UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ý
¨
ANNUAL REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For The Fiscal Year Ended December 31, 2015.
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 ¨ No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not
be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer ý Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý
The aggregate market value of the shares of common stock held by non-affiliates based on the closing price of the common stock on the NASDAQ Global
Market on June 30, 2015 was approximately $419,190,000 .
At February 24, 2016, the Company had outstanding 18,464,880 shares of common stock, par value $.01 per share.
Documents Incorporated By Reference:
Portions of the Company’s Proxy Statement relating to the 2016 Annual Meeting of Shareholders, which will be filed within 120 days after
December 31, 2015, 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, 2015
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
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13
28
28
28
29
30
33
36
72
72
72
72
72
73
73
73
73
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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 42 banking offices in the Dallas-Fort Worth metropolitan
area, the Austin/Central Texas area, and the Houston metropolitan area. As of December 31, 2015, the Company had
consolidated total assets of approximately $5.0 billion, total loans of approximately $3.9 billion, total deposits of approximately
$4.0 billion and total stockholders’ equity of approximately $603 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. 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 nine
acquisitions that the Company believes have enhanced shareholder value and the Company’s market presence. The following
table summarizes each of the nine acquisitions completed since 2010.
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Acquired Institution/Market
Date of Acquisition
Fair Value of Total Assets
Acquired
(dollars in thousands)
Town Center Bank
Dallas/North Texas
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
Grand Bank
Dallas, 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
November 1, 2015
$37,451
99,420
172,587
110,967
168,320
131,008
1,188,893
350,747
620,176 *
* Estimated values subject to change pending final acquisition accounting adjustments
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 11 banking centers in
the Houston metropolitan area with an aggregate of $1.12 billion in total assets.
The Grand Bank acquisition represented the Company’s continued expansion in the Dallas metropolitan area. Through this
acquisition, the Company added two locations in attractive sub markets in the Dallas area and added approximately $620
million in assets. The assets acquired in this acquisition represented 15% of the Company’s asset growth in 2015.
The Company plans to explore additional opportunities in the growing sub markets within the Company’s current market
regions as well as in attractive new markets such as Fort Worth and the San Antonio metropolitan area. Factors considered by
the Company to evaluate expansion opportunities include a) similar management and operating philosophy, b) accretive to
earnings and increase shareholder value, c) ability to improve efficiency, d) strategic expansion of Company footprint and e)
enhance market presence in existing markets. The Company has a scalable infrastructure and experienced acquisition team
which it believes will enable the Company to successfully integrate acquired banks. The Company intends to remain
disciplined in its approach to acquisitions using appropriate valuation metrics.
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Improve Efficiency and Increase Profitability. The Company employs a systematic and calculated approach to increasing the
Company’s profitability and improving the Company’s efficiencies. The Company has updated the Company’s operating
capabilities and created synergies within the Company in the areas of technology, data processing, finance, compliance and
human resources. The Company believes that the Company’s scalable infrastructure provides the Company with an efficient
operating platform from which to grow in the near term without incurring significant incremental noninterest expenses, which
will enhance the Company’s returns.
Independent’s Community Banking Services
The Independent Way. Nearly a century after the Company’s beginning, the Company’s dedication to serving the needs of
businesses and individuals in the Company’s communities remains stronger than ever. The Company strives to provide the
Company’s customers with innovative financial products and services, local decision making and a level of service and
responsiveness that is second to none. The Company’s innovative and independent spirit is balanced by adherence to
fundamental banking principles that have enabled the Company to remain strong, sound and financially secure even during
challenging economic times. The Company is also steeped in a tradition of civic pride as evidenced by the investment of the
Company’s time, energies and financial resources in many local organizations to improve and benefit the Company’s
communities.
Lending Operations. Through Independent Bank, the Company offers a broad range of commercial and retail lending products
to businesses, professionals and individuals. Commercial lending products include owner-occupied commercial real estate
loans, interim construction loans, commercial loans (such as SBA guaranteed loans, business term loans, equipment financing
and lines of credit and energy related loans) to a diversified mix of small and midsized businesses, and loans to professionals,
particularly medical practices. Retail lending products include residential first and second mortgage loans and consumer
installment loans, such as loans to purchase cars, boats and other recreational vehicles.
The Company’s strategy is to maintain a broadly diversified loan portfolio by type and location. The Company’s loans are
primarily real estate secured loans spread among a variety of types of borrowers, including owner occupied offices for small
businesses, medical practices and offices, retail operations and multi-family properties. The Company’s loans are diversified
geographically throughout the Company’s Dallas/North Texas region (approximately 49%), the Company’s Houston region
(approximately 27%) and the Company’s Austin/Central Texas region (approximately 24%). See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations - Loan Portfolio” for a more detailed description of
the Company’s lending operations.
Deposits. Deposits are the Company’s principal source of funds for use in lending and other general banking purposes. The
Company provides a full range of deposit products and services, including a variety of checking and savings accounts, debit
cards, online banking, mobile banking, eStatements and bank-by-mail and direct deposit services. The Company also offers
business accounts and management services, including analyzed business checking, business savings, and treasury management
services. The Company solicits deposits through its relationship-driven team of dedicated and accessible bankers and through
community focused marketing.
Other Services. In connection with our relationship driven approach to our customers, the Company offers residential
mortgages through our mortgage brokerage division. As a mortgage broker, the Company originates residential mortgages
which are sold into the secondary market shortly after closing. The Company also provides wealth management services to its
customers including investment advisory and other related services.
Competition
The Company competes in the commercial banking industry solely through Independent Bank and firmly believes that
Independent Bank’s long-standing presence in the community and personal service philosophy enhance the Company’s ability
to attract and retain customers. This industry is highly competitive, and Independent Bank faces strong direct competition for
deposits, loans and other financial-related services. The Company competes with other commercial banks, thrifts and credit
unions. Although some of these competitors are situated locally, others have statewide or nationwide presence. In addition, the
Company competes with large banks in major financial centers and other financial intermediaries, such as consumer finance
companies, brokerage firms, mortgage banking companies, insurance companies, securities firms, mutual funds and certain
government agencies as well as major retailers, all actively engaged in providing various types of loans and other financial
services. The Company believes that its banking professionals, the range and quality of products that the Company offers and
its emphasis on building long-lasting relationships distinguishes Independent Bank from its competitors.
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Employees
As of December 31, 2015, the Company employed approximately 587 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
General. 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.
The Dodd-Frank Act. The Dodd-Frank Wall Street Reform and Consumer Protection Act, known as the Dodd-Frank Act, was
signed into law on July 21, 2010. The Dodd-Frank Act has had a broad impact on the regulation and operation of financial
institutions. The Dodd-Frank Act codified the “source of strength” doctrine, authorized the Consumer Financial Protection
Bureau and implemented new mortgage lending rules, established a risk retention rule, imposed limitations on trading
activities, made permanent the deposit insurance limit of $250,000 and increased the minimum Deposit Insurance Fund reserve
ratio, enhanced the restrictions on transactions with affiliates, and expanded corporate governance requirements and executive
compensation limitations for U.S. public companies. Many of the requirements have recently been implemented, or are in the
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process of being implemented. Given the uncertainty associated with the manner in which the Dodd-Frank Act will be
implemented and interpreted, the full impact of these changes will not be known for several years. The changes resulting from
the Dodd-Frank Act, to the extent known, are incorporated in the discussion of supervision and regulation of the Company and
Independent Bank below.
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.
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.
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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.
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 $1 billion. 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
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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
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
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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.
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.
8
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.
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%.
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Corrective Measures for Capital Deficiencies. The federal banking regulators are required by the FDI Act to take “prompt
corrective action” with respect to capital-deficient institutions that are FDIC-insured. Agency regulations define, for each
capital category, the levels at which institutions are “well capitalized,” “adequately capitalized,” “undercapitalized,”
“significantly undercapitalized” and “critically undercapitalized.” A “well capitalized” bank has a total risk-based capital ratio
of 10.0% or higher, a Tier 1 risk-based capital ratio of 6.0% or higher, a leverage ratio of 5.0% or higher, and is not subject to
any written agreement, order or directive requiring it to maintain a specific capital level for any capital measure. An
“adequately capitalized” bank has a total risk-based capital ratio of 8.0% or higher, a Tier 1 risk-based capital ratio of 4.0% or
higher, a leverage ratio of 4.0% or higher (3.0% or higher if the bank was rated a composite 1 in its most recent examination
report and is not experiencing significant growth), and does not meet the criteria for a well‑capitalized bank. A bank is
“undercapitalized” if it fails to meet any one of the ratios required to be adequately capitalized.
In addition to requiring undercapitalized institutions to submit a capital restoration plan, agency regulations contain broad
restrictions on certain activities of undercapitalized institutions, including asset growth, acquisitions, branch establishment and
expansion into new lines of business. With certain exceptions, an insured depository institution is prohibited from making
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
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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
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
11
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
statutes and the operating environment of the Company and Independent Bank in substantial and unpredictable ways. The
Company cannot determine the ultimate effect that any potential legislation, if enacted, or implementing regulations with
respect thereto, would have, upon the financial condition or results of operations of the Company or Independent Bank. A
change in statutes, regulations or regulatory policies applicable to the Company or Independent Bank could have a material
effect on the financial condition, results of operations or business of the Company and Independent Bank.
Enforcement Powers of Federal and State Banking Agencies
The federal banking agencies have broad enforcement powers, including the power to terminate deposit insurance, impose
substantial fines and other civil and criminal penalties, and appoint a conservator or receiver. Failure to comply with applicable
laws, regulations and supervisory agreements could subject the Company or Independent Bank and their subsidiaries, as well as
their respective officers, directors, and other institution‑affiliated parties, to administrative sanctions and potentially substantial
civil money penalties. In addition to the grounds discussed above under “Corrective Measures for Capital Deficiencies,” the
appropriate federal banking agency may appoint the FDIC as conservator or receiver for a banking institution (or the FDIC may
appoint itself, under certain circumstances) if any one or more of a number of circumstances exist. The TDB also has broad
enforcement powers over Independent Bank, including the power to impose orders, remove officers and directors, impose fines
and appoint supervisors and conservators.
Effect on Economic Environment
The policies of regulatory authorities, including the monetary policy of the Federal Reserve, have a significant effect on the
operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve to affect
the money supply are open market operations in U.S. government securities, changes in the discount rate on member bank
borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations
to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates
charged on loans or paid for deposits.
Federal Reserve monetary policies have materially affected the operating results of commercial banks in the past and are
expected to continue to do so in the future. The Company cannot predict the nature of future monetary policies and the effect of
such policies on the business and earnings of it and its subsidiaries.
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. The implementation of the Company’s business and growth strategies also depends significantly on the
Company’s ability to retain officers and employees with experience and business relationships within their respective market
areas. The Company could have difficulty replacing officers and employees 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
unexpected loss of any of the Company’s key personnel could therefore have an adverse impact on the Company’s business and
growth.
Volatile market conditions and economic trends could adversely affect the Company’s business, financial condition and
results of operations.
The Company is operating in a dynamic and challenging economic environment, including uncertain global, national and local
market conditions. In particular, Texas based financial institutions are affected by volatility in the energy markets and the
potential impact of that volatility on real estate and other markets. The Company is also subject to uncertain interest rate
conditions. These volatile economic conditions could adversely affect borrowers and their businesses as well as the value of
collateral (particularly real estate collateral) securing loans, which could adversely affect the Company’s business, financial
condition and results of operation.
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 2015 and the current volatility in
oil prices has had, 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 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
13
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, 2015, approximately 80% 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
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 decline in oil prices could have a negative effect on the Company’s asset quality.
As of December 31, 2015, approximately 5% 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 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. The Houston market economy in particular would be adversely affected. If oil prices remain at
historic lows for a sustained period of time, 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
14
in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact the Dallas/North
Texas, Austin/Central Texas, and Houston market areas in which the Company operates 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, 2015, the Company’s allowance for loan losses as a percentage of total loans was 0.68% and as a
percentage of total nonperforming loans was 181.99%. 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.
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.
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 nine acquisitions since 2010, most recently completing the Grand Bank acquisition on November
1, 2015, 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.
15
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 initially relied on the management teams at these banking organizations who joined
the Company to provide guidance regarding operating in this new geographic market. Should these key employees 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 Houston market economy has been adversely affected by the disruption in the energy
markets and the Company’s lack of prior operating history in Houston could adversely affect the Company’s ability to respond
to changing market conditions in Houston.
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,
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.
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, 2015, the Company’s goodwill totaled
$258.6 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
16
and related write-downs, which may have a material adverse effect on the Company’s financial condition and results of
operations.
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.
The redemption by the Company of its Series A preferred stock has reduced the Company’s capital levels and could
negatively effect the Company’s capital adequacy in the future.
In connection with the acquisition of BOH Holdings, the Company, among other things, issued 23,938.35 shares of its Senior
Non-Cumulative Perpetual SBLF Preferred Stock, Series A, or the Series A preferred stock, at $1,000 par value to the Treasury
in exchange for the 23,938.35 shares of BOH Holdings Series C SBLF Preferred Stock that the Treasury previously held. The
Series A preferred stock qualifies as Tier 1 capital. The Series A preferred stock paid noncumulative 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 14, 2016, at which
time the dividend rate would have increased to 9.00%.
Given the increased cost of the Series A preferred stock, on January 14, 2016, the Company redeemed all 23,938.35
outstanding shares of the Series A preferred stock for a redemption price of $23,946,994.40. The source of funds for the
redemption was a dividend from Independent Bank. This redemption reduced the capital levels and ratios of the Company and
17
Independent Bank. While the Company and Independent Bank continue to be well capitalized for regulatory purposes, the
reduction in capital resulting from the redemption could impact the Company’s ability to grow as well as its ability to absorb
unanticipated losses. Further, the Company may be unable to replace the capital provided by the Series A preferred stock in the
future. If the Company is unable to maintain required capital levels, the Company’s financial condition 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.
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.
18
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, 2015), the Company invests a percentage of its total assets (approximately 5.4% as of December 31,
2015) in investment securities as part of its overall liquidity strategy. As of December 31, 2015, the fair value of the
Company’s securities portfolio was approximately $273.5 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.
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
19
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
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.
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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.
Legal and regulatory proceedings could adversely affect the Company’s business, financial condition, and results of
operation.
The Company, like all financial institutions, has been and may in the future become involved in legal and regulatory
proceedings. The Company considers most of these proceedings to be in the normal course of business or typical for the
industry. However, it is inherently difficult to assess the outcome of these matters. Any material legal or regulatory proceeding
could impose substantial cost and cause management to divert its attention from the Company’s business and operations. Any
adverse determination in a legal or regulatory proceeding 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
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
21
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;
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;
changes in government regulations, including tax laws; and
volatility in economic conditions, including changes in interest rates, disruption in energy markets and changes in
the global economy.
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
22
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 28, 2016, the Company renewed its 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 24, 2016, 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, 2016, Messrs. Vincent Viola and David Brooks owned 31.4% of the Company’s outstanding
common stock on a fully diluted basis. Vincent Viola, the largest shareholder of the Company, currently owns 25.5% of the
Company’s outstanding common stock, and David Brooks, the Company’s Chairman of the Board and Chief Executive Officer,
currently owns 6.0% 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 9.7% of the Company’s
outstanding common stock. As a result, these individuals exert controlling influence in the Company’s management and
policies. Further, given the large ownership position of these individuals, it will be difficult for any other shareholder to elect
members to the Company’s board of directors or otherwise influence the Company’s management or direction.
In addition, three of the Company’s directors have close professional and personal ties to Vincent Viola, the Company’s largest
shareholder. Doug Cifu is the Chief Executive Officer of Virtu Financial, LLC, Mr. Viola’s primary operating entity; Torry
Berntsen, the Company’s President and Chief Operating Officer, was formerly Vice Chairman of Virtu Management, LLC, Mr.
