for sale were recorded at cost.
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The methods and assumptions used by the Company in estimating fair values of financial instruments as disclosed herein in accordance with ASC Topic 825, Financial Instruments, other than for those measured at fair value on a recurring and nonrecurring basis discussed above, are as follows:
Cash and cash equivalents: The carrying amounts of cash and cash equivalents approximate their fair value.
Loans and loans held for sale: For variable-rate loans that reprice frequently and have no significant changes in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, one-to-four family residential), commercial real estate and commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
Federal Home Loan Bank of Dallas and other restricted stock: The carrying value of restricted securities such as stock in the Federal Home Loan Bank of Dallas and Independent Bankers Financial Corporation approximates fair value.
Deposits: The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is their carrying amounts). The carrying amounts of variable-rate certificates of deposit (CDs) approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank advances, line of credit and federal funds purchased: The fair value of advances maturing within 90 days approximates carrying value. Fair value of other advances is based on the Company’s current borrowing rate for similar arrangements.
Repurchase agreements and other borrowings: The carrying value of repurchase agreements approximates fair value due to the short term nature. The fair values of privately issued subordinated debentures are based upon prevailing rates on similar debt in the market place. The subordinated debentures that are publicly traded are valued based on indicative bid prices based upon market pricing observations in the current market.
Junior subordinated debentures: The fair value of junior subordinated debentures is estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Accrued interest: The carrying amounts of accrued interest approximate their fair values.
Off-balance sheet instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of commitments is not material.
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The carrying amount, estimated fair value and the level of the fair value hierarchy of the Company’s financial instruments were as follows at December 31, 2014 and 2013:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||
Carrying Amount | Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||
December 31, 2014 | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 324,047 | $ | 324,047 | $ | 324,047 | $ | — | $ | — | ||||||||||
Securities available for sale | 206,062 | 206,062 | — | 206,062 | — | |||||||||||||||
Loans held for sale | 4,453 | 4,453 | — | 4,453 | — | |||||||||||||||
Loans, net | 3,182,045 | 3,203,337 | — | 3,200,261 | 3,076 | |||||||||||||||
FHLB of Dallas stock and other restricted stock | 12,321 | 12,321 | — | 12,321 | — | |||||||||||||||
Accrued interest receivable | 9,655 | 9,655 | — | 9,655 | — | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | 3,249,598 | 3,252,114 | — | 3,252,114 | — | |||||||||||||||
Accrued interest payable | 2,919 | 2,919 | — | 2,919 | — | |||||||||||||||
FHLB advances | 229,405 | 228,607 | — | 228,607 | — | |||||||||||||||
Repurchase agreements | a | 4,012 | 4,012 | — | 4,012 | — | ||||||||||||||
Other borrowings | 72,730 | 75,164 | — | 75,164 | — | |||||||||||||||
Junior subordinated debentures | 18,147 | 18,134 | — | 18,134 | — | |||||||||||||||
Off-balance sheet assets (liabilities): | ||||||||||||||||||||
Commitments to extend credit | — | — | — | — | — | |||||||||||||||
Standby letters of credit | — | — | — | — | — | |||||||||||||||
December 31, 2013 | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 93,054 | $ | 93,054 | $ | 93,054 | $ | — | $ | — | ||||||||||
Securities available for sale | 194,038 | 194,038 | — | 194,038 | — | |||||||||||||||
Loans held for sale | 3,383 | 3,383 | — | 3,383 | — | |||||||||||||||
Loans, net | 1,709,200 | 1,714,815 | — | 1,710,228 | 4,587 | |||||||||||||||
FHLB of Dallas stock and other restricted stock | 9,494 | 9,494 | — | 9,494 | — | |||||||||||||||
Accrued interest receivable | 4,713 | 4,713 | — | 4,713 | — | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | 1,710,319 | 1,712,654 | — | 1,712,654 | — | |||||||||||||||
Accrued interest payable | 948 | 948 | — | 948 | — | |||||||||||||||
FHLB advances | 187,484 | 189,092 | — | 189,092 | — | |||||||||||||||
Other borrowings | 7,730 | 8,061 | — | 8,061 | — | |||||||||||||||
Junior subordinated debentures | 18,147 | 18,099 | — | 18,099 | — | |||||||||||||||
Off-balance sheet assets (liabilities): | ||||||||||||||||||||
Commitments to extend credit | — | — | — | — | — | |||||||||||||||
Standby letters of credit | — | — | — | — | — | |||||||||||||||
115
Note 19. Stock Awards and Stock Warrants
The Company grants common stock awards to certain employees of the Company. The common stock issued prior to 2013 vests five years from the date the award is granted and the related compensation expense is recognized over the vesting period. In connection with the initial public offering in April 2013, the Board of Directors adopted a new 2013 Equity Incentive Plan. Under this plan, the Compensation Committee may grant awards in the form of restricted stock, restricted stock rights, restricted stock units, qualified and nonqualified stock options, performance-based share awards and other equity-based awards. The Plan reserved 800,000 shares of common stock to be awarded by the Company’s compensation committee. The shares issued under the 2013 Plan are restricted and will vest evenly over the employment period, ranging from three to five years. Shares granted under a previous plan prior to 2012 and those in and subsequent to 2013 under the 2013 Equity Incentive Plan were issued at the date of grant and receive dividends. Shares issued under a revised plan in 2012 are not outstanding shares of the Company until they vest and do not receive dividends.
