2014 ANNUAL REPORT
Independent Bank arose from modest origins in
North Central Texas, where banking was done
face-to-face and business relationships were built
with personal service and quality products. To this
day we continue to uphold these principles with
safety and soundness at the core of our decisions.
It was our goal in 2014 to:
• Grow organically and through acquisitions
• Improve efficiencies and increase profitability
• Enhance technology infrastructure
• Extend service offerings
INDEPENDENT BANK GROUP, INC .
NASDAQ: IBTX
Independent Bank Group, Inc. (“IBTX” or “Company”), through its wholly owned subsidiary, Independent
Bank, provides a wide range of relationship-driven commercial banking products and services tailored to
meet the needs of businesses, professionals and individuals. IBTX operates 39 banking offices across
Texas, including the Dallas, Austin and Houston markets.
2014 INVESTMENT HIGHLIGHTS
Achieved Record Earnings
Maintained Solid Loan Growth
Realized Historically Strong Credit Metrics
Improved Efficiency
Enhanced and Upgraded Technology & Operations Infrastructure
ANNUAL MEETING of the SHAREHOLDERS
MAY 14, 2015
The Grand Hotel | 114 West Louisiana Street | McKinney, Texas
3:30 p.m. in the Ballroom
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“ WE ARE PLEASED WITH RESULTS FOR THE YEAR AS
WE CONTINUE TO EXECUTE OUR STRATEGIES IN THE
MIDST OF CHANGING MARKET CONDITIONS.”
DEAR SHAREHOLDERS
For Independent Bank Group, 2014 was another year brimming with activity. In our first
full year as a public company, we experienced continued organic loan growth, significant
acquisition activity and strong earnings. I am pleased to report in 2014 that Independent
Bank Group achieved record net income and our total assets essentially doubled to
$4.1 billion, from $2.2 billion in 2013. We also realized historically strong credit metrics,
strengthened our technology and operations infrastructure and began to benefit from
post-acquisition efficiencies.
We are pleased with results for the year as we continue to execute our strategies in the
midst of changing market conditions.
78%
net income growth
$28.8 MIL
record earnings
Financial Overview
Our core earnings continued to grow on a year-over-year basis, fueled by both organic
and acquisition loan growth. For the year, after tax net income was $28.8 million
compared to pro forma after tax income of $16.2 million in 2013 — an increase of 78%.
Earnings per diluted share in 2014 were $1.85.
$2 BIL
asset growth
39
total locations
Loans held for investment were $3.2 billion at year-end compared to $1.7 billion as of
December 31, 2013 and our 2014 net interest margin was 4.19%. Our core efficiency ratio
for the year was 57.86%.
We fully understand that a superior credit culture is a key component to our overall
operations. Our asset quality remained strong through 2014, as reflected by a
nonperforming assets ratio of 0.36% and a nonperforming loans to total loans ratio of
0.32% at year-end. Maintaining our credit quality and limiting our exposure to loss is
a hallmark of our corporate culture. It has served us well for over 27 years, especially
during challenging economic times.
The credit team continues to closely supervise underwriting, monitor asset quality and
maintain effective credit administration. This is especially true with respect to our energy
portfolio. As of year-end, our production portfolio was made up of 28 relationships
totaling $232 million, or approximately 7% of total loans. Oil field service related loans
represented an additional $27 million or 0.8% of the portfolio. The Company is in close
contact with our borrowers to maintain a real time understanding of their financial
condition and ability to positively respond in this dynamic market.
Welcome to Houston
One of our primary goals in 2014 was the successful conversion, onboarding and
integration of both Bank of Houston and Houston Community Bank. We are very
excited about our future together. The combined Houston acquisitions brought seasoned
and committed management, a consistent level of high profitability, clean balance sheets,
a strong core deposit base, healthy loan mix and a track record of growth. The final
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conversion of Houston customers was completed in
early December, which cleared the way for us to enter
2015 with most of our projected cost savings in place.
recognized among the “Best” places to work. We
continue looking for opportunities to do more for our
staff and reward their results!
Other Services for the Long Term
Our single family residential mortgage origination
business continues to grow. The total loan volume for
2014 exceeded $168 million. The average loan size
increased 10% from the previous year, to $285,000.
We also added staff to service the Houston market,
enhancing our reach in Texas and achieving a revenue
synergy from our acquisitions.
IBG Financial Advisors, a division of Independent
Bank, successfully finished its first year providing the
Houston, Austin and Dallas markets with financial
planning and investment management services. The
group achieved a major milestone by ending 2014 with
more than $100 million in assets under management.
A Strong Technology Core
It was a fast-paced year for our technology group, with
acquisition activity pushing our capabilities to new
limits. The organization oversaw a major core system
upgrade, the addition of mobile deposit services to our
platform and access to anti-malware protection for our
entire customer base. Independent Bank continues to
invest in technology to protect our client data, enhance
service levels, improve the way we work and how we
interact with customers.
An Award Winning Organization
Clearly our success is hinged upon the strength of our
employees and leadership. We were recognized in 2014
with a number of awards and honors spanning our
fiscal performance, innovation, workplaces and culture.
Select 2014 accolades include:
• “Deal of the Year: Money” by the Houston Business
Journal ( for the acquisition of Bank of Houston)
• “Dallas Platinum Fit-Friendly Worksite” by the
American Heart Association ( for our active culture and
healthy workplace)
• “Healthiest Employers of Central Texas” by the
Austin Business Journal
It is our goal to provide an environment where people
can be excited, participate, engage, create and connect.
We are very proud that Independent Bank is perennially
Our commitment to become the most “fit-friendly”
organization possible has become an important part
of the Bank’s culture and business plan. The IB Cares
wellness program is now a robust initiative helping
bank employees lead healthier lives, while keeping our
costs down.
Giving Back to the Community
Independent Bank has a long history of philanthropy.
We believe in creating sustainable and effective change
in our communities. Last year, the Bank donated
approximately $500,000 and our employees volunteered
over 7,000 hours for various charities and community
organizations. In addition, many employees serve on
local boards and committees that support our mission.
Our team of decisive, responsive, experienced banking
professionals has come a long way in 27 years. Our
footprint now extends 325 miles from Denison,
TX (near the Oklahoma border) to Pearland, TX
(just south of Houston). We are fortunate to serve
many communities across Texas, but proud to be
headquartered in McKinney. It was a great year for
McKinney: being crowned the “Best Place to Live in
America” by Money Magazine!
We continue to believe in our business model and the
quality of our people. Our loan pipeline remains strong
and we believe the strength of our asset quality, superior
credit culture and proven methods will yield positive
results and continue to enhance shareholder value.
Thanks to all the exceptional people that contribute to
Independent Bank Group’s success; our talented staff,
the innovators and organizations that make Texas an
exemplary place to do business and the loyal customers
and families in each community we serve.
Warmest Regards,
DAVID BROOKS, CHAIRMAN & CEO
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NORTH TEXAS
WACO
AUSTIN
HOUSTON
HOUSTON
CONTINUED EXPANSION
In 2014, our entry into the dynamic Houston market placed
the Independent Bank brand within reach of an additional
6.4 million Texans. Through this process, we became a
significantly larger organization.
Thanks to the efforts of a great many, all the Houston accounts
integrated into our core system without issue. We were also
able to brand, reorganize and connect locations, departments
and technology quickly and effectively. Following the
onboarding of Bank of Houston (April 2014) and Houston
Community Bank (December 2014), our employee count
jumped from 383 to over 550.
We enter 2015 firmly planted in the metro Houston area and
positioned for continued growth.
Anna
Austin
Celina
Collinsville
Coppell
Dallas (2)
Denison
Denton
Farmersville
Georgetown
Highland Village
Houston (6)
Howe
Humble
Kingwood
Lakeway
Lavon
Little Elm
Manor
McKinney (3)
Pearland
Sugar Land
Plano
Princeton
Prosper
Round Rock
Sherman
Van Alstyne
Waco (2)
Whitewright
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financial highlights
2014
IN THOUSANDS
2014
2013
Total Assets
Loans Held for Investment
Securities
Deposits
Shareholders’ Equity
Pre-Tax Income
Nonperforming Assets to Total Assets
Nonperforming Loans to Total Loans
Net Charge-Offs to Average Loans Outstanding
Tier 1 Risk Based Capital Ratio
Total Risk Based Capital Ratio
Tangible Common Equity to Tangible Assets
$4,132,639
$3,201,084
$206,062
$3,249,598
$540,851
$43,898
0.36%
0.33%
0.03%
9.83%
12.59%
7.07%
$2,163,984
$1,723,160
$194,038
$1,710,319
$233,772
$24,461
0.58%
0.53%
0.09%
12.64%
13.83%
9.21%
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Board of Directors
DAVID R. BROOKS
Chairman / CEO
M. BRIAN AYNESWORTH
CEO & President – Southwestern Commercial Properties, LLC
J. WEBB JENNINGS III
Vice President – Hancock Park Associates
TORRY BERNTSEN
President / COO
DANIEL W. BROOKS
Vice Chairman / Chief Risk Officer
DOUGLAS A. CIFU
CEO – Virtu Financial, LLC
WILLIAM E. FAIR
Chairman / CEO – Home Abstract and Title Company, Inc.
DONALD L. POARCH
Partner / Co-Owner – The Sprint Companies
JACK M. RADKE
Owner / President – AgPower, Inc.
G. STACY SMITH
Managing Partner – SCW Capital, LP
JAMES D. STEIN
Vice Chairman / CEO – Houston Region
CRAIG E. HOLMES
Chief Financial Officer – Sizmek, Inc.
MICHAEL T. VIOLA
Commodities & Currencies Trader – Virtu Financial, LLC
Corporate Leadership Team
DAVID R. BROOKS
Chairman / CEO
TORRY BERNTSEN
President / COO
DANIEL W. BROOKS
Vice Chairman / Chief Risk Officer
BRIAN E. HOBART
Vice Chairman / Chief Lending Officer
JAMES D. STEIN
Vice Chairman / CEO – Houston Region
MICHELLE S. HICKOX
Executive Vice President / CFO
W. RUSS LESSMANN
Executive Vice President / Chief Credit Officer
ROBERT F. TEMPLE
Executive Vice President / Chief Administrative Officer
JAN C. WEBB
Executive Vice President / Secretary
JODY R. ZORN
Executive Vice President – North Texas Market
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6
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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
(State or other jurisdiction of incorporation or organization)
13-4219346
(I.R.S. Employer Identification No.)
1600 Redbud Boulevard, Suite 400
McKinney, Texas
(Address of principal executive offices)
75069-3257
(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
Common Stock, par value $0.01 per share
Name of Each Exchange on which Registered
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
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
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
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
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
No
No
No
No
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
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
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 .
No
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
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Signatures
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
1
13
28
28
28
28
29
32
35
73
73
73
73
73
74
74
74
74
74
75
ITEM 1. BUSINESS
PART I
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.
1
Acquired Institution/Market
Date of Acquisition
Fair Value of Total Assets
Acquired
(dollars in thousands)
Town Center Bank
Dallas/North Texas
Farmersville Bancshares, Inc.
Dallas/North Texas
I Bank Holding Company, Inc.
Austin/Central Texas
The Community Group, Inc.
Dallas/North Texas
Collin Bank
Dallas/North Texas
Live Oak Financial Corp.