Viola’s family investment vehicle; and Michael Viola is the son of Vincent Viola. Further, David Brooks, the Company’s
Chairman and Chief Executive Officer, has over a 25 year history of ownership and operation of Independent Bank with
Vincent Viola; and he has joint investments with Mr. Viola outside of the Company. Given these close relationships, even
though he will not serve on the Company’s board, Mr. Viola has and will continue to have a large influence over the direction
and operation of the Company.
The Company’s corporate organizational documents and the provisions of Texas law to which the Company is subject
contain certain provisions that could have an anti-takeover effect and may delay, make more difficult or prevent an
attempted acquisition of the Company that you may favor.
The Company’s certificate of formation and bylaws contain various provisions that could have an anti-takeover effect and may
delay, discourage or prevent an attempted acquisition or change in control of the Company. These provisions include the
following:
•
•
•
staggered terms for directors;
a provision that directors cannot be removed except for cause;
a provision that any special meeting of the Company’s shareholders may be called only by a majority of the
Company’s board of directors, the Chairman or a holder or group of holders of at least 20% of the Company’s
shares entitled to vote at such special meeting;
23
•
•
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 $50 million. As of December 31, 2015, the Company currently had not drawn upon this credit
facility. Further, as of December 31, 2015, the Company had outstanding
•
•
•
$70.8 million of aggregate principal amount of subordinated indebtedness. Note that $5.8 million was
redeemed in January 2016;
$18.1 million of subordinated debentures issued in connection with trust preferred securities; and
$23.9 million of its Series A preferred stock. Note that the Series A preferred stock was redeemed on January
14, 2016.
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
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, 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.
24
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
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.
25
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 Independent 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, Independent 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
Independent 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.
The Dodd-Frank Act created the Consumer Financial Protection Bureau, or the CFPB, with broad powers to supervise and
enforce consumer protection laws. The CFPB has broad rule-making authority, including the authority to prohibit unfair,
deceptive, and abusive acts and practices. Compliance with the CFPB rules required changes to the Company’s underwriting
practices with respect to mortgage loans, and has resulted in increased regulatory compliance costs. These rules may subject the
Company to increased potential liabilities related to residential mortgage lending activities.
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.
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.
26
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.
Previous economic conditions and the Dodd-Frank Act caused the FDIC to increase deposit insurance 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
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, 2015:
County
Number of Banking Centers
Number of Leased Banking Centers
Deposits at December 31, 2015 (in
millions)
Brazoria
Collin
Dallas
Denton
Fort Bend
Grayson
Harris
McLennan
Montgomery
Travis
Williamson
1
10
5
3
1
6
8
2
1
3
2
—
1
2
—
1
—
4
2
1
—
—
$86.0
1,109.1
702.6
233
38.9
354.9
926.1
187.0
15.5
205.5
169.7
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 and Independent Bank are named as defendants in various lawsuits.
Management of the Company and Independent Bank, following consultation with legal counsel, do not expect the ultimate
disposition of any, or a combination, of these matters to have a material adverse effect on the business of the Company or
Independent Bank. A legal proceeding that the Company believes could become material is described below.
Independent Bank is a party to a legal proceeding inherited by Independent Bank in connection with its acquisition of BOH
Holdings, Inc. and its subsidiary, Bank of Houston, or BOH, that was completed on April 15, 2014. Several entities related to
R. A. Stanford, or the Stanford Entities, including Stanford International Bank, Ltd., or SIBL, had deposit accounts at BOH.
Certain individuals who had purchased certificates of deposit from SIBL filed a class action lawsuit against several banks,
including BOH, on November 11, 2009 in the U.S. District Court Northern District of Texas, Dallas Division, alleging, among
other things, that the plaintiffs were victims of fraud by SIBL and other Stanford Entities and seeking to recover damages and
alleged fraudulent transfers by the defendant banks.
On May 1, 2015, the plaintiffs filed a motion requesting permission to file a Second Amended Class Action Complaint in this
case, which motion was subsequently granted. The Second Amended Class Action Complaint asserts previously unasserted
28
claims, including aiding and abetting or participation in a fraudulent scheme based upon the large amount of deposits that the
Stanford Entities held at BOH and the alleged knowledge of certain BOH officers. Given the new allegations, Independent
Bank notified its insurance carriers of the claims made in the Second Amended Class Action Complaint. The insurance carriers
have initially indicated that a “loss” has not yet occurred or that the claims are not covered by the policies. However,
Independent Bank is continuing to pursue insurance coverage for these claims, as well as for the reimbursement of defense
costs, through the initiation of litigation and other means.
Independent Bank believes that the claims made in this lawsuit are without merit and is vigorously defending this lawsuit. This
is complex litigation involving a number of procedural matters and issues. As such, Independent Bank is unable to predict
when this matter may be resolved and, given the uncertainty of litigation, the ultimate outcome of, or potential costs or
damages arising from, this case.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
29
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 24, 2016, there were 422 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, 2016 (through February 24, 2016)
Quarter ended March 31, 2015
Quarter ended June 30, 2015
Quarter ended September 30, 2015
Quarter ended December 31, 2015
Quarter ended March 31, 2014
Quarter ended June 30, 2014
Quarter ended September 30, 2014
Quarter ended December 31, 2014
Dividends
High
Low
34.95 $
25.74
$
$
39.45 $
45.93
46.66
43.16
$
59.96 $
61.49
56.20
48.78
29.66
38.04
37.85
31.11
48.54
44.86
46.01
38.13
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 24, 2016 and for the quarterly periods in the years ended December 31,
2015 and 2014.
Cash Dividends
Declared per Share
For the Quarter Ending March 31, 2016 (through February 24, 2016)
$
Quarter ended December 31, 2015
Quarter ended September 30, 2015
Quarter ended June 30, 2015
Quarter ended March 31, 2015
Quarter ended December 31, 2014
Quarter ended September 30, 2014
Quarter ended June 30, 2014
Quarter ended March 31, 2014
0.08
0.08
0.08
0.08
0.08
0.06
0.06
0.06
0.06
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
30
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. 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.
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.
Payment of Dividends on Preferred Stock. During 2015, holders of the Company’s Series A preferred stock, which ranked
senior to the Company’s common stock, were 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, 2015) 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. In January 2016, the Company redeemed all 23,938.35 outstanding shares of its Series A
preferred stock. As of February 24, 2016, the Company had no shares of preferred stock outstanding. The Company has the
authority to issue shares of preferred stock in the future, which may include preferential dividend rights.
Recent Sales of Unregistered Securities
None.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of December 31, 2015, 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)
373,512
—
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
31
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, 2015, 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
Comparison of Cumulative Total Return
e
u
l
a
V
x
e
d
n
I
220
200
180
160
140
120
100
80
04/03/13
06/30/13
12/31/13
06/30/14
12/31/14
06/30/15
12/31/15
Period Ending
Independent Bank Group, Inc.
S&P 500
NASDAQ Bank
*
$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
December 31,
2013
June 30, 2014
December 31,
2014
June 30, 2015
December 31,
2015
Independent Bank Group, Inc.
$
100.00 $
103.54 $
169.65 $
190.64 $
134.10 $
147.91 $
S&P 500 Index
NASDAQ Bank Index
100.00
100.00
103.91
109.28
120.86
128.58
129.48
128.76
137.40
132.23
139.09
142.45
110.76
139.30
140.99
(Copyright © 2016 S&P Capital IQ. All rights reserved.)
32
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, 2015, 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 36 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)
2015
2014
2013
2012
2011
As of and for the Year Ended December 31,
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
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
$
174,027
$
140,132
$
87,214
$
71,890
$
19,929
154,098
9,231
144,867
16,128
103,198
19,011
38,786
240
38,546
15,987
124,145
5,359
118,786
13,624
88,512
14,920
28,978
169
28,809
n/a
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
$
$
2.23
2.21
$
1.86
1.85
$
1.78
1.77
$
2.23
2.23
n/a
n/a
0.32
32.79
17.85
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
59,639
13,358
46,281
1,650
44,631
7,708
38,639
—
13,700
—
13,700
9,357
2.00
2.00
1.37
1.37
0.89
12.55
10.53
$
5,055,000
$
4,132,639
$
2,163,984
1,740,060
$1,254,377
293,279
273,463
324,047
206,062
93,054
194,038
102,290
113,355
4,001,704
3,205,537
1,726,543
1,378,676
18,552
241,912
4,763
—
818,022
2,431,576
306,147
18,147
23,938
540,851
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
27,043
275,000
2,168
—
1,071,656
2,956,623
371,283
18,147
23,938
603,371
33
56,654
93,991
988,671
9,060
13,886
8,392
16,065
168,849
861,635
118,086
14,538
—
85,997
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
Common equity tier 1 capital to risk-weighted assets (13)
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)
0.88%
6.83
7.13
n/a
n/a
4.05
60.62
14.35
0.36%
0.37
1.82
0.68
0.02
7.94%
8.28
8.92
11.14
11.94
12.41
6.87
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
n/a
8.15%
9.83
12.59
13.09
12.51
7.07
1.04%
9.90
9.90
0.85
8.09
4.30
67.10
14.20
0.58%
0.53
152.93
0.81
0.09
n/a
10.71%
12.64
13.83
10.80
10.80
9.21
1.17%
16.54
16.54
0.82
11.56
4.40
69.64
11.89
1.59%
0.81
104.02
0.83
0.06
n/a
6.45%
8.22
10.51
7.16
7.16
5.42
1.16%
17.36
17.36
0.79
11.86
4.42
71.57
13.26
2.85%
1.14
80.32
0.92
0.11
n/a
6.89%
8.59
11.19
6.86
6.86
5.81
(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, the increase in 2014 largely relates to shares issued in three acquisitions
completed in 2014 and the increase in 2015 relates to shares issued in the acquisition completed in 2015.. 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,
2015
2014
2013
17,321,513
15,208,544
10,921,777
17,406,108
15,306,998
10,990,245
2012
7,626,205
7,649,366
2011
6,668,534
6,675,078
(4)
(5)
(6)
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, $0.00 per share, $0.52 per share, $0.85
per share and $0.63 per share for the years ended December 31, 2015, 2014, 2013, 2012 and 2011, respectively.
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, 2015,
2014, 2013, 2012 and 2011was 18,399,194 shares, 17,032,669 shares, 12,330,158 shares, 8,269,707 shares and 6,850,288 shares, respectively.
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.
34
(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) Prior to 2015, the Company calculated its risk-weighted assets using the standardized method of the Basel II Framework, as implemented by the Federal
Reserve and the FDIC. Beginning January 1, 2015, the Company calculated its risk-weighted assets using the Basel III Framework. The common
equity tier 1 capital to risk-weighted assets ratio was a new ratio required under the Basel III Framework, effective January 1, 2015. This ratio is not
applicable for periods prior to January 1, 2015.
(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.
35
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;
36
•
•
•
•
•
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 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, 2015 and 2014 and for
the fiscal years ended December 31, 2015, 2014 and 2013, and the accompanying notes, appearing elsewhere in this Annual
Report on Form 10-K. The Company’s fiscal year ends on December 31.
37
Certain Events Affect Year-over-Year Comparability
Acquisitions
During 2015, 2014 and 2013, the Company completed a total of five acquisitions. These acquisitions increased total assets,
gross loans and deposits on their respective acquisition date as detailed below.
Acquisition Date
Total Assets
Gross Loans
(dollars in millions)
Collin Bank
Live Oak Financial Corp.
BOH Holdings, Inc.
November 29, 2013
January 1, 2014
April 15, 2014
Houston Community Bancshares, Inc.
October 1, 2014
Grand Bank *
November 1, 2015
* Estimated values subject to change pending final acquisition accounting adjustments
$168.3
131.0
1,188.9
350.7
620.2
$72.3
71.3
785.2
194.9
273.6
Deposits
$111.7
105.0
820.8
303.1
523.7
The Company issued an aggregate 6,016,599 shares of common stock in connection with these acquisitions. The comparability
of the Company’s consolidated results of operations for the years ended December 31, 2015, 2014 and 2013 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, 2013, to December 31, 2015, 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.
38
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, 2015, with its results of operations for the year ended December 31, 2014, and its results of operations for
the year ended December 31, 2013.
Results of Operations
The Company’s net income available to common shareholders increased by $9.7 million, or 33.8%, to $38.5 million ($2.21 per
common shares on a diluted basis) for the year ended December 31, 2015, from $28.8 million ($1.85 per common share on a
diluted basis) for the year ended December 31, 2014. The increase resulted from a $30.0 million increase in net interest income
and a $2.5 million increase in noninterest income, partially offset by a $3.9 million increase in the provision for loan losses, a
$14.7 million increase in noninterest expense and a $4.1 million increase in income tax expense. The Company’s net income
for the year ended December 31, 2015, and, therefore, the Company’s return on average assets and the Company’s return on
average equity, were adversely affected by $1.4 million of acquisition-related expenses. The Company posted returns on
average common equity of 7.13% and 6.89%, returns on average assets of 0.88% and 0.87%, and efficiency ratios of 60.62%
and 64.25% for the fiscal years ended December 31, 2015, and 2014, 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 14.35% and12.90% and the equity to assets ratio was 12.41% and 13.09%
for the years ended December 31, 2015 and 2014, respectively.
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.
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 $154.1 million for the year ended December 31, 2015, an increase of $30.0
million, or 24.1%, from $124.1 million for the year ended December 31, 2014. The increase in net interest income was
primarily due to growth of the Company’s average interest-earning assets during the year. The Company’s net interest margin
for 2015 decreased to 4.05% from 4.19% in 2014, and the Company’s interest rate spread for 2015 decreased to 3.89% from the
4.03% interest rate spread for 2014. The average balance of interest-earning assets for 2015 increased by $846.4 million, or
28.6%, to $3.8 billion from an average balance of $3.0 billion for 2014. The increases in interest-earning assets during the year
was primarily due to organic loan growth but also in part due to the acquisition that the Company completed in November
2015. The Company’s net interest margin for the year ended December 31, 2015 was adversely affected by a 16 basis point
decline in the weighted-average yield on interest-earning assets to 4.57% for the year ended December 31, 2015, from 4.73%
for the year ended December 31, 2014. This decline in yield resulted from changes in market interest rates and the competitive
landscape in the Company's lending area.
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
39
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.
40
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, 2015, 2014 and 2013. The average balances are principally daily averages and, for loans, include both
performing and nonperforming balances.
Total interest-earning assets
3,806,538
$ 174,027
(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,
2015
2014
2013
Average
Outstanding
Balance (1)
Interest
Yield/
Rate
Average
Outstanding
Balance (1)
Interest
Yield/
Rate
Average
Outstanding
Balance (1)
Interest
Yield/
Rate
$
3,456,128
$ 169,504
4.90% $
2,628,667
$ 135,461
5.15% $
1,502,817
$ 84,350
5.61%
95,259
31,247
1,516
1,024
1.59%
3.28%
112,841
324
0.29%
1,742,164
$ 87,214
5.01%
139,924
69,112
141,374
2,168
1,783
572
1.55
2.58
0.40
4.57
174,578
57,825
99,083
2,803
1,429
439
2,960,153
$ 140,132
589,014
$
4,395,552
369,449
$
3,329,602
$
1,297,948
$
5,649
0.44
$
1,052,528
$
4,797
143,476
319,982
263
829
842,087
5,283
2,603,493
12,024
225,934
3,077
78,074
18,147
4,289
539
0.18
0.26
0.63
0.46
1.36
5.49
2.97
0.68
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
2,281,204
15,987
601,764
11,152
435,482
1.61
2.47
0.44
4.73
0.46
0.27
0.28
0.60
0.48
1.52
5.55
2.99
0.70
$
$
158,748
1,900,912
734,475
$
3,826
114,699
50,661
334,269
1,234,104
165,354
373
135
2,640
6,974
3,303
17,255
1,461
18,147
543
1,434,860
12,281
259,432
6,626
199,994
Total interest-bearing liabilities
2,925,648
19,929
Noninterest-bearing checking accounts
Noninterest-bearing liabilities
Stockholders’ equity
895,789
9,688
564,427
Total liabilities and equity
$
4,395,552
$
3,329,602
$
1,900,912
Net interest income
Interest rate spread
Net interest margin (2)
Average interest earning assets to interest
bearing liabilities
$ 154,098
$ 124,145
$ 74,933
3.89%
4.05
130.11
4.03%
4.19
129.76
(1)
(2)
Average loan balances include nonaccrual loans.