The following table summarizes the activity in nonvested shares for the years ended December 31, 2014 and 2013:
Number of Shares | Weighted Average Grant Date Fair Value | ||||||
Nonvested shares, December 31, 2013 | 306,524 | $ | 22.75 | ||||
Granted during the period | 201,570 | 56.07 | |||||
Vested during the period | (133,014 | ) | 20.27 | ||||
Forfeited during the period | (1,194 | ) | 30.37 | ||||
Nonvested shares, December 31, 2014 | 373,886 | $ | 41.58 | ||||
Nonvested shares, December 31, 2012 | 208,608 | $ | 17.07 | ||||
Granted during the period | 125,040 | 29.53 | |||||
Vested during the period | (27,124 | ) | 14.13 | ||||
Nonvested shares, December 31, 2013 | 306,524 | $ | 22.75 | ||||
Compensation expense related to these awards is recorded based on the fair value of the award at the date of grant and totaled $2,914, $1,469 and $643 for the years ended December 31, 2014, 2013 and 2012, respectively. Compensation expense is recorded in salaries and employee benefits in the accompanying consolidated statements of income. At December 31, 2014, future compensation expense is estimated to be $12,342 and will be recognized over a remaining weighted average period of 3.5 years.
The fair value of common stock awards that vested during the years ended December 31, 2014, 2013 and 2012 was $6,608, $855 and $609, respectively. The Company has recorded $1,409 and $72 to additional paid in capital, which represents the excess tax benefit recognized on the vested shares for the years ended December 31, 2014 and 2013, respectively.
During 2014, the restricted stock agreement of one employee was modified resulting in an additional 3,000 net shares issued and incremental compensation costs totaling $140. There were no modifications in 2013.
At December 31, 2014, the future vesting schedule of the nonvested shares is as follows:
First year | 84,608 | ||
Second year | 92,138 | ||
Third year | 106,876 | ||
Fourth year | 56,364 | ||
Fifth year | 33,900 | ||
Total nonvested shares | 373,886 | ||
The Company has issued warrants representing the right to purchase 150,544 shares of Company stock at $17.19 per share to certain Company directors and shareholders. The warrants were issued in return for the shareholders' agreement to repurchase the subordinated debt outstanding to an unaffiliated bank in the event of Company default. The warrants expire in December 2018 and were recorded as equity at a fair value of $475 as of the date of the warrants issuance. The Company recorded this amount as debt origination costs and was amortizing it over the term of the debt. In April 2013, the Company paid off the subordinated debt and wrote off the remaining balance of $223 of the debt origination costs to interest expense.
116
Note 20. Regulatory Matters
Under banking law, there are legal restrictions limiting the amount of dividends the Bank can declare. Approval of the regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. For state banks, subject to regulatory capital requirements, payment of dividends is generally allowed to the extent of net profits.