Dallas/North Texas
BOH Holdings, Inc.
Houston, Texas
Houston City Bancshares, Inc.
Houston, Texas
July 31, 2010
September 30, 2010
April 1, 2012
October 1, 2012
November 30, 2013
January 1, 2014
April 15, 2014
October 1, 2014
$37,451
$99,420
$172,587
$110,967
$168,320
$131,008
$1,188,712
$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.
2
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.
3
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
6
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
“undercapitalized” if it fails to meet any one of the ratios required to be adequately capitalized.
bank. A bank is
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
9
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
11
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
filiated parties, to administrative sanctions and potentially substantial
their respective officers, directors, and other
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.
12
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;
•
• maintaining adequate regulatory capital.
attracting and retaining qualified management; and
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.
14
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
15
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.
16
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.
17
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.
18
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:
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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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•
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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:
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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
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$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.
27
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
Collin
Dallas
Denton
Fort Bend
Grayson
Harris
Travis
Williamson
McLennan
1
10
3
3
1
6
8
3
2
2
—
1
1
0
1
0
4
0
0
2
$51.0
992.4
163.4
185.7
34.0
322.0
1,022.0
175.8
128.0
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.
28
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:
Quarter ending March 31, 2015 (through February 26, 2015)
Quarter ended March 31, 2014
Quarter ended June 30, 2014
Quarter ended September 30, 2014
Quarter ended December 31, 2014
Quarter ended June 30, 2013 (beginning April 3, 2013)
Quarter ended September 30, 2013
Quarter ended December 31, 2013
High
Low
39.45 $
29.73
$
$
59.96 $
61.49
56.2
48.78
$
31.66 $
37.69
50.58
48.54
44.86
46.01
38.13
26.00
29.20
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)
$
Quarter ended December 31, 2014
Quarter ended September 30, 2014
Quarter ended June 30, 2014
Quarter ended March 31, 2014
For the Quarter Ended December 31, 2013
For the Quarter Ended September 30, 2013
For the Quarter Ended June 30, 2013
For the Quarter Ended March 31, 2013 1
0.08
0.06
0.06
0.06
0.06
0.06
0.06
—
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.
29
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
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
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)
—
—
N/A
N/A
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
461,785
—
30
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 $
S&P 500
NASDAQ Bank
100
100
103.91
109.28
109.36
114.90
120.86
128.58
123.04
131.85
129.48
128.76
130.94
122.63
134.1
137.4
132.23
(Copyright © 2015 Standard & Poor’s Capital IQ, a division of The McGraw-Hill Companies, Inc. All rights reserved.) (www.spcapitaliq.com)
31
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.
(dollars in thousands except per share)
Selected Income Statement Data
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income (excluding acquisition gains)
Gain on acquisitions
Noninterest expense
Income tax expense
Net income
Preferred stock dividends
Net income available to common shareholders
Pro forma net income (1) (unaudited)
Per Share Data (Common Stock)(2)
Earnings:
Basic
Diluted (3)
Pro forma earnings:(1) (unaudited)
Basic
Diluted (3)
Dividends (4)
Book value (5)
Tangible book value (6)
Selected Period End Balance Sheet Data
Total assets
Cash and cash equivalents
Securities available for sale
Total loans (gross)
Allowance for loan losses
Goodwill and core deposit intangible
Other real estate owned
Adriatica real estate owned
Noninterest-bearing deposits
Interest-bearing deposits
Borrowings (other than junior subordinated debentures)
Junior subordinated debentures (7)
Series A Preferred Stock
Total stockholders’ equity
As of and for the Year Ended December 31,
2014
2013
2012
2011
2010
$
140,132
$
87,214
$
71,890
$
59,639
$
15,987
124,145
5,359
118,786
13,624
—
88,512
14,920
28,978
169
28,809
n/a
12,281
74,933
3,822
71,111
11,021
—
57,671
4,661
19,800
—
19,800
16,174
13,337
58,553
3,184
55,369
9,168
—
47,160
—
17,377
—
17,377
12,147
13,358
46,281
1,650
44,631
7,708
—
38,639
—
13,700
—
13,700
9,357
$
$
1.86
1.85
$
1.78
1.77
$
2.23
2.23
$
2.00
2.00
n/a
n/a
0.24
30.35
16.15
1.45
1.44
0.77
18.96
15.89
1.56
1.56
1.12
15.06
11.19
1.37
1.37
0.89
12.55
10.53
51,734
13,669
38,065
4,043
34,022
5,464
6,692
33,062
—
13,116
—
13,116
8,775
1.95
1.95
1.31
1.31
0.63
11.13
9.02
$
4,132,639
$
2,163,984
1,740,060
$1,254,377
$1,098,216
324,047
206,062
93,054
194,038
102,290
113,355
3,205,537
1,726,543
1,378,676
13,960
37,852
3,322
—
302,756
1,407,563
195,214
18,147
—
233,772
11,478
31,993
6,819
9,727
259,664
1,131,076
201,118
18,147
—
124,510
18,552
241,912
4,763
—
818,022
2,431,576
306,147
18,147
23,938
540,851
32
56,654
93,991
988,671
9,060
13,886
8,392
16,065
168,849
861,635
118,086
14,538
—
85,997
86,346
52,611
860,128
8,403
14,453
7,854
—
133,307
794,236
75,656
14,538
—
76,044
Selected Performance Metrics
Return on average assets(8)
Return on average equity (8)
Return on average common equity (8)
Pro forma return on average assets(1) (8) (unaudited)
Pro forma return on average equity(1) (8) (unaudited)
Net interest margin (9)
Efficiency ratio (10)
Dividend payout ratio (11)
Credit Quality Ratios
Nonperforming assets to total assets
Nonperforming loans to total loans (12)
Allowance for loan losses to nonperforming loans (12)
Allowance for loan losses to total loans
Net charge-offs to average loans outstanding (unaudited)
Capital Ratios
Tier 1 capital to average assets
Tier 1 capital to risk-weighted assets (13)
Total capital to risk-weighted assets (13)
Total stockholders’ equity to total assets
Total common equity to total assets (14)
Tangible common equity to tangible assets (14)
0.87%
6.65
6.89
n/a
n/a
4.19
64.25
12.90
0.36%
0.32
183.43
0.58
0.03
1.04%
1.17%
1.16%
1.35%
9.90
9.90
0.85
8.09
4.30
67.10
14.20
0.58%
0.53
152.93
0.81
0.09
16.54
16.54
0.82
11.56
4.40
69.64
11.89
1.59%
0.81
104.02
0.83
0.06
17.36
17.36
0.79
11.86
4.42
71.57
13.26
19.19
19.19
0.91
12.84
4.43
75.95
13.54
2.85%
2.19%
1.14
80.32
0.92
0.11
1.89
51.93
0.98
0.31
8.15%
10.71%
6.45%
6.89%
6.98%
9.83
12.59
13.09
12.51
7.07
12.64
13.83
10.80
10.80
9.21
8.22
10.51
7.16
7.16
5.42
8.59
11.19
6.86
6.86
5.81
8.88
11.10
6.92
6.92
5.68
(1)
(2)
(3)
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.
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.
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:
Weighted average shares outstanding-basic
Weighted average shares outstanding-diluted
For the Year Ended December 31,
2014
2013
15,208,544
10,921,777
15,306,998
10,990,245
2012
7,626,205
7,649,366
2011
6,668,534
6,675,078
2010
6,518,224
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.
33
(7)
(8)
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.
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.
34
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;
35
•
•
•
•
•
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.
36
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)
I Bank Holding Company
The Community Group
Collin Bank
Live Oak Financial Corp.
BOH Holdings, Inc.
Acquisition Date
Total Assets
Gross Loans
April 1, 2012
October 1, 2012
November 29, 2013
January 1, 2014
April 15, 2014
$172.6
111.0
168.3
131.0
1,188.7
350.7
$116.9
63.5
72.3
71.3
785.2
194.9
Deposits
$122.9
93.6
111.7
105.0
820.8
303.1
Houston Community Bancshares, Inc. *
October 1, 2014
* 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.
37
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.
38
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.
39
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.
Total interest-earning assets
2,960,153
$ 140,132
(dollars in thousands)
Interest-earning assets:
Loans (1)
Taxable securities
Nontaxable securities
Federal funds sold and other
Noninterest-earning assets
Total assets
Interest-bearing liabilities:
Checking accounts
Savings accounts
Money market accounts
Certificates of deposit
Total deposits
FHLB advances
Notes payable, repurchase agreements and
other borrowings
Junior subordinated debentures
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
$
2,628,667
$ 135,461
5.15% $
1,502,817
$ 84,350
5.61% $
1,179,007
$ 69,494
5.89%
73,731
1,288
1.75%
25,397
51,811
828
280
3.26%
0.54%
1,329,946
$ 71,890
5.41%
174,578
57,825
99,083
2,803
1,429
439
1.61
2.47
0.44
4.73
95,259
31,247
112,841
1,516
1,024
324
1,742,164
$ 87,214
369,449
$
3,329,602
158,748
$
1,900,912
$
1,052,528
$
4,797
0.46
$
734,475
$
3,826
129,707
123,392
674,556
1,980,183
242,695
40,179
18,147
345
347
4,048
9,537
3,678
2,230
542
0.27
0.28
0.60
0.48
1.52
5.55
2.99
0.70
114,699
50,661
334,269
1,234,104
165,354
17,255
18,147
373
135
2,640
6,974
3,303
1,461
543
1,434,860
12,281
259,432
6,626
199,994
1.59
3.28
0.29
5.01
0.52
0.33
0.27
0.79
0.57
2.00
8.47
2.99
0.86
$
$
157,668
1,487,614
579,495
$
4,529
110,118
32,976
285,564
1,008,153
105,072
710
117
2,995
8,351
2,383
39,963
2,072
15,260
531
1,168,448
13,337
203,248
10,863
105,055
Total interest-bearing liabilities
2,281,204
15,987
Noninterest-bearing checking accounts
Noninterest-bearing liabilities
Stockholders’ equity
601,764
11,152
435,482
Total liabilities and equity
$
3,329,602
$
1,900,912
$
1,487,614
Net interest income
Interest rate spread
Net interest margin (2)
Average interest earning assets to interest
bearing liabilities
$ 124,145
$ 74,933
$ 58,553
4.03%
4.19
129.76
4.15%
4.30
121.42
(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.
40
0.78
0.64
0.35
1.05
0.83
2.27
5.18
3.48
1.14
4.27%
4.40
113.82
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.