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.
41
0.52
0.33
0.27
0.79
0.57
2.00
8.47
2.99
0.86
4.15%
4.30
121.42
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
Net interest income
For the Fiscal Year Ended December 31, 2015 vs. 2014
For the Fiscal Year Ended December 31, 2014 vs. 2013
Increase (Decrease) Due to
Volume
Rate
Total Increase
(Decrease)
Increase (Decrease) Due to
Volume
Rate
Total Increase
(Decrease)
$
40,856
$
(6,813)
$
34,043
$
58,527
$
(7,416)
$
(540)
289
174
(95)
65
(41)
(635)
354
133
40,779
(6,884)
33,895
1,273
705
(43)
60,462
14
(300)
158
(7,544)
$
1,076
$
(224)
$
852
$
1,496
$
(525)
$
34
511
1,044
2,665
(244)
2,082
—
4,503
(116)
(29)
191
(178)
(357)
(23)
(3)
(561)
(82)
482
1,235
2,487
(601)
2,059
(3)
3,942
45
204
2,165
3,910
1,299
1,410
—
6,619
(73)
8
(757)
(1,347)
(924)
(641)
(1)
(2,913)
$
36,276
$
(6,323)
$
29,953
$
53,843
$
(4,631)
$
51,111
1,287
405
115
52,918
971
(28)
212
1,408
2,563
375
769
(1)
3,706
49,212
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.
Interest Income. The Company’s total interest income increased $33.9 million, or 24.2%, to $174.0 million for the year ended
December 31, 2015, from $140.1 million for the year ended December 31, 2014. The Company’s total interest income
increased $52.9 million, or 60.7%, to $140.1 million for the fiscal year ended December 31, 2014 from $87.2 million for the
fiscal year ended December 31, 2013. The following tables set forth the major components of the Company’s interest income
for the fiscal years ended December 31, 2015, 2014 and 2013 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
2015
2014
2015 v. 2014
2014
2013
2014 v. 2013
$
169,504
$
135,461
$
34,043
$
135,461
$
84,350
$
2,168
1,783
572
2,803
1,429
439
(635)
354
133
2,803
1,429
439
1,516
1,024
324
51,111
1,287
405
115
Total interest income
$
174,027
$
140,132
$
33,895
$
140,132
$
87,214
$
52,918
The 25.1% increase in the Company’s interest and fees on loans for the year ended December 31, 2015, from the year ended
December 31, 2014 was primarily attributable to a $827.5 million increase in the average balance of the Company’s loans to
$3.5 billion during the fiscal year ended 2015 as compared with the average balance of $2.6 billion for the fiscal year ended
42
2014. The increase primarily resulted from organic growth in the Company’s loan portfolio but also in part from the Company’s
acquisition of $273.6 million of loans in the Grand Bank transaction on November 1, 2015.
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.
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 interest the Company earned on taxable securities, which consists primarily of government agency and residential pass-
through securities, decreased by 22.7% during 2015 as a result of a decrease in the average portfolio balance from $174.6
million during 2014 to $139.9 million during 2015 due to paydowns and maturities of securities, along with several sales of
securities during the year. The interest the Company earned on taxable 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, 2014.
The interest the Company earned on nontaxable securities during 2015 increased by 24.8% from 2014 primarily as a result of
an increase in the average portfolio balance from $57.8 million for the year ended December 31, 2014 to $69.1 million for the
year ended December 31, 2015. The interest the Company earned on nontaxable securities during the fiscal year ended 2014
increased by 39.6% from 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, 2014.
Interest Expense. Total interest expense on the Company’s interest-bearing liabilities increased $3.9 million, or 24.7%, to
$19.9 million for the year ended December 31, 2015, from $16.0 million in the prior year. Total interest expense on the
Company’s interest-bearing liabilities increased $3.7 million, or 30.2%, to $16.0 million for 2014 from $12.3 million for 2013.
The following table sets forth the major components of the Company’s interest expense for the fiscal years ended December 31,
2015, 2014 and 2013 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
2015
2014
2015 v. 2014
2014
2013
2014 v. 2013
$
12,024
$
3,077
4,289
539
9,537
3,678
2,230
542
$
$
$
$
$
2,487
$
9,537
$
6,974
$
(601)
2,059
(3)
3,678
2,230
542
3,303
1,461
543
2,563
375
769
(1)
3,942
$
15,987
$
12,281
$
3,706
Total interest expense
$
19,929
$
15,987
Interest expense on deposits for 2015 increased by $2.5 million, or 26.1%, primarily as a result of a 31.5% increase in the
average balance on the Company’s interest-bearing deposit accounts from $2.0 billion in 2014 to $2.6 billion in 2015. The
increase in average balances during this time was both due to organic growth and growth through accounts acquired in the
Grand Bank transaction. This increase was partially offset by a two basis point decrease in the weighted-average rate of
interest the Company paid on the Company’s deposits during the year from 0.48% to 0.46%. This decrease in cost of funds for
this source of funding primarily resulted from lower market interest rates and the 34.9% 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 deposits for 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 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.
43
Interest expense on FHLB advances for 2015 decreased by $601 thousand, or 16.3%, due primarily to a lower average balance
of such advances over the period, from $242.7 million in 2014 to $225.9 million in 2015.
Interest expense on FHLB advances for 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 repurchase agreements and other borrowings for 2015 increased by $2.1 million, or 92.3%, primarily as a
result of a higher average balance of such borrowings. This is due to an increase in the average balance of the Company’s
subordinated debentures which were outstanding the whole year. The Company issued $65 million of subordinate debt in a
public offering in July 2014 so the 2015 average balance and interest paid included a full year compared to half of the year in
2014. Interest expense on this subordinate debt totaled $3.8 million in 2015 compared to $1.9 million in 2014. This increase in
interest expense was partially offset by the effect of the repayment of $1.9 million in principal amounts of subordinated debt
due to individuals.
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 $1.9 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.
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 its allowance for loan losses to $27.0 million at December 31, 2015, by making provisions for loan
losses totaling $9.2 million during the year ended December 31, 2015. This is an increase of $3.9 million, or 72.3% in
provision expense over the total provision expense of $5.4 million made by the Company in 2014. The increase in provision
expense is primarily due to organic growth during the year as well as an increase in general reserves for the energy portfolio in
recognition of continued declines and uncertainties in commodity prices. Increased specific reserves of $2.7 million on certain
energy loans in the portfolio also contributes to the overall increase in provision expense during the year. Offsetting the
increase to the allowance balance were charge-offs totaling $740 thousand for 2015, which is 0.02% of the Company's average
loans outstanding during the period.
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-
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 acquisition completed in 2015 because,
in accordance with acquisition accounting standards, the Company recorded the loans acquired in those acquisitions at fair
44
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. For the three acquisitions completed in 2014, the
Company has begun phasing the acquired portfolios into the allowance allocation as acquired loans are being renewed.
Noninterest Income
The following table sets forth the major components of noninterest income for the fiscal years ended December 31, 2015, 2014
and 2013 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
2015
2014
2015 v. 2014
2014
2013
2014 v. 2013
Service charges on deposit accounts
$
7,982
$
6,009
$
1,973
$
6,009
$
4,841
$
Mortgage fee income
Gain on sale of loans
Gain on sale of other real estate
Gain 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
5,269
116
290
134
(358)
1,077
1,618
3,953
1,078
71
362
(22)
972
1,201
1,316
(962)
219
(228)
(336)
105
417
3,953
1,078
71
362
(22)
972
1,201
3,743
—
1,507
—
(18)
348
600
1,168
210
1,078
(1,436)
362
(4)
624
601
$
16,128
$
13,624
$
2,504
$
13,624
$
11,021
$
2,603
Noninterest income increased $2.5 million, or 18.4%, to $16.1 million for the fiscal year ended 2015 from $13.6 million for
fiscal the year ended 2014. Total noninterest income increased $2.6 million, or 23.6%, for the year ended December 31, 2014,
compared to the year ended December 31, 2013. Significant changes in the components of noninterest income are discussed
below.
Service Charges. Service charges on deposit accounts increased $2.0 million, or 32.8%, for the year ended December 31,
2015, as compared to the same period in 2014. The increase in service charge income is due to an increase in deposit accounts
due primarily to acquisition growth in 2014 and 2015. Service charges on deposit accounts for the year ended December 31,
2014 increased $1.2 million, or 24.1%, compared to the year ended December 31, 2013. The increase during 2014 is due to an
increase in deposits accounts primarily due to acquisition activity in late 2013 and 2014.
Mortgage Fee Income. Mortgage fee income for the year ended December 31, 2015 increased $1.3 million, or 33.3%, over
the same period in 2014. This increase is due to increased home purchase activity in our Austin and north Texas markets, as
well as added commissioned producers in our mortgage group. Mortgage fee income for the year ended December 31, 2014
increased $210 thousand, or 5.6%, compared to the comparable 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 the mortgage
product in our Houston branches.
Gain on Sale of Loans. Gain on sale of loans for the year ended December 31, 2015 and 2014 totaled $116 thousand and $1.1
million, respectively. During 2015, the Company sold its indirect lending portfolio, which resulted in the $116 thousand gain
while in 2014, the SBA loan portfolio totaling $12.0 million that the Company acquired in the BOH Holdings acquisition was
sold resulting in the $1.1 million gain. No such sales occurred in 2013.
Gain on Sale of Other Real Estate. Gains on sale of other real estate were $290 thousand, $71 thousand and $1.5 million for
the years ended December 31, 2015, 2014 and 2013, respectively. The large gain in 2013 relates to several sales of property
including the remaining Adriatica property, on which the Company recognized a $1.3 million gain.
Gain on Sale of Securities Available for Sale. The gain on sale of securities available for sale totaled $134 thousand and
$362 thousand for the years ended December 31, 2015 and 2014, respectively, 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.
45
Loss on Sale of Premises and Equipment. Loss on sale of premises and equipment totaling $358 thousand for the year ended
December 31, 2015 was primarily due to a loss recognized on the sale of the Company's aircraft. Loss on sale of premises and
equipment was minimal for 2014 and 2013.
Increase in Cash Surrender Value of Bank Owned Life Insurance. The increase in cash surrender value of bank owned life
insurance increased $105 thousand, or 10.8% from $972 thousand in 2014 to $1.1 million in 2015. The increase is due to
insurance contracts acquired in the BOH transaction in April 2014 earning interest for a full year in 2015 compared to just since
the acquisition date as was the case in the prior year. 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 insurance policies acquired in the BOH Holdings acquisition in April 2014.
Other Noninterest Income. Other noninterest income for the year ended December 31, 2015, increased $417 thousand, or
34.7%, compared to the same period in 2014. The increase is primarily due to increased earning credits on correspondent
accounts and an increase in wealth management fees over the prior year. Other noninterest income increased $601 thousand, or
100.2%, for the year ended December 31, 2014 compared to the same period in 2013. The increase is directly related to 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 $14.7 million, or 16.6%, to $103.2 million for the year ended 2015 from $88.5 million for the
year ended 2014. The increase from 2014 to 2015 is primarily due to increases in salaries and benefits expenses, occupancy
expenses, data processing expenses and other noninterest expenses due to organic growth within the Company but also due to a
full year or expenses from prior acquisitions and also in part due to the acquisition of Grand Bank in November 2015.
Offsetting the overall increase is a decrease to acquisition expenses of $2.2 million. The lower amount in 2015 is due to less
acquisition activity. with only one acquisition in 2015 compared to three acquisitions in 2014.
Noninterest expense increased $30.8 million, or 53.5%, for the year ended December 31, 2014, compared to the comparable
period in 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.
The following table sets forth the major components of the Company’s noninterest expense for the years ended December 31,
2015, 2014 and 2013, and the period-over-period variations in such categories of noninterest expense:
(dollars in thousands)
Noninterest Expense
For the Year Ended December
31,
Variance
For the Year Ended December
31,
Variance
2015
2014
2015 v. 2014
2014
2013
2014 v. 2013
Salaries and employee benefits
$
60,541
$
52,337
$
8,204
$
52,337
$
31,836
$
20,501
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
16,058
13,250
3,384
2,259
1,038
2,219
169
—
35
1,555
3,191
1,420
11,329
2,080
1,797
835
1,787
232
23
22
1,281
2,567
3,626
8,675
2,808
1,304
462
203
432
(63)
(23)
13
274
624
(2,206)
2,654
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
$
103,198
$
88,512
$
14,686
$
88,512
$
57,671
$
30,841
46
Salaries and Employee Benefits. Salaries and employee benefits expense, which historically has been the largest component
of the Company’s noninterest expense, increased $8.2 million, or 15.7%, for the year ended December 31, 2015, compared to
the year ended December 31, 2014. The increase was primarily attributable to an increase in the number of the Company’s full-
time equivalent employees from 511 to 587, which resulted primarily from organic growth within the Company during the year
but also in part due to employees acquired in the Grand Bank transaction. Salaries and employee benefits 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
primarily 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.
Occupancy Expense. Occupancy expense increased $2.8 million, or 21.2%, for the year ended December 31, 2015 compared
to the same period in 2014 and increased $4.2 million, or 46.5%, for the year ended December 31, 2014 compared to the same
period in 2013. The increases resulted from higher maintenance contract expenses, building lease expenses and property taxes,
attributable primarily to the five acquisitions completed in the three year period. Two branches were added in late 2015, eleven
branches were added in 2014 and one branch was added in 2013 as a result of the acquisitions during those years. In addition,
the increase in 2014 was due to the Company's new Austin building in May 2013 as there were occupancy expenses for a full
year in 2014 compared to half a year in 2013.
Data Processing. Data processing fees increased $1.3 million, or 62.7%, for the year ended December 31, 2015, compared to
the same period in 2014 and increased $733 thousand, or 54.4% for the year ended December 31, 2014 compared to the same
period in 2013. The change is due to increased online banking fees and other costs related directly to an increase in accounts as
well as added employees and locations over the same period prior year, related both to organic growth and growth through
acquisitions.
FDIC Assessment. FDIC assessment expense increased $462 thousand, or 25.7%, for the year ended December 31, 2015,
compared to the same period in 2014 and increased $1.3 million, or 259.4% for the year ended December 31, 2014 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 from 2013 to 2014 is due to a non-recurring refund
of $504 thousand of the Company's prepaid assessment during the second quarter of 2013.
Professional Fees. Professional fees increased $624 thousand, or 24.3%, for the year ended December 31, 2015, over the same
period in 2014 and increased $1.3 million, or 97.8% for the year ended December 31, 2014 compared to the same period in
2013. The increase in 2015 is primarily due to increased legal fees on existing litigation inherited in the BOH transaction. The
increase in 2014 over 2013 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.
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, 2015, decreased $2.2 million, or 30.6% over the same period in 2014. The total
acquisition expense in 2014 increased $1.7 million, or 85.4% over the same period in 2013. The change in the respective
period is directly related to the acquisition activity in those periods. The Company closed one acquisition in 2015, three
acquisitions in 2014 and one in 2013.
Other. Other noninterest expense for the year ended December 31, 2015 increased by $2.7 million, or 30.6%, compared to the
same period in 2014. Other noninterest expense increased by $1.6 million, or 22.5%, for the year ended December 31, 2014,
compared to the same period in 2013. The majority of the increase for each period relates to general increases in operations
due to organic growth within the Company as well as acquisition activity occurring in November 2015, October 2014, April
2014, January 2014 and November 2013.