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2014 and 2013, the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2014 and 2013, the Bank’s capital ratios exceeded those levels necessary to be categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized”, the Bank must maintain minimum total risk based, Tier I risk based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The actual capital amounts and ratios of the Company and Bank as of December 31, 2014 and 2013, are presented in the following table:
Actual | Minimum for Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||
December 31, 2014 | |||||||||||||||||||||
Total capital to risk weighted assets: | |||||||||||||||||||||
Consolidated | $ | 402,326 | 12.59 | % | $ | 255,633 | 8.00 | % | N/A | N/A | |||||||||||
Bank | 397,512 | 12.46 | 255,219 | 8.00 | $ | 319,024 | 10.00 | % | |||||||||||||
Tier I capital to risk weighted assets: | |||||||||||||||||||||
Consolidated | 314,136 | 9.83 | 127,817 | 4.00 | N/A | N/A | |||||||||||||||
Bank | 378,960 | 11.88 | 127,609 | 4.00 | 191,414 | 6.00 | % | ||||||||||||||
Tier I capital to average assets: | |||||||||||||||||||||
Consolidated | 314,136 | 8.15 | 154,270 | 4.00 | N/A | N/A | |||||||||||||||
Bank | 378,960 | 9.93 | 152,598 | 4.00 | 190,747 | 5.00 | % | ||||||||||||||
December 31, 2013 | |||||||||||||||||||||
Total capital to risk weighted assets: | |||||||||||||||||||||
Consolidated | $ | 234,794 | 13.83 | % | $ | 135,801 | 8.00 | % | N/A | N/A | |||||||||||
Bank | 212,656 | 12.54 | 135,648 | 8.00 | $ | 169,560 | 10.00 | % | |||||||||||||
Tier I capital to risk weighted assets: | |||||||||||||||||||||
Consolidated | 214,650 | 12.64 | 67,901 | 4.00 | N/A | N/A | |||||||||||||||
Bank | 198,696 | 11.72 | 67,824 | 4.00 | 101,736 | 6.00 | % | ||||||||||||||
Tier I capital to average assets: | |||||||||||||||||||||
Consolidated | 214,650 | 10.71 | 80,204 | 4.00 | N/A | N/A | |||||||||||||||
Bank | 198,696 | 9.97 | 79,710 | 4.00 | 99,637 | 5.00 | % | ||||||||||||||
117
In July 2013, federal banking agencies issued the final rules (Basel III Capital Rules) establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, compared to the current U.S. risk-based capital rules. The final rule implements a revised definition of regulatory capital, a new common equity Tier 1 minimum capital requirement of 4.50%, and a higher minimum Tier 1 capital requirement of 6.00% (which is an increase from 4.00%). Under the final rule, the total capital ratio remains at 8.00% and the minimum leverage ratio (Tier 1 capital to total assets) for all banking organizations, regardless of supervisory rating, is 4.00%. The Basel III Capital Rules are effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period for certain provisions).
Note 21. Small Business Lending Fund Preferred Stock
In connection with the acquisition of BOH Holdings on April 15, 2014, the Company entered into an Assignment and Assumption Agreement with BOH Holdings to acquire all assets and assume all liabilities of BOH Holdings. BOH Holdings participated in the US Treasury's Small Business Lending Fund (SBLF) program. The SBLF is a U.S. Department of the Treasury lending program that encourages qualified community banks to partner with small businesses and entrepreneurs to create jobs and promote economic development in local communities. As a result of continued participation in the program, the Company issued 23,938.35 shares of Senior Non-Cumulative Perpetual SBLF Preferred Stock, Series A at $1,000 par value to the US Treasury Department in exchange for the 23,938.35 shares of BOH Series C SBLF Preferred Stock.
The SBLF Preferred Stock qualifies as Tier 1 capital. The holders of SBLF Preferred Stock are entitled to receive non-cumulative dividends, payable quarterly. The dividend rate was determined based on the level of Qualified Small Business Lending at BOH Holdings and was set at 1.00% at time of acquisition. The Company qualified for the 1.00% rate continuing through January 2016, at which time the dividend rate will increase to 9.00%. During the year ended December 31, 2014, the Company recorded preferred stock dividends of $169.
The Series A Preferred Stock is non-voting, except in limited circumstances. The Company may redeem the shares of Series A Preferred Stock, in whole or in part, at any time at a redemption price equal to the sum of the Liquidation Amount of $1,000 per share and the per share amount of any unpaid dividends for the then-current period, subject to any required prior approval by the Company’s primary federal banking regulator.