(dollars in thousands)
Interest-earning assets
Loans
Taxable securities
Nontaxable securities
Federal funds sold and other
Total interest-earning assets
Interest-bearing liabilities
Checking accounts
Savings accounts
Limited access money market accounts
Certificates of deposit
Total deposits
FHLB advances
Notes payable, repurchase agreements and
other borrowings
Junior subordinated debentures
Total interest-bearing liabilities
For the Fiscal Year Ended December 31, 2014 vs. 2013
For the Fiscal Year Ended December 31, 2013 vs. 2012
Increase (Decrease) Due to
Volume
Rate
Total Increase
(Decrease)
Increase (Decrease) Due to
Volume
Rate
Total Increase
(Decrease)
$
58,527
$
(7,416)
$
51,111
$
18,310
$
(3,454)
$
14,856
1,273
705
(43)
60,462
14
(300)
158
(7,544)
1,287
405
115
52,918
350
192
219
19,071
(122)
4
(175)
(3,747)
$
1,496
$
(525)
$
971
$
1,031
$
(1,734)
$
45
204
2,165
3,910
1,299
1,410
—
6,619
(73)
8
(757)
(1,347)
(924)
(641)
(1)
(2,913)
(28)
212
1,408
2,563
375
769
(1)
3,706
28
52
459
1,570
1,232
(1,530)
92
1,364
(365)
(34)
(814)
(2,947)
(312)
919
(80)
(2,420)
228
196
44
15,324
(703)
(337)
18
(355)
(1,377)
920
(611)
12
(1,056)
16,380
Net interest income
$
53,843
$
(4,631)
$
49,212
$
17,707
$
(1,327)
$
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)
Interest income
Interest and fees on loans
Interest on taxable securities
Interest on nontaxable securities
Interest on federal funds sold and other
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
$
135,461
$
84,350
$
51,111
$
84,350
$
69,494
$
14,856
2,803
1,429
439
1,516
1,024
324
1,287
405
115
1,516
1,024
324
1,288
828
280
228
196
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.
41
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)
Interest Expense
Interest on deposits
Interest of FHLB advances
Interest on notes payable, repurchase agreements and other
borrowings
Interest on junior subordinated debentures
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
$
9,537
$
3,678
2,230
542
6,974
3,303
1,461
543
$
$
$
$
$
2,563
$
6,974
$
8,351
$
(1,377)
375
769
(1)
3,303
1,461
543
2,383
2,072
531
920
(611)
12
3,706
$
12,281
$
13,337
$
(1,056)
Total interest expense
$
15,987
$
12,281
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
42
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-
43
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:
(dollars in thousands)
Noninterest Income
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
Service charges on deposit accounts
$
6,009
$
4,841
$
1,168
$
4,841
$
3,386
$
Mortgage fee income
Gain on sale of loans
Gain on sale of branch
Gain on sale of other real estate
Gain (loss) on sale of securities available for sale
Loss on sale of premises and equipment
Increase in cash surrender value of bank owned life insurance
All other noninterest income
Total noninterest income
3,953
1,078
—
71
362
(22)
972
1,201
3,743
—
—
210
1,078
—
3,743
—
—
1,507
(1,436)
1,507
—
(18)
348
600
362
(4)
624
601
—
(18)
348
600
4,116
—
38
1,135
(3)
(343)
327
512
1,455
(373)
—
(38)
372
3
325
21
88
$
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.
44
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:
45
(dollars in thousands)
Noninterest Expense
For the Year Ended December
31,
Variance
For the Year Ended December
31,
Variance
2014
2013
2014 v. 2013
2013
2012
2013 v. 2012
Salaries and employee benefits
$
52,337
$
31,836
$
20,501
$
31,836
$
26,569
$
Occupancy
Data processing
FDIC assessment
Advertising and public relations
Communications
Other real estate owned expense, net
Net expenses of operations of IBG Adriatica
Impairment of other real estate
Core deposit intangible amortization
Professional fees
Acquisition expense, including legal
Other
Total noninterest expense
13,250
2,080
1,797
835
1,787
232
23
22
1,281
2,567
3,626
8,675
9,042
1,347
500
684
1,385
485
806
549
703
1,298
1,956
7,080
4,208
733
1,297
151
402
(253)
(783)
(527)
578
1,269
1,670
1,595
9,042
1,347
500
684
1,385
485
806
549
703
1,298
1,956
7,080
7,317
1,198
800
626
1,334
220
832
94
656
1,104
1,401
5,009
$
88,512
$
57,671
$
30,841
$
57,671
$
47,160
$
5,267
1,725
149
(300)
58
51
265
(26)
455
47
194
555
2,071
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.
46
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.
47
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.
(dollars in thousands, except per share data)
Interest Income
Interest Expense
Net Interest Income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Provision for income taxes
Net income
Preferred stock dividends
Net income available to common shareholders
Comprehensive income
Basic earnings per share
Diluted earnings per share
(dollars in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Provision for income taxes
Net income
Comprehensive income
Basic earnings per share
Diluted earnings per share
December 31
September 30
June 30
March 31
Quarter Ended 2014
$
42,952 $
36,940 $
35,078 $
(unaudited)
4,777
38,175
1,751
36,424
3,961
24,931
15,454
5,356
4,509
32,431
976
31,455
4,210
22,162
13,503
4,543
3,674
31,404
1,379
30,025
3,119
25,343
7,801
2,682
$
$
$
$
10,098 $
8,960 $
5,119 $
60
10,038 $
10,385 $
0.59 $
0.59
60
8,900 $
9,225 $
0.54 $
0.54
49
5,070 $
6,521 $
0.32 $
0.32
25,162
3,027
22,135
1,253
20,882
2,334
16,076
7,140
2,339
4,801
—
4,801
6,380
0.38
0.38
December 31
September 30
June 30
March 31
Quarter Ended 2013
$
22,847 $
21,841 $
21,105 $
(unaudited)
2,894
19,953
883
19,070
3,412
15,714
6,768 $
2,489 $
4,279 $
3,707 $
0.35 $
0.35
2,926
18,915
830
18,085
2,451
14,650
5,886 $
1,927 $
3,959 $
4,610 $
0.33 $
0.33
3,255
17,850
1,079
16,771
2,732
13,384
6,119 $
245 $
5,784 $
2,971 $
0.49 $
0.49
$
$
$
$
$
21,421
3,206
18,215
1,030
17,185
2,426
13,923
5,688
—
5,688
4,804
0.69
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:
(dollars in thousands)
Commercial
Real estate:
Commercial
Commercial construction, land and land
development
Residential (1)
Single family interim construction
Agricultural
Consumer
Other
2014
2013
2012
2011
2010
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
$
672,052
21.0% $
241,178
14.0% $
169,882
12.3% $
127,827
12.9% $
121,805
14.2%
1,450,434
45.2
843,436
48.9
648,494
47.0
470,820
47.6%
361,106
42.0
334,964
518,478
138,278
38,822
52,267
242
10.5
16.2
4.3
1.2
1.6
—
130,320
342,037
83,144
40,558
45,762
108
7.5
19.8
4.8
2.3
2.7
—
97,329
315,349
67,920
40,127
39,502
73
7.1
22.9
4.9
2.9
2.9
—
79,063
222,929
24,592
34,923
28,437
80
8.0%
22.6%
2.5%
3.5%
2.9%
—
81,270
211,297
20,402
32,902
31,270
76
9.4
24.6
2.4
3.8
3.6
—
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
Allowance for loan losses
(487)
(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.
49
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
(dollars in thousands)
Commercial
Real estate:
Commercial real estate
Commercial construction, land and land
development
Residential real estate
Single family interim construction
Agricultural
Consumer
Other
Total loans
Within One Year
Fixed Rate
Adjustable
Rate
One Year to Five Years
Adjustable
Rate
Fixed Rate
After Five Years
Total
Fixed Rate
Adjustable
Rate
Fixed Rate
Adjustable
Rate
$
47,571 $
133,551 $
150,900 $
284,832 $
35,404 $
19,794 $
233,875 $
438,177
50,865
23,412
507,518
143,772
208,032
516,835
766,415
684,019
45,414
46,462
45,960
6,636
10,695
242
30,584
10,261
67,171
6,554
7,183
—
104,556
210,386
9,230
11,080
32,243
—
65,986
4,874
4,950
468
1,051
—
17,454
131,847
9,890
1,123
951
—
70,970
114,648
1,077
12,961
144
—
167,424
388,695
65,080
18,839
43,889
242
167,540
129,783
73,198
19,983
8,378
—
$
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.
50
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.
51
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.
52
(dollars in thousands)
Nonaccrual loans
Commercial
Real estate:
Commercial real estate, construction, land and land development
Residential real estate
Single-family interim construction
Consumer
Total nonaccrual loans (1)
Loans delinquent 90 days or more and still accruing
Commercial
Real estate:
Residential real estate
Agricultural
Consumer
Total loans delinquent 90 days or more and still accruing
Troubled debt restructurings, not included in nonaccrual loans
Commercial
Real estate:
Commercial real estate, construction, land and land development
Residential real estate
Consumer
Total troubled debt restructurings, not included in nonaccrual
loans
Total nonperforming loans
Other real estate owned (Bank only):
Commercial real estate, construction, land and land development
Agricultural real estate
Residential real estate
Total other real estate owned
Adriatica real estate owned
Total nonperforming assets
Ratio of nonperforming loans to total loans
Ratio of nonperforming assets to total assets
As of December 31,
2014
2013
2012
2011
2010
$
1,449
$
357
$
218
$
131
$
194
70
2,117
—
67
3,703
157
288
—
6
451
30
4,668
1,254
8
5,960
10,114
4,763
—
4,763
—
253
1,852
170
43
2,675
—
—
—
—
—
5,090
1,288
1
6,486
9,161
3,322
—
—
3,322
—
4,857
894
560
70
1,291
2,864
91
54
5,531
2,079
—
42
6,599
4,431
7,846
—
—
—
2
2
31
—
—
24
55
1,778
2,165
9
4,433
6,094
136
12
6,794
39
92
2
1
134
147
7,671
382
—
8,200
11,034
11,280
16,180
6,166
—
653
6,819
9,727
7,835
457
100
8,392
16,065
7,164
535
155
7,854
—
107
481
552
$ 14,877
$ 12,483
$ 27,580
$ 35,737
$ 24,034
0.32%
0.36
0.53%
0.58
0.81%
1.59
1.14%
2.85
1.89%
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.
53
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
54
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:
(dollars in thousands)
Amount
As of December 31,
2014
2013
2012
2011
2010
% 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
Real estate:
Commercial real estate, construction,
land and land development
Residential real estate
Single family interim construction
Agricultural
Consumer
Unallocated
$
5,051
21.0% $
2,401
14.0% $
2,377
12.3% $
1,259
12.9% $
1,228
14.2%
10,110
2,205
669
246
146
125
55.7
16.2
4.3
1.2
1.6
—
7,872
2,440
577
238
363
69
56.4
19.8
4.8
2.3
2.7
—
4,924
2,965
523
159
278
252
54.1
22.9
4.9
2.9
2.9
—
5,051
1,964
317
209
235
25
55.6
22.6
2.5
3.5
2.9
—
4,294
1,639
250
167
293
532
51.4
24.6
2.4
3.8
3.6
—
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
55
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:
(dollars in thousands)
As of and for the Year Ended December 31,
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
Real estate:
Commercial real estate, construction, land and land
development
Residential real estate
Single-family interim construction
Consumer
Total charge-offs
Recoveries
Commercial
Real estate:
Commercial real estate, construction, land and land
development
Residential real estate
Single-family interim construction
Consumer
Total recoveries
Net charge-offs
Provision for loan losses
(368)
(612)
(169)
(23)
(579)
(371)
(32)
—
(143)
(914)
19
79
8
11
30
(634)
(130)
—
(64)
(1,440)
20
28
10
—
42
(484)
(178)
—
(86)
(917)
26
68
3
—
54
147
(767)
5,359
100
(1,340)
3,822
151
(766)
3,184
(694)
(316)
(20)
(94)
(416)
(837)
(561)
(114)
(1,147)
(2,507)
17
35
—
49
53
15
3
49
10
48
154
(993)
1,650
9,060
$
125
(2,382)
4,043
8,403
Allowance for loan losses-balance at end of year
$
18,552
$
13,960
$
11,478
$
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
Allowance for loan losses to total loans at end of year (1)
183.43
0.58
152.39
0.81
104.02
0.84
80.32
0.92
51.93
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.