Income Tax Expense
Income tax expense was $19.1 million for the year ended December 31, 2015, which is an effective tax rate of 32.9%. Income
tax expense was $14.9 million for the year ended December 31, 2014, which is an effective tax rate of 34.0%. The increased
rate for 2014 was due to the effect of certain non-deductible acquisition expenses during the year due to increased acquisition
activity. 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
47
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 rate would have been 33.9% for the year ended December 31, 2013. 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, resulting in pro
forma net income, after federal taxes, for that period of $16.2 million.
No valuation allowance for deferred tax assets was recorded at December 31, 2015, 2014 or 2013, as management believes it is
more likely than not that all of the deferred tax assets will be realized.
48
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, 2015
and 2014. This information should be read in conjunction with the Company’s consolidated financial statements as of and for
the fiscal years ended December 31, 2015 and December 31, 2014 appearing elsewhere in this Annual Report on Form 10-K.
(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
Preferred stock dividends
Net income available to common shareholders
Comprehensive income
Basic earnings per share
Diluted earnings per share
December 31
September 30
June 30
March 31
Quarter Ended 2015
$
47,414 $
43,130 $
42,747 $
(unaudited)
5,263
42,151
1,970
40,181
4,254
28,527
15,908 $
5,347
10,561 $
60
10,501 $
10,080 $
0.58 $
0.58
5,041
38,089
3,932
34,157
3,799
25,830
12,126 $
3,924
8,202 $
60
8,142 $
9,120 $
0.48 $
0.47
4,967
37,780
1,659
36,121
4,109
24,455
15,775 $
5,204
10,571 $
60
10,511 $
9,215 $
0.61 $
0.61
$
$
$
$
$
40,736
4,658
36,078
1,670
34,408
3,966
24,386
13,988
4,536
9,452
60
9,392
10,350
0.55
0.55
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
10,098 $
60
10,038 $
10,385 $
0.59 $
0.59
4,509
32,431
976
31,455
4,210
22,162
13,503 $
4,543
8,960 $
60
8,900 $
9,225 $
0.54 $
0.54
3,674
31,404
1,379
30,025
3,119
25,343
7,801 $
2,682
5,119 $
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
49
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, 2015 and 2014 and certain changes in that financial condition from December 31, 2014, to
December 31, 2015, and from December 31, 2013, to December 31, 2014.
Assets
The Company's total assets increased by $922.4 million, or 22.3%, to $5.1 billion as of December 31, 2015 from $4.1 billion at
December 31, 2014. The growth during the year was due to both organic growth and growth through the acquisition of Grand
Bank in November 2015. 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.
Loan Portfolio
The Company’s loan portfolio is the largest category of the Company’s earning assets. As of December 31, 2015, the
Company's loan portfolio, net of the allowance for loan losses, totaled $4.0 billion, which is an increase of 24.7% over total
loans, net of the allowance for loan losses at December 31, 2014. The increase is primarily due to organic growth, but also due
to $273.6 million acquired in the Grand Bank acquisition in November 2015. 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
2014.
The following table presents the balance and associated percentage of each major category in the Company’s loan portfolio as
of December 31, 2015, 2014, 2013, 2012 and 2011:
(dollars in thousands)
Commercial
Real estate:
Commercial
Commercial construction, land and land
development
Residential (1)
Single family interim construction
Agricultural
Consumer
Other
2015
2014
2013
2012
2011
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
$
731,818
18.3% $
672,052
21.0% $
241,178
14.0% $
169,882
12.3% $
127,827
12.9%
1,949,734
48.7
1,450,434
45.2
843,436
48.9
648,494
47.0%
470,820
47.6
419,611
620,289
187,984
50,178
41,966
124
10.5
15.5
4.7
1.3
1.0
—
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
—
4,001,704
100.0%
3,205,537
100.0%
1,726,543
100.0%
1,378,676
100.0%
988,671
100.0%
Deferred loan fees
Allowance for loan losses
(1,553)
(27,043)
(487)
(18,552)
—
(13,960)
—
(11,478)
—
(9,060)
Total loans, net
$
3,973,108
$
3,186,498
$
1,712,583
$
1,367,198
$
979,611
(1) Includes mortgage loans held for sale as of December 31, 2015, 2014, 2013, 2012 and 2011 of $12.3 million, $4.5 million, $3.4 million, $9.2 million and
$3.0 million, respectively.
Gross loans increased $796.2 million, or 24.8%, to $4.0 billion at December 31, 2015 from $3.2 billion at December 31, 2014.
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.
The loan growth is as a result of the organic growth of the Company’s loan portfolio and the Company’s acquisition activity,
one in 2015 and three in 2014.
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
50
December 31, 2015:
As of December 31, 2015
(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
$
66,747 $
248,057 $
159,315 $
189,182 $
31,592 $
36,925 $
257,654 $
474,164
69,710
22,207
702,773
282,557
229,634
642,853
1,002,117
947,617
60,506
69,800
72,666
7,100
16,572
124
36,842
14,185
84,234
5,321
3,901
—
114,483
216,092
3,918
18,198
17,705
—
115,514
16,168
9,695
3,237
2,629
—
31,672
178,501
13,381
1,574
978
—
60,594
125,543
4,090
14,748
181
—
206,661
464,393
89,965
26,872
35,255
124
212,950
155,896
98,019
23,306
6,711
—
$
363,225 $
414,747 $ 1,232,484 $
618,982 $
487,332 $
884,934 $
2,083,041 $
1,918,663
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’s commercial loan portfolio increased $59.8 million, or 8.9%, to $731.8 million as of December 31, 2015, from
$672.1 million as of December 31, 2014. 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
exploration and production (E&P) portfolio totaled $182.5 million, or approximately 4.6% as of December 31, 2015, which is a
decrease of 21.2% from $231.7 million, or approximately 7.2% of the total portfolio at December 31, 2014. The E&P energy
portfolio totaled $68.3 million, or 4.0% of the total portfolio at December 31, 2013.
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 40%, 48% and 43% of
the Company’s commercial real estate loans as of December 31, 2015, 2014, and 2013, 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.
Commercial real estate loans increased $499.3 million, or 34.4%, to $1.95 billion as of December 31, 2015 from $1.45 billion
as of December 31, 2014. The increase was primarily due to organic loan growth in this loan type during the year primarily
related to the Austin and north Texas markets. 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 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.
Commercial construction, land and land development loans increased $84.6 million, or 25.3% to $419.6 million at December
31, 2015 from $335.0 million at December 31, 2014, both due to organic loan growth in this type of loan and also due in part to
loans acquired in the Grand Bank transaction in November 2015. The Company’s loans in this segment increased $204.6
51
million, or 157.0%, to $335.0 million as of December 31, 2014 from $130.3 million as of December 31, 2013. The increase in
such loans from December 31, 2013, to December 31, 2014, resulted primarily from the Company’s three acquisitions in 2014.
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.
The Company’s residential real estate loan portfolio grew by $101.8 million, or 19.6%, to a balance of $620.3 million as of
December 31, 2015 from $518.5 million as of December 31, 2014. The increase in this category was due to both organic loan
growth and loans acquired in the Grand Bank transaction. 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.
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.
The balance of single-family interim construction loans in the Company’s loan portfolio increased by $49.7 million, or 35.9%,
to $188.0 million as of December 31, 2015 from the balance of $138.3 million as of December 31, 2014, which resulted
primarily from these types of loans being acquired in the Grand Bank transaction. 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.
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, 2015, 2014, or 2013 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.
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-
52
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 2015, 2014 or 2013.
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.
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.
53
(dollars in thousands)
Nonaccrual loans
Commercial
Real estate:
Commercial real estate, construction, land and land development
Residential real estate
Single-family interim construction
Agricultural
Consumer
As of December 31,
2015
2014
2013
2012
2011
$
7,366
$
1,449
$
357
$
218
$
131
591
552
—
170
111
70
2,117
—
—
67
253
1,852
170
—
43
4,857
894
560
—
70
1,291
2,864
91
—
54
Total nonaccrual loans (1)
8,790
3,703
2,675
6,599
4,431
Loans delinquent 90 days or more and still accruing
Commercial
Real estate:
Residential real estate
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
—
—
—
—
16
3,480
2,574
—
6,070
157
288
6
451
30
4,668
1,254
8
5,960
Total nonperforming loans
14,860
10,114
—
—
—
—
—
—
2
2
31
—
24
55
107
481
552
5,090
1,288
1
6,486
9,161
1,778
2,165
9
4,433
6,094
136
12
6,794
11,034
11,280
Other real estate owned and other repossessed assets (Bank only):
Commercial real estate, construction, land and land development
Commercial
Consumer
Agricultural real estate
Residential real estate
Total other real estate owned and other repossessed assets
Adriatica real estate owned
Total nonperforming assets
Ratio of nonperforming loans to total loans
Ratio of nonperforming assets to total assets
2,168
1,050
14
—
—
3,232
—
4,763
3,322
6,166
7,835
—
—
—
—
4,763
—
—
—
—
—
3,322
—
—
—
—
653
6,819
9,727
—
—
457
100
8,392
16,065
$ 18,092
$ 14,877
$ 12,483
$ 27,580
$ 35,737
0.37%
0.36
0.32%
0.36
0.53%
0.58
0.81%
1.59
1.14%
2.85
(1) Nonaccrual loans include troubled debt restructurings of $621 thousand, $1.3 million, $1.5 million, $3.1 million and $305 thousand as of December 31,
2015, 2014, 2013, 201 and, 2011, respectively.
The Company had $8.8 million, $3.7 million and $2.7 million in loans on nonaccrual status as of December 31, 2015, 2014,
and 2013, respectively. The increase from December 21, 2015 to December 31, 2015 was primarily due to two energy loans
totaling $7.1 million being placed on nonaccrual during 2015 and offset by a $1.4 million commercial loan being removed from
nonaccrual status during the year due to the repossession of collateral. 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.
Troubled debt restructurings that were also on nonaccrual status totaled $621 thousand, $1.3 million and $1.5 million at
December 31, 2015, 2014 and 2013, respectively. Loans past due 90 days and still accruing totaled $451 thousand as of
54
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.
The Company did not recognize any interest income on nonaccrual loans during fiscal 2015, 2014 or 2013 while the loans were
in nonaccrual status. The amount of interest the Company included in the Company’s net interest income for fiscal year 2015,
2014 and 2013 with respect to nonperforming loans was $638 thousand, $433 thousand and $257 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 $329 thousand, $203 thousand and $158 thousand, respectively, during fiscal year
2015, 2014 and 2013, respectively.
As of December 31, 2015, the Company had a total of 51 loans with an aggregate principal balance of $21.0 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, 2015, the Company had other real estate owned of $2.2 million, which is a decrease of 54.5% from the
balance of $4.8 million for prior year. This was due to numerous sales of other real estate properties during 2015 and with
minimal foreclosures during the year. 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. In addition, at
December 31, 2015, the Company had total repossessed assets totaling $1.1 million, which is primarily comprised of one
commercial aircraft that the Company repossessed 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
55
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,
2015
2014
2013
2012
2011
% of
Total
Loans(1)
% of
Total
Loans(1)
Amount
Amount
% of
Total
Loans(1)
% of
Total
Loans(1)
Amount
% of
Total
Loans(1)
Amount
Commercial loans
Real estate:
Commercial real estate, construction,
land and land development
Residential real estate
Single family interim construction
Agricultural
Consumer
Unallocated
$
10,573
18.3% $
5,051
21.0% $
2,401
14% $
2,377
12.3% $
1,259
12.9%
13,007
2,339
769
215
164
(24)
59.2
15.5
4.7
1.3
1.0
—
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
—
Total allowance for loan losses
$
27,043
100.0% $
18,552
100.0% $
13,960
100.0% $
11,478
100.0% $
9,060
100.0%
(1) Represents the percentage of Independent’s total loans included in each loan category.
As of December 31, 2015, the allowance for loan losses amounted to $27.0 million, or 0.68%, of total loans held for
investment, compared with $18.6 million, or 0.58%, as of December 31, 2014 and $14.0 million, or 0.81%, as of December 31,
2013. The increase in the allowance balance and allowance to total loans ratio for 2015 is due to increased provisions due to
organic loan growth, increased general reserves on acquired loans renewed since acquisition date and increased general
allocations due to prolonged declines in commodity prices and increased specific reserves, primarily on two of the Company's
energy loans. 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. 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 for loan losses as a percentage of nonperforming loans decreased slightly from 183.43% at December 31, 2014,
to 181.99% at December 31, 2015, due to a combination of increases in both the allowance and nonperforming loan balances.
As of December 31, 2015, the Company had made a specific allowance for loan losses of $3.2 million for impaired loans
totaling $15.5 million, compared with a specific allowance of $475 thousand for impaired loans totaling $11.7 million as of
December 31, 2014. This increase in impaired loans and related specific reserves was due primarily to the addition of two
impaired energy loans during 2015 with balances and specific reserves totaling $7.1 million and $3.0 million, respectively.
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.
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
56
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, 2015, 2014, 2013, 2012 and 2011 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,
2015
2014
2013
2012
2011
Allowance for loan losses-balance at beginning of year
$
18,552
$
13,960
$
11,478
$
9,060
$
8,403
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
(606)
(368)
(612)
(169)
(23)
(69)
(9)
—
(176)
(860)
28
42
5
—
45
(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
120
(740)
9,231
147
(767)
5,359
100
(1,340)
3,822
151
(766)
3,184
(694)
(316)
(20)
(94)
(1,147)
17
35
—
49
53
154
(993)
1,650
9,060
Allowance for loan losses-balance at end of year
$
27,043
$
18,552
$
13,960
$
11,478
$
Ratios
Net charge-offs to average loan outstanding
0.02%
0.03%
0.09%
0.06%
0.11%
Allowance for loan losses to nonperforming loans at end of year
Allowance for loan losses to total loans at end of year (1)
181.99
0.68
183.43
0.58
152.39
0.81
104.02
0.84
80.32
0.92
(1) Calculation excludes loans held for sale from total loans.
The Company’s ratio of allowance to loan losses to total loans as of December 31, 2015 was 0.68%, up from 0.58% at
December 31, 2014. The increased ratio for 2015 is due to increased provisions due to organic loan growth, increased general
allocations due to prolonged declines in commodity prices and increased specific reserves, primarily on two of the Company's
energy loans as discussed above. Furthermore, as loans acquired in the 2014 acquisitions are being renewed, they are being
included back in the general allocation of the allowance. The ratio of net charge-offs to average loans outstanding during the
fiscal year ended December 31, 2015 improved slightly to 0.02% from 0.03% for the year ended December 31, 2014.
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.
57
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, 2015, 2014 and 2013:
2015
As of December 31,
2014
2013
(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
Corporate bonds
Total securities available for sale
$
$
1,002
135,300
85,416
51,745
—
273,463
0.37% $
49.48
31.23
18.92
—
100.00% $
1,006
58,023
76,899
69,053
1,081
206,062
0.37% $
21.22
28.12
25.25
0.40
75.36% $
3,513
94,415
36,615
57,443
2,052
194,038
1.70%
45.82
17.77
27.88
1.00
94.17%
The Company recognized gains on the sale of securities of $134 thousand and $362 thousand for the years ended December 31,
2015 and 2014, respectively. The Company had no gain or loss on sales of securities in the fiscal year ended December 31,
2013. Securities represented 5.4%, 5.0% and 9.0% of the Company’s total assets at December 31, 2015, 2014 and 2013,
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, 2015 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, 2015, is temporary and no impairment has been realized in the Company’s consolidated financial
statements.