Note 22. IBG Adriatica
In June 2011, IBG formed a wholly owned subsidiary, IBG Adriatica Holdings (Adriatica), to acquire loans from First United Bank, Durant, Oklahoma (First United Bank). The loans had an aggregate face value of $23,000 and were secured by approximately 27 acres of real property located in the Adriatica Development in McKinney, TX. The loans were acquired for $16,250, of which $12,188 was financed with First United Bank and guaranteed by IBG. Adriatica fully paid the note in April 2013.
Adriatica subsequently acquired the real property through a deed in lieu of foreclosure. The real property consisted of a commercial office building, retail center, residential lots and a multi-story parking garage. The property was recorded at a fair value net of selling costs of $16,949 based on a current independent appraisal and a gain of $699 was recognized.
In December 2011, a tract of land adjacent to the garage and rights to parking spaces were sold to an investment partnership comprised of certain of the Company's principals, including the Chairman of the Board and the majority shareholder as well as certain other directors of the Company. Adriatica received proceeds of $1,500 for this property which was the appraised value. Adriatica recognized a gain of $115 due to minimal selling costs incurred on the sale. In December 2012, an additional tract of land and parking was sold to the same investment partnership for net proceeds of $3,443 generating a gain of $869.
In December 2013, the remaining real property was sold to two real estate investment partnerships of which the Company's Chairman, majority shareholder and other directors are also investors. The total sales price was $11,100 generating a net gain of approximately $1.3 million which is included in gains on sale of other real estate. Current appraisals were obtained prior to the transaction to support the sales price and financing for the transaction was provided by an unrelated bank. IBG Adriatica Holdings became inactive in 2014.
Management believes that these transactions have comparable terms to those that could be arranged with an independent third party.
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Note 23. Business Combinations
Houston City Bancshares
On October 1, 2014, the Company acquired 100% of the outstanding stock of Houston City Bancshares, Inc. and its wholly owned subsidiary, Houston Community Bank, Houston, TX (HCB) with branches located in the Houston area. The Company issued 637,856 shares of Company stock and paid $16,804 in cash for the outstanding shares of HCB common stock.
The Company recognized a provisional amount of goodwill of $21,201, which is calculated as the excess of both the consideration exchanged and liabilities assumed compared to the fair market value of identifiable assets acquired. The goodwill in this acquisition resulted from a combination of expected synergies and the intent to expand our presence in the Houston market. None of the goodwill recognized is expected to be deductible for income tax purposes.
The Company has recorded acquired values based on the valuation report, but these values are still subject to final adjustments until the measurement period has ended. The Company does not not expect any significant adjustments to be made to recorded values upon completion of the valuation and settlement of all acquired accounts.
Non-credit impaired loans had an estimated fair value of $184,650 at the date of acquisition and contractual balances of $186,953. The difference of $2,303 will be recognized into interest income as an adjustment to yield over the life of the loans.
The Company has incurred expenses related to the acquisition of approximately $1,126 during the year ended December 31, 2014, which is included in acquisition expenses in the consolidated statements of income. In addition, for the year ended December 31, 2014, the Company paid offering costs totaling $16 which were recorded as a reduction to stock issuance proceeds through additional paid in capital. The acquisition is not considered significant to the Company’s financial statements and therefore, pro forma financial data is not included.
Estimated fair values of the assets acquired and liabilities assumed in this transaction as of the closing date are as follows:
Assets of acquired bank: | |||
Cash and cash equivalents | $ | 118,825 | |
Securities available for sale | 3,548 | ||
Loans | 194,870 | ||
Premises and equipment | 9,227 | ||
Goodwill | 21,201 | ||
Core deposit intangible | 2,459 | ||
Other assets | 617 | ||
Total assets | $ | 350,747 | |
Liabilities of acquired bank: | |||
Deposits | $ | 303,092 | |
Other liabilities | 585 | ||
Total liabilities | $ | 303,677 | |
Common stock issued in the HCB transaction | $ | 30,266 | |
Cash paid for the HCB transaction | $ | 16,804 | |
119
BOH Holdings
On April 15, 2014, the Company acquired 100% of the outstanding stock of BOH Holdings, Inc. and its subsidiary, Bank of Houston (BOH), Houston, Texas. This transaction gives the Company branches in the greater Houston area. The Company issued 3,615,886 shares of Company stock and paid $34,010 in cash for the outstanding shares of BOH common stock. In addition, the Company issued 23,938.35 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series A to the US Treasury Department in exchange for the 23,938.35 shares of BOH Series C Preferred Stock. The preferred stock is senior to the Company's common stock with respect to dividend rights and liquidation.