56
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:
2014
As of December 31,
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
Government agency securities
Obligations of state and municipal subdivisions
Residential pass-through securities guaranteed by
FNMA, GNMA, FHLMC and FHR
Corporate bonds
Total securities available for sale
$
$
1,006
58,023
76,899
69,053
1,081
206,062
0.49% $
28.16
37.32
3,513
94,415
36,615
1.81% $
48.66%
18.87%
3,547
70,211
36,814
33.51
0.52
100.00% $
57,443
2,052
194,038
29.60%
1.06%
100.00% $
680
2,103
113,355
3.13%
61.94%
32.48%
0.60%
1.85%
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.
57
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)
U.S. Treasury securities
Maturing within one year
Maturing in one to five years
Maturing in five to ten years
Maturing after ten years
Total U.S. Treasury securities
Government agency securities
Maturing within one year
Maturing in one to five years
Maturing in five to ten years
Maturing after ten years
Total government agency securities
Obligations of state and municipal subdivisions
Maturing within one year
Maturing in one to five years
Maturing in five to ten years
Maturing after ten years
Total obligations of state and municipal subdivisions
Residential pass through securities guaranteed by FNMA, GNMA, FHLMC and FHR
Maturing within one year
Maturing in one to five years
Maturing in five to ten years
Maturing after ten years
Total residential pass through securities guaranteed by FNMA, GNMA, FHLMC and FHR
Corporate bonds
Maturing within one year
Maturing in one to five years
Maturing in five to ten years
Maturing after ten years
Total corporate bonds
Total investment securities
Book Value
% of Total
Investment
Securities
Weighted
Average Yield
$
—
1,006
—
—
1,006
—
42,062
14,131
1,830
58,023
3,880
6,844
25,155
41,020
76,899
1
47,271
18,556
3,225
69,053
—
—
1,081
—
1,081
—%
—%
0.49
—
—
0.49
—
20.41
6.86
0.89
28.16
1.88
3.32
12.21
19.91
37.32
—
22.94
9.01
1.56
33.51
—
—
0.52
—
0.52
1.06
—
—
1.06
—
1.28
1.89
1.68
1.45
1.24
1.63
3.21
4.50
3.67
7.50
2.51
2.79
3.52
2.63
—
—
3.10
—
3.10
$
206,062
100.00%
2.66%
58
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)
Securities available for sale
As of December 31, 2014
U.S. treasuries
Government agency securities
Obligations of state and municipal subdivisions
Corporate bonds
Residential pass through securities guaranteed by FNMA, GNMA, FHLMC and FHR
As of December 31, 2013
U.S. treasuries
Government agency securities
Obligations of state and municipal subdivisions
Corporate bonds
Residential pass through securities guaranteed by FNMA, GNMA, FHLMC, FHLB, FFCB and FHR
As of December 31, 2012
U.S. treasuries
Government agency securities
Obligations of state and municipal subdivisions
Corporate bonds
Residential mortgage backed securities guaranteed by FNMA, GNMA, FHLMC and SBA
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
999
$
7
$
— $
$
$
$
$
58,174
75,599
1,068
67,437
203,277
3,498
95,407
37,861
2,079
57,844
196,689
3,493
69,636
34,908
2,105
635
$
$
$
$
199
1,837
13
1,616
3,672
15
84
541
—
67
707
54
575
2,123
23
45
$
$
$
$
(350)
(537)
—
—
1,006
58,023
76,899
1,081
69,053
(887)
$
206,062
— $
(1,076)
(1,787)
(27)
(468)
3,513
94,415
36,615
2,052
57,443
(3,358)
$
194,038
— $
—
(217)
(25)
—
3,547
70,211
36,814
2,103
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.
59
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
60
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:
(dollars in thousands)
Deposit Type
Noninterest-bearing demand accounts
Interest-bearing checking accounts
Savings accounts
Limited access money market accounts
Certificates of deposit, including individual retirement accounts (IRA)
For the Year Ended
December 31, 2014
For the Year Ended
December 31, 2013
For the Year Ended
December 31, 2012
Weighted
Average
Rate
Balance
Weighted
Average
Rate
Balance
Weighted
Average
Rate
Balance
$
601,764
—% $ 259,432
—% $
203,248
—%
1,052,528
129,707
123,392
674,556
0.46
0.27
0.28
0.60
734,475
114,699
50,661
334,269
0.52
0.33
0.27
0.79
579,495
110,118
32,976
285,564
0.78
0.65
0.36
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:
(dollars in thousands)
Individual retirement accounts
Certificates of deposit (excluding CDARS)
CDARS
Total
Short-Term Borrowings
Maturity within:
Three
Months
Three to Six
Months
Six to
Twelve
Months
After
Twelve
Months
Total
$
$
2,649 $
2,694 $
5,515 $
5,337 $
16,195
134,354
51,411
116,301
35,975
157,425
48,034
120,231
2,850
528,311
138,270
188,414 $
154,970 $
210,974 $
128,418 $
682,776
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.
61
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:
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):
As of December 31,
2014
2013
2012
Maturing Within
First Year
Second Year
Third Year
Fourth Year
Fifth Year
Thereafter
Principal Amount to Mature
As of
December 31, 2014
$
$
91,000
32,513
30,000
35,000
40,069
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.
62
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
First Year
Second Year
Third Year
Fourth Year
Fifth Year
Thereafter
Principal Amount to Mature
As of
December 31, 2014
$
$
1,933
1,933
1,932
1,932
—
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.
63
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.”
64
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:
Tier 1 capital to average assets ratio
Tier 1 capital to risk-weighted assets ratio
Total capital to risk-weighted assets ratio
As of December 31, 2014
Required to be
considered well
capitalized
Ratio
Actual
Ratio
8.15%
9.83
12.59
Required to be
considered
adequately
capitalized
Ratio
4.00-5.00%
4.00-6.00
8.00-10.00
65
Tier 1 capital to average assets ratio
Tier 1 capital to risk-weighted assets ratio
Total capital to risk-weighted assets ratio
Tier 1 capital to average assets ratio
Tier 1 capital to risk-weighted assets ratio
Total capital to risk-weighted assets ratio
As of December 31, 2013
Required to be
considered well
capitalized
Ratio
Required to be
considered
adequately
capitalized
Ratio
4.00-5.00%
4.00-6.00
8.00-10.00
As of December 31, 2012
Required to be
considered well
capitalized
Ratio
Required to be
considered
adequately
capitalized
Ratio
4.00-5.00%
4.00-6.00
8.00-10.00
Actual
Ratio
10.71%
12.64
13.83
Actual
Ratio
6.45%
8.22
10.51
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.
66
The following table contains supplemental information regarding the Company’s total contractual obligations as of December
31, 2014:
(dollars in thousands)
Deposits without a stated maturity
Time deposits
FHLB advances
Subordinated debt
Junior subordinated debentures
Operating leases
Total contractual obligations
Payments Due
Within One
Year
One to Three
Years
Three to
Five Years
After Five
Years
Total
$
2,426,738 $
— $
— $
— $
2,426,738
659,338
135,620
91,000
1,933
—
1,706
62,513
3,865
—
3,065
27,835
75,069
1,932
—
1,372
67
823
65,000
18,147
1,770
822,860
229,405
72,730
18,147
7,913
$
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.
67
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
100
(100)
(0.45)%
(0.52)
(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.
68
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
69
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
70
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:
71
(dollars in thousands, except per share data)
Tangible Common Equity
Total common stockholders’ equity
Adjustments:
Goodwill
Core deposit intangibles
Tangible common equity
Common shares outstanding(1)
Book value per common share
Tangible book value per common share
2014
2013
2012
2011
2010
As of December 31,
$
516,913 $
233,772 $
124,510 $
85,997 $
76,044
(229,457)
(12,455)
(34,704)
(3,148)
275,001 $
195,920 $
(28,742)
(3,251)
92,517
(11,222)
(2,664)
(11,222)
(3,231)
$ 72,111
$ 61,591
17,032,669
12,330,158
8,269,707
6,850,293
6,832,328
30.35 $
16.15
18.96
15.89
$15.06
11.19
$12.55
10.53
$11.13
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:
(dollars in thousands)
Tier 1 Capital
2014
2013
2012
2011
2010
As of December 31,
Total common stockholders’ equity-GAAP
$
516,913
$
233,772
$
124,510
$ 85,997
$ 76,044
Adjustments:
Unrealized loss (gain) on available-for-sale securities
Goodwill
Other intangibles
Qualifying Restricted Core Capital Elements (TRUPS)
Tier 1 capital
Total Risk-weighted Assets
On balance sheet
Off balance sheet
Total risk-weighted assets
(2,403)
(229,457)
(12,455)
17,600
290,198
3,059,172
136,241
3,195,413
$
$
$
1,130
(34,704)
(3,148)
17,600
214,650
1,637,117
60,397
1,697,514
$
$
$
$
$
$
(2,578)
(28,742)
(3,251)
17,600
107,539
(2,162)
(11,222)
(2,664)
14,100
(866)
(11,222)
(3,231)
14,100
$ 84,049
$ 74,825
1,297,795
10,860
1,308,655
$
$
971,322
6,850
978,172
$
$
834,898
8,139
843,037
Total common stockholders’ equity to risk-weighted assets ratio
Tier 1 common equity to risk-weighted assets ratio
16.18%
9.08
13.77%
12.64
9.51%
8.22
8.79%
8.59
9.02%
8.88
72
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
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.
to meet the
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.
73
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.
74
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K:
PART IV
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.
75
EXHIBIT LIST
Exhibit Number
2.1
3.1
3.2
3.3
3.4
3.5
4.1
4.2
4.3
4.4
4.5
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Description
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))
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”))
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)
Third Amended and Restated Bylaws of the Registrant (incorporated herein by reference to Exhibit
3.2 to the Form S-1 Registration Statement)
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”))
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
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)
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)
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)
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)
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.