58
The following table sets forth the book value, scheduled maturities and weighted average yields for the Company’s investment
portfolio as of December 31, 2015:
(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
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
Total investment securities
Book Value
% of Total
Investment
Securities
Weighted
Average Yield
$
1,002
0.37%
1.06%
—
—
—
1,002
7,509
119,870
7,921
—
135,300
8,896
17,321
22,503
36,696
85,416
—
50,728
—
1,017
51,745
—
—
—
0.37
2.75
43.83
2.90
—
49.48
3.25
6.33
8.23
13.42
31.23
—
18.55
—
0.37
18.92
—
—
—
1.06
1.04
1.14
1.70
—
1.17
0.69
1.42
2.25
3.53
2.35
—
2.10
—
2.93
2.12
$
273,463
100.00%
1.70%
59
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, 2015
U.S. treasuries
Government agency securities
Obligations of state and municipal subdivisions
Residential pass through securities guaranteed by FNMA, GNMA and FHLMC
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
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
$
$
$
$
999
$
3
$
— $
1,002
$
$
$
$
135,630
83,442
50,640
270,711
999
58,174
75,599
1,068
67,437
203,277
3,498
95,407
37,861
2,079
57,844
$
$
$
$
237
2,222
1,202
3,664
7
199
1,837
13
1,616
3,672
15
84
541
—
67
(567)
(248)
(97)
135,300
85,416
51,745
(912)
$
273,463
— $
(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
$
196,689
$
707
$
(3,358)
$
194,038
The Company’s securities available for sale, carried at fair value, increased $67.4 million, or 32.7%, during 2015 and increased
$12.0 million, or 6.2% during 2014. The increase in 2015 was due to securities acquired in the Grand Bank transaction in
November 2015. Securities held for sale remained fairly stable in 2014, due to liquidity needs for loan growth.
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.
Cash and Cash Equivalents
Cash and cash equivalents decreased by $30.8 million, or 9.5% to $293.3 million at December 31, 2015 from $324.0 million at
December 31, 2014. 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 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.
60
Certificates of Deposit Held in Other Banks
The Company owned certificates of deposit held in other banks in the amount of $61.7 million as of December 31, 2015, all of
which were acquired in the Grand Bank transaction in November 2015. There were no certificates of deposit held in other
banks as of December 31, 2014 and 2013.
Goodwill and Core Deposit Intangible, Net
Goodwill represents the excess of the consideration paid over the fair value of the net assets acquired. The Company’s total
goodwill was $258.6 million at December 31, 2015, $229.5 million as of December 31, 2014 and $34.7 million as of
December 31, 2013. The increase in the goodwill balance from December 31, 2014 to December 31, 2015 was due primarily
to $28,825 in goodwill recognized from the Grand Bank transaction with the remainder of the change being from measurement
period adjustments from prior acquisitions. During the year ended December 31, 2014, 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.
The Company’s core deposit intangible, net, was $16.4 million as of December 31, 2015, $12.5 million as of December 31,
2014 and $3.1 million as of December 31, 2013. The Company’s core deposit intangible is amortized on a straight-line basis
over its estimated life of 10 years. The increase in core deposit intangibles from 2014 to 2015 was due to $5.5 million in core
deposit intangibles acquired in the Grand Bank transaction offset partially by the amortization expense during the year. 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
Total liabilities increased $835.9 million, or 23.3%, to $4.4 million as of December 31, 2015, from $3.6 million as of December
31, 2014, primarily due to the assumption of deposit liabilities of $523.7 million from the Grand Bank transaction. The
remainder of the increase is due to organic deposit growth and an increase of $58.9 million in FHLB advances.
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 and an increase in the Company’s subordinated debentures of $65.0 million.
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.
Total deposits increased $778.7 million, or 24.0%, to $4.0 billion as of December 31, 2015 from $3.2 billion as of December
31, 2014. The increase was primarily due to $523.7 million in deposit accounts acquired in the Grand Bank transaction, but
also in part due to organic deposit growth as well as an increase in use of brokered funds. Brokered deposits totaled $476.6
million and $355.1 million at December 31, 2015 and 2014, respectively. As of December 31, 2015 and 2014, noninterest-
bearing demand, interest-bearing checking, savings deposits and limited access money market accounts accounted for 79% and
75%, respectively, of the Company’s total deposits, while individual retirement accounts and certificates of deposit made up
21% and 25%, respectively, of total deposits. Noninterest-bearing demand deposits totaled $1.1 billion, or 26.6% of total
deposits, as of December 31, 2015, compared with $818.0 million, or 25.2% of total deposits, as of December 31, 2014
which slightly decreases the total cost of deposits three basis points from 0.37% at December 31, 2014 to 0.34% at December
31, 2015. The average cost of interest-bearing deposits was 0.46% per annum for 2015 compared with 0.48% for 2014.
,
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, including an
increase in brokered deposits during the period. Brokered deposits totaled $355.1 million and $62.4 million at December 31,
2014 and 2013, respectively. As of December 31, 2014 and 2013, noninterest-bearing demand, interest-bearing checking,
61
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 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 0.48% per annum for 2014 compared
with 0.57% for 2013.
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, 2015
For the Year Ended
December 31, 2014
For the Year Ended
December 31, 2013
Weighted
Average
Rate
Balance
Weighted
Average
Rate
Balance
Weighted
Average
Rate
Balance
$
895,789
—% $ 601,764
—% $
259,432
—%
1,297,948
143,476
319,982
842,087
0.44
0.18
0.26
0.63
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
Total deposits
$
3,499,282
0.34% $ 2,581,947
0.37% $
1,493,536
0.47%
The following table sets forth the maturity of time deposits (including IRA deposits) of $100,000 or more as of December 31,
2015:
(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
$
$
2,726 $
2,823 $
5,756 $
5,910 $
17,215
163,791
86,479
120,655
18,988
157,070
33,520
119,569
257
561,085
139,244
252,996 $
142,466 $
196,346 $
125,736 $
717,544
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, 2015, 2014 and 2013, the Company had $70.0 million, $55.0 million and $13.0
million, respectively, in short-term borrowings outstanding, all of which were short-term FHLB advances. These were
recorded on the balance sheet under FHLB advances and are included in the total advances outstanding as discussed in the
section below. The Company had no other short-term borrowings outstanding at December 31, 2015, 2014 and 2013. 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.
62
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 $288.3 million as of December 31, 2015, compared with $229.4 million as of
December 31, 2014, and $187.5 million as of December 31, 2013. The increase for each respective year is primarily to provide
additional short-term liquidity due to loan growth. As of December 31, 2015, 2014 and 2013, the Company had $817.0
million, $727.3 million and $218.0 million, respectively, in unused and available advances from the FHLB. At December 31,
2015, the Company’s FHLB advances are collateralized by assets, including a blanket pledge of certain loans with a carrying
value of $1.6 billion and FHLB stock. As of December 31, 2015 and 2014, the Company had $461.5 million and $354.2
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, 2015 or 2014.
The following table provides a summary of the Company’s FHLB advances at the dates indicated:
Fixed-rate, fixed term, at rates from 0.31% to 6.26%, with a weighted-average of 1.21% (maturing
January 2016 through January 2026)
$
288,325
—
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
As of December 31, 2015, the scheduled maturities of the Company’s FHLB advances were as follows (dollars in thousands):
As of December 31,
2015
2014
2013
Maturing Within
First Year
Second Year
Third Year
Fourth Year
Fifth Year
Thereafter
Principal Amount to Mature
As of
December 31, 2015
$
$
152,504
30,000
65,000
40,054
—
767
288,325
Other Long-Term Indebtedness
As of December 31, 2015, 2014 and 2013, the Company had $70.8 million, 72.7 million and $7.7 million, respectively, of long-
term indebtedness (other than FHLB advances and junior subordinated debentures) outstanding, which included subordinated
debentures. The slight decrease in borrowings from December 31, 2014 to December 31, 2014 was due to principal paydowns
of $1.9 million during the year. 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.
63
As of December 31, 2015, 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, 2015
$
$
1,933
1,933
1,932
—
—
65,000
70,798
In January 2016, the Company redeemed two of the subordinated debenture issuances in full with principal payments totaling
$5,798 plus all interest accrued at time of redemption.
Junior Subordinated Debentures
As of December 31, 2015, 2014 and 2013, 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, 2015, the interest rate on the various series of debentures was 3.58%,
3.17%, 2.78%, 3.63% and 2.11%, respectively, while 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. 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 $603.4 million at December 31, 2015, compared with $540.9 million at December 31, 2014, an
increase of approximately $62.5 million. The increase was due primarily to the issuance of common stock totaling $49.3
million in connection with the Company's acquisition of Grand Bank. In addition, there was stock awards amortization of $4.3
million and net income of $38.8 million earned by the Company for the year ended December 31, 2015, offset by dividends
paid of $5.8 million and the transfer of $23.9 million of Series A preferred stock to temporary equity due to the notice given to
the US Treasury of the intent to redeem it shortly after December 31, 2015.
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 year ended December 31, 2014, offset by dividends paid of $3.9 million.
64
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, 2015,
the Company had established federal funds lines of credit with nine unaffiliated banks totaling $200 million. 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, the Company had established a federal funds line of credit with one unaffiliated bank totaling
$40.0 million, with no amounts advanced against the line. Based on the values of stock, securities, and loans pledged as
collateral, as of December 31, 2015, 2014 and 2013, the Company had additional borrowing capacity with the FHLB of $817.0
million, $727.3 million and $218.0 million, respectively.
During 2014, the Company entered into a $35 million unsecured revolving line of credit with an unrelated bank. During 2015,
the Company renewed the unsecured line of credit with two unrelated commercial banks and increased the line from $35
million to $50 million. The line bears interest at LIBOR plus 2.50% and matures July 19, 2016. As of December 31, 2015 and
2014, there was 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.
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.”
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
65
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 Basel III Capital Rules became effective for the Company on January 1, 2015 (subject to a phase-in period for certain
provisions). In connection with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement to include
most components of accumulated other comprehensive income in regulatory capital. Accordingly, amounts reported as
accumulated other comprehensive income/loss related to securities available for sale do not increase or reduce regulatory
capital and are not included in the calculation of risk-based capital and leverage ratios. Regulatory agencies for banks and bank
holding companies utilize capital guidelines designed to measure capital and take into consideration the risk inherent in both
on-balance sheet and off-balance sheet items. Please refer to Note 20 - Regulatory Matters in the accompanying notes to
consolidated financial statements included elsewhere in this report.
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, 2015, 2014, and 2013, 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
Common equity tier 1 to risk-weighted 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
Tier 1 capital to average assets ratio
Tier 1 capital to risk-weighted assets ratio
Total capital to risk-weighted assets ratio
Share Repurchase Program
As of December 31, 2015
Required to be
considered well
capitalized
Required to be
considered
adequately
capitalized
Ratio
≥5.00%
≥6.50
≥8.00
≥10.00
Ratio
4.00-5.00%
4.50-6.50
6.00-8.00
8.00-10.00
Actual
Ratio
8.28%
7.94
8.92
11.14
As of December 31, 2014
Required to be
considered well
capitalized
Ratio
≥5.00%
≥6.00
≥10.00
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
As of December 31, 2013
Required to be
considered well
capitalized
Ratio
≥5.00%
≥6.00
≥10.00
Actual
Ratio
10.71%
12.64
13.83
Required to be
considered
adequately
capitalized
Ratio
4.00-5.00%
4.00-6.00
8.00-10.00
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 by the Company of up to $30 million of the Company's common stock. On January 28,
66
2016, the Company announced the renewal of its repurchase program, which is authorized to continue through December 31,
2016. No shares have been repurchased by the Company under this program through the date of this report.
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, 2015, the Company acquired deposit accounts and repurchase agreements in the
Grand Bank transaction. In addition, the Company assumed an operating lease for one of the branches acquired. Other than
acquired accounts 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, 2014.
The following table contains supplemental information regarding the Company’s total contractual obligations as of December
31, 2015:
(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
$
3,183,018 $
— $
— $
— $
3,183,018
688,500
152,504
1,933
—
2,047
127,023
95,000
3,865
—
2,756
29,670
40,054
—
—
1,873
68
767
65,000
18,147
1,946
845,261
288,325
70,798
18,147
8,622
$
4,028,002 $
228,644 $
71,597 $
85,928 $
4,414,171
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
67
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.
Commitments to extend credit and outstanding standby letters of credit were $838.3 million and $10.4 million, respectively, as
of December 31, 2015. Commitments to extend credit and outstanding standby letters of credit were $565.9 million and $8.6
million, respectively, as of December 31, 2014. Commitments to extend credit and outstanding standby letters of credit were
$365.6 million and $2.1 million, respectively, as of December 31, 2013. 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.
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, 2015. 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, 2015:
68
Hypothetical Shift in Interest Rates (in bps)
% Change in Projected Net Interest Income
200
100
(100)
0.21%
(0.05)
(4.58)
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.
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 79.0% of total deposits as of December 31, 2015, 74.7% of total deposits as of
December 31, 2014 and 75.1% of total deposits as of December 31, 2013. The Company had brokered deposits, including
CDARS totaling $476.6 million, $355.1 million and $62.4 million, at December 31, 2015, 2014 and 2013, 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 lower cost 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
69
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
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.
70
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
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.
71
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 74 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, 2015, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
As of December 31, 2015, management assessed the effectiveness of the Company’s internal control over financial reporting
based on the criteria for effective internal control over financial reporting established in “Internal Control-Integrated
Framework,” issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in 1992. This
assessment included controls over the preparation of the schedules equivalent to the basic financial statements in accordance
with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y‑9C) to meet the
reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act. Based on the
assessment management determined that the Company maintained effective internal control over financial reporting as of
December 31, 2015.
RSM US 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.
72
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 2016 Annual Meeting of Shareholders (the “2016 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 2016 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
2016 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 2016 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 2016 Proxy Statement.
73
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 77 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, 2015 and 2014
Consolidated Statements of Income for the Years Ended December 31, 2015, 2014 and 2013
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013
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.
74
EXHIBIT LIST
Exhibit Number
2.1
3.1
3.2
3.3
3.4
3.5
3.6
4.1
4.2
4.3
4.4
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., which is incorporated herein by reference to Exhibit 3.6 to the Form S-3 Registration
Statement
Certificate of Merger, dated September 30, 2014, of Houston City Bancshares, Inc. with and into
Independent Bank Group, Inc., which are incorporated by reference to Exhibit 3.7 to the Registrant’s
Quarterly Report on Form 10-Q, dated July 31, 2015
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)
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.
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)
2015 Performance Award Plan, which is incorporated by reference to Annex A of the Company’s
definitive Proxy Statement for its 2015 Annual Meeting of Shareholders, dated April 13,2015
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)
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 Registration Statement on Form S-4 (Registration No. 333-193373)
75
10.8
10.9
10.10.1
10.10.2
10.10.3
10.10.4
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
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 July 22, 2015, between Independent Bank Group, Inc., U.S. Bank
National Association and Frost Bank, which is incorporated by reference to Exhibit 10.29.1 to the
Registrant’s Registration Statement on Form S-4 (Registration No. 333-206747) filed with the SEC
on September 24, 2015 (the “Grand Bank Registration Statement”)
Revolving Credit Note, dated July 22, 2015, by Independent Bank Group, Inc., in favor of U.S. Bank
National Association, which is incorporated by reference to Exhibit 10.29.2 to the Grand Bank
Registration Statement filed with the SEC on September 24, 2015
Revolving Credit Note, dated July 22, 2015, by Independent Bank Group, Inc., in favor of Frost
Bank, which is incorporated by reference to Exhibit 10.29.3 to the Grand Bank Registration
Statement filed with the SEC on September 24, 2015
Negative Pledge Agreement, dated as of July 22, 2015, by Independent Bank Group, Inc., in favor of
U.S. Bank National Association, which is incorporated by reference to Exhibit 10.29.4 to the Grand
Bank Registration Statement filed with the SEC on September 24, 2015
Statement regarding computation of Earnings to Fixed Charges and Preferred Share Dividends
Ratios*
Subsidiaries of Independent Bank Group, Inc.*
Consent of RSM US 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 Instance 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*
*
**
Filed herewith as an Exhibit
Furnished herewith as an Exhibit
76
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 (the
Company) as of December 31, 2015 and 2014, 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, 2015. 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. 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. 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, 2015 and 2014, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S.
generally accepted accounting principles.