The Company has recognized goodwill of $165,932 which is calculated as the excess of both the consideration exchanged and liabilities assumed compared to the fair market value of identifiable assets acquired. The goodwill in this acquisition resulted from a combination of expected synergies and entrance into a desirable Texas market. None of the goodwill recognized is expected to be deductible for income tax purposes.
The Company has incurred expenses related to the acquisition of approximately $1,911 and $592 for the years ended December 31, 2014 and 2013 and is included in acquisition expenses in the consolidated statements of income. In addition, for the year ended December 31, 2014, the Company paid offering costs totaling $550 which were recorded as a reduction to stock issuance proceeds through additional paid in capital.
Fair values of the assets acquired and liabilities assumed in this transaction as of the closing date and subsequent measurement period adjustments are presented as follows:
Initially recorded at Acquisition Date | Measurement Period Adjustments | Adjusted Values | |||||||||
Assets of acquired bank: | |||||||||||
Cash and cash equivalents | $ | 135,525 | $ | — | $ | 135,525 | |||||
Securities available for sale | 59,141 | — | 59,141 | ||||||||
Loans | 786,761 | (1,545 | ) | 785,216 | |||||||
Premises and equipment | 7,211 | — | 7,211 | ||||||||
Other real estate | 1,191 | 33 | 1,224 | ||||||||
Goodwill | 164,766 | 1,166 | 165,932 | ||||||||
Core deposit intangible | 7,265 | — | 7,265 | ||||||||
Other assets | 27,394 | (196 | ) | 27,198 | |||||||
Total assets acquired | $ | 1,189,254 | $ | (542 | ) | $ | 1,188,712 | ||||
Liabilities of acquired bank: | |||||||||||
Deposits | $ | 820,752 | $ | — | $ | 820,752 | |||||
FHLB Advances | 95,000 | — | 95,000 | ||||||||
Other liabilities | 6,737 | (542 | ) | 6,195 | |||||||
Total liabilities assumed | $ | 922,489 | $ | (542 | ) | $ | 921,947 | ||||
Common stock issued | $ | 208,817 | $ | — | $ | 208,817 | |||||
Series A Preferred Stock Exchanged in connection with acquired bank | $ | 23,938 | $ | — | $ | 23,938 | |||||
Cash paid | $ | 34,010 | $ | — | $ | 34,010 | |||||
Non-credit impaired loans had an estimated fair value of $739,128 at the date of acquisition and contractual balances of $739,247. As of the acquisition date, the Company expects that an insignificant amount of the contractual balance of these loans will be uncollectible. The difference of $119 will be recognized into interest income as an adjustment to yield over the life of the loans.
Pro forma net income for the year ended December 31, 2014 was $29,617 and pro forma revenue was $166,223 had the transaction occurred as of January 1, 2013. Pro forma after tax net income for the year ended December 31, 2013 was $26,959 and pro forma revenue was $139,164 had the transaction occurred on January 1, 2013.
120
Live Oak Financial Corp.
On January 1, 2014, the Company acquired 100% of the outstanding stock of Live Oak Financial Corp. and its wholly owned subsidiary, Live Oak State Bank, Dallas, TX (Live Oak) with one branch located east of downtown Dallas. The Company issued 235,594 shares of Company stock and paid $10,000 in cash for the outstanding shares of Live Oak common stock. During the year ended December 31, 2014, the Company made certain measurement-period adjustments to previous acquisition accounting estimates for this acquisition. The changes resulted from completion of the valuations.
The following table summarizes the previously reported estimates and the measurement-period adjustments made to asset and liability accounts to derive at the final acquisition accounting allocations for Live Oak Financial Corp.