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)
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)
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)
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)
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)
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)
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)
76
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
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)
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)
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)
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)
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)
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)
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)
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)
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”))
Form of Indemnification Agreement for directors and officers (incorporated herein by reference to
Exhibit 10.16 to the Form S-1 Registration Statement)
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)
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)
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)
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)
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)
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)
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)
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)
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))
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))
77
10.28
10.29
10.30
10.31
10.32
12.1
21.1
23.1
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
*
Filed herewith
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)
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)
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)
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)
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)
Statement regarding computation of Earnings to Fixed Charges and Preferred Share Dividends
Ratios*
Subsidiaries of Independent Bank Group, Inc.*
Consent of McGladrey LLP, Independent Registered Public Accounting Firm of Independent Bank
Group, Inc.*
Chief Executive Officer Section 302 Certification*
Chief Financial Officer Section 302 Certification*
Chief Executive Officer Section 906 Certification*
Chief Financial Officer Section 906 Certification*
XBRL Instant Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
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)
Assets
Cash and due from banks
Interest-bearing deposits in other banks
Cash and cash equivalents
Securities available for sale (amortized cost of $203,277 and 196,689, respectively)
Loans held for sale
Loans, net of allowance for loan losses of $18,552 and $13,960, respectively
Premises and equipment, net
Other real estate owned
Federal Home Loan Bank (FHLB) of Dallas stock and other restricted stock
Bank-owned life insurance (BOLI)
Deferred tax asset
Goodwill
Core deposit intangible, net
Other assets
Total assets
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
FHLB advances
Repurchase agreements
Other borrowings
Other borrowings, related parties
Junior subordinated debentures
Other liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Series A preferred stock (23,938.35 and 0 shares issued and outstanding, respectively)
Common stock (17,032,669 and 12,330,158 shares outstanding, respectively)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
See Notes to Consolidated Financial Statements
80
December 31,
2014
153,158
170,889
324,047
206,062
4,453
3,182,045
88,902
4,763
12,321
39,784
2,235
229,457
12,455
26,115
4,132,639
818,022
2,431,576
3,249,598
229,405
4,012
69,410
3,320
18,147
17,896
3,591,788
23,938
170
476,609
37,731
2,403
540,851
4,132,639
$
$
$
$
$
$
$
$
2013
25,874
67,180
93,054
194,038
3,383
1,709,200
72,735
3,322
9,494
21,272
4,834
34,704
3,148
14,800
2,163,984
302,756
1,407,563
1,710,319
187,484
—
4,460
3,270
18,147
6,532
1,930,212
—
123
222,116
12,663
(1,130)
233,772
2,163,984
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)
Interest income:
Interest and fees on loans
Interest on taxable securities
Interest on nontaxable securities
Interest on federal funds sold and other
Total interest income
Interest expense:
Interest on deposits
Interest on FHLB advances
Interest on repurchase agreements, notes payable and other borrowings
Interest on junior subordinated debentures
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service charges on deposit accounts
Mortgage fee income
Gain on sale of loans
Gain on sale of branch
Gain on sale of other real estate
Gain (loss) on sale of securities available for sale
Loss on sale of premises and equipment
Increase in cash surrender value of BOLI
Other
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Occupancy
Data processing
FDIC assessment
Advertising and public relations
Communications
Net other real estate owned expenses (including taxes)
Operations of IBG Adriatica, net
Other real estate impairment
Core deposit intangible amortization
Professional fees
Acquisition expense, including legal
Other
Total noninterest expense
Income before taxes
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
Pro Forma:
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
See Notes to Consolidated Financial Statements
81
Years ended December 31,
2014
2013
2012
$
135,461
$
84,350
$
2,803
1,429
439
140,132
9,537
3,678
2,230
542
15,987
124,145
5,359
118,786
6,009
3,953
1,078
—
71
362
(22)
972
1,201
13,624
52,337
13,250
2,080
1,797
835
1,787
232
23
22
1,281
2,567
3,626
8,675
88,512
43,898
14,920
28,978
1.86
1.85
n/a
n/a
n/a
n/a
$
$
$
$
$
$
$
$
$
1,516
1,024
324
87,214
6,974
3,303
1,461
543
12,281
74,933
3,822
71,111
4,841
3,743
—
—
1,507
—
(18)
348
600
11,021
31,836
9,042
1,347
500
684
1,385
485
806
549
703
1,298
1,956
7,080
57,671
24,461
4,661
19,800
1.78
1.77
8,287
16,174
1.45
1.44
$
$
$
$
$
$
69,494
1,288
828
280
71,890
8,351
2,383
2,072
531
13,337
58,553
3,184
55,369
3,386
4,116
—
38
1,135
(3)
(343)
327
512
9,168
26,569
7,317
1,198
800
626
1,334
220
832
94
656
1,104
1,401
5,009
47,160
17,377
—
17,377
2.23
2.23
5,230
12,147
1.56
1.56
Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2014, 2013 and 2012
(Dollars in thousands)
Net income
Other comprehensive income (loss) before tax:
Change in net unrealized gains (losses) on available for sale securities
during the year
Reclassification adjustment for gain (loss) on sale of securities
available for sale included in net income
Other comprehensive income (loss) before tax
Income tax expense (benefit)
Other comprehensive income (loss), net of tax
Comprehensive income
See Notes to Consolidated Financial Statements
Years ended December 31,
2014
2013
2012
$
28,978
$
19,800
$
17,377
5,798
(5,229)
(362)
5,436
1,903
3,533
$
32,511
$
—
(5,229)
(1,521)
(3,708)
16,092
413
3
416
—
416
$
17,793
82
Additional
Paid in
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
$
59,196
$
24,594
$
(24)
$
2,162
$
85,997
17,377
—
—
—
—
—
(8,681)
33,290
19,800
—
—
—
(33,624)
—
—
—
—
(6,803)
12,663
28,978
—
—
—
—
—
—
—
(169)
(3,741)
—
—
—
—
—
(208)
—
(232)
—
—
232
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
416
—
—
—
—
—
2,578
—
(3,708)
—
—
—
—
—
—
—
—
17,377
416
25,265
3,701
643
(208)
(8,681)
124,510
19,800
(3,708)
—
86,571
—
11,861
—
72
1,469
(6,803)
(1,130)
233,772
—
3,533
—
—
—
—
—
—
—
—
28,978
3,533
23,938
250,217
—
—
1,409
2,914
(169)
(3,741)
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
Balance, December 31, 2011
$
Net income
Other comprehensive income
Stock issued
Stock issued for acquisition of bank
Stock based compensation expense
Treasury stock purchased (6,631 shares)
Dividends ($1.12 per share)
Balance, December 31, 2012
Net income
Other comprehensive loss, net of tax
Treasury stock retired
Common stock issued, net of offering costs
Reclassification adjustment for change in
taxable status
Stock issued for acquisition of bank
Restricted stock granted
Excess tax benefit on restricted stock
vested
Stock based compensation expense
Dividends ($0.77 per share)
Balance, December 31, 2013
Net income
Other comprehensive income, net of tax
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Series A preferred stock issued
23,938
Stock issued for acquisition of banks, net
of offering costs of $566
Restricted stock forfeited
Restricted stock granted
Excess tax benefit on restricted stock
vested
Stock based compensation expense
Preferred stock dividends
Dividends ($0.24 per share)
Balance, December 31, 2014
Common Stock
$.01 Par Value
100 million shares
authorized
Shares
Amount
6,852,309
$
—
—
1,243,824
182,221
—
—
—
8,278,354
—
—
(8,647)
3,680,000
—
247,731
132,720
—
—
—
69
—
—
12
2
—
—
—
83
—
—
—
37
—
2
1
—
—
—
—
—
25,253
3,699
643
—
—
88,791
—
—
(232)
86,534
33,624
11,859
(1)
72
1,469
—
12,330,158
123
222,116
—
—
—
4,489,336
(394)
213,569
—
—
—
—
—
—
—
45
—
2
—
—
—
—
—
—
—
250,172
—
(2)
1,409
2,914
—
—
—
—
—
—
—
—
—
See Notes to Consolidated Financial Statements
83
$
23,938
17,032,669
$
170
$
476,609
$
37,731
$
— $
2,403
$
540,851
Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2014, 2013 and 2012
(Dollars in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
28,978
$
19,800
$
17,377
Years ended December 31,
2013
2012
2014
Depreciation expense
Amortization of core deposit intangibles
Amortization (accretion) of premium (discount) on securities, net
Stock grants amortized
FHLB stock dividends
Net loss (gain) on sale of premises and equipment
Gain on sale of loans
Gain on sale of branch
(Gain) loss on sale of securities available for sale
Gain recognized on other real estate transactions
Impairment of other real estate
Deferred tax expense (benefit)
Provision for loan losses
Increase in cash surrender value of life insurance
Mortgage loans originated for sale
Proceeds from sale of mortgage loans
Net change in other assets
Net change in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from maturities and paydowns of securities available for sale
Proceeds from sale of securities available for sale
Purchases of securities available for sale
Proceeds from maturities of certificates held in other banks
Purchase of bank owned life insurance contracts
Net redemptions (purchases) of FHLB stock
Proceeds from sale of SBA loans
Net loans originated
Additions to premises and equipment
Proceeds from sale of premises and equipment
Proceeds from sale of other real estate owned
Capitalized additions to other real estate
Cash received from acquired banks
Cash paid in connection with acquisitions
Net cash transferred in branch sale
Net cash used in investing activities
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts
Net increase (decrease) in time deposits
Net change in FHLB advances
Net change in repurchase agreements
Repayments of notes payable and other borrowings
Proceeds from other borrowings
Offering costs paid in connection with acquired banks
Proceeds from sale of common stock
Treasury stock purchased
Dividends paid
Net cash provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
See Notes to Consolidated Financial Statements
84
5,285
1,281
2,002
2,914
(47)
22
(1,078)
—
(362)
(71)
22
71
5,359
(972)
(148,910)
147,840
(4,769)
3,047
40,612
1,483,062
19,260
(1,430,794)
—
—
4,033
12,147
(439,366)
(4,854)
18
3,415
(28)
286,596
(60,812)
—
(127,323)
230,070
79,850
(53,079)
279
—
65,000
(566)
—
—
(3,850)
317,704
230,993
93,054
324,047
$
4,322
703
145
1,469
(27)
18
—
—
—
(1,507)
549
(2,083)
3,822
(348)
(161,160)
166,939
(2,582)
701
30,761
282,102
4,067
(309,853)
7,720
(10,000)
(146)
—
(285,181)
(6,795)
442
17,081
(93)
22,792
(18,412)
—
(296,276)
145,085
63,330
(3,117)
—
(28,787)
—
—
86,571
—
(6,803)
256,279
(9,236)
102,290
93,054
$
3,524
656
(1)
643
(17)
343
—
(38)
3
(1,135)
94
—
3,184
(327)
(177,063)
170,892
95
(421)
17,809
245,581
2,078
(256,295)
9,358
—
(1,584)
—
(202,371)
(14,063)
5,095
8,880
(592)
46,230
(46,600)
(18,563)
(222,846)
183,919
(20,039)
69,810
—
(10,958)
11,680
—
25,150
(208)
(8,681)
250,673
45,636
56,654
102,290
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.
86
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
87
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.
88
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.