/s/ RSM US LLP
Dallas, Texas
February 25, 2016
77
Independent Bank Group, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2015 and 2014
(Dollars in thousands, except share information)
Assets
Cash and due from banks
Interest-bearing deposits in other banks
Cash and cash equivalents
Certificates of deposit held in other banks
Securities available for sale (amortized cost of $270,711 and $203,277, respectively)
Loans held for sale
Loans, net of allowance for loan losses of $27,043 and $18,552, 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, Temporary Equity 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
Temporary equity: Series A preferred stock (28,938.35 shares issued and outstanding)
Stockholders’ equity:
Series A preferred stock (23,938.35 shares issued and outstanding)
Common stock (18,399,194 and 17,032,669 shares outstanding, respectively)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities, temporary equity and stockholders’ equity
See Notes to Consolidated Financial Statements
78
December 31,
2015
2014
$
$
$
151,285
141,994
293,279
61,746
273,463
12,299
3,960,809
93,015
2,168
14,256
40,861
5,892
258,643
16,357
22,212
5,055,000
1,071,656
2,956,623
4,028,279
288,325
12,160
68,295
2,503
18,147
9,982
4,427,691
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
—
—
184
530,107
70,698
2,382
603,371
5,055,000
$
23,938
170
476,609
37,731
2,403
540,851
4,132,639
$
$
$
$
Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2015, 2014 and 2013
(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 other real estate
Gain 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
Years ended December 31,
2015
2014
2013
$
169,504
$
135,461
$
2,168
1,783
572
2,803
1,429
439
174,027
140,132
12,024
3,077
4,289
539
19,929
154,098
9,231
144,867
7,982
5,269
116
290
134
(358)
1,077
1,618
16,128
60,541
16,058
3,384
2,259
1,038
2,219
169
—
35
1,555
3,191
1,420
11,329
103,198
57,797
19,011
38,786
2.23
2.21
n/a
n/a
n/a
n/a
$
$
$
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
$
$
$
$
$
$
$
$
$
79
84,350
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
Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2015, 2014 and 2013
(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 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,
2015
2014
2013
$
38,786
$
28,978
$
19,800
101
5,798
(5,229)
(134)
(33)
(12)
(21)
(362)
5,436
1,903
3,533
—
(5,229)
(1,521)
(3,708)
$
38,765
$
32,511
$
16,092
80
Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2015, 2014 and 2013
(Dollars in thousands, except for par value, share and per share information)
Series A
Preferred Stock
$.01 Par Value
10 million
shares
authorized
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
Net income
Other comprehensive loss, net of tax
Stock issued for acquisition of bank, net of
offering costs of $568
Restricted stock forfeited
Restricted stock granted
Income tax deficiency on restricted stock
vested
—
—
—
—
—
—
—
—
—
—
—
—
—
Reclassification to temporary equity
(23,938)
Stock based compensation expense
Preferred stock dividends
Dividends ($0.32 per share)
Balance, December 31, 2015
$
—
—
—
—
See Notes to Consolidated Financial Statements
Common Stock
$.01 Par Value
100 million shares
authorized
Shares
Amount
8,278,354
$
—
—
(8,647)
3,680,000
—
247,731
132,720
—
—
—
Additional
Paid in
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
$
88,791
$
33,290
$
(232)
$
2,578
$
124,510
—
—
(232)
86,534
33,624
11,859
(1)
72
1,469
—
19,800
—
—
—
(33,624)
—
—
—
—
(6,803)
—
—
232
—
—
—
—
—
—
—
—
(3,708)
—
—
—
—
—
—
—
—
19,800
(3,708)
—
86,571
—
11,861
—
72
1,469
(6,803)
83
—
—
—
37
—
2
1
—
—
—
12,330,158
$
123
$
222,116
$
12,663
$
— $
(1,130)
$
233,772
—
—
—
4,489,336
(394)
213,569
—
—
—
—
—
—
—
45
—
2
—
—
—
—
—
—
—
250,172
—
(2)
1,409
2,914
—
—
28,978
—
—
—
—
—
—
—
(169)
(3,741)
—
—
—
—
—
—
—
—
—
—
—
3,533
—
—
—
—
—
—
—
—
28,978
3,533
23,938
250,217
—
—
1,409
2,914
(169)
(3,741)
—
—
1,279,532
(19,131)
106,124
—
—
—
—
—
—
—
13
—
1
—
—
—
—
—
—
—
49,257
—
(1)
(72)
—
4,314
—
—
38,786
—
—
—
—
—
—
—
(240)
(5,579)
—
—
—
—
—
—
—
—
—
—
—
(21)
—
—
—
—
—
—
—
—
38,786
(21)
49,270
—
—
(72)
(23,938)
4,314
(240)
(5,579)
18,399,194
$
184
$
530,107
$
70,698
$
— $
2,382
$
603,371
81
$
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, 2015, 2014 and 2013
(Dollars in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
38,786
$
28,978
$
19,800
Years ended December 31,
2014
2013
2015
Depreciation expense
Amortization of core deposit intangibles
Amortization of premium on securities, net
Stock grants amortized
FHLB stock dividends
Net loss on sale of premises and equipment
Gain on sale of loans
Gain on sale of securities available for sale
Gain on sale of other real estate owned
Impairment of other real estate
Deferred tax (benefit) expense
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 of deposits held in other banks
Purchase of bank owned life insurance contracts
Net (purchases) redemptions of FHLB stock
Proceeds from sale of 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 used in investing activities
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts
Net increase in time deposits
Repayments of FHLB advances
Proceeds from 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
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
82
6,270
1,555
1,558
4,314
(43)
358
(116)
(134)
(290)
35
(3,935)
9,231
(1,077)
(215,404)
208,129
6,087
(9,032)
46,292
535,141
14,915
(546,294)
22,781
—
(1,552)
4,765
(520,620)
(13,781)
4,254
2,460
(10)
152,913
(24,103)
(369,131)
245,831
6,128
(293,916)
350,000
(7,653)
(1,932)
—
(568)
—
(5,819)
292,071
(30,768)
324,047
293,279
$
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)
3,107
40,672
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
(517,079)
464,000
279
—
65,000
(566)
—
(3,910)
317,644
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
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., IBG Aircraft Acquisition, Inc., IBG Aircraft Company III and Preston Grand, Inc. IBG Aircraft Company III
was formed in 2015 to hold the Company's new aircraft and Preston Grand, Inc. was acquired in the Grand Bank acquisition
(see Note 22) and holds the Bank building and land for that acquired branch. Adriatica became inactive in 2014 and IBG
Aircraft Acquisition, Inc. was dissolved during 2015. 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). 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, the Company terminated its S-Corporation status and became a taxable corporate
entity (C Corporation) on April 1, 2013. The consolidated statement of changes in 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
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.
83
Cash and cash equivalents include interest-bearing funds of $141,994 and $170,889 at December 31, 2015 and 2014,
respectively.
Certificates of deposit: Certificates of deposit are FDIC insured deposits in other financial institutions that mature within one
year and are carried at cost.
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 tounaffiliated third
parties. 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 and former Grand Bank branches, 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.
84
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
85
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, 2015 or 2014.
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.
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.
86
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 24.
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,
2015
2014
2013
$
38,786
$
28,978
$
19,800
$
$
$
$
(240)
38,546
(169)
28,809
661
111
37,774
16,974,484
2.23
37,774
406
60
28,343
15,208,544
1.86
28,343
$
$
$
—
19,800
259
135
$
$
$
19,406
10,921,777
1.78
19,406
16,974,484
15,208,544
10,921,777
84,595
98,454
68,468
17,059,079
15,306,998
10,990,245
2.21
$
1.85
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
$
$
$
$
$
1.77
16,174
187
135
15,852
1.45
1.44
58,726
96,840
159,485
87
Note 2. Recent Accounting Pronouncements
ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU
2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct
deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for the
Company on January 1, 2016 and will change the presentation of debt issuance costs from an asset to a direct reduction of the
related debt liability on the balance sheet. ASU 2015-15, Interest—Imputation of Interest (Subtopic 835-30) - Presentation
and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, further addresses the
presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. This update is also
effective on January 1, 2016 and is not expected to have a significant impact to the Company.
ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The
amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during
the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require
that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation,
amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting
had been completed at the acquisition date. This update will be effective for the Company on January 1, 2016 and is not
expected to have a significant impact to the Company's financial statements.
ASU 2016-01, Financial Instruments─Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities. The amendments in this Update address certain aspects of recognition, measurement, presentation, and
disclosure of financial instruments. ASU 2016-01, among other things, i) requires equity investments, with certain
exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment
assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify
impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions
used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the
balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial
instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of
the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has
elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires
separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the
balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need
for a valuation allowance on a deferred tax asset related to available-for-sale. This update will be effective for the Company
on January 1, 2018 and is not expected to have a significant impact to the Company's financial statements.
Note 3. Restrictions on Cash and Due From Banks
At December 31, 2015 and 2014, the Company had a deposit reserve requirement of $22,513 and $5,025, respectively, with the
Federal Reserve Bank.
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:
88
Years ended December 31,
2014
2013
2015
20,056
24,450
$
$
14,016
7,730
$
$
12,095
5,910
221
248
1,064
$
$
$
— $
— $
(72) $
— $
$
3,072
1,203
$
$
48
— $
— $
$
327
$
1,409
$
2,400
— $
2,919
113
—
223
—
72
—
—
Cash transactions:
Interest expense paid
Income taxes paid
Noncash transactions:
Transfers of loans to other real estate owned
Loans to facilitate the sale of other real estate owned
Transfers of loans to other assets
Writeoff of debt origination costs related to warrants
Security purchased, not yet settled
Excess tax benefit (tax deficiency) on restricted stock vested
Transfer of bank premises to other real estate
Transfer of repurchase accounts to deposits
$
$
$
$
$
$
$
$
$
$
89
Supplemental schedule of noncash investing activities from acquisitions is as follows:
Years Ended December 31,
2015
2014
2013
Noncash assets acquired
Certificates of deposit held in other banks
$
84,527
$
— $
72,619
340
79,429
6,813
273,632
1,051,390
1,214
—
28,825
5,457
—
649
19,038
1,224
194,179
10,606
17,540
3,650
—
62,373
1,156
72,611
141
—
5,962
600
—
2,160
$
$
$
$
$
$
$
467,263
$ 1,383,869
$
145,003
523,650
18,873
2,836
876
$ 1,228,854
3,733
95,000
7,345
546,235
$ 1,334,932
152,913
24,103
$
$
286,596
60,812
— $
23,938
49,838
$
250,783
$
111,164
—
26,000
358
137,522
22,792
18,412
—
11,861
$
$
$
$
$
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
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
90
In addition, the following measurement-period adjustments were made during the years ended December 31, 2015, 2014 and
2013 relating to Company acquisition activity:
Noncash assets acquired:
Loans
Goodwill
Core deposit intangibles
Other assets
Total assets
Noncash liabilities assumed:
Deposits
Other liabilities
Total liabilities
Year Ended December 31,
2015
2014
2013
$
$
$
$
— $
361
—
(180)
181
$
— $
181
181
$
(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, 2015 and 2014, are as follows:
Securities Available for Sale
December 31, 2015:
U.S. treasuries
Government agency securities
Obligations of state and municipal subdivisions
Residential pass-through securities guaranteed by FNMA,
GNMA and FHLMC
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
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
$
999
$
3
$
— $
1,002
$
$
135,630
83,442
50,640
270,711
999
58,174
75,599
1,068
67,437
$
$
237
2,222
1,202
3,664
7
199
1,837
13
1,616
(567)
(248)
135,300
85,416
(97)
51,745
(912) $
273,463
— $
(350)
(537)
—
—
1,006
58,023
76,899
1,081
69,053
$
203,277
$
3,672
$
(887) $
206,062
Securities with a carrying amount of approximately $195,479 and $174,741 at December 31, 2015 and 2014, respectively, were
pledged to secure public fund deposits.
91
Proceeds from sale of securities available for sale and gross gains and losses for the years ended December 31, 2015, 2014 and
2013 were as follows:
Proceeds from sale
Gross gains
Gross losses
Years ended December 31,
2015
2014
2013
$
$
$
14,915
136
2
$
$
$
19,260
$
4,067
362
$
— $
—
—
The amortized cost and estimated fair value of securities available for sale at December 31, 2015, 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 and FHLMC
December 31, 2015
Securities Available for Sale
Amortized
Cost
Fair
Value
$
17,387
$
137,589
29,986
35,109
220,071
50,640
17,407
137,191
30,424
36,696
221,718
51,745
$
270,711
$
273,463
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, 2015 and 2014, are summarized as follows:
Description of Securities
Securities Available for Sale
December 31, 2015
Government agency securities
Obligations of state and
municipal subdivisions
Residential pass-through
securities guaranteed by
FNMA, GNMA and FHLMC
December 31, 2014
Government agency securities
Residential pass-through
securities guaranteed by
FNMA, GNMA, FHLMC
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
25
32
6
63
$ 84,798
$
(531)
16,202
(88)
10,765
$ 111,765
$
(97)
(716)
4
19
—
23
$
4,964
$
(36) $ 89,762
$
(567)
8,662
(160)
24,864
(248)
—
$ 13,626
$
—
10,765
(196) $ 125,391
$
(97)
(912)
6
$
6,396
$
(24)
14
$ 22,671
$
(326) $ 29,067
$
(350)
44
50
16,636
$ 23,032
$
(197)
(221)
13
27
8,541
$ 31,212
$
(340)
25,177
(666) $ 54,244
$
(537)
(887)
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.
92
Note 6. Loans, Net and Allowance for Loan Losses
Loans, net at December 31, 2015 and 2014, 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,
2015
2014
$
731,818
$
672,052
1,949,734
419,611
607,990
187,984
50,178
41,966
124
3,989,405
(1,553)
(27,043)
3,960,809
$
1,450,434
334,964
514,025
138,278
38,822
52,267
242
3,201,084
(487)
(18,552)
3,182,045
$
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, 2015 and 2014, there was approximately $182.5 million and $231.7 million,
respectively, of exploration and production (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
93
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 2% 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,
2015 and 2014, 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, 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;
change in value of underlying collateral; 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 $2.4 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.
94
The Texas economy has been affected by the continued decline in oil prices over the past year, however, the north and central
Texas areas that the Company lends in have continued to experience economic growth. The southeast area of Texas has been
the most impacted by commodity prices. These prolonged declines in oil prices have the potential to further negatively impact
the Texas economy and increase the risk of loss for all segments of the portfolio. The Company increased its allowance for
loan losses during the year ended December 31, 2015 in consideration of this risk to the energy portfolio.