Initially recorded at Acquisition Date | Measurement Period Adjustments | Adjusted Values | |||||||||
Assets of acquired bank: | |||||||||||
Cash and cash equivalents | $ | 32,246 | $ | — | $ | 32,246 | |||||
Securities available for sale | 16,740 | — | 16,740 | ||||||||
Loans | 70,627 | 677 | 71,304 | ||||||||
Premises and equipment | 2,675 | (75 | ) | 2,600 | |||||||
Goodwill | 7,619 | (573 | ) | 7,046 | |||||||
Core deposit intangible | 775 | 107 | 882 | ||||||||
Other assets | 256 | (66 | ) | 190 | |||||||
Total assets | $ | 130,938 | $ | 70 | $ | 131,008 | |||||
Liabilities of acquired bank: | |||||||||||
Deposits | $ | 104,960 | $ | 50 | $ | 105,010 | |||||
Repurchase agreements | 3,733 | — | 3,733 | ||||||||
Other liabilities | 545 | 20 | 565 | ||||||||
Total liabilities | $ | 109,238 | $ | 70 | $ | 109,308 | |||||
Common stock issued in the Live Oak transaction | $ | 11,700 | $ | — | $ | 11,700 | |||||
Cash paid in the Live Oak transaction | $ | 10,000 | $ | — | $ | 10,000 | |||||
The Company recognized goodwill of $7,046 which is calculated as the excess of both the consideration exchanged and liabilities assumed compared to the fair market value of identifiable assets acquired. The goodwill in this acquisition resulted from a combination of expected synergies and a desirable branch location. None of the goodwill recognized is expected to be deductible for income tax purposes.
Non-credit impaired loans had a fair value of $68,422 at the date of acquisition and contractual balances of $68,532. The difference of $95 will be recognized into interest income as an adjustment to yield over the life of the loans.
The Company has incurred expenses related to the acquisition of approximately $354 and $357 for the years ended December 31, 2014 and 2013, which is included in acquisition expenses in the consolidated statements of income. The acquisition is not considered significant to the Company’s financial statements and therefore, pro forma financial data is not included.
121
Collin Bank
On November 30, 2013, the Company acquired 100% of the outstanding stock of Collin Bank, Plano. The Company issued 247,731 shares of Independent Bank Group common stock and paid $18,412 in cash for the outstanding shares of Collin Bank common stock. During the year ended December 31, 2014, the Company made certain measurement-period adjustments to previous acquisition accounting estimates for this acquisition. The changes resulted from completion of the valuations. The following table summarizes the previously reported estimates and the measurement-period adjustments made to asset and liability accounts to derive at the final acquisition accounting allocations for Collin Bank.
As Reported at December 31, 2013 | Measurement Period Adjustments | Final Recorded Value | |||||||
Assets of acquired bank: | |||||||||
Cash and cash equivalents | $ | 22,792 | $ | — | $ | 22,792 | |||
Securities available for sale | 62,373 | — | 62,373 | ||||||
Loans | 72,611 | (328 | ) | 72,283 | |||||
Premises and equipment | 141 | — | 141 | ||||||
Investment in FHLB stock | 1,156 | — | 1,156 | ||||||
Goodwill | 5,962 | 574 | 6,536 | ||||||
Core deposit intangible | 600 | (18 | ) | 582 | |||||
Deferred tax asset | 1,385 | 287 | 1,672 | ||||||
Other assets | 775 | 10 | 785 | ||||||
Total assets | $ | 167,795 | $ | 525 | $ | 168,320 | |||
Liabilities of acquired bank: | |||||||||
Deposits | $ | 111,164 | $ | 505 | $ | 111,669 | |||
FHLB advances | 26,000 | — | 26,000 | ||||||
Other liabilities | 358 | 20 | 378 | ||||||
Total liabilities | $ | 137,522 | $ | 525 | $ | 138,047 | |||
Common stock issued in the Collin Bank transaction | $ | 11,861 | $ | — | $ | 11,861 | |||
Cash paid in the Collin Bank transaction | $ | 18,412 | $ | — | $ | 18,412 | |||
The Company recognized goodwill of $6,536 which is calculated as the excess of both the consideration exchanged and liabilities assumed compared to the fair market value of identifiable assets acquired. The goodwill in this acquisition resulted from a combination of expected synergies and a desirable branch location. None of the goodwill recognized is deductible for income tax purposes.