Basic earnings per share:
Net income
Less: Preferred stock dividends
Net income after preferred stock dividends
Less:
Undistributed earnings allocated to participating securities
Dividends paid on participating securities
Net income available to common shareholders
Weighted-average basic shares outstanding
Basic earnings per share
Diluted earnings per share:
Net income available to common shareholders
Total weighted-average basic shares outstanding
Add dilutive stock warrants
Total weighted-average diluted shares outstanding
Diluted earnings per share
Pro forma earnings per share:
Pro forma net income
Less undistributed earnings allocated to participating securities
Less dividends paid on participating securities
Pro forma net income available to common shareholders after tax
Pro forma basic earnings per share
Pro forma diluted earnings per share
Anti-dilutive participating securities
Years ended December 31,
2014
2013
2012
$
$
$
$
$
28,978
(169)
28,809
406
60
28,343
15,208,544
1.86
28,343
15,208,544
98,454
15,306,998
1.85
n/a
n/a
n/a
n/a
n/a
n/a
$
19,800
$
17,377
—
19,800
259
135
19,406
10,921,777
1.78
19,406
10,921,777
68,468
10,990,245
1.77
16,174
187
135
15,852
1.45
1.44
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
—
17,377
168
169
17,040
7,626,205
2.23
17,040
7,626,205
23,161
7,649,366
2.23
12,147
66
169
11,912
1.56
1.56
96,840
159,485
105,238
89
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,
2013
2012
2014
Cash transactions:
Interest expense paid
Income taxes paid
Noncash transactions:
Accrued preferred stock dividends
Transfers of loans to other real estate owned
Loans to facilitate the sale of other real estate owned
Writeoff of debt origination costs related to warrants
Security purchased, not yet settled
Excess tax benefit on restricted stock vested
Common stock issued for noncompete agreement
Transfer of bank premises to other real estate
$
$
$
$
$
$
$
$
$
$
14,016
7,730
$
$
12,095
5,910
$
$
13,329
—
$
60
$
1,203
$
48
— $
$
327
$
1,409
— $
$
2,400
— $
$
2,919
$
113
223
$
— $
72
$
— $
— $
—
885
3,473
—
—
—
115
379
90
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
$
— $
— $
Securities available for sale
Restricted stock
Loans
Premises and equipment
Other real estate owned
Goodwill
Core deposit intangibles
Bank owned life insurance
Other assets
Total assets
Noncash liabilities assumed:
Deposits
Repurchase agreements
FHLB advances
Junior subordinated debt
Other liabilities
Total liabilities
Cash and cash equivalents acquired from acquisitions
Cash paid to shareholders of acquired banks
Series A preferred stock exchanged in connection with acquired banks
Fair value of common stock issued to shareholders of acquired bank
Noncash assets transferred:
Loans
Premises and equipment
Goodwill
Core deposit intangibles
Other assets
Total assets
Noncash liabilities transferred:
Deposits
Other liabilities
Total liabilities
Cash and cash equivalents transferred in branch sale
Deposit premium received
Cash paid to buyer, net of deposit premium
91
$
$
$
$
$
$
$
$
$
$
$
79,429
6,813
1,051,390
19,038
1,224
194,179
10,606
17,540
3,650
62,373
1,156
72,611
141
—
5,962
600
—
2,160
17,078
10,314
1,417
180,448
5,717
1,545
17,774
1,362
—
1,669
$ 1,383,869
$
145,003
$
237,324
$ 1,228,854
$
111,164
$
216,444
3,733
95,000
—
7,345
$ 1,334,932
286,596
60,812
23,938
250,783
—
26,000
—
358
137,522
22,792
18,412
$
$
$
—
12,500
3,609
700
233,253
46,230
46,600
— $
—
11,861
$
3,701
$
$
$
$
$
— $
— $
—
—
—
—
—
—
—
—
807
280
254
119
13
— $
— $
1,473
— $
—
— $
— $
— $
— $
— $
20,068
—
6
— $
20,074
— $
— $
133
414
— $
18,430
In addition, the following measurement-period adjustments were made during the year ended December 31, 2014 relating the
2013 acquisition of Collin Bank:
Noncash assets acquired:
Loans
Goodwill
Core deposit intangibles
Other assets
Total assets
Noncash liabilities assumed:
Deposits
Other liabilities
Total liabilities
Year Ended December 31,
2014
2013
2012
$
$
$
$
(328) $
574
(18)
297
525
505
20
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
Government agency securities
Obligations of state and municipal subdivisions
Corporate bonds
Residential pass-through securities guaranteed by FNMA,
GNMA, FHLMC and FHR
December 31, 2013:
U.S. treasuries
Government agency securities
Obligations of state and municipal subdivisions
Corporate bonds
Residential pass-through securities guaranteed by FNMA,
GNMA, FHLMC, FHLB, FFCB and FHR
$
999
$
7
$
— $
$
$
58,174
75,599
1,068
67,437
203,277
3,498
95,407
37,861
2,079
57,844
$
$
199
1,837
13
1,616
3,672
15
84
541
—
67
$
$
$
196,689
$
707
$
(350)
(537)
—
1,006
58,023
76,899
1,081
—
(887) $
69,053
206,062
— $
(1,076)
(1,787)
(27)
3,513
94,415
36,615
2,052
(468)
(3,358) $
57,443
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.
92
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:
Proceeds from sale
Gross gains
Gross losses
Years ended December 31,
2014
2013
2012
$
$
$
19,260
362
$
$
— $
4,067
$
2,078
— $
— $
—
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.
Due in one year or less
Due from one year to five years
Due from five to ten years
Thereafter
Residential pass-through securities guaranteed by FNMA, GNMA, FHLMC and FHR
December 31, 2014
Securities Available for Sale
Amortized
Cost
Fair
Value
$
3,876
$
50,203
40,104
41,657
135,840
67,437
3,880
49,911
40,368
42,850
137,009
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:
Description of Securities
Securities Available for Sale
December 31, 2014
Government agency securities
Obligations of state and
municipal subdivisions
December 31, 2013
Government agency securities
Obligations of state and
municipal subdivisions
Corporate bonds
Residential pass-through
securities guaranteed by
FNMA, GNMA, FHLMC,
FHLB, FFCB and FHR
Less Than 12 Months
Greater Than 12 Months
Total
Number
of
Securities
Estimated
Fair Value
Unrealized
Losses
Number of
Securities
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
6
44
50
46
21
2
14
83
6,396
16,636
$ 23,032
$
(24)
(197)
(221)
14
13
27
22,671
(326)
29,067
8,541
$ 31,212
$
(340)
25,177
(666) $ 54,244
$
(350)
(537)
(887)
$ 74,331
$
(1,076)
— $
— $
— $ 74,331
$
(1,076)
11,888
2,052
(1,139)
(27)
49,126
$ 137,397
$
(468)
(2,710)
6
—
—
6
4,047
—
(648)
—
15,935
2,052
(1,787)
(27)
—
4,047
$
$
—
49,126
(648) $ 141,444
$
(468)
(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.
93
Note 6. Loans, Net and Allowance for Loan Losses
Loans, net at December 31, 2014 and 2013, consisted of the following:
Commercial
Real estate:
Commercial
Commercial construction, land and land development
Residential
Single family interim construction
Agricultural
Consumer
Other
Deferred loan fees
Allowance for loan losses
December 31,
2014
2013
$
672,052
$
241,178
1,450,434
334,964
514,025
138,278
38,822
52,267
242
3,201,084
(487)
(18,552)
3,182,045
$
843,436
130,320
338,654
83,144
40,558
45,762
108
1,723,160
—
(13,960)
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
94
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
Real Estate,
Land and
Land
Development
Residential
Real
Estate
Commercial
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
Charge-offs
Recoveries
2,999
(368)
19
2,530
(371)
79
(211)
(32)
8
81
—
11
8
—
—
(104)
(143)
30
—
—
—
56
—
—
5,359
(914)
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
Charge-offs
Recoveries
616
(612)
20
3,554
(634)
28
(405)
(130)
10
54
—
—
79
—
—
107
(64)
42
—
—
—
(183)
—
—
3,822
(1,440)
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 $
Provision for loan losses
Charge-offs
Recoveries
1,261
(169)
26
289
(484)
68
1,176
(178)
3
206
—
—
(50)
—
—
75
(86)
54
—
—
—
227
—
—
9,060
3,184
(917)
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
Real Estate,
Land and
Land
Development
Residential
Real Estate
Commercial
Single-
Family
Interim
Construction Agricultural
Consumer
Other
Unallocated
Total
December 31, 2014
Allowance for losses:
Individually evaluated for
impairment
Collectively evaluated for
impairment
$
339 $
124 $
8 $
— $
— $
4 $
— $
— $
475
Loans acquired with deteriorated
credit quality
—
—
—
4,712
9,986
2,197
669
—
246
—
142
—
—
—
125
18,077
—
—
Ending balance
$
5,051 $
10,110 $
2,205 $
669 $
246 $
146 $
— $
125 $
18,552
Loans:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Acquired with deteriorated credit
quality
$
1,479 $
6,768 $
3,387 $
— $
— $
75 $
— $
— $
11,709
666,830
1,724,514
508,833
138,278
38,822
52,159
3,743
54,116
1,805
—
—
33
242
—
— 3,129,678
—
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
Collectively evaluated for
impairment
$
313 $
504 $
14 $
— $
— $
24 $
— $
— $
855
Loans acquired with deteriorated
credit quality
—
—
—
2,088
7,368
2,426
577
—
238
—
339
—
—
—
69
—
13,105
—
Ending balance
$
2,401 $
7,872 $
2,440 $
577 $
238 $
363 $
— $
69 $
13,960
Loans:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Acquired with deteriorated credit
quality
$
501 $
8,013 $
3,182 $
170 $
— $
68 $
— $
— $
11,934
234,103
959,254
334,770
82,974
40,558
45,682
6,574
6,489
702
—
—
12
108
—
— 1,697,449
—
13,777
Ending balance
$ 241,178 $
973,756 $
338,654 $
83,144 $
40,558 $
45,762 $
108 $
— $ 1,723,160
97
Nonperforming loans by loan class at December 31, 2014 and 2013, are summarized as follows:
Commercial
Real Estate,
Land and Land
Development
Residential
Real Estate
Single-Family
Interim
Construction
Commercial
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
Troubled debt
restructurings (not
included in nonaccrual
or loans past due
and still accruing)
December 31, 2013:
Nonaccrual loans
Loans past due 90 days
and still accruing
Troubled debt
restructurings (not
included in nonaccrual
or loans past due and
still accruing)
157
288
—
—
—
6
—
451
30
1,636
357
—
107
464
$
$
$
$
$
4,668
5,026
253
—
$
$
1,254
3,371
1,852
—
$
$
—
—
— $
— $
8
81
—
5,960
$ — $ 10,114
170
$
— $
43
$ — $ 2,675
—
—
—
—
—
5,090
1,288
—
—
$
5,343
$
3,140
$
170
$
— $
1
44
—
6,486
$ — $ 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:
December 31, 2014:
Recorded investment in impaired loans:
Impaired loans with an
allowance for loan losses
Impaired loans with no
allowance for loan losses
Total
Unpaid principal balance of impaired
loans
Allowance for loan losses on impaired
loans
December 31, 2013:
Recorded investment in impaired loans:
Impaired loans with an
allowance for loan losses
Impaired loans with no
allowance for loan losses
Total
Unpaid principal balance of impaired
loans
Allowance for loan losses on impaired
loans
For the year ended December 31, 2014:
Average recorded investment in impaired
loans
Interest income recognized on impaired
loans
For the year ended December 31, 2013:
Average recorded investment in impaired
loans
Interest income recognized on impaired
loans
For the year ended December 31, 2012:
Average recorded investment in impaired
loans
Interest income recognized on impaired
loans
Commercial
Real Estate,
Land and Land
Development
Residential
Real Estate
Single-
Family
Interim
Construction
Commercial
Agricultural
Consumer
Other
Total
$
1,475
$
2,056
$
13
$
— $
— $
7
$ — $ 3,551
4
1,479
1,482
339
$
$
$
4,712
6,768
7,274
124
$
$
$
3,374
3,387
3,605
8
$
$
$
—
—
— $
— $
68
75
—
8,158
$ — $11,709
— $
— $
93
$ — $12,454
— $
— $
4
$ — $
475
401
$
3,866
$
1,135
$
— $
— $
40
$ — $ 5,442
100
501
501
313
502
64
649
28
777
27
$
$
$
$
$
$
$
$
$
4,147
8,013
8,408
504
7,484
400
8,669
517
12,291
483
$
$
$
$
$
$
$
$
$
2,047
3,182
3,216
14
3,253
83
3,384
148
3,976
187
$
$
$
$
$
$
$
$
$
170
170
170
$
$
—
— $
28
68
—
6,492
$ — $11,934
— $
75
$ — $12,370
— $
— $
24
$ — $
855
34
$
— $
69
$ — $11,342
— $
— $
3
$ — $
550
34
6
$
$
— $
80
$ — $12,816
— $
6
$ — $
705
46
$
— $
99
$ — $17,189
— $
— $
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
Real Estate,
Land and Land
Development
Residential
Real Estate
Single-Family
Interim
Construction
Commercial
Agricultural
Consumer
Other
Total
Troubled debt restructurings
during the year ended December
31, 2014
Number of contracts
Pre-restructuring
outstanding recorded
investment
Post-restructuring
outstanding recorded
investment
Troubled debt restructurings
during the year ended December
31, 2013
Number of contracts
Pre-restructuring
outstanding recorded
investment
Post-restructuring
outstanding recorded
investment
$
$
$
$
—
2
—
—
—
1
—
3
— $
1,108
$
— $
— $
— $
9
$ — $ 1,117
— $
1,108
$
— $
— $
— $
9
$ — $ 1,117
—
3
—
—
—
—
—
3
— $
2,015
$
— $
— $
— $
— $ — $ 2,015
— $
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:
December 31, 2014
Commercial
Commercial real estate, land and land
development
Residential real estate
Single-family interim construction
Agricultural
Consumer
Other
December 31, 2013
Commercial
Commercial real estate, land and land
development
Residential real estate
Single-family interim construction
Agricultural
Consumer
Other
Loans
30-89 Days
Past Due
Loans
90 or More
Past Due
Total Past
Due Loans
Current
Loans
Total
Loans
$
6,006
$
157
$
6,163
$
665,889
$
672,052
$
$
973
1,258
410
—
1,899
10,546
257
2,076
1,322
—
3
97
—
$
$
288
554
—
—
8
—
1,007
357
73
1,603
170
—
1
$
$
1,261
1,812
410
—
1,907
—
1,784,137
1,785,398
512,213
137,868
38,822
50,360
242
514,025
138,278
38,822
52,267
242
11,553
$ 3,189,531
$ 3,201,084
614
$
240,564
$
241,178
2,149
2,925
170
3
98
—
971,607
335,729
82,974
40,555
45,664
108
973,756
338,654
83,144
40,558
45,762
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.