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, 2015, 2014 and 2013:
Commercial
Real Estate,
Land and
Land
Development
Residential
Real
Estate
Commercial
Single-
Family
Interim
Construction Agricultural Consumer
Other
Unallocated
Total
Year ended December 31, 2015
Balance at the beginning of year $
5,051 $
10,110 $
2,205 $
669 $
246 $
146 $
— $
125 $
18,552
Provision for loan losses
Charge-offs
Recoveries
6,100
(606)
28
2,924
(69)
42
138
(9)
5
100
—
—
(31)
—
—
149
(176)
45
—
—
—
(149)
9,231
—
—
(860)
120
Balance at end of year
$
10,573 $
13,007 $
2,339 $
769 $
215 $
164 $
— $
(24) $
27,043
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
95
The following table details the amount of the allowance for loan losses and recorded investment in loans by class as of
December 31, 2015 and 2014:
Commercial
Real Estate,
Land and
Land
Development
Residential
Real Estate
Commercial
Single-
Family
Interim
Construction Agricultural
Consumer
Other
Unallocated
Total
December 31, 2015
Allowance for losses:
Individually evaluated for
impairment
Collectively evaluated for
impairment
$
3,085 $
116 $
— $
— $
— $
2 $
— $
— $
3,203
Loans acquired with deteriorated
credit quality
—
—
—
7,488
12,891
2,339
769
—
215
—
162
—
—
—
(24)
23,840
—
—
Ending balance
$
10,573 $
13,007 $
2,339 $
769 $
215 $
164 $
— $
(24) $
27,043
Loans:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Acquired with deteriorated credit
quality
$
7,382 $
4,671 $
3,136 $
— $
170 $
111 $
— $
— $
15,470
720,732
2,321,209
602,206
187,984
50,008
41,835
3,704
43,465
2,648
—
—
20
124
—
— 3,924,098
—
49,837
Ending balance
$ 731,818 $ 2,369,345 $
607,990 $ 187,984 $
50,178 $
41,966 $
124 $
— $ 3,989,405
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
96
Nonperforming loans by loan class at December 31, 2015 and 2014, 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, 2015:
Nonaccrual loans
$
7,366
$
591
$
552
$
— $
170
$
111
$ — $ 8,790
Loans past due 90 days
and still accruing
Troubled debt
restructurings (not
included in nonaccrual
or loans past due
and still accruing)
December 31, 2014:
Nonaccrual loans
Loans past due 90 days
and still accruing
Troubled debt
restructurings (not
included in nonaccrual
or loans past due and
still accruing)
—
—
—
$
$
16
7,382
1,449
157
$
$
3,480
4,071
70
288
$
$
2,574
3,126
2,117
—
$
$
—
—
—
—
—
—
—
—
—
6,070
— $
170
$
111
$ — $ 14,860
— $
— $
67
$ — $ 3,703
—
—
6
—
451
30
4,668
1,254
—
—
$
1,636
$
5,026
$
3,371
$
— $
— $
8
81
—
5,960
$ — $ 10,114
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.
97
Impaired loans by loan class at December 31, 2015 and 2014, are summarized as follows:
December 31, 2015:
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, 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
For the year ended December 31, 2015:
Average recorded investment in impaired
loans
Interest income recognized 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
Commercial
Real Estate,
Land and Land
Development
Residential
Real Estate
Single-
Family
Interim
Construction
Commercial
Agricultural
Consumer
Other
Total
$
7,221
$
1,930
$
— $
— $
— $
5
$ — $ 9,156
161
7,382
7,520
3,085
$
$
$
2,741
4,671
4,936
116
$
$
$
3,136
3,136
3,204
$
$
—
— $
— $
170
170
172
$
$
106
111
—
6,314
$ — $15,470
133
$ — $15,965
— $
— $
— $
2
$ — $ 3,203
1,475
$
2,056
$
13
$
— $
— $
7
$ — $ 3,551
4
1,479
1,482
339
4,951
189
502
64
649
28
$
$
$
$
$
$
$
$
$
4,712
6,768
7,274
124
5,904
286
7,484
400
8,669
517
$
$
$
$
$
$
$
$
$
3,374
3,387
3,605
8
3,220
181
3,253
83
3,384
148
$
$
$
$
$
$
$
$
$
—
— $
—
— $
68
75
—
8,158
$ — $11,709
— $
— $
93
$ — $12,454
— $
— $
4
$ — $
475
— $
— $
34
10
$
$
93
$ — $14,202
24
$ — $
690
34
$
— $
69
$ — $11,342
— $
— $
3
$ — $
550
34
6
$
$
— $
80
$ — $12,816
— $
6
$ — $
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.
98
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 $6,691 and $7,302 as of December 31, 2015 and 2014.
Following is a summary of loans modified under troubled debt restructurings during the years ended December 31, 2015 and
2014:
.
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, 2015
Number of contracts
Pre-restructuring
outstanding recorded
investment
Post-restructuring
outstanding recorded
investment
Troubled debt restructurings
during the year ended December
31, 2014
Number of contracts
Pre-restructuring
outstanding recorded
investment
Post-restructuring
outstanding recorded
investment
$
$
$
$
1
1
—
—
—
—
—
2
90
$
776
$
— $
— $
— $
— $ — $ 866
90
$
776
$
— $
— $
— $
— $ — $ 866
—
2
—
—
—
1
—
3
— $
1,108
$
— $
— $
— $
9
$ — $ 1,117
— $
1,108
$
— $
— $
— $
9
$ — $ 1,117
At December 31, 2015 and 2014, there were no loans modified under troubled debt restructurings during the previous twelve
month period that subsequently defaulted during the years ended December 31, 2015 and 2014. At December, 31, 2015 and
2014, 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.
99
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, 2015 and 2014:
December 31, 2015
Commercial
Commercial real estate, land and land
development
Residential real estate
Single-family interim construction
Agricultural
Consumer
Other
December 31, 2014
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
$
2,740
$
7,220
$
9,960
$
721,858
$
731,818
$
$
2,059
1,456
503
89
290
—
7,137
6,006
973
1,258
410
—
1,899
—
$
$
—
330
—
170
26
—
7,746
157
288
554
—
—
8
—
2,059
1,786
503
259
316
—
14,883
2,367,286
2,369,345
606,204
187,481
49,919
41,650
607,990
187,984
50,178
41,966
124
$ 3,974,522
124
$ 3,989,405
6,163
$
665,889
$
672,052
$
$
1,261
1,812
410
—
1,907
—
1,784,137
1,785,398
512,213
137,868
38,822
50,360
514,025
138,278
38,822
52,267
242
$ 3,189,531
242
$ 3,201,084
$
10,546
$
1,007
$
11,553
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.
100
A summary of loans by credit quality indicator by class as of December 31, 2015 and 2014, is as follows:
Pass
Pass/
Watch
OAEM
Substandard
Doubtful
Total
$
616,149
$ 46,607
$ 44,469
$
24,593
$
— $
731,818
December 31, 2015
Commercial
Commercial real estate, construction, land
and land development
Residential real estate
Single-family interim construction
Agricultural
Consumer
Other
December 31, 2014
Commercial
2,343,883
599,937
187,984
48,185
41,601
18,463
2,150
—
66
57
3,341
982
—
1,757
32
124
$ 3,837,863
—
$ 67,343
—
$ 50,581
$
647,894
$ 16,919
$
977
$
$
Commercial real estate, construction, land
and land development
Residential real estate
Single-family interim construction
Agricultural
Consumer
Other
1,759,533
505,920
138,278
38,422
52,055
8,667
2,188
—
57
39
242
$ 3,142,344
—
$ 27,870
6,008
325
—
—
50
—
$
7,360
$
23,510
$
3,658
4,921
—
170
276
—
33,618
6,262
11,190
5,592
—
343
123
—
$
$
— 2,369,345
—
—
—
—
607,990
187,984
50,178
41,966
—
124
— $ 3,989,405
— $
672,052
— 1,785,398
—
—
—
—
514,025
138,278
38,822
52,267
—
242
— $ 3,201,084
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 2015 and 2014:
Outstanding balance
Nonaccretable difference
Accretable yield
Carrying amount
Acquisition Date
November 1, 2015
October 1, 2014
April 15, 2014
January 1, 2014
Grand Bank *
Houston City
Bancshares
BOH Holdings
Live Oak
Financial Corp.
$
$
3,548
$
12,021
$
53,316
$
(660)
—
(1,240)
(561)
(3,717)
(3,511)
2,888
$
10,220
$
46,088
$
3,583
(519)
(182)
2,882
* Amounts represent provisional estimates and are subject to final acquisition accounting adjustments.
The changes in accretable yield during the years ended December 31, 2015 and 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.
101
Balance at January 1
Additions
Accretion
Net transfers to/from nonaccretable
Balance at December 31
2015
2014
$
$
2,546
$
—
(1,048)
882
2,380
$
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, 2015 and 2014, were as follows:
Outstanding balance
Carrying amount
December 31,
2015
2014
$
57,178
$
49,837
69,371
59,697
At December 31, 2015 and 2014, 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, 2015 and 2014 consisted of the following:
Land
Building
Furniture, fixtures and equipment
Aircraft
Leasehold and tenant improvements
Construction in progress
Less accumulated depreciation
December 31,
2015
2014
20,081
71,448
23,629
8,807
1,714
642
126,321
(33,306)
93,015
$
$
19,421
69,243
21,356
5,298
1,416
25
116,759
(27,857)
88,902
$
$
Depreciation expense amounted to $6,270, $5,285 and $4,322 for the years ended December 31, 2015, 2014 and 2013,
respectively.
The Company leases offices in the corporate location and other buildings to other unaffiliated tenants. Rental income of $277,
$399 and $726 was recognized during the years ended December 31, 2015, 2014 and 2013, respectively. This rental income is
recorded in the statements of income as an offset to occupancy expense.
At December 31, 2015, minimum future rental payments receivable from these tenants were as follows:
First year
Second year
Third year
Fourth year
Fifth year
$
$
176
116
43
—
—
335
102
Note 8. Other Real Estate Owned
Other real estate owned at December 31, 2015 and 2014 consisted of the following:
Construction, land and land development
Commercial real estate
Note 9. Goodwill and Core Deposit Intangible, Net
December 31,
2015
2014
$
$
1,198
970
2,168
$
$
1,761
3,002
4,763
At December 31, 2015 and 2014, goodwill totaled $258,643 and $229,457, respectively. In 2015, the Company made
measurement-period adjustments of $118 and $243 relating to the BOH Holdings and Houston City Bancshares acquisitions,
respectively, and recorded goodwill of $28,825 relating to the acquisition of Grand Bank in November 2015 (Note 22).
The gross carrying value and accumulated amortization of core deposit intangible is as follows:
Core deposit intangible
Less accumulated amortization
December 31,
2015
2014
$
$
23,019
(6,662)
16,357
$
$
17,562
(5,107)
12,455
Amortization of the core deposit intangible amounted to $1,555, $1,281 and $703 for the years ended December 31, 2015, 2014
and 2013, respectively.
The future amortization expense related to core deposit intangible remaining at December 31, 2015 is as follows:
First year
Second year
Third year
Fourth year
Fifth year
Thereafter
$
$
1,989
1,989
1,967
1,921
1,891
6,600
16,357
103
Note 10. Deposits
Deposits at December 31, 2015 and 2014 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,
2015
2014
Amount
$ 1,071,656
1,401,078
141,792
568,492
Percent
Amount
Percent
26.6% $
34.8
3.5
14.1
818,022
1,213,937
142,989
251,790
25.2%
37.4
4.4
7.7
470,336
11.7
509,072
15.7
374,925
$ 4,028,279
9.3
313,788
100.0% $ 3,249,598
9.6
100.0%
At December 31, 2015, the scheduled maturities of certificates of deposit, including IRAs, were as follows:
First year
Second year
Third year
Fourth year
Fifth year
Thereafter
$
$
688,500
83,074
43,949
10,956
18,714
68
845,261
Brokered deposits at December 31, 2015 and 2014 totaled $476,558 and $355,112, respectively.
Note 11. Federal Home Loan Bank Advances
At December 31, 2015, the Company has advances from the FHLB of Dallas under note payable arrangements with
maturities which range from January 15, 2016 to January 1, 2026. Interest payments on these notes are made monthly. The
weighted average interest rate of all notes was 1.21% and 1.48% at December 31, 2015 and 2014, respectively. The
balances outstanding on these advances were $288,325 and $229,405 at December 31, 2015 and 2014, respectively.
Contractual maturities of FHLB advances at December 31, 2015 were as follows:
First year
Second year
Third year
Fourth year
Fifth year
Thereafter
$
$
152,504
30,000
65,000
40,054
—
767
288,325
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 $1,566,180 at December 31, 2015. The Company had remaining credit available under the
FHLB advance program of $817,049 at December 31, 2015.
At December 31, 2015, the Company had $461,455 in undisbursed advance commitments (letters of credit) with the FHLB. As
of December 31, 2015, these commitments mature on various dates from January 2016 through October 2017. The FHLB
104
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, 2015, there were no disbursements against the advance commitments.
Note 12. Repurchase Agreements and Other Borrowings
At December 31, 2015 and 2014, repurchase accounts totaled $12,160 and $4,012, respectively. At December 31, 2015,
securities held in safekeeping totaling $24,916 were pledged as security on these repurchase agreement accounts.
Other borrowings at December 31, 2015 and 2014 consisted of the following:
Unsecured subordinated debentures (notes) in the amount of $65,000. Interest payments of
5.875% are 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 original amount of $5,000. Interest payments at
7.00% are made quarterly with semiannual principal payments of $625. The remaining
principal and accrued interest is due on July 15, 2018. The debentures may be redeemed
prior to maturity and meet the criteria to be recognized as Tier 2 capital for regulatory
purposes.
Unsecured subordinated debentures in the original amount of $2,730. Interest payments at
7.00% are made quarterly with semiannual principal payments of $341. The remaining
principal and accrued interest is due on October 15, 2018. The debentures may be redeemed
prior to maturity and meet the criteria to be recognized as Tier 2 capital for regulatory
purposes.
December 31,
2015
2014
$
65,000
$
65,000
3,750
5,000
2,048
70,798
$
2,730
72,730
$
At December 31, 2015 and 2014, other borrowings included amounts owed to related parties of $2,503 and $3,320,
respectively.
At December 31, 2015, the scheduled principal maturities of the Company's other borrowings were as follows:
First year
Second year
Third year
Fourth year
Fifth year
Thereafter
$
$
1,933
1,933
1,932
—
—
65,000
70,798
In January 2016, the Company redeemed the two small subordinated debenture issuances in full with principal payments
totaling $5,798 plus all interest accrued at time of redemption.
In 2014, the Company entered into a $35 million unsecured revolving line of credit with an unrelated bank. During 2015, the
Company renewed the unsecured line of credit with two unrelated commercial banks and increased the line from $35 million to
$50 million. The line bears interest at LIBOR plus 2.50% and matures July 19, 2016. As of December 31, 2015 and 2014,
there was 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 notes with nine unaffiliated banks totaling $200 million
of borrowing capacity at December 31, 2015. The Company had federal funds lines with five unaffiliated banks totaling $125
million of borrowing capacity at December 31, 2014. 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, 2015 or 2014.
105
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, 2015 and 2014.
These securities bear an interest rate of 3.25% over the three-month LIBOR (3.58% and 3.48% at December 31, 2015 and
2014, 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 are
payable quarterly.
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, 2015 and 2014.
These securities bear an interest rate of 2.85% over the three-month LIBOR (3.17% and 3.08% at December 31, 2015 and
2014, 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 are
payable quarterly.
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, 2015
and 2014. These securities bear an interest rate of 2.40% over the three-month LIBOR (2.78% and 2.63% at December 31,
2015 and 2014, 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
are payable quarterly.
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, 2015
and 2014. These securities bear an interest rate of 3.25% over the three-month LIBOR (3.63% and 3.48% at December 31,
2015 and 2014, 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 are payable quarterly.
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, 2015 and 2014. 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 at a rate equal to the three-month LIBOR rate plus 1.60% (2.11% and 1.84% at December 31, 2015 and
2014). 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 at an amount equal to the principal amount of the Debentures being redeemed plus accrued and
unpaid interest.
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.
106
Note 14. Income Taxes
Income tax expense for the years ended December 31, 2015, 2014 and 2013 was as follows:
Current income tax expense
Deferred income tax expense (benefit)
Income tax expense, as reported
Years Ended December 31,
2015
2014
2013
$
$
22,946
(3,935)
19,011
$
$
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. 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.