The Company incurred expenses related to the acquisition of approximately $149 and $672 during the years ended December 31, 2014 and 2013, which are included in acquisition expenses in the consolidated statements of income.
At the date of acquisition, non-credit impaired loans had a fair value of $62,604 and a contractual balance totaling $61,947. The difference of $657 will be recorded against interest income as adjustment to yield over the life of the loans.
The operations of Collin Bank were merged into Independent Bank as of the date of the acquisition. Separate revenue and earnings of the former Collin Bank are not available subsequent to the business combination. The acquisition is not considered significant to the Company’s financial statements and therefore pro forma financial data is not included.
122
Note 24. Parent Company Only Financial Statements
The following balance sheets, statements of income and statements of cash flows for Independent Bank Group, Inc. should be read in conjunction with the consolidated financial statements and the notes thereto.
Balance Sheets | |||||||
December 31, | |||||||
Assets | 2014 | 2013 | |||||
Cash and cash equivalents | $ | 5,773 | $ | 13,111 | |||
Investment in subsidiaries | 623,275 | 246,143 | |||||
Investment in Trusts | 547 | 547 | |||||
Other assets | 4,627 | 1,518 | |||||
Total assets | $ | 634,222 | $ | 261,319 | |||
Liabilities and Stockholders' Equity | |||||||
Other borrowings | 72,730 | 7,730 | |||||
Junior subordinated debentures | 18,147 | 18,147 | |||||
Other liabilities | 2,494 | 1,670 | |||||
Total liabilities | 93,371 | 27,547 | |||||
Stockholders' equity: | |||||||
Preferred stock | 23,938 | — | |||||
Common stock | 170 | 123 | |||||
Additional paid-in capital | 476,609 | 222,116 | |||||
Retained earnings | 37,731 | 12,663 | |||||
Accumulated other comprehensive income | 2,403 | (1,130 | ) | ||||
Total stockholders' equity | 540,851 | 233,772 | |||||
Total liabilities and stockholders' equity | $ | 634,222 | $ | 261,319 | |||
123
Statements of Income | |||||||||||
Years Ended December 31, | |||||||||||
2014 | 2013 | 2012 | |||||||||
Interest expense: | |||||||||||
Interest on notes payable and other borrowings | $ | 2,225 | $ | 1,425 | $ | 1,720 | |||||
Interest on junior subordinated debentures | 542 | 543 | 531 | ||||||||
Total interest expense | 2,767 | 1,968 | 2,251 | ||||||||
Noninterest income: | |||||||||||
Dividends from subsidiaries | 33,850 | 11,547 | 25,634 | ||||||||
Other | 19 | 16 | 24 | ||||||||
33,869 | 11,563 | 25,658 | |||||||||
Noninterest expense: | |||||||||||
Salaries and employee benefits | 3,693 | 2,316 | 1,163 | ||||||||
Professional fees | 1,163 | 157 | — | ||||||||
Acquisition expense, including legal | 2,681 | 1,956 | 1,401 | ||||||||
Other | 800 | 397 | 36 | ||||||||
Total noninterest expense | 8,337 | 4,826 | 2,600 | ||||||||
Income before income tax benefit and equity in undistributed income of subsidiaries | 22,765 | 4,769 | 20,807 | ||||||||
Income tax benefit | 3,283 | 2,643 | — | ||||||||
Income before equity in undistributed income of subsidiaries | 26,048 | 7,412 | 20,807 | ||||||||
Equity in undistributed income (loss) of subsidiaries | 2,930 | 12,388 | (3,430 | ) | |||||||
Net income | $ | 28,978 | $ | 19,800 | $ | 17,377 | |||||
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Statements of Cash Flows | |||||||||||
Years Ended December 31, | |||||||||||
2014 | 2013 | 2012 | |||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 28,978 | $ | 19,800 | $ | 17,377 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Equity in undistributed net (income) loss of subsidiaries | (2,930 | ) | (12,388 | ) | 3,430 | ||||||
Stock compensation expense | 2,914 | 1,469 | 643 | ||||||||
Net change in other assets | (3,291 | ) | (531 | ) | (523 | ) | |||||