101
A summary of loans by credit quality indicator by class as of December 31, 2014 and 2013, is as follows:
December 31, 2014
Commercial
Commercial real estate, construction, land
and land development
Residential real estate
Single-family interim construction
Agricultural
Consumer
Other
December 31, 2013
Commercial
Commercial real estate, construction, land
and land development
Residential real estate
Single-family interim construction
Agricultural
Consumer
Other
Pass
Pass/
Watch
OAEM Substandard
Doubtful
Total
$
647,894
$16,919
$
977
$
6,262
$
— $
672,052
8,667
2,188
6,008
325
11,190
5,592
1,759,533
505,920
138,278
38,422
52,055
242
—
57
39
—
—
—
50
—
$ 3,142,344
$27,870
$ 7,360
$
231,080
$ 7,199
$ 1,311
$
$
952,863
10,697
328,918
5,379
2,982
454
83,144
40,328
45,556
108
—
210
82
—
—
—
39
—
— 1,785,398
—
—
—
—
—
514,025
138,278
38,822
52,267
242
$
$
— $ 3,201,084
135
$
241,178
—
—
—
—
—
—
973,756
338,654
83,144
40,558
45,762
108
—
343
123
—
23,510
1,453
7,214
3,903
—
20
85
—
$ 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:
Outstanding balance
Nonaccretable difference
Accretable yield
Carrying amount
Acquisition Date
October 1, 2014 April 15, 2014
January 1, 2014 November 30, 2013
Houston City
Bancshares *
BOH
Holdings
$
$
12,021
(1,240)
(561)
10,220
$
$
53,316
(3,717)
(3,511)
46,088
Live Oak
Financial Corp.
3,583
$
(519)
(182)
2,882
$
$
$
Collin Bank
11,897
(1,810)
(408)
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
Balance at January 1
Additions
Accretion
Net transfers to/from nonaccretable
Balance at December 31
2014
408
4,254
(2,116)
—
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:
Outstanding balance
Carrying amount
December 31,
2014
2013
$
69,371
$
59,697
15,768
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:
Land
Building
Furniture, fixtures and equipment
Aircraft
Leasehold and tenant improvements
Construction in progress
Less accumulated depreciation
December 31,
2014
2013
$
$
19,421
69,243
21,356
5,298
1,416
25
116,759
(27,857)
88,902
$
$
14,548
58,853
16,243
5,298
641
36
95,619
(22,884)
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
Second year
Third year
Fourth year
Fifth year
$
$
196
71
31
—
—
298
103
Note 8. Other Real Estate Owned
Other real estate owned at December 31, 2014 and 2013 consisted of the following:
Construction, land and land development
Commercial real estate
Note 9. Goodwill and Core Deposit Intangible, Net
December 31,
2014
2013
$
$
1,761
3,002
4,763
$
$
3,053
269
3,322
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:
Core deposit intangible
Less accumulated amortization
December 31,
2014
2013
$
$
17,562
(5,107)
12,455
$
$
6,974
(3,826)
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
Second year
Third year
Fourth year
Fifth year
Thereafter
$
$
1,464
1,443
1,443
1,421
1,376
5,308
12,455
104
Note 10. Deposits
Deposits at December 31, 2014 and 2013 consisted of the following:
Noninterest-bearing demand accounts
Interest-bearing checking accounts
Savings accounts
Limited access money market accounts
Certificates of deposit and individual retirement accounts (IRA),
less than $250,000
Certificates of deposit and individual retirement accounts (IRA),
$250,000 and greater
December 31,
2014
2013
Amount
Percent
Amount
Percent
$
818,022
1,213,937
142,989
251,790
25.2% $
37.4
4.4
7.7
302,756
796,225
122,257
62,985
17.7%
46.6
7.1
3.7
509,072
15.7
264,239
15.4
313,788
$ 3,249,598
9.6
161,857
100.0% $ 1,710,319
9.5
100.0%
At December 31, 2014, the scheduled maturities of certificates of deposit, including IRAs, were as follows:
First year
Second year
Third year
Fourth year
Fifth year
Thereafter
$
$
659,338
111,483
24,137
16,436
11,399
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
Second year
Third year
Fourth year
Fifth year
Thereafter
$
$
91,000
32,513
30,000
35,000
40,069
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
105
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:
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.
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.
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.
December 31,
2014
2013
65,000
—
5,000
5,000
2,730
$
72,730
$
2,730
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
Second year
Third year
Fourth year
Fifth year
Thereafter
$
$
1,933
1,933
1,932
1,932
—
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.
106
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.
107
Note 14. Income Taxes
Income tax expense for the years ended December 31, 2014 and 2013 is as follows:
Current income tax expense
Deferred income tax expense (benefit)
Income tax expense, as reported
Years Ended December 31,
2014
2013
$
$
14,849
71
14,920
$
$
6,744
(2,083)
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:
Income tax expense computed at the statutory rate
Initial recording of deferred tax asset
Tax-exempt interest income from municipal securities
Tax-exempt loan income
Bank owned life insurance income
Non-deductible acquisition expenses
Other
Years Ended December 31,
2014
2013
15,364
$
—
(500)
(174)
(340)
486
84
14,920
$
6,571
(1,760)
(259)
(86)
(93)
279
9
4,661
$
$
108
Components of deferred tax assets and liabilities are as follows:
Deferred tax assets:
Allowance for loan losses
NOL carryforwards from acquisitions
Net unrealized loss on available for sale securities
Acquired loan fair market value adjustments
Restricted stock
Reserve for bonuses
Deferred loan fees
Acquisition costs
Securities
Start up costs
Other real estate owned
Unearned rent income
Nonaccrual loans
Other
December 31,
2014
2013
$
6,420
$
793
—
4,310
1,121
138
170
41
—
344
284
48
32
147
4,776
1,352
928
1,159
1,044
—
—
140
305
329
310
55
69
76
Deferred tax liabilities:
Premises and equipment
Net unrealized gain on available for sale securities
Core deposit intangibles
Securities
FHLB stock
Other
Net deferred tax asset
$
13,848
10,543
(5,776)
(975)
(4,348)
(332)
(52)
(130)
(11,613)
2,235
$
(4,539)
—
(1,102)
—
(68)
—
(5,709)
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.
109
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:
Commitments to extend credit
Standby letters of credit
December 31,
2014
2013
$
$
565,881
8,571
574,452
$
$
365,575
2,120
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
Second year
Third year
Fourth year
Fifth year
Thereafter
$
$
1,706
1731
1334
774
598
1770
7,913
110
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
New loans
Repayments
Changes in affiliated persons
Balance at end of year
See also Note 12 for related party borrowings.
Note 17. Employee Benefit Plans
$
$
40,756
7,010
(16,406)
4,848
36,208
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.
111
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
Government agency securities
Obligations of state and municipal subdivisions
Corporate bonds
Residential pass-through securities guaranteed by
FNMA, GNMA, FHLMC and FHR
$
1,006
$
— $
1,006
$
58,023
76,899
1,081
69,053
—
—
—
—
58,023
76,899
1,081
69,053
December 31, 2013
Measured on a recurring basis:
Assets:
Investment securities available for sale:
U.S. treasuries
Government agency securities
Obligations of state and municipal subdivisions
Corporate bonds
Residential pass-through securities guaranteed by
FNMA, GNMA, FHLMC, FHLB, FFCB and FHR
$
3,513
$
— $
3,513
$
94,415
36,615
2,052
57,443
—
—
—
—
94,415
36,615
2,052
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.
112
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
Significant
Other
Observable
Inputs
(Level 2)
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Unobservable
Inputs (Level 3)
Assets/
Liabilities
Measured
at Fair Value
December 31, 2014
Measured on a nonrecurring basis:
Assets:
Impaired loans
Other real estate
December 31, 2013
Measured on a nonrecurring basis:
Assets:
Impaired loans
Other real estate
$
4,943
$
138
— $
—
— $
—
4,943
$
138
$
1,514
$
2,449
— $
—
— $
—
1,514
$
2,449
Period Ended
Total Losses
188
22
497
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.
113
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.