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, 2015, 2014 and 2013 as follows:
Years Ended December 31,
2015
2014
2013
Income tax expense computed at the statutory rate
$
20,229
$
15,364
$
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
—
(624)
(398)
(377)
108
73
—
(500)
(174)
(340)
486
84
6,571
(1,760)
(259)
(86)
(93)
279
9
$
19,011
$
14,920
$
4,661
107
Components of deferred tax assets and liabilities are as follows:
Deferred tax assets:
Allowance for loan losses
NOL carryforwards from acquisitions
Acquired loan fair market value adjustments
Restricted stock
Reserve for bonuses
Deferred loan fees
Acquisition costs
Start up costs
Other real estate owned
Unearned rent income
Nonaccrual loans
Other
Deferred tax liabilities:
Premises and equipment
Net unrealized gain on available for sale securities
Core deposit intangibles
Securities
FHLB stock
Acquired tax accounting method changes
Other
Net deferred tax asset
December 31,
2015
2014
$
9,428
$
571
4,540
1,422
1,045
424
—
294
80
91
45
235
18,175
(4,900)
(963)
(5,715)
(330)
(66)
(255)
(54)
$
(12,283)
5,892
$
6,420
793
4,310
1,121
138
170
41
344
284
48
32
147
13,848
(5,776)
(975)
(4,348)
(332)
(52)
—
(130)
(11,613)
2,235
At December 31, 2015, the Company had federal net operating loss carryforwards of approximately $1,630 which expire in
2028 and 2029. 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, 2015 or 2014 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, 2015, 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 2012.
108
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,
2015 and 2014, the approximate amounts of these financial instruments were as follows:
Commitments to extend credit
Standby letters of credit
December 31,
2015
2014
$
$
838,341
10,361
848,702
$
$
565,881
8,571
574,452
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, 2015 and
2014, 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. A legal proceeding that the Company believes could become material is described below.
Independent Bank is a party to a legal proceeding inherited by Independent Bank in connection with its acquisition of BOH
Holdings, Inc. and its subsidiary, Bank of Houston (BOH). The plaintiffs in the case are alleging that Independent Bank aided
and abetted or participated in a fraudulent scheme. Independent Bank is pursuing insurance coverage for these claims,
including reimbursement for defense costs. The Company believes the claims made in this lawsuit are without merit and is
vigorously defending the lawsuit. The Company is unable to predict when the matter will be resolved, the ultimate outcome or
potential costs or damages to be incurred. Please see Part I, Item 3. for more details on this lawsuit.
Lease Commitments
The Company leases certain branch facilities and other facilities. Rent expense related to these leases amounted to $2,182,
$1,410 and $716 for the years ended December 31, 2015, 2014 and 2013, respectively.
At December 31, 2015, minimum future rental payments due under noncancelable lease commitments were as follows:
109
First year
Second year
Third year
Fourth year
Fifth year
Thereafter
$
$
2,047
1,652
1,104
933
940
1,946
8,622
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, 2015 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
$
$
36,208
29,101
(8,403)
(227)
56,679
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 ($18 in 2015). 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 $1,208, $894 and $524 for the years ended December 31, 2015, 2014 and 2013, 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, 2015 and 2014 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, 2015
Measured on a recurring basis:
Assets:
Investment securities available for sale:
U.S. treasuries
Government agency securities
Obligations of state and municipal subdivisions
Residential pass-through securities guaranteed by
FNMA, GNMA and FHLMC
$
1,002
$
— $
1,002
$
135,300
85,416
51,745
—
—
—
135,300
85,416
51,745
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
—
—
—
—
—
—
—
—
—
There were no transfers between level categorizations and no changes in valuation methodologies 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, 2015 and 2014, for which a
nonrecurring change in fair value has been recorded:
Fair Value Measurements at Reporting Date
Using
Assets/
Liabilities
Measured
at Fair Value
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
Period Ended
Total Losses
$
4,827
$
577
— $
—
— $
—
4,827
$
577
3,029
35
$
4,943
$
138
— $
—
— $
—
4,943
$
138
188
22
December 31, 2015
Measured on a nonrecurring basis:
Assets:
Impaired loans
Other real estate
December 31, 2014
Measured on a nonrecurring basis:
Assets:
Impaired loans
Other real estate
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, 2015 and
2014, 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.
Certificates of deposit held in other banks: The fair value of certificates of deposit held in other banks is based upon current
rates in the market.
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, 2015 and 2014:
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
December 31, 2015
Financial assets:
Cash and cash equivalents
$
293,279
$
293,279
$
293,279
$
— $
Certificates of deposit held in other banks
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, 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
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,076
—
—
—
—
—
—
—
—
—
—
3,960,246
5,953
61,746
273,463
12,299
61,873
273,463
12,299
3,960,809
3,966,199
14,256
10,991
14,256
10,991
4,028,279
4,031,365
2,792
288,325
12,160
70,798
18,147
—
—
2,792
295,345
12,160
70,935
18,128
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
61,873
273,463
12,299
14,256
10,991
4,031,365
2,792
295,345
12,160
70,935
18,128
—
—
$
324,047
$
324,047
$
324,047
$
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
206,062
4,453
3,200,261
12,321
9,655
3,252,114
2,919
228,607
4,012
75,164
18,134
—
—
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
228,607
4,012
75,164
18,134
—
—
2,919
229,405
4,012
72,730
18,147
—
—
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 generally 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, 2015 and 2014:
Nonvested shares, December 31, 2014
Granted during the period
Vested during the period
Forfeited during the period
Nonvested shares, December 31, 2015
Nonvested shares, December 31, 2013
Granted during the period
Vested during the period
Forfeited during the period
Nonvested shares, December 31, 2014
Number of
Shares
Weighted Average
Grant Date
Fair Value
373,886
106,124
(84,107)
(22,331)
373,572
306,524
201,570
(133,014)
(1,194)
373,886
$
$
$
$
41.58
32.91
42.32
33.64
40.29
22.75
56.07
20.27
30.37
41.58
Compensation expense related to these awards is recorded based on the fair value of the award at the date of grant and totaled
$4,314, $2,914 and $1,469 for the years ended December 31, 2015, 2014 and 2013, respectively. Compensation expense is
recorded in salaries and employee benefits in the accompanying consolidated statements of income. At December 31, 2015,
future compensation expense is estimated to be $10,856 and will be recognized over a remaining weighted average period of
3.02 years.
The fair value of common stock awards that vested during the years ended December 31, 2015, 2014 and 2013 was $3,300,
$6,608 and $855, respectively. The Company has recorded $(72), $1,409 and $72 to additional paid in capital, which
represents the income tax deficiency and excess tax benefit, respectively, recognized on the vested shares for the years ended
December 31, 2015, 2014 and 2013, respectively.
There were no significant modifications of stock agreements during 2015. In 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.
At December 31, 2015, the future vesting schedule of the nonvested shares is as follows:
First year
Second year
Third year
Fourth year
Fifth year
Total nonvested shares
123,522
126,628
83,222
36,800
3,400
373,572
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 were recorded as
equity awards at fair value and were being amortized over the term of the debt. The Company paid off the related subordinated
debt in 2013. The warrants expire in December 2018.
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.
In July 2013, the Federal Reserve published final rules for the adoption of the Basel III regulatory capital framework (the
"Basel III Capital Rules"). The Basel III Capital Rules, among other things, (i) introduce a new capital measure called
"Common Equity Tier 1" ("CET1"), (ii) specify that Tier 1 capital consist of Common Equity Tier 1 and "Additional Tier 1
Capital" instruments meeting specified requirements, (iii) define Common Equity Tier 1 narrowly by requiring that most
deductions/adjustments to regulatory capital measures be made to Common Equity Tier 1 and not to the other components of
capital and (iv) expand the scope of the deductions/adjustments as compared to existing regulations. The Basel III Capital
Rules became effective for the Company on January 1, 2015 with certain transition provisions fully phased in on January 1,
2019.
Starting in January 2016, the implementation of the capital conservation buffer will be effective for the Company starting at the
0.625% level and increasing 0.625% each year thereafter, until it reaches 2.5% on January 1, 2019. The capital conservation
buffer is designed to absorb losses during periods of economic stress and effectively increases the minimum required risk-
weighted capital ratios.
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, CET1 and Tier 1 capital (as defined in the regulations) to
risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of
December 31, 2015 and 2014, the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2015 and 2014, 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, CET1, Tier 1 risk based and Tier 1 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.
117
The actual capital amounts and ratios of the Company and Bank as of December 31, 2015 and 2014, 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, 2015
Total capital to risk weighted assets:
Consolidated
Bank
$ 473,993
470,495
11.14% $ 340,533
340,259
11.06
8.00%
8.00
N/A
$ 425,323
N/A
10.00%
Tier 1 capital to risk weighted assets:
Consolidated
Bank
Common equity tier 1 to risk weighted assets:
Consolidated
Bank
Tier 1 capital to average assets:
Consolidated
Bank
December 31, 2014
Total capital to risk weighted assets:
379,631
443,452
338,093
443,452
379,631
443,452
8.92
10.43
7.94
10.43
8.28
9.72
255,400
255,194
191,550
191,396
183,379
182,421
6.00
6.00
4.50
4.50
4.00
4.00
N/A
340,259
N/A
276,460
N/A
228,026
N/A
8.00
N/A
6.50
N/A
5.00
Consolidated
Bank
$ 402,326
397,512
12.59% $ 255,633
255,219
12.46
8.00%
8.00
N/A
$ 319,024
N/A
10.00%
Tier 1 capital to risk weighted assets:
Consolidated
Bank
Tier 1 capital to average assets:
Consolidated
Bank
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
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 years ended December 31, 2015 and
2014, the Company recorded preferred stock dividends of $240 and $169, respectively.
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.
118
In December 2015, the Board of Directors approved the redemption of the SBLF Series A Preferred Stock and the redemption
was approved by both the Federal Reserve and U.S. Department of Treasury. Upon such approval, the shares became
redeemable at a determinable price and date; therefore, the Company reclassified the preferred stock to temporary equity on its
balance sheet. On January 14, 2016, the Company redeemed all 23,938.35 outstanding shares of its Senior Non-Cumulative
Perpetual Small Business Lending Fund Series A Preferred Stock and related accrued dividends for a total redemption price of
$23,947.
Note 22. Business Combinations
Grand Bank
On November 1, 2015, the Company acquired 100% of the outstanding stock of Grand Bank with two branches located in
Dallas, TX. The Company issued 1,279,532 shares of Company stock and paid $24,103 in cash for the outstanding shares of
Grand Bank common stock.
The Company recognized a provisional amount of goodwill of $28,825, which is calculated as the excess of both the
consideration exchanged and liabilities assumed compared to the fair 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 Dallas market.
None of the goodwill recognized is expected to be deductible for income tax purposes.
Provisional estimates for loans, goodwill, core deposit intangible and deposits have been recorded for the acquisition as
independent valuations have not been finalized. The Company does not not expect any significant differences from estimated
values upon completion of the valuations.
Non-credit impaired loans had an estimated fair value of $270,744 at the date of acquisition and contractual balances of
$273,680. The difference of $2,936 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 $902 during the year ended December 31,
2015, which is included in acquisition expenses in the consolidated statements of income. In addition, for the year ended
December 31, 2015, the Company paid offering costs totaling $424 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
Time deposits with other banks
Securities available for sale
Loans
Premises and equipment
Goodwill
Core deposit intangible
Other assets
Total assets
Liabilities of acquired bank:
Deposits
Repurchase accounts
FHLB advances
Other liabilities
Total liabilities
Common stock issued in the Grand Bank transaction
Cash paid for the Grand Bank transaction
119
$
$
$
$
$
$
152,913
84,527
72,619
273,632
1,214
28,825
5,457
989
620,176
523,650
18,873
2,836
876
546,235
49,838
24,103
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 has recognized total goodwill of $21,444, which is calculated as the excess of both the consideration exchanged
and liabilities assumed compared to the fair 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 deductible for income tax purposes.
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 $422 and $1,126 during the years ended
December 31, 2015 and 2014, which is included in acquisition expenses in the consolidated statements of income. In addition,
for the years ended December 31, 2015 and 2014, the Company paid offering costs totaling $144 and $16, respectively, 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.
The following table summarizes the previously reported estimates and the measurement-period adjustments made during 2015
to asset and liability accounts to derive at the final acquisition accounting allocations for HCB:
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
As reported at
December 31, 2014
$
118,825 $
Measurement
period adjustments
Final recorded
value
3,548
194,870
9,227
21,201
2,459
617
— $
—
—
—
243
—
(243)
118,825
3,548
194,870
9,227
21,444
2,459
374
$
$
$
$
$
350,747 $
— $
350,747
303,092 $
585
303,677
30,266
16,804
—
—
—
—
—
303,092
585
303,677
30,266
16,804
120
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 $166,050 which is calculated as the excess of both the consideration exchanged and
liabilities assumed compared to the fair 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 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 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 $550 which were recorded as a reduction to stock issuance
proceeds through additional paid in capital.
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 BOH:
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
Reported Estimates at
December 31, 2014
Measurement
Period Adjustments
Final Recorded
Values
$
135,525
$
— $
59,141
785,216
7,211
1,224
165,932
7,265
27,198
—
—
—
—
118
—
63
135,525
59,141
785,216
7,211
1,224
166,050
7,265
27,261
$
$
$
$
$
$
1,188,712
$
181
$
1,188,893
820,752
$
— $
95,000
6,195
921,947
208,817
23,938
34,010
$
$
$
$
—
181
181
$
— $
— $
— $
820,752
95,000
6,376
922,128
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.
121
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.
The following table summarizes the final fair values of the assets acquired and liabilities assumed in the transaction:
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
$
$
$
$
$
$
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 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.
122
Note 23. 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, Temporary Equity and Stockholders' Equity
Other borrowings
Junior subordinated debentures
Other liabilities
Total liabilities
Temporary equity: Preferred stock
Stockholders' equity:
Preferred stock
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities, temporary equity and stockholders' equity
December 31,
2015
2014
$
$
$
$
6,624
708,730
547
2,856
718,757
70,798
18,147
2,503
91,448
23,938
—
184
530,107
70,698
2,382
603,371
718,757
$
$
$
$
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
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 of subsidiaries
Years Ended December 31,
2014
2013
2015
$
$
4,282
539
4,821
$
2,225
542
2,767
1,425
543
1,968
35,250
16
35,266
4,270
546
1,282
1,217
7,315
23,130
4,121
27,251
11,535
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
Net income
$
38,786
$
28,978
$
19,800
124
Statements of Cash Flows
Years Ended December 31,
2014
2013
2015
$
38,786
$
28,978
$
19,800
(11,535)
4,314
1,771
(63)
33,273
—
—
—
(24,103)
(24,103)
(1,932)
—
(568)
—
(5,819)
(8,319)
851
5,773
6,624
$
(2,930)
2,914
(3,291)
2,233
27,904
(52,000)
10,940
6,108
(60,814)
(95,766)
—
65,000
(566)
—
(3,910)
60,524
(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
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income 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
Offering costs paid in connection with acquired banks
Proceeds from issuance of common stock
Dividends paid
Net cash (used in) 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 24. Subsequent Events
Redemption of Small Business Lending Fund Series A Preferred Stock and Subordinated Debentures
On January 14, 2016, the Company redeemed all 23,938.35 outstanding shares of its Senior Non-Cumulative Perpetual Small
Business Lending Fund Series A Preferred Stock held by the Treasury and related accrued dividends for a total redemption
price of $23,947.
Also on January 14, 2016, the Company redeemed the subordinated debentures owed to individuals with principal balances
totaling $5,798. The total redemption price including accrued interest totaled $5,899.
Share Repurchase Program Renewal
On January 28, 2016, the Company announced the renewal of its stock repurchase program. The program authorizes the
repurchase by the Company of up to $30 million of the Company's common stock. The repurchase program is authorized to
continue through December 31, 2016. No shares have been repurchased by the Company under this program through the date
of this report.
Declaration of Dividends
On January 28, 2016, 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 8, 2016. The dividend totaling $1,477 was paid on February 18, 2016.
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 25,
2016.
SIGNATURES
Independent Bank Group, Inc. (Registrant)
Date: February 25, 2016
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 25, 2016
Executive Vice President and Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
February 25, 2016
President, Chief Operating Officer and Director
February 25, 2016
Vice Chairman, Chief Risk Officer and Director
February 25, 2016
Vice Chairman, Houston Region Chief Executive Officer and
Director
February 25, 2016
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 25, 2016
February 25, 2016
February 25, 2016
February 25, 2016
February 25, 2016
February 25, 2016
February 25, 2016
February 25, 2016
February 25, 2016