Net change in other liabilities | 2,173 | 783 | 9 | ||||||||
Net cash provided by operating activities | 27,844 | 9,133 | 20,936 | ||||||||
Cash flows from investing activities: | |||||||||||
Capital investment in subsidiaries | (52,000 | ) | (33,466 | ) | (2,050 | ) | |||||
Cash received from liquidation of Adriatica | 10,940 | — | — | ||||||||
Cash received from acquired companies | 6,108 | — | 39 | ||||||||
Cash paid in acquisitions | (60,814 | ) | (18,412 | ) | (46,600 | ) | |||||
Net cash used in investing activities | (95,766 | ) | (51,878 | ) | (48,611 | ) | |||||
Cash flows from financing activities: | |||||||||||
Repayments of other borrowings | — | (25,308 | ) | (3,245 | ) | ||||||
Proceeds from other borrowings | 65,000 | — | 11,680 | ||||||||
Treasury stock purchased | — | — | (208 | ) | |||||||
Offering costs paid in connection with acquired banks | (566 | ) | — | — | |||||||
Proceeds from issuance of common stock | — | 86,571 | 25,150 | ||||||||
Dividends paid | (3,850 | ) | (6,803 | ) | (8,681 | ) | |||||
Net cash provided by financing activities | 60,584 | 54,460 | 24,696 | ||||||||
Net change in cash and cash equivalents | (7,338 | ) | 11,715 | (2,979 | ) | ||||||
Cash and cash equivalents at beginning of year | 13,111 | 1,396 | 4,375 | ||||||||
Cash and cash equivalents at end of year | $ | 5,773 | $ | 13,111 | $ | 1,396 | |||||
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Note 25. Subsequent Events
Share Repurchase Program
On January 23, 2015, the Company announced the approval of a Share Repurchase Program. Under this program, the Board of Directors has authorized the repurchase of up to $30 million of the Company's common stock. The repurchase program is authorized to continue through December 31, 2015. Repurchased shares will be canceled and returned to unissued status.
No shares have been repurchased by the Company under this program through the date of this report.
Declaration of Dividends
On February 4, 2015, the Company declared a quarterly cash dividend in the amount of $0.08 per share of common stock to the stockholders of record on February 17, 2015. The dividend totaling $1,370 was paid on February 26, 2015.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of McKinney, Texas, on February 27, 2015.
Independent Bank Group, Inc. (Registrant) | ||
Date: February 27, 2015 | By: /s/ David R. Brooks | |
David R. Brooks | ||
Chairman and Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date |
/s/ David R. Brooks | Chairman, Chief Executive Officer and Director (Principal Executive Officer) | February 27, 2015 |
David R. Brooks | ||
/s/ Michelle S. Hickox | Executive Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer) | February 27, 2015 |
Michelle S. Hickox | ||
/s/ Torry Berntsen | President, Chief Operating Officer and Director | February 27, 2015 |
Torry Berntsen | ||
/s/ Daniel W. Brooks | Vice Chairman, Chief Risk Officer and Director | February 27, 2015 |
Daniel W. Brooks | ||
/s/ James D. Stein | Vice Chairman, Houston Region Chief Executive Officer and Director | February 27, 2015 |
James D. Stein | ||
/s/ M. Brian Aynesworth | Director | February 27, 2015 |
M. Brian Aynesworth | ||
/s/ Douglas A. Cifu | Director | February 27, 2015 |
Douglas A. Cifu | ||
/s/ William E. Fair | Director | February 27, 2015 |
William E. Fair | ||
/s/ Craig E. Holmes | Director | February 27, 2015 |
Craig E. Holmes | ||
/s/ J. Webb Jennings III | Director | February 27, 2015 |
J. Webb Jennings III | ||
/s/ Donald L. Poarch | Director | February 27, 2015 |
Donald L. Poarch | ||
/s/ Jack M. Radke | Director | February 27, 2015 |
Jack M. Radke | ||
/s/ G. Stacy Smith | Director | February 27, 2015 |
G. Stacy Smith | ||
/s/ Michael T. Viola | Director | February 27, 2015 |
Michael T. Viola | ||