114
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
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Amount
Estimated
Fair Value
$
324,047
$
324,047
$
324,047
$
— $
206,062
4,453
206,062
4,453
3,182,045
3,203,337
12,321
9,655
12,321
9,655
3,249,598
3,252,114
2,919
229,405
4,012
72,730
18,147
—
—
2,919
228,607
4,012
75,164
18,134
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
206,062
4,453
3,200,261
12,321
9,655
3,252,114
2,919
228,607
4,012
75,164
18,134
—
—
$
93,054
$
93,054
$
93,054
$
— $
194,038
3,383
194,038
3,383
1,709,200
1,714,815
9,494
4,713
9,494
4,713
1,710,319
1,712,654
948
187,484
7,730
18,147
—
—
948
189,092
8,061
18,099
—
—
—
—
—
—
—
—
—
—
—
—
—
—
194,038
3,383
1,710,228
9,494
4,713
1,712,654
948
189,092
8,061
18,099
—
—
—
—
—
3,076
—
—
—
—
—
—
—
—
—
—
—
—
—
4,587
—
—
—
—
—
—
—
—
—
December 31, 2014
Financial assets:
Cash and cash equivalents
Securities available for sale
Loans held for sale
Loans, net
FHLB of Dallas stock and other restricted stock
Accrued interest receivable
Financial liabilities:
Deposits
Accrued interest payable
FHLB advances
Repurchase agreements
Other borrowings
Junior subordinated debentures
Off-balance sheet assets (liabilities):
Commitments to extend credit
Standby letters of credit
December 31, 2013
Financial assets:
Cash and cash equivalents
Securities available for sale
Loans held for sale
Loans, net
FHLB of Dallas stock and other restricted stock
Accrued interest receivable
Financial liabilities:
Deposits
Accrued interest payable
FHLB advances
Other borrowings
Junior subordinated debentures
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:
Nonvested shares, December 31, 2013
Granted during the period
Vested during the period
Forfeited during the period
Nonvested shares, December 31, 2014
Nonvested shares, December 31, 2012
Granted during the period
Vested during the period
Nonvested shares, December 31, 2013
Number of
Shares
Weighted Average
Grant Date
Fair Value
306,524
201,570
(133,014)
(1,194)
373,886
208,608
125,040
(27,124)
306,524
$
$
$
$
22.75
56.07
20.27
30.37
41.58
17.07
29.53
14.13
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
Second year
Third year
Fourth year
Fifth year
Total nonvested shares
84,608
92,138
106,876
56,364
33,900
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
Amount
Ratio
Minimum for Capital
Adequacy Purposes
Ratio
Amount
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
December 31, 2014
Total capital to risk weighted assets:
Consolidated
Bank
$
402,326
397,512
12.59% $
12.46
255,633
255,219
8.00%
8.00
$
N/A
319,024
N/A
10.00%
Tier I capital to risk weighted assets:
Consolidated
Bank
Tier I capital to average assets:
Consolidated
Bank
December 31, 2013
Total capital to risk weighted assets:
314,136
378,960
314,136
378,960
9.83
11.88
8.15
9.93
127,817
127,609
154,270
152,598
4.00
4.00
4.00
4.00
N/A
191,414
N/A
190,747
N/A
6.00%
N/A
5.00%
Consolidated
Bank
$
234,794
212,656
13.83% $
12.54
135,801
135,648
8.00%
8.00
$
N/A
169,560
N/A
10.00%
Tier I capital to risk weighted assets:
Consolidated
Bank
Tier I capital to average assets:
Consolidated
Bank
214,650
198,696
214,650
198,696
67,901
67,824
80,204
79,710
4.00
4.00
4.00
4.00
N/A
101,736
N/A
99,637
N/A
6.00%
N/A
5.00%
12.64
11.72
10.71
9.97
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.
118
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
Securities available for sale
Loans
Premises and equipment
Goodwill
Core deposit intangible
Other assets
Total assets
Liabilities of acquired bank:
Deposits
Other liabilities
Total liabilities
Common stock issued in the HCB transaction
Cash paid for the HCB transaction
$
$
$
$
$
$
118,825
3,548
194,870
9,227
21,201
2,459
617
350,747
303,092
585
303,677
30,266
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:
Assets of acquired bank:
Cash and cash equivalents
Securities available for sale
Loans
Premises and equipment
Other real estate
Goodwill
Core deposit intangible
Other assets
Total assets acquired
Liabilities of acquired bank:
Deposits
FHLB Advances
Other liabilities
Total liabilities assumed
Common stock issued
Series A Preferred Stock Exchanged in connection with acquired bank
Cash paid
Initially recorded
at Acquisition Date
Measurement
Period
Adjustments
Adjusted Values
$
135,525
$
— $
59,141
786,761
7,211
1,191
164,766
7,265
27,394
1,189,254
$
820,752
$
95,000
6,737
922,489
208,817
23,938
34,010
$
$
$
$
$
$
$
$
$
$
—
(1,545)
—
33
1,166
—
(196)
(542) $
— $
—
(542)
(542) $
— $
— $
— $
135,525
59,141
785,216
7,211
1,224
165,932
7,265
27,198
1,188,712
820,752
95,000
6,195
921,947
208,817
23,938
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.
Assets of acquired bank:
Cash and cash equivalents
Securities available for sale
Loans
Premises and equipment
Goodwill
Core deposit intangible
Other assets
Total assets
Liabilities of acquired bank:
Deposits
Repurchase agreements
Other liabilities
Total liabilities
Common stock issued in the Live Oak transaction
Cash paid in the Live Oak transaction
Initially recorded
at Acquisition Date
Measurement
Period
Adjustments
Adjusted Values
$
32,246
$
— $
16,740
70,627
2,675
7,619
775
256
130,938
$
104,960
$
3,733
545
109,238
11,700
10,000
$
$
$
$
$
$
$
$
—
677
(75)
(573)
107
(66)
70
50
—
20
70
$
$
$
— $
— $
32,246
16,740
71,304
2,600
7,046
882
190
131,008
105,010
3,733
565
109,308
11,700
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.
Assets of acquired bank:
Cash and cash equivalents
Securities available for sale
Loans
Premises and equipment
Investment in FHLB stock
Goodwill
Core deposit intangible
Deferred tax asset
Other assets
Total assets
Liabilities of acquired bank:
Deposits
FHLB advances
Other liabilities
Total liabilities
Common stock issued in the Collin Bank transaction
Cash paid in the Collin Bank transaction
As Reported at
December 31, 2013
Measurement
Period Adjustments
Final Recorded
Value
$
$
$
$
$
$
22,792 $
62,373
72,611
141
1,156
5,962
600
1,385
775
167,795 $
111,164 $
26,000
358
137,522 $
11,861 $
18,412 $
— $
—
(328)
—
—
574
(18)
287
10
525 $
505 $
—
20
525 $
— $
— $
22,792
62,373
72,283
141
1,156
6,536
582
1,672
785
168,320
111,669
26,000
378
138,047
11,861
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
Assets
Cash and cash equivalents
Investment in subsidiaries
Investment in Trusts
Other assets
Total assets
Liabilities and Stockholders' Equity
Other borrowings
Junior subordinated debentures
Other liabilities
Total liabilities
Stockholders' equity:
Preferred stock
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
December 31,
2014
2013
$
$
$
5,773
623,275
547
4,627
634,222
$
$
72,730
18,147
2,494
93,371
23,938
170
476,609
37,731
2,403
540,851
634,222
$
13,111
246,143
547
1,518
261,319
7,730
18,147
1,670
27,547
—
123
222,116
12,663
(1,130)
233,772
261,319
123
Statements of Income
Interest expense:
Interest on notes payable and other borrowings
Interest on junior subordinated debentures
Total interest expense
Noninterest income:
Dividends from subsidiaries
Other
Noninterest expense:
Salaries and employee benefits
Professional fees
Acquisition expense, including legal
Other
Total noninterest expense
Income before income tax benefit and equity in undistributed income of
subsidiaries
Income tax benefit
Income before equity in undistributed income of subsidiaries
Equity in undistributed income (loss) of subsidiaries
Years Ended December 31,
2013
2012
2014
$
$
2,225
542
2,767
$
1,425
543
1,968
1,720
531
2,251
33,850
19
33,869
3,693
1,163
2,681
800
8,337
22,765
3,283
26,048
2,930
11,547
16
11,563
2,316
157
1,956
397
4,826
4,769
2,643
7,412
12,388
25,634
24
25,658
1,163
—
1,401
36
2,600
20,807
—
20,807
(3,430)
17,377
Net income
$
28,978
$
19,800
$
124
Statements of Cash Flows
Years Ended December 31,
2013
2012
2014
$
28,978
$
19,800
$
17,377
(2,930)
2,914
(3,291)
2,173
27,844
(52,000)
10,940
6,108
(60,814)
(95,766)
—
65,000
—
(566)
—
(3,850)
60,584
(7,338)
13,111
5,773
$
(12,388)
1,469
(531)
783
9,133
(33,466)
—
—
(18,412)
(51,878)
(25,308)
—
—
—
86,571
(6,803)
54,460
11,715
1,396
13,111
$
3,430
643
(523)
9
20,936
(2,050)
—
39
(46,600)
(48,611)
(3,245)
11,680
(208)
—
25,150
(8,681)
24,696
(2,979)
4,375
1,396
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net (income) loss of subsidiaries
Stock compensation expense
Net change in other assets
Net change in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Capital investment in subsidiaries
Cash received from liquidation of Adriatica
Cash received from acquired companies
Cash paid in acquisitions
Net cash used in investing activities
Cash flows from financing activities:
Repayments of other borrowings
Proceeds from other borrowings
Treasury stock purchased
Offering costs paid in connection with acquired banks
Proceeds from issuance of common stock
Dividends paid
Net cash provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
125
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.
126
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.
SIGNATURES
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
David R. Brooks
/s/ Michelle S. Hickox
Michelle S. Hickox
/s/ Torry Berntsen
Torry Berntsen
/s/ Daniel W. Brooks
Daniel W. Brooks
/s/ James D. Stein
James D. Stein
/s/ M. Brian Aynesworth
M. Brian Aynesworth
/s/ Douglas A. Cifu
Douglas A. Cifu
/s/ William E. Fair
William E. Fair
/s/ Craig E. Holmes
Craig E. Holmes
/s/ J. Webb Jennings III
J. Webb Jennings III
/s/ Donald L. Poarch
Donald L. Poarch
/s/ Jack M. Radke
Jack M. Radke
/s/ G. Stacy Smith
G. Stacy Smith
/s/ Michael T. Viola
Michael T. Viola
Chairman, Chief Executive Officer and Director (Principal
Executive Officer)
February 27, 2015
Executive Vice President and Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
February 27, 2015
President, Chief Operating Officer and Director
February 27, 2015
Vice Chairman, Chief Risk Officer and Director
February 27, 2015
Vice Chairman, Houston Region Chief Executive Officer and
Director
February 27, 2015
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
CORPORATE HEADQUARTERS
1600 REDBUD BOULEVARD, SUITE 400 | MCKINNEY, TEXAS 75069
972 562 9004 | IBTX.COM
CERTIFICATIONS
The certifications of the Chief Executive Officer and the Chief Financial Officer of Independent Bank Group, Inc.
required under Section 302 of the Sarbanes-Oxley Act of 2002, have been filed as exhibits to Independent Bank
Group Inc.’ s 2014 Annual Report on Form 10-K. In addition, the certification of the Chief Executive Officer of
Independent Bank Group, Inc. required under the rules of FINRA, has been filed with FINRA.
FORM 10-K AND INVESTOR INQUIRIES
Analysts, investors and others desiring additional information about Independent Bank Group, Inc.
may contact Torry Berntsen, President and Chief Operating Officer, or
Michelle Hickox, Executive Vice President and Chief Financial Officer, at 972.562.9004
TRANSFER AGENT AND REGISTRAR
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